As filed with the Securities and Exchange Commission on October 31, 1996
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 18
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 627-2400
(Registrant's Telephone Number, Including Area Code)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
X on November 12, 1996 pursuant to Rule 485(b)
----
____ 60 days after filing pursuant to Rule 485(a)(1)
____ 75 days after filing pursuant to Rule 485(a)(2)
____ on _________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1996 was filed on August 28, 1996.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:*
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheet for Montgomery Asset Allocation Fund and
Montgomery Institutional Series: Emerging Markets Portfolio
Part A - Combined Prospectus for Class R shares of Montgomery Asset
Allocation Fund
Part A - Combined Prospectus for Class P shares of Montgomery Asset
Allocation Fund
Part A - Prospectus for Montgomery Institutional Series: Emerging
Markets Portfolio
Part B - Statement of Additional Information for Montgomery
Institutional Series: Emerging Markets Portfolio
Part C - Other Information
Signature Page
Exhibit
- --------
* This Amendment does not relate to the following document: the Combined
Statement of Additional Information for Montgomery Asset Allocation
Fund.
ii
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(Prospectus for Montgomery Asset Allocation Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "The Multi-Strategy Funds," and "Fees and Expenses
of the Funds"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "The Multi-Strategy Funds,"
of Registrant "The Funds' Investment Objectives and Policies,"
"Portfolio Securities," "Other Investment Practices,"
"Risk Considerations" and "General Information"
5. Management of "The Funds' Investment Objectives and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable (contained in the Funds' Annual
of Fund Performance Report)
6. Capital Stock and "Dividends and Distributions," "The Multi-Strategy
Other Securities Funds," "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Funds,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
iii
<PAGE>
Part A: Information Required in Prospectus
(Prospectus for Montgomery Institutional Series: Emerging Markets Portfolio)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Fund"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "The Fund's Investment Objective and
of Registrant Policies," "Portfolio Securities," "Other Investment
Practices," "Risk Considerations" and "General
Information"
5. Management of "The Fund's Investment Objective and Policies,"
the Fund "Management of the Fund" and "How to Invest in the
Fund"
5A. Management's Discussion Not Applicable (contained in the Fund's Annual
of Fund Performance Report)
6. Capital Stock and "Dividends and Distributions," "Taxation" and
Other Securities "General Information"
7. Purchase of Securities "How to Invest in the Fund,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Fund" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Statement of Additional Information for Montgomery
Institutional Series: Emerging Markets Portfolio)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trust" and "General Information"
and History
13. Investment Objectives "Investment Objective and Policies of the Fund,"
"Risk Considerations" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trust" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of and "Determination of Net Asset Value"
Securities Being
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS R SHARES
MONTGOMERY ASSET ALLOCATION FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
November __, 1996
The following eighteen mutual funds (the "Funds") are offered in this
Prospectus:
Fund Number
o Montgomery Growth Fund 284
o Montgomery Equity Income Fund 293
o Montgomery Small Cap Fund 276
o Montgomery Small Cap Opportunities Fund 645
o Montgomery Micro Cap Fund 294
o Montgomery Global Opportunities Fund 285
o Montgomery Global Communications Fund 280
o Montgomery International Small Cap Fund 283
o Montgomery International Growth Fund 296
o Montgomery Emerging Asia Fund 648
o Montgomery Emerging Markets Fund 277
o Montgomery Select 50 Fund 295
o Montgomery Asset Allocation Fund 291
o Montgomery Short Government Bond Fund 279
o Montgomery Government Reserve Fund 278
o Montgomery Federal Tax-Free Money Fund 647
o Montgomery California Tax-Free Intermediate Bond Fund 281
o Montgomery California Tax-Free Money Fund 292
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. The minimum initial investment in each Fund is
$1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must be at
least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated November __, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is www.xperts.montgomery.com/1.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONTGOMERY GOVERNMENT RESERVE FUND,
MONTGOMERY FEDERAL TAX-FREE MONEY FUND AND MONTGOMERY CALIFORNIA TAX-FREE MONEY
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 5
Financial Highlights 7
The Funds' Investment Objectives and Policies 11
Portfolio Securities 18
Other Investment Practices 21
Risk Considerations 23
Management of the Funds 25
How to Contact the Funds 29
How To Invest in the Funds 29
How To Redeem an Investment in the Funds 32
Exchange Privileges and Restrictions 34
How Net Asset Value is Determined 36
Dividends and Distributions 36
Taxation 37
General Information 38
Backup Withholding 39
Glossary A1
2
<PAGE>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 11, "Portfolio Securities"
beginning on page 18, "Other Investment Practices" beginning on page 21 and
"Risk Considerations" beginning on page 23 for more detailed information.
The Equity Funds
- --------------------------------------------------------------
Montgomery Growth Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of domestic companies of
all sizes and emphasizes companies having market
capitalizations of $1 billion or more.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Small Cap Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of small-capitalization
domestic companies, which the Fund currently considers to be
companies having total market capitalizations of less than
$1 billion.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Micro Cap Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of domestic companies
that have the potential for rapid growth and are
micro-capitalization companies, which the Fund currently
considers to be companies having total market
capitalizations that would place them in the smallest 10% of
market capitalization for domestic companies as measured by
the Wilshire 5000 Index.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Emerging Markets Fund
Seeks capital appreciation by investing primarily in equity
securities of companies in countries having economies and
markets generally considered by the World Bank or the United
Nations to be emerging or developing.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Global Opportunities Fund
Seeks capital appreciation by investing primarily in equity
securities of companies of all sizes throughout the world
but emphasizes companies having market capitalizations of $1
billion or more, sound fundamental values and potential for
long-term growth at a reasonable price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in equity
securities of companies outside the U.S. having total market
capitalizations of less than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable
price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Equity Income Fund
Seeks current income and capital appreciation by
investing primarily in income-producing equity
securities of domestic companies, with the goal to
provide significantly greater yield than the average
yield offered by the stocks of the S&P 500 and a low
level of price volatility.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Small Cap Opportunities Fund
Seeks capital appreciation by investing primarily in
equity securities, usually common stocks, of
small-capitalization domestic companies, which the Fund
currently considers to be companies having total market
capitalizations of less than $1 billion.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Emerging Asia Fund
Seeks long-term capital appreciation through investment
primarily in the equity securities of emerging Asian
companies.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Global Communications Fund
Seeks capital appreciation by investing primarily in
equity securities of communications companies (i.e.,
companies primarily engaged in developing, manufacturing
or selling communications equipment or services)
throughout the world having sound fundamental values and
potential for long-term growth at a reasonable price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery International Growth Fund
Seeks capital appreciation by investing primarily in
equity securities of companies outside the United States
having total market capitalizations over $1 billion,
sound fundamental values and potential for long-term
growth at a reasonable price.
- --------------------------------------------------------------
3
<PAGE>
The Multi-Strategy Funds
- --------------------------------------------------------------
Montgomery Select 50 Fund
Seeks capital appreciation by investing primarily in at
least 50 different equity securities of companies of all
sizes throughout the world. Each of the Manager's five
equity discipline management teams selects 10 equity
securities based on the potential for capital appreciation.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Asset Allocation Fund
Seeks high total return, while also seeking to reduce
risk, through a strategic or active allocation of assets
among domestic stocks, fixed-income securities and cash
or cash equivalents.
- --------------------------------------------------------------
The Fixed Income Funds
- --------------------------------------------------------------
Montgomery Short Government Bond Fund
Seeks maximum total return consistent with preservation of
capital and prudent investment management by investing
primarily in U.S. Government Securities and, to manage
interest rate risk, maintains an average portfolio effective
duration comparable to or less than three-year U.S. Treasury
Notes. It targets higher yields than money market funds
generally with less fluctuation in the value of its shares
than long-term bond funds. This Fund does not maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund
Seeks current income exempt from federal income tax
consistent with liquidity and preservation of capital. It
seeks to maintain a stable net asset value of $1.00 per
share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund
Seeks maximum current income exempt from federal and
California personal income taxes consistent with preserving
capital and prudent investment management. It targets
higher yields than tax-free money market funds but generally
with less fluctuation in the value of its shares than
long-term tax-free bond funds. It does not maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Government Reserve Fund
Seeks current income consistent with liquidity and
preservation of capital by investing exclusively in U.S.
Government Securities, repurchase agreements for U.S.
Government Securities and other money market funds
investing exclusively in U.S. Government Securities and
such repurchase agreements. It seeks to maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery California Tax-Free Money Fund
Seeks maximum current income exempt from federal and
California personal income taxes consistent with
liquidity and preservation of capital. It seeks to
maintain a stable net asset value of $1.00 per share.
- --------------------------------------------------------------
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
Prospectus, call The Montgomery Funds at (800) 572-FUND or contact sales
representatives or financial intermediaries who offer those classes.
4
<PAGE>
Fees And Expenses Of The Funds
<TABLE>
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Total Fund Operating
Other Expenses Expenses
The Equity Funds Management Fee* (after reimbursement)* (after reimbursement)*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montgomery Growth Fund 1.00% 0.50% 1.50%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 0.60% 0.25% 0.85%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund 1.00% 0.37% 1.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 1.20% 0.30% 1.50%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund 1.40% 0.35% 1.75%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 1.10% 0.55% 1.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 1.07% 0.73% 1.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating
Other Expenses Expenses
The Multi-Strategy and Fixed Income Funds Management Fee* (after reimbursement)* (after reimbursement)*
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund 1.25% 0.55% 1.80%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 0.80% 0.50% 1.30%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund 0.50% 0.20% 0.70%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund 0.50% 0.20% 0.70%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
These tables are intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. The Funds also reserve the
right to impose a $20 annual account maintenance fee on accounts that fall
below the minimum investment because of redemptions. See "How to Redeem an
Investment in the Funds."
5
<PAGE>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996. Expenses for the Montgomery
Emerging Asia Fund and Montgomery Federal Tax-Free Money Fund are estimated.
The Manager will reduce its fees and may absorb or reimburse a Fund for
certain expenses to the extent necessary to limit total annual fund
operating expenses to the lesser of the amount indicated in the table for a
Fund or the maximum allowed by applicable state expense limitations. A Fund
is required to reimburse the Manager for any reductions in the Manager's fee
only during the two years (three years in the case of the Montgomery Asset
Allocation Fund) following that reduction and only if such reimbursement can
be achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for fees
and expenses for the current year. Absent reduction, actual total Fund
operating expenses for the period ended June 30, 1996 (annualized) would
have been as follows: Montgomery Equity Income Fund, 1.45% (0.85% other
expenses); Montgomery Small Cap Opportunities Fund, 2.16% (0.96% other
expenses); Montgomery Micro Cap Fund, 1.79% (0.39% other expenses);
Montgomery Global Opportunities Fund, 2.05% (0.80% other expenses);
Montgomery Global Communications Fund, 2.01% (0.76% other expenses);
Montgomery International Growth Fund, 2.91% (1.81% other expenses);
Montgomery International Small Cap Fund, 2.76% (1.53% other expenses);
Montgomery Asset Allocation Fund, 1.55% (0.95% other expenses); Montgomery
Select 50 Fund, 2.11% (0.86% other expenses); Montgomery Short Government
Bond Fund, 1.55% (1.05% other expenses); Montgomery Government Reserve Fund,
0.74% (0.34% other expenses); Montgomery California Tax-Free Intermediate
Bond Fund, 1.43% (0.93% other expenses); and Montgomery California Tax-Free
Money Fund, 0.80% (0.40% other expenses). Absent the reduction, actual total
Fund operating expenses are estimated to be as follows: Montgomery Federal
Tax-Free Money Fund, 1.00%(0.60% other expenses); Montgomery Emerging Asia
Fund, 3.25% (2.00% other expenses). The Manager may terminate these
voluntary reductions at any time. See "Management of the Funds."
</TABLE>
<TABLE>
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund $15 $47 $82 $179
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund $9 $27 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund $14 $43 $75 $165
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund $15 $47 $82 $179
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund $18 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund $19 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund $17 $52 $90 $195
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund $19 $55 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund $18 $57 $97 $212
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund $18 $57 $97 $212
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund $13 $41 $71 $157
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund $7 $22 $39 $87
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund $6 $19 $33 $75
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund $6 $19 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund $7 $22 $39 $87
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund $6 $19 $33 $75
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns; actual expenses and returns may vary.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. The information
for the period ended June 30, 1991 was audited by other independent accountants
whose report is not included herein.
<CAPTION>
GROWTH FUND MICRO CAP FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995 1994(a) 1996 1995(b)#
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $19.16 $15.27 $12.00 $13.75 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.17 0.12 0.04 (0.04) 0.09
Net realized and unrealized gain on investments 4.32 3.91 3.31++ 4.26 1.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 4.49 4.03 3.35 4.22 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.07) (0.01) (0.04) --
Distributions from net realized capital gains (1.54) (0.07) -- (0.11) --
Distribution in excess of net realized capital gains -- -- (0.07) -- --
Distributions from capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.71) (0.14) (0.08) (0.15) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $21.94 $19.16 $15.27 $17.82 $13.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 24.85% 26.53% 27.98% 30.95% 14.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $926,382 $878,776 $149,103 $306,217 $162,949
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/loss to average net assets 0.78% 0.98% 1.09%+ (0.11)% 1.40%+
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.35% 1.50% 1.49%+ 1.75% 1.75%+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 88.98% 36.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0596 N/A N/A $0.0573 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- $0.03 ($0.05) $0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 1.79%+ 1.79% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R Shares commenced operations on September 30, 1993.
(b) The Micro Cap Fund's Class R Shares commenced operations on December 30,
1994.
(c) The Small Cap Fund's Class R Shares became available for investment by the
public on July 13, 1990.
(d) The Small Cap Opportunities Fund's Class R Shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL GROWTH
FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995(a) 1996(b)
<S> <C> <C> <C>
Net asset value -- beginning of year $13.38 $12.00 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.43 0.31 0.02
Net realized and unrealized gain/(loss) on investments 2.82 1.38 3.29
- --------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.25 1.69 3.31
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.42) (0.31) --
Distributions from net realized capital gains (0.12) -- --
Distribution in excess of net realized capital gains -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.31) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $16.09 $13.38 $15.31
- --------------------------------------------------------------------------------------------------------------------------------
Total return** 24.56% 14.26% 27.58%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $19,312 $6,383 $18,303
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 3.03% 4.06%+ 0.26%+
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest expense 0.85% 0.84%+ 1.65%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 238.91%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0423 N/A $0.0176
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $0.34 $0.13 ($0.07)
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 1.45% 3.16%+ 2.91%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994.
(b) The International Growth Fund's Class R Shares commenced operations on July
3, 1995.
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
(d) The Global Opportunities Fund's Class R Shares commenced operations on
September 30, 1993.
(e) The Global Communications Fund's Class R Shares commenced operations on June
1, 1993.
** Total return represents aggregate total return for the periods indicated
+ Annualized.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP
SMALL CAP FUND OPPORTUNITIES
FUND
1996 1995 1994 1993 1992 1991 1990(c) 1996(d)#
<S> <C> <C> <C> <C> <C> <C> <C>
$17.11 $15.15 $16.83 $12.90 $13.24 $10.05 $10.62 $12.00
- ---------------------------------------------------------------------------------------------------------------------------------
(0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07) 0.02
6.31 3.04 (0.47) 4.04 3.25 3.27 2.71 3.78++
- ---------------------------------------------------------------------------------------------------------------------------------
6.22 2.94 (0.59) 3.93 3.19 3.21 2.64 3.80
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
(1.78) (0.98) (1.09) -- (2.75) (0.02) (0.02) --
-- -- -- -- -- -- -- --
-- -- -- -- (0.78) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
(1.78) (0.98) (1.09) -- (3.53) (0.02) (0.02) --
- ---------------------------------------------------------------------------------------------------------------------------------
$21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24 $15.80
- ---------------------------------------------------------------------------------------------------------------------------------
39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89% 31.67%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
$275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181 $136,140
- ---------------------------------------------------------------------------------------------------------------------------------
(0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+ 0.23%+
- ---------------------------------------------------------------------------------------------------------------------------------
1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+ 1.50%+
- ---------------------------------------------------------------------------------------------------------------------------------
80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16% 81.29%
- ---------------------------------------------------------------------------------------------------------------------------------
$0.0529 N/A N/A N/A N/A N/A N/A $0.0578
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- ($0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 2.16%+
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Per share numbers have been calculated using the average share method,
which more appropriately represent the per share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL OPPORTUNITIES GLOBAL COMMUNICATIONS
SMALL CAP FUND FUND FUND
1996 1995 1994(c) 1996 1995 1994(d) 1996 1995 1994 1993(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.75 $12.02 $12.00 $13.25 $12.92 $12.00 $15.42 14.20 $12.45 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
0.03 0.12 0.00# (0.06) 0.13 0.01 (0.20) (0.03) (0.05) 0.00#
3.10 (0.39) 0.02 3.84 0.70 0.91 2.83 1.28 1.80++ 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
3.13 (0.27) 0.02 3.78 0.83 0.92 2.63 1.25 1.75 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00)# -- (0.07) -- -- -- -- -- --
-- -- -- -- (0.50) -- -- -- -- --
-- -- -- -- -- -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00) -- (0.07) (0.50) -- -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
14.86 $11.75 $12.02 $16.96 $13.25 $12.92 $18.05 $15.42 $14.20 $12.45
- ------------------------------------------------------------------------------------------------------------------------------------
26.68% (2.23)% 0.17% 28.64% 6.43% 7.67 17.06% 8.83% 14.06% 3.75%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
$41,640 $28,516 $34,555 $28,496 $13,677 $12,504 $206,671 $209,644 $234,886 $4,670
- ------------------------------------------------------------------------------------------------------------------------------------
0.20% 0.95% 0.04%+ (0.56)% 1.03% 0.02%+ (1.01)% (0.10)% (0.46)% (0.05)%+
- ------------------------------------------------------------------------------------------------------------------------------------
1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90% 1.90%+
- ------------------------------------------------------------------------------------------------------------------------------------
177.36% 156.13% 123.50% 163.80% 118.75% 67.22% 103.73% 50.17% 29.20% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
$0.0123 N/A N/A $0.0235 N/A N/A $0.0129 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
($0.08) $0.05 ($0.02) ($0.16) ($0.01) ($0.05) ($0.22) ($0.07) ($0.06) ($0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
2.76% 2.50% 2.32%+ 3.10% 2.99% 2.75%+ 2.11% 2.09% 2.04% 8.96%+
- ------------------------------------------------------------------------------------------------------------------------------------
1.96% 1.91% 1.99%+ 2.05% 1.91% 1.99%+ 2.01% 1.91% 1.94% --
- ------------------------------------------------------------------------------------------------------------------------------------
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995++ 1994 1993 1992(a)
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $13.17 $13.68 $11.07 $9.96 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.08 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 0.94 0.25## 2.92 1.05 (0.07)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.02 0.28 2.89 1.12 (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- (0.01) --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- (0.37) -- -- --
Distributions from capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.79) (0.28) (0.01) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $14.19 $13.17 $13.68 $11.07 $9.96
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return** 7.74% 1.40% 26.10% 11.27% (0.40)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $994,378 $998,083 $654,960 $206,617 $54,625
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.58% 0.23% (0.14)% 0.66% 1.70%+
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest 1.72% 1.80% 1.85% 1.90% 1.90%+
expense
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 109.92% 92.09% 63.79% 21.40% 0.19%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0007 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager -- -- -- $0.06 $0.01
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense -- -- -- 1.93% 2.80%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Emerging Markets Fund's Class R Shares commenced operations on March 1,
1992.
(b) The Select 50 Fund's Class R Shares commenced operations on October 2, 1995.
(c) The Asset Allocation Fund's Class R Shares commenced operations on March 31,
1994.
(d) The Short Government Bond Fund's Class R Shares commenced operations on
December 18, 1992.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE
BOND FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995 1994(a)
<S> <C> <C> <C>
Net asset value -- beginning of year $12.04 $11.79 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.19 0.25 (0.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.73 0.69 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.54) (0.44) (0.41)
Dividends in excess of net investment income -- -- --
Distributions from net realized capital gains -- (0.00)# --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $12.23 $12.04 $11.79
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 6.11% 6.03% 1.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $13,948 $5,153 $11,556
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.34% 3.71% 3.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest 0.61% 0.56% 0.23%
expense
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 58.11% 37.93% 77.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.43 $0.34 $0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.43% 1.41% 1.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The California Tax-Free Intermediate Bond Fund's Class R Shares commenced
operations on July 1, 1993.
(b) The Government Reserve Fund's Class R Shares commenced operations on
September 14, 1992.
(c) The California Tax-Free Money Fund's Class R Shares commenced operations on
September 30, 1994.
** Total return represents aggregate total return for the periods indicated.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION SHORT GOVERNMENT
FUND FUND BOND FUND
1996(b) 1996 1995 1994(c) 1996 1995 1994 1993(d)
$12.00 $16.33 $12.24 $12.00 $9.95 $9.80 $10.23 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0.06 0.26 0.25 0.06 0.60 0.62 0.61 0.33
4.45 3.54 4.11 0.18 (0.04) 0.16 (0.34) 0.23
- --------------------------------------------------------------------------------------------------------------------------------
4.51 3.80 4.36 0.24 0.56 0.78 0.27 0.56
- --------------------------------------------------------------------------------------------------------------------------------
(0.04) (0.25) (0.17) -- (0.59) (0.62) (0.56) (0.33)
-- -- -- -- (0.00)# -- (0.07) --
-- (0.55) (0.10) -- -- -- -- --
(0.01) -- -- (0.07) --
-- -- -- -- -- (0.01) -- (0.00)#
- --------------------------------------------------------------------------------------------------------------------------------
(0.05) (0.80) (0.27) -- (0.59) (0.63) (0.70) (0.33)
- --------------------------------------------------------------------------------------------------------------------------------
$16.46 $19.33 $16.33 $12.24 $9.92 $9.95 $9.80 $10.23
- --------------------------------------------------------------------------------------------------------------------------------
37.75% 23.92% 35.99% 2.00% 5.74% 8.28% 2.49% 5.66%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
$77,955% $132,511 $60,234 $1,548 $22,681 $17,093 $21,937 $22,254
- --------------------------------------------------------------------------------------------------------------------------------
0.42%+ 1.85% 3.43% 2.54%+ 5.88% 6.41% 5.93% 6.02%+
- --------------------------------------------------------------------------------------------------------------------------------
1.80%+ 1.30% 1.30% 1.30%+ 0.60% 0.47% 0.25% 0.22%+
- --------------------------------------------------------------------------------------------------------------------------------
105.98% 225.91% 95.75% 190.94% 349.62% 284.23% 603.07% 213.22%
- --------------------------------------------------------------------------------------------------------------------------------
$0.0097 $0.0595 N/A N/A -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
$0.02 $0.24 $0.19 $(0.11) $0.52 $0.54 $0.51 $0.27
- --------------------------------------------------------------------------------------------------------------------------------
2.11%+ 1.55% 2.07% 9.00%+ 2.31% 2.23% 1.75% 2.07%+
- --------------------------------------------------------------------------------------------------------------------------------
-- 1.42% 1.31% 1.43%+ 1.55% 1.38% 0.71% --
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
++ Per shares numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE CALIFORNIA TAX-FREE
FUND MONEY FUND
1996 1995 1994 1993(b) 1996 1995(c)
<S> <C> <C> <C> <C> <C>
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------
0.052 0.049 0.029 0.024 0.030 0.027
0.000## 0.000## 0.000## 0.000## 0.000## .000##
- -------------------------------------------------------------------------------------------------------------------------------
0.052 0.049 0.029 0.024 0.030 0.027
- -------------------------------------------------------------------------------------------------------------------------------
(0.052) (0.049) (0.029) (0.024) (0.030) (0.027)
-- -- -- -- -- (0.000)##
-- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(0.052) (0.049) (0.029) (0.024) (0.030) (0.027)
- -------------------------------------------------------------------------------------------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------
5.28% 4.97% 2.96% 2.41% 3.03% 2.68%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
$439,423 $258,956 $211,129 $124,795 $98,134 $64,780
- -------------------------------------------------------------------------------------------------------------------------------
5.17% 4.92% 2.99% 2.96%+ 2.99% 3.55%+
- -------------------------------------------------------------------------------------------------------------------------------
0.60% 0.60% 0.60% 0.38%+ 0.59% 0.33%+
- -------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
$0.050 $0.047 $0.028 $0.013 $0.028 $0.023
- -------------------------------------------------------------------------------------------------------------------------------
0.74% 0.79% 0.71% 0.77%+ 0.80% 0.86%+
- -------------------------------------------------------------------------------------------------------------------------------
-- 0.63% -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Annualized.
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
The Funds' Investment Objectives And Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 18. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 21. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 23. Certain terms used in the Prospectus are
defined in the Glossary found at the end of this Prospectus. This Prospectus may
refer to groups of similar funds using the following defined terms:
SUMMARY COMPARISON OF FUNDS
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Funds
Domestic Equity Funds
Montgomery Growth Fund 65-100% 35% Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund 65-100% 35% Micro-Cap Not exceed $600 Million
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund 80-100% 35% Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
===================================================================================================================================
International Funds
Montgomery International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 65-100% 35% Asian Growth Any size
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 65-100% 35% Emerging Growth Any size
===================================================================================================================================
Global Funds
Montgomery Global Opportunities Fund 65-100% 35% Worldwide Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund 65-100% 35% Worldwide Any size
===================================================================================================================================
Multi-Strategy Funds
Montgomery Select 50 Fund 65-100% 35% Worldwide Growth Any size
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 20-80% 20-80% Balanced Any size
===================================================================================================================================
Fixed-Income Funds
Montgomery Short Government Bond Fund 0% 100% Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0% 100% Income N/A
===================================================================================================================================
Tax-Free Funds
Montgomery Federal Tax-Free Money Fund 0% 100% Federal Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund 0% 100% California Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0% 100% California Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock but also
invests in other types of equity securities and equity derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in Highly Rated Debt
Securities. See "Portfolio Securities."
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
11
<PAGE>
Montgomery Micro Cap Fund (the "Micro Cap Fund")
The investment objective of the Micro Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of domestic companies that have potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having market capitalizations that would place them in the smallest
10% of market capitalizations for domestic companies as measured by the Wilshire
5000 Index. Currently, these companies have market capitalizations of $600
million and less. Current income from dividends, interest and other sources is
only incidental. The Micro Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those in other equity securities
and in debt instruments, including foreign securities. Any debt securities
purchased by this Fund must be Highly Rated Debt Securities. See "Portfolio
Securities."
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The Micro Cap Fund is currently closed to new investors. The Manager may,
however, reopen and close the Micro Cap Fund to new investors from time to time
at its discretion. If this Fund is closed, shareholders who maintain open
accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible.
Montgomery Small Cap Fund (the "Small Cap Fund")
The investment objective of the Small Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those assets in companies having
total market capitalizations of $1 billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity securities and equity
derivative securities but limits to 5% of its total assets any single other type
of security. Any debt securities purchased by this Fund must be Highly Rated
Debt Securities. See "Portfolio Securities." Current income from dividends,
interest and other sources is only incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with this Fund may make additional
investments. Once your account is closed, additional investments in this Fund
may not be possible. An Account may be considered closed and subject to
redemption by this Fund if the value of the shares remaining after a transfer or
redemption falls below $1,000. This Fund may resume sales of shares to new
investors at some future date, but it has no present intention to do so.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1.5 billion. The Small Cap Opportunities
Fund generally invests the remaining 35% of its total assets in a similar manner
but may invest those assets in domestic and foreign companies having total
market capitalizations of $1.5 billion or more. This Fund invests primarily in
common stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be Highly
Rated Debt Securities. See "Portfolio Securities." Current income from
dividends, interest and other sources is only incidental.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
12
<PAGE>
market share for existing product lines. Using fundamental research, the Fund
targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities,
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including up to 5% of its total assets in debt securities rated below investment
grade. See "Portfolio Securities" and "Risk Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery Emerging Asia Fund (the "Emerging Asia Fund")
The investment objective of the Montgomery Emerging Asia Fund is long term
capital appreciation which, under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of companies that have their
principal activities in emerging Asia. The Fund currently considers the
following to be emerging Asia countries: Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan and Thailand. The Fund, however, does not expect to invest in Japanese
securities. In the future, the Fund may invest in other countries in Asia when
their markets become sufficiently developed. Under normal conditions, the Fund
maintains investments in at least three emerging Asia countries at all times and
invests no more than one-third of its total assets in any one emerging Asia
country. As part of the remaining 35% of its total assets, the Fund may invest
in more developed Asian countries, such as Japan and Hong Kong, that may serve
defensive purposes in an Asian portfolio. Alternatively, companies in more
developed Asian markets may have significant operations in emerging Asian
countries.
The Fund considers a company to be an emerging Asian company if its securities
are principally traded in the capital market of an emerging Asia country; it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging Asia countries or from sales made in such emerging Asia
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, an
emerging Asia country.
Emerging Asia countries are in various stages of economic development with most
being considered emerging markets. Each country has its unique risks. Most
emerging Asia countries are heavily dependent on international trade. Some have
prosperous economies, but are sensitive to world commodity prices. Others are
especially vulnerable to recession in other countries. Some emerging Asia
countries have experienced rapid growth, although many suffer from obsolete
financial systems, economic problems, or archaic legal systems. The return of
Hong Kong to Chinese dominion will affect the entire Pacific region. For
information on risks, see "Portfolio Securities," "Risk Considerations" and the
Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in high yield debt securities, including up to 5% in high yield debt
securities rated below investment grade (also known as "junk bonds"). See
"Portfolio Securities" and "Risk Considerations." During the two-to three-month
period following commencement of the Fund's operations, the Fund may have its
assets invested substantially in cash and cash equivalents.
The Fund may invest in certain debt securities issued by the governments of
emerging Asia countries that are, or may be eligible for, conversion into
investments in emerging Asian companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities.
See "Portfolio Securities."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging market country.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's
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aims are to invest in those countries that are expected to have the highest
risk/reward trade-off when incorporated into a total portfolio context. This
"top-down" country selection is combined with "bottom-up" fundamental industry
analysis and stock selection based on original research and publicly available
information and company visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities. This Fund
may invest no more than 20% of its total assets in the equity securities of
companies constituting the EAFE Index. See "Portfolio Securities." These
companies typically have larger average market capitalizations than the Emerging
Market Companies in which this Fund generally invests. Accordingly, subject to
its investment objective, this Fund invests in EAFE Index companies for
temporary defensive strategies.
Montgomery Global Opportunities Fund (the "Opportunities Fund")
The investment objective of the Opportunities Fund is capital appreciation.
Under normal conditions, the Opportunities Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
companies, which may be of any size, throughout the world. While the
Opportunities Fund emphasizes common stocks of those companies having total
market capitalizations of more than $1 billion, it also may invest in other
types of equity securities and equity derivative securities.
The Opportunities Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Opportunities Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Opportunities Fund may invest substantially in securities denominated in one
or more foreign currencies. Under normal conditions, the Opportunities Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Opportunities Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities
are outside the U.S. The Manager uses its financial expertise and research
capabilities in markets located throughout the world in attempting to identify
securities providing the greatest potential for long-term capital appreciation.
For information on risks, see "Portfolio Securities" and "Risk Considerations."
Montgomery Global Communications Fund (the "Communications Fund")
The investment objective of the Communications Fund is capital appreciation.
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
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The Communications Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Communication Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Communications Fund may invest substantially in securities denominated in
one or more foreign currencies. Under normal conditions, the Communications Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Communications Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities" and "Risk Considerations."
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents, coupled with active management of the individual investments in
each asset class. This Fund adjusts the proportion of its investments in each of
these categories as needed to respond to current market conditions, maintaining
from 20 to 80% of total assets in stocks, 20 to 80% of total assets in debt
instruments of any remaining maturity, and 0 to 50% of total assets in cash or
cash equivalents. The Manager will implement its allocation strategy with the
use of a quantitative risk model and computer optimization program. The Manager
may temporarily increase the Fund's cash allocation from its set strategy in
order to meet anticipated redemptions. The Manager seeks to reduce risk through
investment in high-grade debt instruments and cash or cash equivalents. Under
normal conditions, at least 65% of the Fund's total assets are invested in
securities issued by domestic issuers.
The debt instruments in which this Fund invests include U.S. Government
securities and other Highly Rated Debt Securities. This Fund expects that, under
normal circumstances, the dollar-weighted average maturity of its debt
instruments (or period until next interest rate reset date) may be longer than
three years (see "Duration" discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation) as well as warrants, rights and options. The Manager selects
equity securities of issuers exhibiting positive trends in revenue and earnings
that, in the opinion of the Manager, are sustainable. Among the Fund's equity
investments, the Fund may invest up to 35% of its total assets in foreign equity
securities of various countries, primarily those listed on foreign exchanges.
Montgomery Short Government Bond Fund (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions,
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the Fund seeks to achieve its objective by investing at least 65% of the value
of its total assets in U.S. Government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury Notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value per share of $1.00.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and high-grade liquid debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities that are
considered Highly Rated Debt Securities. The Fund also may invest in other
investment companies investing primarily in U.S.
Government securities of appropriate duration. See "Portfolio Securities."
Duration of the Asset Allocation Fund and the Short Bond Fund. The Short Bond
Fund and the Asset Allocation Fund expect that, under normal circumstances, the
dollar-weighted average maturity (or period until the next interest rate reset
date) of their portfolio securities may be longer than three years but the
maturity of individual securities may be up to 30 years. However, of these two
Funds, only the Short Bond Fund seeks to maintain an average portfolio effective
duration comparable to or less than that of three-year U.S. Treasury Notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. Government Securities, repurchase agreements for
U.S. Government Securities and other money market funds investing in U.S.
Government Securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. Government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund")
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund")
Montgomery California Tax-Free Money Fund (the "California Money Fund")
The investment objective of the Federal Money Fund is to maintain a stable net
asset value while maximizing current income exempt from federal income tax
consistent with liquidity and preservation of capital. The investment objective
of the California Intermediate Bond Fund is to provide maximum current income
exempt from federal income and California personal income taxes consistent with
preservation of capital and prudent investment management, and that of the
California Money Fund is to maintain a stable net asset value while maximizing
current income exempt from federal and California personal income taxes
consistent with liquidity and preservation of capital. Under normal conditions,
the Federal Money Fund seeks to achieve its objective by investing at least 80%
of its net assets in municipal securities, the interest from which is, in the
opinion of counsel to the issuer, exempt from federal income tax. Under normal
conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in municipal securities and at least
65% of net assets in debt securities, the interest from which is, in the opinion
of counsel to the issuer, also exempt from California personal income taxes
("California municipal securities"). Under normal conditions, the California
Intermediate Bond Fund seeks to achieve its objective by investing at least 80%
of its net assets in California municipal securities.
The California Intermediate Bond Fund is designed primarily for investors who
seek higher yields than tax-free money market funds generally offer and are
willing to accept some fluctuation in this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally changes with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity to interest rate change.
See "Duration" above.) Under normal conditions, the average dollar-weighted
portfolio maturity of the California Intermediate Bond Fund is expected to stay
within a range of 5 to 10 years. However, this Fund may invest in securities of
any maturity. This Fund is not suitable for investors who cannot benefit from
the tax-exempt character of its dividends, such as IRAs, qualified retirement
plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California municipal securities that at the time of purchase are
rated within the four highest ratings of municipal securities (AAA to BBB)
assigned
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by S&P, (Aaa to Baa) assigned by Moody's, or (AAA to BBB) assigned by Fitch; or
have S&P's short-term municipal rating of SP-2 or higher, or a municipal
commercial paper rating of A-2 or higher; Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, are deemed by the
Manager to be of comparable quality, using guidelines approved by the Board (but
not to exceed 20% of this Fund's net assets). Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. However, there is no assurance that any municipal issuers
will make full payments of principal and interest or remain solvent. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. See also "Risk Considerations."
Under normal conditions, the California Intermediate Bond Fund and the
California Money Fund seek to invest in California municipal securities to the
greatest extent practicable, but they may, however, invest in other municipal
securities if in such Fund's opinion, suitable California municipal securities
are not available. The California Intermediate Bond Fund may invest up to 20%,
and the Federal Money and California Money Funds may invest up to 35%, of their
respective total assets in cash, U.S. government securities, and obligations of
U.S. possessions, commercial paper and other debt securities, including
corporate debt instruments or instruments the interest from which is subject to
the federal alternative minimum tax for individuals. Additionally, the
California Intermediate Bond Fund may invest up to 20% and the California Money
Fund may invest 35%, of their respective total assets in municipal securities
other than California municipal securities. For the California Intermediate Bond
Fund, these other securities must be Highly Rated Debt Securities. From time to
time, the California Intermediate Bond and the California Money Funds may invest
more than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California.
The Federal Money and California Money Funds seek to maintain a stable net asset
value per share of $1.00 in compliance with Rule 2a-7 under the Investment
Company Act and, pursuant to procedures adopted under such Rule, limit their
investments to those securities that the Board determines present minimal credit
risks and have remaining maturities, as determined under the Rule, of 397
calendar days or less. These Funds also maintain a dollar-weighted average
maturity of their portfolio securities of 90 days or less.
Portfolio Securities
Equity Securities
The Domestic Equity, Select 50, International and Global Funds emphasize
investments in common stock, and common stock may constitute up to 80% of the
Asset Allocation Fund's portfolio. These Funds may also invest in other types of
equity securities (such as preferred stocks or convertible securities) and
equity derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
may invest in ADRs, EDRs and GDRs and convertible securities which the Manager
regards as a form of equity security. Each such Fund may also invest up to 5% of
its net assets in warrants, including up to 2% of net assets for those not
listed on a securities exchange.
Privatizations
The Select 50, International and Global Funds believe that foreign governmental
programs of selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and these Funds may invest in privatizations. The ability of U.S.
entities, such as these Funds, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations
The Select 50, International and Global Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International and Global Funds to invest in certain
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markets. Such investments may involve the payment of substantial premiums above
the net asset value of those investment companies' portfolio securities and are
subject to limitations under the Investment Company Act. The International and
Global Funds also may incur tax liability to the extent they invest in the stock
of a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds. See the Statement of Additional Information.
The Select 50, International, Global, Asset Allocation, Equity Income and Fixed
Income Funds do not intend to invest in other investment companies unless, in
the Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
Debt Securities
The Select 50, International and Global Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Asset Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each of the
Select 50, Global and International Funds will not invest more than 5% of its
total assets in debt securities rated lower than investment grade, and the
Allocation and Equity Income Funds will not invest more than 5% of their total
assets in debt securities rated lower than Highly Rated Debt Securities. Subject
to this limitation, each of these Funds may invest in any debt security,
including securities in default. After its purchase by a Fund a debt security
may cease to be rated or its rating may be reduced below that required for
purchase by the Fund. A security downgraded below the minimum level may be
retained if determined by the Manager and the Board to be in the best interests
of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, each of the International, Global, Allocation and Equity Income
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging market
countries. The percentage distribution between equity and debt will vary from
country to country based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. Government Securities
All Funds may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Reserve, Tax-Free, Short Bond and Asset Allocation Funds may invest in
mortgage-related securities. A mortgage-related security is an interest in a
pool of mortgage loans and is considered a derivative security. Most
mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a pro rata share of both principal and
interest (less servicing and other fees), as well as unscheduled prepayments, as
mortgages in the underlying mortgage pool are paid off by the borrowers. Certain
mortgage-related securities are subject to high volatility. These funds use
these derivative securities in an effort to enhance return and as a means to
make certain investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities.
Investors in the Reserve, Tax-Free, Short Bond and Asset Allocation Funds should
note that the dominant issuers or guarantors of mortgage-related securities
today are GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from
pools of government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages.
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The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, and FHLMC
guarantees timely payment of interest and ultimate collection of principal of
its pass-through securities. Securities from FNMA and FHLMC are not backed by
the full faith and credit of the U.S. Government but are generally considered to
offer minimal credit risks. The yields provided by these mortgage-related
securities have historically exceeded the yields on other types of U.S.
Government Securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. Government
securities for purposes of their investment policies. However, the Money Market
Funds do not invest in stripped mortgage securities, and the Short Bond Fund
limits its stripped mortgage securities investments to 10% of total assets. The
liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Allocation and Short Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and the Asset Allocation Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities for pools of conventional
residential mortgage loans; mortgage pay-through obligations and mortgage-backed
bonds, which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and CMOs
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by
pools of conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Bond Fund may purchase some mortgage-related securities
through private placements that are restricted as to further sale. See "Illiquid
Securities." The value of these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Funds' Investment Objectives and
Policies - Duration."
Variable Rate Demand Notes
The Fixed Income and the Asset Allocation Funds may invest in variable rate
demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income and Asset Allocation Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the Fixed Income and Asset Allocation Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities, Custodial Receipts, Participation Interests and Tender
Option Bonds
Each Fund may invest up to 5% (25% in the case of the Allocation and Short Bond
Funds) of its total assets in asset-backed securities. Like mortgage-related
securities, these securities are subject to the risk of prepayment. See "Risk
Considerations." The California Intermediate Bond Fund may invest in custodial
receipts. The Tax-Free Funds may invest in participation interests and tender
option bonds.
20
<PAGE>
<TABLE>
Other Investment Practices
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
Small International
Equity Small Cap Micro Global Global Small
Growth Income Cap Opportunities Cap Opportunities Communications Cap
Fund Fund Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements (1) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse-dollar roll transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% of
total fund assets x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third
of total fund assets x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
30% of total fund assets x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts (9) x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
indices (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts (8) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on
futures x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities x/ (6) x/ (6) x/ (4) x/ (6) x/ (6) x/ (6) x/ (6) x/ (6)
====================================================================================================================================
California
Short Federal Tax-Free California
International Emerging Emerging Select Asset Government Government Tax-Free Intermediate Tax-Free
Growth Asia Markets 50 Allocation Bond Reserve Money Bond Money
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements (1) x/ x/ x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions x/ (1) x/ (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% of
total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third
of total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x/ x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage x/ x/ x/ x/ x/ (2) x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
30% of total fund assets x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities x/ x/ x/ x/ x/ (3) x/ (3) x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts (9) x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
indices (7) x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(8)x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on
futures x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities x/ (6) x/ (6) x/ (6) x/ (6) x/ (6) x/ (6) x/ (5) x/ (5) x/ (6) x/(5)
====================================================================================================================================
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by Collateral Assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay
21
<PAGE>
or difficulty in exercising its rights to realize upon the security, may
incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury Notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 Limited to 5% of the Fund's net assets.
5 Limited to 10% of the Fund's net assets.
6 Limited to 15% of the Fund's net assets.
7 A Fund will not enter into any options on securities, securities indices
or currencies or related options (including options on futures) if the sum
of the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
8 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
9 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
</TABLE>
Borrowing
Subject to the limits set forth in the Prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 5% of its total assets (excluding, in the case of
the Short Bond Fund, fully collateralized reverse repurchase agreements and
dollar roll transactions), except that the Growth, Small Cap Opportunities,
International Growth, Select 50, Asset Allocation, Equity Income, International
Small Cap, and Opportunities Funds may not purchase securities if such
borrowings exceed 10% of their total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer mark-ups and
other transaction costs, and may result in the recognition of capital gains that
may be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. The annual portfolio turnover rate for the Emerging Asia
Fund is expected to be approximately 125%. Even when portfolio turnover exceeds
100% for a Fund that Fund does not regard portfolio turnover as a limiting
factor. Portfolio turnover in excess of 100% is considered high, increases
brokerage costs incurred by a Fund and may cause recognition of gain by
shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Funds) may employ certain risk management practices using certain
derivative securities and techniques (known as Derivatives). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. While a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
22
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The California Money, Federal Money, Growth & Income, Equity Income, Select 50,
Micro Cap and Small Cap Opportunities Funds have reserved the right, if approved
by the Board, to convert in the future to a "feeder" fund that would invest all
of its assets in a "master" fund having substantially the same investment
objective, policies and restrictions. At least 30-days' prior written notice of
any such action would be given to all shareholders if and when such a proposal
is approved, although no such action has been proposed as of the date of this
Prospectus.
Risk Considerations
Small Companies
The Small Cap, Small Cap Opportunities, Micro Cap and International Small Cap
Funds emphasize, and the Select 50, other International, Growth, Allocation and
Global Funds may make investments in, smaller companies that may benefit from
the development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Foreign Securities
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Select 50, International and Global Funds, particularly the
Emerging Asia Fund and Emerging Markets Fund, may invest in securities of
companies domiciled in, and in markets of, so-called "emerging market
countries." These investments may be subject to higher risks than investments in
more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
23
<PAGE>
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Security Lending
The Funds may lend its securities to brokers, dealers and other financial
organizations. There is a risk of delay in receiving collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially.
Lower Quality Debt
The Select 50, International and Global Funds are authorized to invest in
medium-quality (rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's)
and in limited amounts of high-risk debt securities below investment grade
quality. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds". The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk, lower
quality debt securities would be consistent with the interests of these Funds
and their shareholders. Unrated debt securities are not necessarily of lower
quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because this Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the Code,
this Fund may not always be able to take full advantage of opportunities to
invest in certain communications companies.
Concentration in Securities of Emerging Asian Companies
The Emerging Asia Fund concentrates its investments in companies that have their
principal activities in emerging Asian countries. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
geographic concentration. The value of the Fund's shares may vary in response to
political and economic factors affecting issuers in emerging Asian countries.
Although the Fund normally does not expect to invest in Japanese companies, some
emerging Asian economies are directly affected by Japanese capital investment in
the region and by Japanese consumer demands. Many of the emerging Asian
countries are developing both economically and politically. Emerging Asia
countries may have relatively unstable governments, economies based on only a
few commodities or industries, and securities markets trading infrequently or in
low volumes. Some emerging Asian countries restrict the extent to which
foreigners may invest in their securities markets. Securities of issuers located
in some emerging Asian countries tend to have volatile prices and may offer
significant potential for loss as well as gain. Further, certain
24
<PAGE>
companies in emerging Asia may not have firmly established product markets, may
lack depth of management, or may be more vulnerable to political or economic
developments such as nationalization of their own industries.
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fixed Income Funds, and the Asset Allocation
Fund, to the extent it retains the same percentage of debt securities, may have
to reinvest the proceeds of prepayments at lower interest rates than those of
their previous investments. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Fixed Income Funds or the Asset Allocation Fund purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See "Duration" in the Glossary.
Tax-Free Funds
Investing in Municipal Securities. Because the California Intermediate Bond and
the California Money Funds invest primarily in California municipal securities,
their performance may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California municipal securities to meet their obligations. As a
result, the value of the Funds' shares may fluctuate more widely than the value
of shares of a portfolio investing in securities relating to a number of
different states. The Federal Money Fund also may invest a portion of its
portfolio in California municipal securities. Investors in the Federal Money
Fund should note that the types of risks of investing in California municipal
securities exist in varying degrees for municipal securities of other states.
Non-diversified Portfolio. The California Intermediate Bond Fund is a
"non-diversified" investment company under the Investment Company Act. This
means that, with respect to 50% of its total assets, it may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
Government). The balance of its assets may be invested in as few as two issuers.
Thus, up to 25% of the Fund's total assets may be invested in the securities of
any one issuer. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) the assets and revenues of which
back the security, or, with respect to an industrial development bond, that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. However, the investment return on
a non-diversified portfolio typically is dependent upon the performance of a
smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw
25
<PAGE>
upon the research and administrative resources of Montgomery Securities in its
discretion and consistent with applicable regulations.
Portfolio Managers
John D. Boich is a Managing Director and Senior Portfolio Manager. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial adviser with Prudential-Bache
Securities and E.F. Hutton & Company. Mr. Boich, together with Mr. Castro,
manages the Global Opportunities Fund, the Global Communications Fund, the
International Small Cap Fund and the International Growth Fund.
John H. Brown, CFA, is a Managing Director and Senior Portfolio Manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California from
June 1986. Mr. Brown manages the Equity Income Fund.
Michael Carmen, CFA, is a Vice President and Portfolio Manager. From 1993 until
joining the Manager in 1996, he was a Vice President and Associate Portfolio
Manager with State Street Research and Management Company in Boston where he
assisted with the management of capital appreciation and growth portfolios.
Before then, he was a Senior Equity Analyst with State Street and, from 1991 to
1992, with Cigna Investments in Hartford. Mr. Carmen, as a key member of the
growth equity team (which includes also Mr. Honour and Mr. Pratt), manages the
Growth Fund, the Micro Cap Fund and the Small Cap Opportunities Fund and the
equity component of the Asset Allocation Fund.
Oscar A. Castro is a Managing Director and Senior Portfolio Manager. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International. Mr.
Castro, together with Mr. Boich, manages the Global Opportunities Fund, the
Global Communications Fund, the International Small Cap Fund and the
International Growth Fund.
Angeline Ee is a Vice President and Portfolio Manager. From 1990 until joining
the Manager in July 1994, Ms. Ee was an Investment Manager with AIG Investment
Corp. in Hong Kong. From June 1989 until September 1990, Ms. Ee was a co-
manager of a portfolio of Asian equities and bonds at Chase Manhattan Bank in
Singapore. Ms. Ee, together with Ms. Jimenez, Mr. Sudweeks and Mr. Haslett,
manages the Emerging Markets Fund.
Kevin T. Hamilton, Chairman of the Manager's Investment Oversight Committee and
a Managing Director, is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams for the Select 50 Fund. The
portfolio management teams responsible for the different disciplines used in the
Select 50 Fund are described throughout this "Portfolio Managers" section. From
1985 until joining the Manager in February 1991, Mr. Hamilton was a Senior Vice
President responsible for investment oversight at Analytic Investment Management
in Irvine, California.
Thomas R. Haslett, CFA, is a Managing Director and Senior Portfolio Manager.
From 1987 until joining the Manager in April 1992, Mr. Haslett was a Portfolio
Manager at Gannett, Welsh and Kotler in Boston, Massachusetts. Mr. Haslett,
together with Ms. Jimenez, Mr. Sudweeks and Ms. Ee, manages the Emerging Asia
and Emerging Markets Funds.
Roger W. Honour is a Managing Director and Senior Portfolio Manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
Vice President and Portfolio Manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as Vice President and Portfolio
Manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a Vice
President with Merrill Lynch Capital Markets. Mr. Honour, as a key member of the
growth equity team (which includes also Mr. Pratt and Mr. Carmen), manages the
Growth Fund, the Micro Cap Fund and the Small Cap Opportunities Fund and the
equity component of the Asset Allocation Fund.
Josephine S. Jimenez, CFA, is a Managing Director and Senior Portfolio Manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior analyst
and portfolio manager. Ms. Jimenez, together with Mr. Sudweeks, Mr. Haslett and
Ms. Ee, manages the Emerging Asia and Emerging Markets Funds.
Bradford D. Kidwell is a Vice President and Portfolio Manager. Mr. Kidwell
joined the Manager in 1991 from the position he held since 1989 as the sole
general partner and portfolio manager of Oasis Financial Partners, an affiliate
of the Distributor that invested in savings and loans. Before then, he covered
the savings and loan industry for Dean Witter Reynolds from 1987 to 1989. Mr.
Kidwell, together with Mr. Roberts and Mr. Philpott, manages the Small Cap Fund.
26
<PAGE>
Jerome C. (Cam) Philpott, CFA, is a Vice President and Portfolio Manager. Before
joining the Manager, Mr. Philpott was a securities analyst with Boettcher &
Company in Denver from 1988 to 1991. Mr. Philpott, together with Mr. Roberts and
Mr. Kidwell, manages the Small Cap Fund.
Andrew Pratt, CFA, is a Vice President and Portfolio Manager. He joined
Montgomery Asset Management from Hewlett-Packard Company, where he was an equity
analyst, managed a portfolio of small capitalization technology companies, and
researched private placement and venture capital investments. From 1983 through
1988, he worked in the Capital Markets Group at Fidelity Investments in Boston,
Massachusetts. Mr. Pratt, as a key member of the growth equity team (which
includes also Mr. Honour and Mr. Carmen), manages the Growth Fund, the Micro Cap
Fund and the Small Cap Opportunities Fund and the equity component of the Asset
Allocation Fund.
Stuart O. Roberts is a Managing Director and Senior Portfolio Manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, Colorado, where he
managed three public mutual funds. Mr. Roberts, together with Mr. Philpott and
Mr. Kidwell, manages the Small Cap Fund.
Bryan L. Sudweeks, Ph.D., CFA, is a Managing Director and Senior Portfolio
Manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991. Mr. Sudweeks, together with
Ms. Jimenez, Mr. Haslett and Ms. Ee, manages the Emerging Asia and Emerging
Markets Funds. Mr. Sudweeks is also a Portfolio Strategist for the International
Growth Fund.
William C. Stevens is a Managing Director and a Senior Portfolio Manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was
responsible for the origination and trading of all derivative mortgage-related
securities. Mr. Stevens manages the Short Government Bond Fund, the Government
Reserve Fund, the Federal Tax-Free Money Fund, the California Tax-Free
Intermediate Bond Fund and the California Tax-Free Money Fund. Mr. Stevens is
also the portfolio manager for the fixed-income and cash components of the Asset
Allocation Fund.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
<TABLE>
The management fees for the Domestic Equity, Select 50, Asset Allocation,
International and Global Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
27
<PAGE>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund First $500 million 0.80%
Over $500 million 0.65%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: each of the Growth, Equity Income,
Opportunities, Emerging Asia and Allocation Funds pays seven one-hundredths of
one percent (0.07%) of average daily net assets (0.06% of average daily net
assets over $500 million); each of the Small Cap, Small Cap Opportunities,
Select 50, Micro Cap, Emerging Markets, International Small Cap, International
Growth and Communications Funds pays seven one-hundredths of one percent (0.07%)
of average daily net assets (0.06% of daily net assets over $250 million); each
of the Short, Reserve and Tax-Free Funds pays five one-hundredths of one percent
(0.05%) of average daily net assets (0.04% of average daily net assets over $500
million and the Reserve Fund over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each Fund's average net assets: the Growth Fund, one and
five-tenths of one percent (1.50%); the Equity Income Fund, eighty-five
one-hundredths of one percent (0.85%); the Small Cap Fund, one and four-tenths
of one percent (1.40%); the Small Cap Opportunities Fund, one and five-tenths of
one percent (1.50%); the Micro Cap Fund, one and seventy-five one-hundredths of
one percent (1.75%); the International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); the Select 50 Fund, one and eight-tenths
of one percent (1.80%); the Emerging Markets, International Small Cap,
Communications and Opportunities Funds, one and nine-tenths of one percent
(1.90%); the Asset Allocation Fund, one and three-tenths of one percent (1.30%);
the Bond Funds, seven-tenths of one percent (0.70%); and the Money Market Funds,
six-tenths of one percent (0.60%). The Manager also may voluntarily reduce
additional amounts to increase the return to a Fund's investors. The Manager may
terminate these voluntary reductions at any time. Any reductions made by the
Manager in its fees are subject to reimbursement by that Fund within the
following two years (three years for the Asset Allocation Fund), provided that
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Funds for fees and
expenses for the current year.
28
<PAGE>
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To Contact The Funds
For information on the Funds or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-3863
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Funds
must be received by 12:00 noon, New York time. Orders for Fund shares received
after the Funds' cutoff times will be purchased at the next-determined net asset
value after receipt of the order. Shares of the Fixed Income Funds will not be
priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 ($5,000 for the Micro Cap
Fund) (including IRAs) and $100 ($500 for the Micro Cap Fund) for subsequent
investments. The Manager or the Distributor, in its discretion, may waive these
minimums. Purchases may also be made in certain circumstances by payment of
securities. See the Statement of Additional Information for further details.
29
<PAGE>
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Minimum Initial Investment for the Micro Cap Fund (including IRAs): $5,000
- --------------------------------------------------------------------------------
Initial Investments by Check
- --------------------------------------------------------------------------------
o Complete the Account Application. Tell us in which Fund(s)
you want to invest and make your check payable to The
Montgomery Funds.
o We do not accept third party checks or cash investments.
Checks must be in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make
your initial investment by wire. Provide the Transfer Agent
with your name, dollar amount to be invested and Fund(s) in
which you want to invest. They will provide you with
further instructions to complete your purchase. Complete
information regarding your account must be included in all
wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds
by wire for purchase of shares in your name to the
following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s)
account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to
reject any purchase order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs): $500
- --------------------------------------------------------------------------------
Subsequent Investments by Check
- --------------------------------------------------------------------------------
o Make your check payable to The Montgomery Funds. Enclose an
investment stub or Flexible Account Builder stub with your
check. If you do not have an investment stub, mail your
check with written instructions indicating the Fund name
and account number to which your investment should be
credited.
o We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
30
<PAGE>
- --------------------------------------------------------------------------------
Subsequent Investments by Wire
- --------------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to
making subsequent investments by wire. Instruct your bank
to wire funds to the Transfer Agent's affiliated bank by
using the bank wire information under "Initial Investments
by Wire."
- --------------------------------------------------------------------------------
Subsequent Investments by Telephone
- --------------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone
purchases. To make a purchase, call the Transfer Agent at
(800) 572-3863 before the Fund cutoff time.
o Shares of the Money Funds and shares for IRAs may not be
purchased by phone.
o The maximum telephone purchase is an amount up to five
times your account value on the previous day.
o Payments for shares purchased must be received by the
Transfer Agent within three business days after the
purchase request. Write your confirmed purchase number on
your check or include it in your wire instructions.
o You should do one of the following to ensure payment is
received in time:
o Transfer funds directly from your bank
account by sending a letter and a voided
check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day
courier service.
o Instruct your bank to wire funds to the
Transfer Agent's affiliated bank by using
the bank wire information under the
section titled "Initial Investments by
Wire."
- --------------------------------------------------------------------------------
Automatic Account Builder ("AAB")
- --------------------------------------------------------------------------------
o AAB will be established on existing accounts only. You may
not use an AAB investment to open a new account. The
minimum automatic investment amount is each Fund's
subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account)
or preprinted deposit slip (savings account) from your bank
account to your Montgomery account application or your
letter of instruction. Investments will automatically be
transferred into your Montgomery account from your checking
or savings account.
o Investments may be transferred either monthly or quarterly
on or up to two business days before the 5th or 20th day of
the month. If no day is specified on your account
application or your letter of instruction, the 20th of each
month will be selected.
o You should allow 20 business days for this service to
become effective.
31
<PAGE>
o You may cancel your AAB at any time by sending a letter to
the Transfer Agent. Your request will be processed upon
receipt.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Funds upon 30- days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below.
32
<PAGE>
- --------------------------------------------------------------------------------
Redeeming by Written Instruction
- --------------------------------------------------------------------------------
o Write a letter giving your name, account number, the name
of the Fund from which you wish to redeem and the dollar
amount or number of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption
proceeds to go to a party other than the account owner(s),
your predesignated bank account or if the dollar amount of
the redemption exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock
broker, a savings association or national securities
exchange. Contact the Transfer Agent for more information.
o If you do not have a predesignated bank account and want to
wire your redemption proceeds, include a voided check or
deposit slip with your letter. The minimum amount that may
be wired is $500 (wire charges, if any, will be deducted
from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's
discretion.
- --------------------------------------------------------------------------------
Redeeming by Check
- --------------------------------------------------------------------------------
o Checkwriting is available on the Government Reserve,
Federal Money, California Money, California Intermediate
Tax-Free Bond and Short Government Bond Funds.
o The minimum amount per check is $250. A check for less may
be returned to you.
o All checks will require only one signature unless otherwise
indicated.
o Checks should not be used to close accounts with
fluctuating net asset values (California Intermediate
Tax-Free Bond and Short Government Bond Funds).
o Checks will be returned to you at the end of each month.
o Checkwriting privileges may not be available for Montgomery
Securities brokerage accounts.
o A charge may be imposed for any stop payments requested.
- --------------------------------------------------------------------------------
Redeeming By Telephone
- --------------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on
your account application, you may redeem shares up to
$50,000 by calling the Transfer Agent before the Fund
cutoff time.
o If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may request that the Transfer
Agent wire your redemption proceeds to your bank account.
Allow at least two business days for redemption proceeds to
be credited to your bank account. If you want to wire your
redemption proceeds to arrive at your bank on the same
business day (subject to bank cutoff times), there is a $10
fee.
33
<PAGE>
o Telephone redemption privileges will be suspended 30 days
after an address change. All redemption requests during
this period must be in writing with a guaranteed signature.
o Telephone redemption privileges may be cancelled after an
account is opened by instructing the Transfer Agent in
writing. Your request will be processed upon receipt. This
service is not available for IRA accounts.
- --------------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone redemption instructions given by the shareholder's
designee. The Funds may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Funds will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, taxpayer
identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of Fund telephone procedures
and limitations of liability under "Telephone Transactions."
- --------------------------------------------------------------------------------
Purchasing and Redeeming Shares by Exchange
- --------------------------------------------------------------------------------
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange
fee) after your request is received. Your request is subject to the
Funds' cut-off times.
o Exchange purchases must meet the minimum investment requirements of
the Fund you intend to purchase.
34
<PAGE>
o You may exchange for shares of a Fund only in states where that
Fund's shares are qualified for sale and only for Funds offered by
this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make
more than four exchanges out of any one fund during a twelve-month
period. The Fund may also refuse an exchange into a Fund from which
you have redeemed shares within the previous 90 days (accounts under
common control and accounts with the same taxpayer identification
number will be counted together). Exchanges out of the Fixed Income
Funds are exempt. A shareholder's exchanges may be restricted or
refused if a Fund receives, or the Manager anticipates, simultaneous
orders affecting significant portions of that Fund's assets and, in
particular, a pattern of exchanges coinciding with a "market timing"
strategy. The Trusts reserve the right to refuse exchanges by any
person or group if, in the Manager's judgment, a Fund would be unable
to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to
affected shareholders when it is reasonable to do so, they may impose
these restrictions at any time. The exchange limit may be modified
for accounts in certain institutional retirement plans to conform to
plan exchange limits and U.S. Department of Labor regulations (for
those limits, see plan materials). The Trusts reserve the right to
terminate or modify the exchange privileges of Fund shareholders in
the future.
- --------------------------------------------------------------------------------
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed Income Funds into any other
Fund. The minimum exchange is $100 ($500 for the Micro Cap Fund). Periodically
investing a set dollar amount into a Fund is also referred to as dollar-cost
averaging because the number of shares purchased will vary depending on the
price per share. Your account with the recipient Fund must meet the applicable
minimum of $1,000 or $5,000 for the Micro Cap Fund. Exchanges out of the Fixed
Income Funds are exempt from the exchange limit policy.
Directed Dividend Service
If you own shares of the Fixed Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000 or
$5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Money Funds Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Fund when the free credit
balance in the investor's brokerage account (including deposits, proceeds of
sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Montgomery Securities as collateral for margin obligations to
Montgomery Securities) exceeds $100 on each day the NYSE is open for trading
other than national bank holidays. Upon request, a free credit balance in a
Montgomery Securities brokerage account also may be invested in shares of the
Money Funds following receipt by the Transfer Agent of investor instructions. If
such instructions are received after 12:00 noon, New York time, Fund shares will
be purchased at the next-determined asset value. Checkwriting privileges may not
be available for Montgomery Securities brokerage accounts. For the Money Market
Funds, the minimum initial investment through an investor's brokerage account
with Montgomery Securities is $100.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Money Funds), New York time, on days
that the Fund issues shares. Orders received after
35
<PAGE>
that time will be purchased at the next-determined net asset value. To the
extent that these agents perform shareholder servicing activities for the Fund,
they may receive fees from the Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account (Money Funds
Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the selected
Money Fund automatically to satisfy debit balances in a shareholder's Montgomery
Securities brokerage account or to provide necessary cash collateral for a
shareholder's margin obligation to Montgomery Securities. Redemptions also may
be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected Money Fund, not to exceed the number
of shares in the shareholder's account, will be redeemed on the next day the
NYSE is open for trading to satisfy any remaining debits or amounts needed for
pending securities settlements.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a redemption order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Money Funds), on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Money Funds), New York time, on each day that the NYSE is open for
trading (except for bank holidays for the Fixed Income Funds). Per-share net
asset value is calculated by dividing the value of each Fund's total net assets
by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
<TABLE>
Dividends And Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
36
<PAGE>
<CAPTION>
==========================================================================================================================
Income Dividends Capital Gains
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Funds (except Equity Declared and paid in November Declared and paid in November
Income Fund) or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the Declared and paid in November
last business day of each quarter. or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in November Declared and paid in November
or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Fixed-Income Funds Declared daily and paid monthly Declared and paid in November
on or about the last business day or December each year*
of each month
==========================================================================================================================
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a Fund.
</FN>
</TABLE>
Unless investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
Fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time
37
<PAGE>
the Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The Federal Money Fund intends, and the California Money and California
Intermediate Bond Funds intend to continue, to qualify to pay "exempt-interest
dividends" to their shareholders by maintaining, as of the close of each quarter
of its taxable year, at least 50% of the value of its total assets in municipal
securities. If these Funds satisfy this requirement, distributions from net
investment income to shareholders will be exempt from federal income taxation to
the extent net investment income is represented by interest on municipal
securities. Distributions from other net investment income, such as market
discount on municipal securities, and from certain other investment practices,
such as certain transactions in options, will be ordinary income. Shareholders
generally will not incur any federal income tax on the amount of exempt-interest
dividends received by them from these Funds, whether taken in cash or reinvested
in additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security or railroad
retirement benefits are subject to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards to issue an unlimited number of full
and fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
This Prospectus relates only to the Class R shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. While
the Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated
38
<PAGE>
in a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. In the case of the
California Money and California Intermediate Bond Funds, tax equivalent yield is
the yield that a taxable investment must generate in order to equal (after
applicable taxes are deducted) either Fund's yield for an investor in stated
federal income and California personal income tax brackets. For the Federal
Money Fund, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) the Fund's
yield for an investor in stated federal income tax brackets. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and pre-authorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semi-annual reports are mailed approximately 60 days after
June 30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-3863 or (800) 572-FUND.
Backup Withholding
Tax identification number (TIN)
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors
39
<PAGE>
Act, the TIN of the minor should be furnished. If a shareholder has been
notified by the IRS that he or she is subject to backup withholding because he
or she failed to report all interest and dividend income on his or her tax
return and the shareholder has not been notified by the IRS that such
withholding will cease, the shareholder should cross out the appropriate item in
the Account Application. Dividends paid to a foreign shareholder's account by a
Fund may be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Funds' official sales literature.
40
<PAGE>
Glossary
o Asset backed securities. Asset backed securities represent a direct or
indirect participation in, or are secured by and payable from, pools of
assets, such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (e.g., credit card) agreements. Payments
or distributions of principal and interest on asset-backed securities may be
supported by credit enhancements, such as various forms of cash collateral
accounts or letters of credit.
o Cash Equivalents. Cash equivalents are short-term, interest bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury Bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P
or Prime-1 by Moody's, or the issuer has an outstanding issue of debt
securities rated at least A by S&P or Moody's, or are of comparable quality
in the opinion of the Manager.
o Collateral Assets include cash, letters of credit, U.S. Government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral Assets are separately
identified and rendered unavailable for investment or sale.
o Collateralized Mortgage Obligations (CMOs). Derivative mortgage-related
securities that separate the cash flows of mortgage pools into different
classes or tranches. Stripped mortgage securities are CMOs that allocate
different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only or
"IO" class) while another may receive all of the principal (principal only
or "PO" class). The yield to maturity on any IO or PO class is extremely
sensitive not only to changes in interest rates but also to the rate of
principal payments and prepayments on underlying mortgages. In the most
extreme cases, an IO class may become worthless.
o Convertible security. A fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. Through their conversion feature, they provide an opportunity to
participate in capital appreciation resulting from a market price advance in
the underlying common stock. The price of a convertible security is
influenced by the market value of the underlying common stock and tends to
increase as the common stock's market value rises and decrease as the common
stock's market value declines.
o Covered call option. A call option is "covered" if the Fund owns the
optioned securities or has the right to acquire such securities without
additional consideration, a Fund causes its custodian to segregate
Segregable Assets having a value sufficient to meet its obligations under
the option, or a Fund owns an offsetting call option.
o Covered put option. A put option is "covered" if the Fund causes its
custodian to segregate Segregable Assets with a value not less than the
exercise price of the option or holds a put option on the underlying
security.
o Custodial receipts. Custodial receipts represent rights to receive certain
future principal and interest payments on municipal securities deposited
with a custodian. Typically, two classes of receipts are issued in a private
placement, and the ownership and interest rates of such classes are adjusted
periodically through an auction mechanism. The interest rate of the first
class is similar to that of the underlying Municipal Security, and the
interest rate of the second changes inversely to changes in the interest
rate of the first class because the aggregate interest paid to both classes
cannot exceed the interest paid from the underlying Municipal Security.
Consequently, the value of the second class may be quite volatile.
o Depositary receipts include American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar instruments. Depositary Receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
Unsponsored depositary receipts are organized without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored depositary
receipts, and the prices of unsponsored depositary receipts may be more
volatile.
o Derivatives include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps
and options on futures contracts on U.S. Government and foreign government
securities and currencies. The Board has adopted derivative guidelines that
require the Board to review each new type of derivative that may be used by
these Funds.
o Dollar roll transaction. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a Fund to repurchase a similar
rather than the same security.
o Duration. Traditionally, a debt security's "term to maturity" characterizes
a security's sensitivity to changes in interest rates. However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of pre-maturity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a
more precise measure of interest rate risk than "term to maturity." Standard
duration accounts for the time intervals between the present and scheduled
payments (for a callable bond, when expected to be received) but it does not
properly reflect certain types of interest rate risk. For example, floating
and variable rate debt securities may have final maturities of 10 or more
years, yet their interest rate risk corresponds to the frequency of the
coupon reset. Similarly, with mortgage "pass-through" securities, the stated
final maturity is generally 30 years, but current prepayment rates are more
important. In such situations, the Manager uses more sophisticated
analytical techniques to arrive at an "effective" duration to reflect
interest rate risk. With "effective duration," an interest rate change of
one percent would generally result in a variation of two percent by a
security having an effective duration of two, and a variation of three
percent by a security having an effective
A 1
<PAGE>
duration of three. These techniques may involve the Manager's estimates of
future economic parameters, which may vary from actual future values.
Fixed-income securities with effective durations of three years are more
responsive to interest rate fluctuations than those with effective durations
of one year. If interest rates rise by 1%, the value of securities having an
effective duration of three years will decrease by approximately 3%.
o EAFE Index. The Morgan Stanley Capital International Europe, Australia, Far
East Index.
o Emerging Market Companies. A company is considered to be an Emerging Market
Company if its securities are principally traded in the capital market of an
emerging market country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging market countries or
from sales made in such emerging market countries, regardless of where the
securities of such companies are principally traded; or it is organized
under the laws of, and with a principal office in, an emerging market
country. An emerging market country is one having an economy and market that
are or would be considered by the World Bank or the United Nations to be
emerging or developing. The Manager currently regards the following to be
emerging market countries: Latin America (Argentina, Brazil, Chile,
Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay,
Venezuela); Asia (Bangladesh, China, India, Indonesia, Korea, Malaysia,
Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam);
Southern and Eastern Europe (Czech Republic, Greece, Hungary, Poland,
Portugal, Russia, Turkey); Mid-East (Israel, Jordan); and Africa (Egypt,
Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia,
Zimbabwe). In the future, the Fund may invest in other emerging market
countries.
o Equity derivative securities include, among other things, options on equity
securities, warrants and future contracts on equity securities.
o Equity swaps. Equity swaps allow the parties to exchange the dividend income
or other components of return on an equity investment (e.g., a group of
equity securities or an index) for a component of return on another
non-equity or equity investment. Equity swaps transitions may be volatile
and may present the Fund with counterparty risks.
o FHLMC. The Federal Home Loan Mortgage Corporation.
o FNMA. The Federal National Mortgage Association.
o Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. A Fund (except the Money Market
Funds) normally conducts its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate in the foreign currency
exchange market at the time of the transaction, or through entering into
forward contracts to purchase or sell foreign currencies at a future date.
The Funds generally do not enter into forward contracts with terms greater
than one year.
A Fund generally enters into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second,
if the Manager believes that the currency of a particular foreign country
will substantially rise or fall against the U.S. dollar, it may enter into a
forward contract to buy or sell the currency approximating the value of some
or all of a Fund's portfolio securities denominated in such currency. A Fund
will not enter into a forward contract if, as a result, it would have more
than one-third of total assets committed to such contracts (unless it owns
the currency that it is obligated to deliver or has caused its custodian to
segregate Segregable Assets having a value sufficient to cover its
obligations). Although forward contracts are used primarily to protect a
Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
o Futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. Government
Securities, at a specified date and price. A Fund may sell interest rate
futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Conversely, a Fund may purchase an interest rate futures contract
(i.e., enter into a futures contract to purchase an underlying security) to
hedge against interest rate decreases and corresponding increases in the
value of debt securities it anticipates purchasing. In addition, a Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. Each
Fund segregates Segregable Assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
o GNMA. The Government National Mortgage Association.
o Highly Rated Debt Securities. Debt securities rated within the three highest
grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moody's
Investors Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services,
Inc. ("Fitch") (AAA to A), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. See the Appendix to the Statement of Additional Information for a
description of these ratings.
o Illiquid securities. The Funds treat any securities subject to restrictions
on repatriation for more than seven days and securities issued in connection
with foreign debt conversion programs that are restricted as to remittance
of invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under
the Securities Act of 1933 and that, subject to the review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid.
State securities laws may impose further limitations on the amount of
illiquid or restricted securities a Fund may purchase.
A 2
<PAGE>
o Investment grade. Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB), Moody's (at least Baa) or
Fitch (at least Baa) or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees.
o Leverage. Some Funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. For example, leveraging may
magnify changes in the net asset values of a Fund's shares and in the yield
on its portfolio. Although the principal of such borrowings will be fixed, a
Fund's assets may change in value while the borrowing is outstanding.
Leveraging creates interest expenses that can exceed the income from the
assets retained.
o Municipal securities. Municipal securities are obligations issued by, or on
behalf of, states, territories and possessions of the U.S. and the District
of Columbia, and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S.
Government. Municipal securities are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from revenue derived from
a particular facility, class of facilities or the proceeds of a special
excise or other specific revenue source but not from the issuer's general
taxing power. Private activity bonds and industrial revenue bonds, in most
cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality but generally are guaranteed by the corporate entity on
whose behalf they are issued. Notes are short-term instruments that are
obligations of the issuing municipalities or agencies sold in anticipation
of a bond sale, collection of taxes or other receipt of revenues.
o Options on securities, securities indices and currencies. A Fund may
purchase call options on securities which it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put
options on particular securities (or on currencies in which those securities
are denominated) in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid
for the option (or an adverse movement in the applicable currency relative
to the U.S. dollar). Put options allow a Fund to protect unrealized gain in
an appreciated security that it owns without selling that security. Prior to
expiration, most options are expected to be sold in a closing sale
transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A
Fund may purchase put and call options on stock indices in order to hedge
against risks of stock market or industry-wide stock price fluctuations.
o Participation interests. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of
interest. Some participation interests permit these Funds to demand payment
upon specified notice for all or any part of their interest in the
underlying Municipal Security plus accrued interest. Some participation
interests are subject to a "nonappropriation" or "abatement" feature by
which, under certain conditions, the issuer of the underlying Municipal
Security, without penalty, may terminate its payment obligation. In such
event, the Funds must look to the underlying collateral, often a municipal
facility leased and used by the issuer. The liquidity and valuation of
participation interests collateralized by such facilities and subject to
"nonappropriation" or "abatement" features are determined by the Manager.
o Repurchase agreement. Pursuant to a repurchase agreement, a Fund acquires a
U.S. Government security or other high-grade liquid debt instrument (for the
Money Market Funds, the instrument must be rated in the highest grade) from
a financial institution that simultaneously agrees to repurchase the same
security at a specified time and price. The repurchase price reflects an
agreed-upon rate of return not determined by the coupon rate on the
underlying security.
o Reverse dollar roll transactions. When a Fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at
an agreed-upon price.
o Reverse repurchase agreement. In a reverse repurchase agreement, a Fund
sells to a financial institution a security that it holds and agrees to
repurchase the same security at an agreed-upon price and date.
o S&P 500. Standard & Poor's 500 Composite Price Index.
o Securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
Segregable Assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest.
o Tender option bonds. Tender option bonds are municipal securities, usually
held pursuant to a custodial arrangement, that have a relatively long
maturity and bear interest at a fixed rate substantially higher than the
prevailing short-term tax-exempt rates, coupled with an option to tender the
securities to a bank, broker-dealer or other financial institution at
periodic intervals and in order to receive the securities' face value. In
consideration of the option, the holder of the securities pays the financial
institution a fee in an amount that causes the municipal securities to trade
at face value when the option is issued. Effectively, the security bears the
short-term tax-exempt rate at the time the option was issued.
o U.S. Government securities include U.S. Treasury Bills, Notes, Bonds and
other obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
o Variable rate demand notes. Variable rate demand notes ("VRDNs") are
instruments with rates of interest adjusted periodically or which "float"
continuously according to specific formulae and often have a demand feature
entitling the purchaser to resell the securities at an amount approximately
equal to amortized cost or the principal amount plus accrued interest.
However, many issuers or servicers of mortgage-related securities guarantee
or provide insurance for timely payment of interest and principal.
A 3
<PAGE>
o A warrant typically is a long-term option that permits the holder to buy a
specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. Stock index
warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock
index. A warrant not exercised or disposed of by its expiration date expires
worthless.
o When-issued and forward commitment securities. The Funds may purchase U.S.
Government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date, normally 7 to 15 days or, in
the case of certain CMO issues, 45 to 60 days later. When-issued securities
and forward commitments may be sold prior to the settlement date, but a Fund
will enter into when-issued and forward commitments only with the intention
of actually receiving or delivering the securities, as the case may be. No
income accrues on securities that have been purchased pursuant to a forward
commitment or on a when-issued basis prior to delivery to a Fund. If a Fund
disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it may incur a gain or loss. At the time a Fund enters into a
transaction on a when-issued or forward commitment basis, it causes its
custodian to segregate Segregable Assets equal to the value of the
when-issued or forward commitment securities and causes the Segregable
Assets to be marked to market daily. There is a risk that the securities may
not be delivered and that the Fund may incur a loss.
o Zero coupon bonds. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will
accrue and compound over the period to maturity or the first
interest-payment date at a rate of interest reflecting the market rate of
interest at the time of issuance.
A 4
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS P SHARES
MONTGOMERY ASSET ALLOCATION FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
November 12, 1996
The following ten mutual funds (the "Funds") are offered in this Prospectus:
o Montgomery Growth Fund
o Montgomery Equity Income Fund
o Montgomery Small Cap Opportunities Fund
o Montgomery International Growth Fund
o Montgomery International Small Cap Fund
o Montgomery Emerging Markets Fund
o Montgomery Asset Allocation Fund
o Montgomery Select 50 Fund
o Montgomery Short Government Bond Fund
o Montgomery Government Reserve Fund
Each Fund's shares offered in this Prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
with no sales load, no commissions, and no exchange fees. The Class P shares are
subject to a Rule 12b-1 distribution fee as described in this prospectus. The
minimum initial investment in each Fund is $1,000 and subsequent investments
must be at least $100. The Manager or the Distributor may waive these minimums.
See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated November 12, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is www.xperts.montgomery.com/1.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONTGOMERY GOVERNMENT RESERVE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 4
Financial Highlights 6
The Funds' Investment Objectives and Policies 9
Portfolio Securities 13
Other Investment Practices 16
Risk Considerations 18
Management of the Funds 19
How To Contact The Funds 24
How To Invest in the Funds 24
How To Redeem an Investment in the Funds 27
Exchange Privileges and Restrictions 29
How Net Asset Value is Determined 30
Dividends and Distributions 31
Taxation 32
General Information 32
Backup Withholding 34
2
<PAGE>
<TABLE>
<CAPTION>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 9, "Portfolio Securities"
beginning on page 13, "Other Investment Practices" beginning on page 16 and
"Risk Considerations" beginning on page 18 for more detailed information.
The Equity Funds
<S> <C>
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Growth Fund Montgomery Equity Income Fund
Seeks capital appreciation by investing primarily in Seeks current income and capital appreciation by
equity securities, usually common stocks, of domestic investing primarily in income-producing equity
companies of all sizes and emphasizes companies having securities of domestic companies, with the goal to
market capitalizations of $1 billion or more. provide significantly greater yield than the average
yield offered by the stocks of the S&P 500 and a low
level of price volatility.
- ----------------------------------------------------------- --------------------------------------------------------
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Emerging Markets Fund Montgomery Small Cap Opportunities Fund
Seeks capital appreciation by investing primarily in Seeks capital appreciation by investing primarily in
equity securities of companies in countries having equity securities, usually common stocks, of small-
economies and markets generally considered by the capitalization domestic companies, which the Fund
World Bank or the United Nations to be emerging or currently considers to be companies having total
developing. market capitalizations of less than $1 billion.
- ----------------------------------------------------------- --------------------------------------------------------
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery International Growth Fund Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in Seeks capital appreciation by investing primarily in
equity securities of companies outside the United States equity securities of companies outside the U.S. having
having total market capitalizations over $1 billion, total market capitalizations of less than $1 billion,
sound fundamental values and potential for long-term sound fundamental values and potential for long-term
growth at a reasonable price. growth at a reasonable price.
- ----------------------------------------------------------- --------------------------------------------------------
The Multi-Strategy Funds
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Select 50 Fund Montgomery Asset Allocation Fund
Seeks capital appreciation by investing primarily in at Seeks high total return, while also seeking to reduce
least 50 different equity securities of companies of all risk, through a strategic or active allocation of assets
sizes throughout the world. Each of the Manager's five among domestic stocks, fixed-income securities and
equity discipline management teams selects 10 equity cash or cash equivalents.
securities based on the potential for capital appreciation.
- ----------------------------------------------------------- --------------------------------------------------------
The Fixed Income Funds
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Short Government Bond Fund Montgomery Government Reserve Fund
Seeks maximum total return consistent with preservation Seeks current income consistent with liquidity and
of capital and prudent investment management by preservation of capital by investing exclusively in
investing primarily in U.S. government securities and, to U.S. government securities, repurchase agreements
manage interest rate risk, maintains an average portfolio for U.S. government securities and other money
effective duration comparable to or less than three-year market funds investing exclusively in U.S.
U.S. Treasury notes. It targets higher yields than money government securities and such repurchase
market funds generally with less fluctuation in the value agreements. It seeks to maintain a stable net asset
of its shares than long-term bond funds. This Fund does value of $1.00 per share.
not maintain a stable net asset value of $1.00 per share.
- ----------------------------------------------------------- --------------------------------------------------------
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
Prospectus, call The Montgomery Funds at (800) 572-FUND or contact sales
representatives or financial intermediaries who offer those classes.
</TABLE>
3
<PAGE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Imposed
Imposed on Purchases on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Total Fund Operating
Other Expenses Expenses
(after reimbursement (after reimbursement
The Equity Funds Management Fee* 12b-1 Fee unless noted)* unless noted)*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund 0.96% 0.25% 0.39%+ 1.60%+
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 0.60% 0.25% 0.25% 1.10%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 1.20% 0.25% 0.30% 1.75%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 1.10% 0.25% 0.55% 1.90%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 1.06% 0.25% 0.66%+ 1.97%+
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Fund Operating
Other Expenses Expenses
(after reimbursement) (after reimbursement)
The Multi-Strategy and Fixed Income Funds Management Fee* 12b-1 Fee unless noted)* unless noted)*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Select 50 Fund 1.25% 0.25% 0.55% 2.05%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 0.80% 0.25% 0.50% 1.55%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund 0.50% 0.25% 0.10% 0.85%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0.38% 0.25% 0.22% 0.85%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
This table is intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year. Because Rule 12b-1 distribution charges are accounted for
on a class-level basis (and not on an individual shareholders-level basis),
individual long-term investors in the Class P shares of the Fund may over time
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD"), even
though all shareholders of that Class in the aggregate will not. This is
recognized and permitted by the NASD.
+ These figures show actual expenses; no reimbursements or waivers applied.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. See "How to Redeem an
Investment in the Funds."
4
<PAGE>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996 for the Class P shares (or, if no
Class P shares were outstanding, for another class of shares (but adjusted
to include the Rule 12b-1 fee). The Manager will reduce its fees and may
absorb or reimburse a Fund for certain expenses to the extent necessary to
limit total annual fund operating expenses to the lesser of the amount
indicated in the table for a Fund or the maximum allowed by applicable state
expense limitations. A Fund is required to reimburse the Manager for any
reductions in the Manager's fee only during the two years (three years in
the case of the Montgomery Asset Allocation Fund) following that reduction
and only if such reimbursement can be achieved within the foregoing expense
limits. The Manager generally seeks reimbursement for the oldest reductions
and waivers before payment for fees and expenses for the current year.
Absent reduction and including the Rule 12b-1 fee for the Class P Shares,
actual total Fund operating expenses for the period ended June 30, 1996
(annualized) would have been as follows: Montgomery Equity Income Fund,
1.70% (0.85% other expenses); Montgomery Small Cap Opportunities Fund, 2.41%
(0.96% other expenses); Montgomery International Growth Fund, 3.16% (1.81%
other expenses); Montgomery International Small Cap Fund, 3.01% (1.53% other
expenses); Montgomery Asset Allocation Fund, 1.80% (0.95% other expenses);
Montgomery Select 50 Fund, 2.36% (0.86% other expenses); Montgomery Short
Government Bond Fund, 2.50% (1.05% other expenses) and Montgomery Government
Reserve Fund, 0.99% (0.34% other expenses). The Manager may terminate these
voluntary reductions at any time. See "Management of the Funds."
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund $16 $50 $87 $190
- ----------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund $11 $35 $61 $134
- ----------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund $18 $55 $95 $206
- ----------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund $22 $67 $115 $248
- ----------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund $19 $60 $103 $222
- ----------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund $20 $62 $106 $230
- ----------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund $21 $64 $110 $238
- ----------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund $16 $49 $84 $185
- ----------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund $9 $27 $47 $105
- ----------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund $9 $27 $47 $105
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns; actual expenses and returns may vary.
5
<PAGE>
Financial Highlights
Selected Per Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. This financial
information for periods indicated with the note "R" relate to another class of
shares of the Funds not subject to the Class P Rule 12b-1 fee because the Class
P shares were not offered during those periods.
<CAPTION>
GROWTH FUND SMALL CAP
OPPORTUNITIES FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995R 1994(a)R 1996(b)#R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $19.22 $15.27 $12.00 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.03 0.12 0.04 0.02
Net realized and unrealized gain on investments 2.69 3.91 3.31++ 3.78++
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 2.72 4.03 3.35 3.80
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.07) (0.01) --
Distributions from net realized capital gains -- (0.07) -- --
Distribution in excess of net realized capital gains -- -- (0.07) --
Distributions from capital -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.14) (0.08) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $21.94 $19.16 $15.27 $15.80
- --------------------------------------------------------------------------------------------------------------------------------
Total return** 14.15% 26.53% 27.98% 31.67%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 82 $878,776 $149,103 $136,140
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 0.53%+ 0.98% 1.09%+ 0.23%+
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.60%+ 1.50% 1.49%+ 1.50%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 81.29%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0596 N/A N/A $0.0578
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- $0.03 ($0.04)
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 1.79%+ 2.16%+
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R Shares and Class P Shares commenced operations
on September 30, 1993 and January 12, 1996, respectively.
(b) The Small Cap Opportunities Fund's Class R Shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Per share numbers have been calculated using the average share method,
which more appropriately represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL INTERNATIONAL
GROWTH SMALL CAP FUND
FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995(a)R 1996(b) 1996R 1995R 1994(c)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $15.66 $12.00 $13.66 11.75 $12.02 $12.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.08 0.31 0.00# 0.03 0.12 0.00#
Net realized and unrealized gain/(loss) on investments 0.35 1.38 1.65 3.10 (0.39) 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.43 1.69 1.65 3.13 (0.27) 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.31) -- (0.02) (0.00)# --
Distributions from net realized capital gains -- -- -- -- -- --
Distribution in excess of net realized capital gains -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.31) -- (0.02) (0.00) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.09 $13.38 $15.31 14.86 $11.75 $12.02
- ----------------------------------------------------------------------------------------------------------------------------------
Total return** 2.75% 14.26% 12.08% 26.68% (2.23)% 0.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 2 $6,383 $ 1 $41,640 $28,516 $34,555
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 2.78%+ 4.06%+ 0.01%+ 0.20% 0.95% 0.04%+
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest 1.10%+ 0.84%+ 1.90%+ 1.90% 1.90% 1.90%+
expense
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 238.91% 177.36% 156.13% 123.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0423 N/A N/A $0.0123 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by $0.06 $0.13 $(0.05) ($0.08) $0.05 ($0.02)
Manager
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 1.70%+ 3.16%+ 3.16%+ 2.76% 2.50% 2.32%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- 1.96% 1.91% 1.99%+
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class R Shares and Class P Shares commenced
operations on September 30, 1994 and March 12, 1996, respectively.
(b) The International Growth Fund's Class P Shares commenced operations on
March 12, 1996. (c) The International Small Cap Fund's Class R Shares
commenced operations on September 30, 1993.
** Total return represents aggregate total return for the periods indicated
+ Annualized.
# Amount represents less than $0.01 per share.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995++R 1994R 1993R 1992(a)R
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $12.62 $13.68 $11.07 $9.96 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 1.56 0.25## 2.92 1.05 (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.57 0.28 2.89 1.12 (0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- (0.01) --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- (0.37) -- -- --
Distributions from capital -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.79) (0.28) (0.01) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $14.19 $13.17 $13.68 $11.07 $9.96
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return** 12.44% 1.40% 26.10% 11.27% (0.40)%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 2 $998,083 $654,960 $206,617 $54,625
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest 1.97%+ 1.80% 1.85% 1.90% 1.90%+
expense
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 109.92% 92.09% 63.79% 21.40% 0.19%
- ---------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0007 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager -- -- -- $0.06 $0.01
- ---------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense -- -- -- 1.93% 2.80%+
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Emerging Markets Fund's Class R Shares and Class P Shares commenced
operations on March 1, 1992 and March 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per shares numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 share.
## The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION
FUND FUND
Selected Per Share Data for the Year or Period Ended: 1996(b)R 1996(c) 1995R 1994(c)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $12.00 $17.86 $12.24 $12.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.06 0.09 0.25 0.06
Net realized and unrealized gain/(loss) on investments 4.45 1.38 4.11 0.18
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.51 1.47 4.36 0.24
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.04) -- (0.17) --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- (0.10) --
Distributions in excess of net realized capital gains (0.01)
Distributions from capital -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) -- (0.27) --
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.46 $19.33 $16.33 $12.24
- -------------------------------------------------------------------------------------------------------------------------------
Total Return** 37.75% 8.23% 35.99% 2.00%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $77,955% $ 43 $60,234 $1,548
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.42%+ 1.60%+ 3.43% 2.54%+
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 1.80%+ 1.55%+ 1.30% 1.30%+
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 105.98% 225.91% 95.75% 190.94%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0097 $0.0595 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.02 $0.08 $0.19 $(0.11)
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.11%+ 1.80%+ 2.07% 9.00%+
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 1.67%+ 1.31% 1.43%+
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(b) The Select 50 Fund's Class R Shares commenced operations on October 2,
1995.
(c) The Asset Allocation Fund's Class R Shares and Class P Shares commenced
operations on March 31, 1994 and January 3, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SHORT GOVERNMENT
BOND FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995R 1994R 1993(a)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $9.98 $9.80 $10.23 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 0.16 0.62 0.61 0.33
Net realized and unrealized gain/(loss) on investments (0.05) 0.16 (0.34) 0.23
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.11 0.78 0.27 0.56
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.62) (0.56) (0.33)
Distributions in excess of net investment income -- -- (0.07) --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital gains -- -- (0.07) --
Distributions from capital -- (0.01) -- (0.00)#
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.17) (0.63) (0.70) (0.33)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $9.92 $9.95 $9.80 $10.23
- ---------------------------------------------------------------------------------------------------------------------------
Total Return** 1.12% 8.28% 2.49% 5.66%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 1 $17,093 $21,937 $22,254
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.63%+ 6.41% 5.93% 6.02%+
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 0.85%+ 0.47% 0.25% 0.22%+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 349.62% 284.23% 603.07% 213.22%
- ---------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.14 $0.54 $0.51 $0.27
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.56%+ 2.23% 1.75% 2.07%+
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense 1.80%+ 1.38% 0.71% --
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Short Government Bond Fund's Class R Shares and Class P Shares
commenced operations on December 18, 1992 and March 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE
FUND
Selected Per Share Data for the Year or Period Ended: 1996(b) 1995R 1994R 1993(b)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.014 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on investments 0.000## 0.000## 0.000## 0.000##
- ------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.014 0.049 0.029 0.024
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.014) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.014) (0.049) (0.029) (0.024)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
Total Return** 1.38% 4.97% 2.96% 2.41%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 1 $258,956 $211,129 $124,795
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.91%+ 4.92% 2.99% 2.96%+
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 0.85%+ 0.60% 0.60% 0.38%+
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.013 $0.047 $0.028 $0.013
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees
by Manager, including interest expense 0.99%+ 0.79% 0.71% 0.77%+
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 0.63% -- --
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(b) The Short Government Bond Fund's Class R Shares and Class P Shares
commenced operations on September 14, 1992 and March 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
8
<PAGE>
The Funds' Investment Objectives And Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 13. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 16. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 18. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY FOUND AT THE END OF THIS PROSPECTUS.
----------------------------------------------
Domestic Equity International
Funds Funds Multi- Fixed-
----------------------------- Strategy Income
Equity Funds Funds Funds
----------------------------------------------
<TABLE>
SUMMARY COMPARISON OF FUNDS
<CAPTION>
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund 65-100% 35% Growth Over $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
============================================================================================================================
Montgomery International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 65-100% 35% Foreign Emerging Growth Any size
============================================================================================================================
Montgomery Select 50 Fund 65-100% 35% Worldwide Growth Any size
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 20-80% 20-80% Balanced Any size
============================================================================================================================
Montgomery Short Government Bond Fund 0% 100% Income N/A
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0% 100% Income N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock but also
invests in other types of equity securities and equity derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in highly rated debt
securities. See "Portfolio Securities."
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those assets in domestic and foreign companies having total market
capitalizations of $1 billion or more. This Fund invests primarily in common
stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be highly
rated debt securities. See "Portfolio Securities." Current income from
dividends, interest and other sources is only incidental.
9
<PAGE>
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Using fundamental research, the Fund
targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may
10
<PAGE>
invest those assets in equity securities of U.S. companies, in
lower-capitalization companies or in debt securities, including up to 5% of its
total assets in debt securities rated below investment grade. See "Portfolio
Securities" and "Risk Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. The Manager currently
regards the following to be emerging market countries: Latin America (Argentina,
Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay, Venezuela); Asia (Bangladesh, China, India, Indonesia, Korea, Malaysia,
Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam);
Southern and Eastern Europe (Czech Republic, Greece, Hungary, Poland, Portugal,
Russia, Turkey); Mid-East (Israel, Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the future,
the Fund may invest in other emerging market countries. Under normal conditions,
the Emerging Markets Fund maintains investments in at least six emerging market
countries at all times and invests no more than 35% of its total assets in any
one emerging market country.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's aims are to invest
in those countries that are expected to have the highest risk/reward trade-off
when incorporated into a total portfolio context. This "top-down" country
selection is combined with "bottom-up" fundamental industry analysis and stock
selection based on original research and publicly available information and
company visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities. This Fund
may invest no more than 20% of its total assets in the equity securities of
companies constituting the EAFE Index. See "Portfolio Securities." These
companies typically have larger average market capitalizations than the Emerging
Market Companies in which this Fund generally invests. Accordingly, subject to
its investment objective, this Fund invests in EAFE Index companies for
temporary defensive strategies.
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent
11
<PAGE>
more than 40% of its total assets. The Manager uses its financial expertise and
research capabilities in markets throughout the world in attempting to identify
those countries, currencies and companies in which this Fund may invest. See
"Risk Considerations."
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents, coupled with active management of the individual investments in
each asset class. This Fund adjusts the proportion of its investments in each of
these categories as needed to respond to current market conditions, maintaining
from 20 to 80% of total assets in stocks, 20 to 80% of total assets in debt
instruments of any remaining maturity, and 0 to 50% of total assets in cash or
cash equivalents. The Manager will implement its allocation strategy with the
use of a quantitative risk model and computer optimization program. The Manager
may temporarily increase the Fund's cash allocation from its set strategy in
order to meet anticipated redemptions. The Manager seeks to reduce risk through
investment in high-grade debt instruments and cash or cash equivalents. Under
normal conditions, at least 65% of the Fund's total assets are invested in
securities issued by domestic issuers.
The debt instruments in which this Fund invests include U.S. government
securities and other highly rated debt securities. This Fund expects that, under
normal circumstances, the dollar-weighted average maturity of its debt
instruments (or period until next interest rate reset date) may be longer than
three years (see "Duration" discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation as well as warrants, rights and options. The Manager selects equity
securities of issuers exhibiting positive trends in revenue and earnings that,
in the opinion of the Manager, are sustainable. Among the Fund's equity
investments, the Fund may invest up to 35% of its total assets in foreign equity
securities of various countries, primarily those listed on foreign exchanges.
Montgomery Short Government Bond Fund (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value per share of $1.00.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and high-grade liquid debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities that are
considered highly rated debt securities. The Fund also may invest in other
investment companies investing primarily in U.S. government securities of
appropriate duration. See "Portfolio Securities."
Duration of the Asset Allocation Fund and the Short Bond Fund. The Short Bond
Fund and the Asset Allocation Fund expect that, under normal circumstances, the
dollar-weighted average maturity (or period until the next interest rate reset
date) of their portfolio securities may be longer than three years but the
maturity of individual securities may be up to 30 years. However, of these two
Funds, only the Short Bond Fund seeks to maintain an average portfolio effective
duration comparable to or less than that of three-year U.S. Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. government securities, repurchase agreements for
U.S. government securities and other money market funds investing in U.S.
government securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
12
<PAGE>
Portfolio Securities
Equity Securities
The Domestic Equity, Select 50 and International Funds emphasize investments in
common stock, and common stock may constitute up to 80% of the Asset Allocation
Fund's portfolio. These Funds may also invest in other types of equity
securities (such as preferred stocks or convertible securities) and equity
derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Domestic Equity, Select 50, Asset Allocation and International Funds may
invest in ADRs, EDRs and GDRs and convertible securities which the Manager
regards as a form of equity security. Each such Fund may also invest up to 5% of
its net assets in warrants, including up to 2% of net assets for those not
listed on a securities exchange.
Privatizations
The Select 50 and International Funds believe that foreign governmental programs
of selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and these Funds may invest in privatizations. The ability of U.S.
entities, such as these Funds, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations
The Select 50 and International Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International Funds to invest in certain markets. Such investments may
involve the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act. The International Funds also may incur tax liability
to the extent they invest in the stock of a foreign issuer that is a "passive
foreign investment company" regardless of whether such "passive foreign
investment company" makes distributions to the Funds. See the Statement of
Additional Information.
The Select 50, International, Asset Allocation, Equity Income and Fixed Income
Funds do not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
Debt Securities
The Select 50 and International Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Asset Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each of the
Select 50 and International Funds will not invest more than 5% of its total
assets in debt securities rated lower than investment grade, and the Allocation
and Equity Income Funds will not invest more than 5% of their total assets in
debt securities rated lower than highly rated debt securities. Subject to this
limitation, each of these Funds may invest in any debt security, including
securities in default. After its purchase by a Fund a debt security may cease to
be rated or its rating may be reduced below that required for purchase by the
Fund. A security downgraded below the minimum level may be retained if
determined by the Manager and the Board to be in the best interests of the Fund.
See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, each of the International, Allocation and Equity Income Funds may
invest in external (i.e., to foreign lenders) debt obligations issued by the
governments, governmental entities and companies of emerging market countries.
The percentage distribution between equity and debt will vary from
13
<PAGE>
country to country based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Reserve, Short Bond and Asset Allocation Funds may invest in
mortgage-related securities. A mortgage-related security is an interest in a
pool of mortgage loans and is considered a derivative security. Most
mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a pro rata share of both principal and
interest (less servicing and other fees), as well as unscheduled prepayments, as
mortgages in the underlying mortgage pool are paid off by the borrowers. Certain
mortgage-related securities are subject to high volatility. These funds use
these derivative securities in an effort to enhance return and as a means to
make certain investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities.
Investors in the Reserve, Short Bond and Asset Allocation Funds should note that
the dominant issuers or guarantors of mortgage-related securities today are
GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from pools of
government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. Government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. government
securities for purposes of their investment policies. However, the Reserve Fund
does not invest in stripped mortgage securities, and the Short Bond Fund limits
its stripped mortgage securities investments to 10% of total assets. The
liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Allocation and Short Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and the Asset Allocation Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities for pools of conventional
residential mortgage loans; mortgage pay-through obligations and mortgage-backed
bonds, which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and CMOs
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by
pools of conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees.
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<PAGE>
However, many issuers or servicers of mortgage-related securities guarantee or
provide insurance for timely payment of interest and principal. The Short Bond
Fund may purchase some mortgage-related securities through private placements
that are restricted as to further sale. See "Illiquid Securities." The value of
these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Funds' Investment Objectives and
Policies - Duration."
Variable Rate Demand Notes
The Fixed Income and the Asset Allocation Funds may invest in variable rate
demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income and Asset Allocation Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the Fixed Income and Asset Allocation Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the Allocation and Short Bond
Funds) of its total assets in asset-backed securities. Like mortgage-related
securities, these securities are subject to the risk of prepayment. See "Risk
Considerations."
15
<PAGE>
Other Investment Practices
<TABLE>
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
=========================================================
Growth Equity Income Small Cap Opportunities
International Small Cap International Growth
Emerging Markets Select 50 Asset Allocation
Short Government Bond Government Reserve
======================================================================---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements1 x/ x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions x/ 1 x/ 1
- -------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% of total fund assets x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total fund assets x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Leverage x/ x/ x/ x/ x/ x/ 2
- -------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 10% of total fund assets x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total fund assets x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities x/ x/ x/ x/ x/ x/ x/ x/ 3 x/ 3 x/
- -------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts 6 x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices 4 x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Write covered call options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Write covered put options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts5 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to 10% of fund's net assets x/
- -------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to 15% of fund's net assets x/ x/ x/ x/ x/ x/ x/ x/ x/
===============================================================================================================================
<FN>
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying
16
<PAGE>
security, a Fund may experience delay or difficulty in exercising its
rights to realize upon the security, may incur a loss if the value of the
security declines and may incur disposition costs in liquidating the
security.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 A Fund will not enter into any options on securities, securities indices
or currencies or related options (including options on futures) if the sum
of the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
5 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
6 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the Prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 5% of its total assets (excluding, in the case of
the Short Bond Fund, fully collateralized reverse repurchase agreements and
dollar roll transactions), except that the Growth, Small Cap Opportunities,
International Growth, Select 50, Asset Allocation and Equity Income Funds may
not purchase securities if such borrowings exceed 10% of their total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer mark-ups and
other transaction costs, and may result in the recognition of capital gains that
may be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. Even when portfolio turnover exceeds 100% for a Fund that
Fund does not regard portfolio turnover as a limiting factor. Portfolio turnover
in excess of 100% is considered high, increases brokerage costs incurred by a
Fund and may cause recognition of gain by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds may employ
certain risk management practices using certain derivative securities and
techniques (known as Derivatives). Markets in some countries currently do not
have instruments available for hedging transactions. To the extent that such
instruments do not exist, the Manager may not be able to hedge its investment
effectively in such countries. Furthermore, a Fund engages in hedging activities
only when the Manager deems it to be appropriate and does not necessarily engage
in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. While a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
17
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Equity Income, Select 50 and Small Cap Opportunities Funds have reserved the
right, if approved by the Board, to convert in the future to a "feeder" fund
that would invest all of its assets in a "master" fund having substantially the
same investment objective, policies and restrictions. At least 30-days' prior
written notice of any such action would be given to all shareholders if and when
such a proposal is approved, although no such action has been proposed as of the
date of this Prospectus.
Risk Considerations
Small Companies
The Small Cap Opportunities and International Small Cap Funds emphasize, and the
Select 50, International Growth, Growth, and Asset Allocation Funds may make
investments in, smaller companies that may benefit from the development of new
products and services. Such smaller companies may present greater opportunities
for capital appreciation but may involve greater risk than larger, more mature
issuers. Such smaller companies may have limited product lines, markets or
financial resources, and their securities may trade less frequently and in more
limited volume than those of larger, more mature companies. As a result, the
prices of their securities may fluctuate more than those of larger issuers.
Foreign Securities
The Domestic Equity, Select 50, Asset Allocation and International Funds have
the right to purchase securities in foreign countries. Accordingly, shareholders
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks of loss inherent in domestic investments. The Select
50 and International Funds, particularly the Emerging Markets Fund, may invest
in securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to higher risks than
investments in more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
18
<PAGE>
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower Quality Debt
The Select 50 and International Funds are authorized to invest in medium-quality
(rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's) and in limited
amounts of high-risk debt securities below investment grade quality. Medium
quality debt securities have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than with higher grade debt
securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds". The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk, lower
quality debt securities would be consistent with the interests of these Funds
and their shareholders. Unrated debt securities are not necessarily of lower
quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fixed Income Funds, and the Asset Allocation
Fund, to the extent it retains the same percentage of debt securities, may have
to reinvest the proceeds of prepayments at lower interest rates than those of
their previous investments. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Fixed Income Funds or the Asset Allocation Fund purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See "Duration" in the Glossary.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
19
<PAGE>
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
portfolio managers
John D. Boich is a managing director and senior portfolio manager. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial adviser with Prudential-Bache
Securities and E.F. Hutton & Company. Mr. Boich, together with Mr. Castro,
manages the International Small Cap Fund and the International Growth Fund.
John H. Brown, CFA, is a managing director and senior portfolio manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California from
June 1986. Mr. Brown manages the Equity Income Fund.
Michael Carmen, CFA, is a vice president and portfolio manager. From 1993 until
joining the Manager in 1996, he was a vice president and Associate portfolio
manager with State Street Research and Management Company in Boston where he
assisted with the management of capital appreciation and growth portfolios.
Before then, he was a Senior Equity Analyst with State Street and, from 1991 to
1992, with Cigna Investments in Hartford. Mr. Carmen, as a key member of the
growth equity team (which includes also Mr. Honour and Mr. Pratt), manages the
Growth Fund, the Small Cap Opportunities Fund and the equity component of the
Asset Allocation Fund.
Oscar A. Castro is a managing director and senior portfolio manager. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International. Mr.
Castro, together with Mr. Boich, manages the International Growth Fund.
Frank Chiang is a vice president and portfolio manager. From 1993 until joining
the Manager in 1996, Mr. Chiang was managing director and portfolio manager at
TCW Asia Ltd. in Hong Kong. Mr. Chiang, together with Ms. Ee, Ms. Jimenez, Mr.
Sudweeks and Mr. Haslett, manages the Emerging Markets Fund.
Angeline Ee is a vice president and portfolio manager. From 1990 until joining
the Manager in July 1994, Ms. Ee was an Investment Manager with AIG Investment
Corp. in Hong Kong. From June 1989 until September 1990, Ms. Ee was a co-
manager of a portfolio of Asian equities and bonds at Chase Manhattan Bank in
Singapore. Ms. Ee, together with Ms. Jimenez, Mr. Sudweeks, Mr. Haslett and Mr.
Chiang, manages the Emerging Markets Fund.
Kevin T. Hamilton, Chairman of the Manager's Investment Oversight Committee and
a managing director, is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams for the Select 50 Fund. The
portfolio management teams responsible for the different disciplines used in the
Select 50 Fund are described throughout this "portfolio managers" section. From
1985 until joining the Manager in February 1991, Mr. Hamilton was a Senior vice
president responsible for investment oversight at Analytic Investment Management
in Irvine, California.
Thomas R. Haslett, CFA, is a managing director and senior portfolio manager.
From 1987 until joining the Manager in April 1992, Mr. Haslett was a portfolio
manager at Gannett, Welsh and Kotler in Boston, Massachusetts. Mr. Haslett,
together with Ms. Jimenez, Mr. Sudweeks, Ms. Ee and Mr. Chiang, manages the
Emerging Markets Fund.
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets. Mr. Honour, as a key member of the
growth equity team (which includes also Mr. Pratt and Mr. Carmen), manages the
Growth Fund, the Small Cap Opportunities Fund and the equity component of the
Asset Allocation Fund.
Josephine S. Jimenez, CFA, is a managing director and senior portfolio manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior analyst
and portfolio manager. Ms. Jimenez, together with Mr. Sudweeks, Mr. Haslett, Mr.
Chiang and Ms. Ee, manages the Emerging Markets Fund.
20
<PAGE>
Andrew Pratt, CFA, is a vice president and portfolio manager. He joined
Montgomery Asset Management from Hewlett- Packard Company, where he was an
equity analyst, managed a portfolio of small capitalization technology
companies, and researched private placement and venture capital investments.
From 1983 through 1988, he worked in the Capital Markets Group at Fidelity
Investments in Boston, Massachusetts. Mr. Pratt, as a key member of the growth
equity team (which includes also Mr. Honour and Mr. Carmen), manages the Growth
Fund, the Small Cap Opportunities Fund and the equity component of the Asset
Allocation Fund.
Bryan L. Sudweeks, Ph.D., CFA, is a managing director and senior portfolio
manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991. Mr. Sudweeks, together with
Ms. Jimenez, Mr. Haslett, Ms. Ee and Mr. Chiang, manages the Emerging Markets
Fund. Mr. Sudweeks is also a Portfolio Strategist for the International Growth
Fund.
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was
responsible for the origination and trading of all derivative mortgage-related
securities. Mr. Stevens manages the Short Government Bond Fund and the
Government Reserve Fund. Mr. Stevens is also the portfolio manager for the
fixed-income and cash components of the Asset Allocation Fund.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
<TABLE>
The management fees for the Domestic Equity, Select 50, Asset Allocation and
International Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- ------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- ------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- ------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- ------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- ------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- ------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
- ------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund First $500 million 0.80%
Over $500 million 0.65%
- ------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- ------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
======================================================================================================
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee
21
<PAGE>
at the following annual rates: each of the Growth, Equity Income and Allocation
Funds pays seven one-hundredths of one percent (0.07%) of average daily net
assets (0.06% of average daily net assets over $500 million); each of the Small
Cap Opportunities, Select 50, Emerging Markets, International Small Cap and
International Growth Funds pays seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million); each of
the Short and Reserve Funds pays five one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of average daily net assets over $500 million
and the Reserve Fund over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class P
shares. Under the Plan, each Fund will pay distribution fees to the Manager at
an annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily and paid
monthly, and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares. The Class P shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
was terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Manager to compensate those persons on an ongoing basis in connection
with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct.
22
<PAGE>
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each Fund's average net assets (before Rule 12b-1 fees): the
Growth Fund, one and five-tenths of one percent (1.50%); the Equity Income Fund,
eighty-five one-hundredths of one percent (0.85%); the Small Cap Opportunities
Fund, one and five-tenths of one percent (1.50%); the International Growth Fund,
one and sixty-five one-hundredths of one percent (1.65%); the Select 50 Fund,
one and eight-tenths of one percent (1.80%); the Emerging Markets and
International Small Cap Funds, one and nine-tenths of one percent (1.90%); the
Asset Allocation Fund, one and three-tenths of one percent (1.30%); the Short
Government Bond Fund, seven-tenths of one percent (0.70%); and the Government
Reserve Fund, six-tenths of one percent (0.60%). The Manager also may
voluntarily reduce additional amounts to increase the return to a Fund's
investors. The Manager may terminate these voluntary reductions at any time. Any
reductions made by the Manager in its fees are subject to reimbursement by that
Fund within the following two years (three years for the Asset Allocation Fund),
provided that the Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Funds
for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
23
<PAGE>
How To Contact The Funds
For information on the Funds or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-3863
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Montgomery Securities, the Funds' Distributor, 600 Montgomery Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Government
Reserve Fund must be received by 12:00 noon, New York time. Orders for Fund
shares received after the Funds' cutoff times will be purchased at the
next-determined net asset value after receipt of the order. Shares of the Fixed
Income Funds will not be priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. The Funds do not accept third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
- --------------------------------------------------------------------------------
Initial Investments by Check
- --------------------------------------------------------------------------------
o Complete the Account Application. Tell us in which Fund(s) you want
to invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
- --------------------------------------------------------------------------------
Initial Investments by Wire
- --------------------------------------------------------------------------------
o Call the Transfer Agent to tell them you intend to make your initial
investment by wire. Provide the Transfer Agent with your name,
dollar amount to be invested and Fund(s) in which you want to
invest. They will provide you with further instructions to complete
your purchase. Complete information regarding your account must be
included in all wire instructions to ensure accurate handling of
your investment.
24
<PAGE>
o Request your bank to transmit immediately available funds by wire
for purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
- --------------------------------------------------------------------------------
Subsequent Investments by Check
- --------------------------------------------------------------------------------
o Make your check payable to The Montgomery Funds. Enclose an
investment stub with your check. If you do not have an investment
stub, mail your check with written instructions indicating the Fund
name and account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
- --------------------------------------------------------------------------------
Subsequent Investments by Wire
- --------------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire funds to
the Transfer Agent's affiliated bank by using the bank wire
information under "Initial Investments by Wire."
- --------------------------------------------------------------------------------
Subsequent Investments by Telephone
- --------------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone purchases.
To make a purchase, call the Transfer Agent at (800) 572-3863 before
the Fund cutoff time.
o Shares of the Government Reserve Fund and shares for IRAs may not be
purchased by phone.
o The maximum telephone purchase is an amount up to five times your
account value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent
within three business days after the purchase request. Write your
confirmed purchase number on your check or include it in your wire
instructions.
o You should do one of the following to ensure payment is received in
time:
o Transfer funds directly from your bank account by sending
a letter and a voided check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day courier service.
25
<PAGE>
o Instruct your bank to wire funds to the Transfer Agent's
affiliated bank by using the bank wire information under
the section titled "Initial Investments by Wire."
- --------------------------------------------------------------------------------
Automatic Account Builder ("AAB")
- --------------------------------------------------------------------------------
o AAB will be established on existing accounts only. You may not use
an AAB investment to open a new account. The minimum automatic
investment amount is each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank account to
your Montgomery account application or your letter of instruction.
Investments will automatically be transferred into your Montgomery
account from your checking or savings account.
o Investments may be transferred either monthly or quarterly on or up
to two business days before the 5th or 20th day of the month. If no
day is specified on your account application or your letter of
instruction, the 20th of each month will be selected.
o You should allow 20 business days for this service to become
effective.
o You may cancel your AAB at any time by sending a letter to the
Transfer Agent. Your request will be processed upon receipt.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Funds upon 30- days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
26
<PAGE>
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below.
- --------------------------------------------------------------------------------
Redeeming by Written Instruction
- --------------------------------------------------------------------------------
o Write a letter giving your name, account number, the name of the
Fund from which you wish to redeem and the dollar amount or number
of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption proceeds
to go to a party other than the account owner(s), your predesignated
bank account or if the dollar amount of the redemption exceeds
$50,000. Signature guarantees may be provided by an eligible
guarantor institution such as a commercial bank, an NASD member firm
such as a stock broker, a savings association or national securities
exchange. Contact the Transfer Agent for more information.
o If you do not have a predesignated bank account and want to wire
your redemption proceeds, include a voided check or deposit slip
with your letter. The minimum amount that may be wired is $500 (wire
charges, if any, will be deducted from redemption proceeds). The
Fund reserves the right to permit lesser wire amounts or fees in the
Manager's discretion.
- --------------------------------------------------------------------------------
Redeeming by Check
- --------------------------------------------------------------------------------
o Checkwriting is available on the Government Reserve and Short
Government Bond Funds.
o The minimum amount per check is $250. A check for less may be
returned to you.
o All checks will require only one signature unless otherwise
indicated.
o Checks should not be used to close accounts with fluctuating net
asset values (e.g. the Short Government Bond Fund).
o Checks will be returned to you at the end of each month.
o Checkwriting privileges may not be available for Montgomery
Securities brokerage accounts.
27
<PAGE>
o A charge may be imposed for any stop payments requested.
- --------------------------------------------------------------------------------
Redeeming By Telephone
- --------------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on your
account application, you may redeem shares up to $50,000 by calling
the Transfer Agent before the Fund cutoff time.
o If you included bank wire information on your account application or
made subsequent arrangements to accommodate bank wire redemptions,
you may request that the Transfer Agent wire your redemption
proceeds to your bank account. Allow at least two business days for
redemption proceeds to be credited to your bank account. If you want
to wire your redemption proceeds to arrive at your bank on the same
business day (subject to bank cutoff times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an
address change. All redemption requests during this period must be
in writing with a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is
opened by instructing the Transfer Agent in writing. Your request
will be processed upon receipt. This service is not available for
IRA accounts.
- --------------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone redemption instructions given by the shareholder's
designee. The Funds may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Funds will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make an involuntary redemption, the shareholder will first be
notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to the minimum investment required to open an
account before the Fund takes any action.
28
<PAGE>
Exchange Privileges And Restrictions
You may exchange shares from another Class P Fund with the same registration,
taxpayer identification number and address. An exchange may result in a
recognized gain or loss for income tax purposes. See the discussion of Fund
telephone procedures and limitations of liability under "Telephone
Transactions."
- --------------------------------------------------------------------------------
Purchasing and Redeeming Shares by Exchange
- --------------------------------------------------------------------------------
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange
fee) after your request is received. Your request is subject to the
Funds' cut-off times.
o Exchange purchases must meet the minimum investment requirements of
the Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that
Fund's shares are qualified for sale and only for Funds offered by
this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make
more than four exchanges out of any one fund during a twelve-month
period. The Fund may also refuse an exchange into a Fund from which
you have redeemed shares within the previous 90 days (accounts under
common control and accounts with the same taxpayer identification
number will be counted together). Exchanges out of the Fixed Income
Funds are exempt. A shareholder's exchanges may be restricted or
refused if a Fund receives, or the Manager anticipates, simultaneous
orders affecting significant portions of that Fund's assets and, in
particular, a pattern of exchanges coinciding with a "market timing"
strategy. The Trusts reserve the right to refuse exchanges by any
person or group if, in the Manager's judgment, a Fund would be unable
to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to
affected shareholders when it is reasonable to do so, they may impose
these restrictions at any time. The exchange limit may be modified
for accounts in certain institutional retirement plans to conform to
plan exchange limits and U.S. Department of Labor regulations (for
those limits, see plan materials). The Trusts reserve the right to
terminate or modify the exchange privileges of Fund shareholders in
the future.
- --------------------------------------------------------------------------------
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed Income Funds into any other
Fund. The minimum exchange is $100. Periodically investing a set dollar amount
into a Fund is also referred to as dollar-cost averaging because the number of
shares purchased will vary depending on the price per share. Your account with
the recipient Fund must meet the applicable minimum of $1,000. Exchanges out of
the Fixed Income Funds are exempt from the four exchanges limit policy.
Directed Dividend Service
If you own shares of the Fixed Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000.
29
<PAGE>
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Government Reserve
Fund Only) Investors with Montgomery Securities brokerage accounts may instruct
Montgomery Securities automatically to purchase shares of the Government Reserve
Fund when the free credit balance in the investor's brokerage account (including
deposits, proceeds of sales of securities, and miscellaneous cash dividends and
interest, but not amounts held by Montgomery Securities as collateral for margin
obligations to Montgomery Securities) exceeds $100 on each day the NYSE is open
for trading other than national bank holidays. Upon request, a free credit
balance in a Montgomery Securities brokerage account also may be invested in
shares of the Government Reserve Fund following receipt by the Transfer Agent of
investor instructions. If such instructions are received after 12:00 noon, New
York time, Fund shares will be purchased at the next-determined asset value.
Checkwriting privileges may not be available for Montgomery Securities brokerage
accounts. For the Government Reserve Fund, the minimum initial investment
through an investor's brokerage account with Montgomery Securities is $100.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Government Reserve Fund), New York
time, on days that the Fund issues shares. Orders received after that time will
be purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Fund, they may receive
fees from the Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account
(Government Reserve Fund Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the Government
Reserve Fund automatically to satisfy debit balances in a shareholder's
Montgomery Securities brokerage account or to provide necessary cash collateral
for a shareholder's margin obligation to Montgomery Securities. Redemptions also
may be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the Government Reserve Fund, not to exceed the
number of shares in the shareholder's account, will be redeemed on the next day
the NYSE is open for trading to satisfy any remaining debits or amounts needed
for pending securities settlements.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a redemption order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Government Reserve Fund), on a day that the Fund redeems shares. Orders
received after that time are entitled to the net asset value next determined
after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Government Reserve Fund), New York time, on each day that the NYSE
is open for trading (except for bank holidays for the Fixed Income Funds).
Per-share net asset value is calculated by dividing the value of each Fund's
total net assets by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
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<PAGE>
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
Dividends And Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<TABLE>
<CAPTION>
==========================================================================================================================
<S> <C> <C>
Income Dividends Capital Gains
- --------------------------------------------------------------------------------------------------------------------------
Equity Funds (except Equity Declared and paid in November Declared and paid in November
Income Fund) or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the Declared and paid in November
last business day of each quarter. or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in November Declared and paid in November
or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Fixed-Income Funds Declared daily and paid monthly Declared and paid in November
on or about the last business day or December each year*
of each month
==========================================================================================================================
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a Fund.
</FN>
</TABLE>
Unless investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid
31
<PAGE>
to you would be included in your gross income for tax purposes even though you
may not have participated in the increase of net asset value of the Fund,
regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
Fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trusts
All of the Funds with the exception of the Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards to issue an unlimited number of full
and fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
This Prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. Except
as set forth herein, all classes of shares issued by a Fund shall have identical
voting, dividend, liquidation and other rights, preferences, and terms and
conditions. The only differences among the various classes of shares relate
solely to the following: (a) each class may be subject to different class
expenses; (b) each class may bear a different identifying designation; (c) each
class may have exclusive voting rights with respect to matters solely affecting
such class; (d) each class may have different exchange privileges; and (e) each
class may provide for the automatic conversion
32
<PAGE>
of that class into another class. While the Trusts are not required and do not
intend to hold annual meetings of shareholders, such meetings may be called by
each Trust's Board at its discretion, or upon demand by the holders of 10% or
more of the outstanding shares of the Trust for the purpose of electing or
removing Trustees. Shareholders may receive assistance in communicating with
other shareholders in connection with the election or removal of Trustees
pursuant to the provisions of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Performance data may be quoted separately for the
Class P shares as for other classes. Total return information generally will
include a Fund's average annual compounded rate of return over the most recent
four calendar quarters and over the period from the Fund's inception of
operations. A Fund may also advertise aggregate and average total return
information over different periods of time. Each Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions
(monthly) and pre-authorized automatic investment, exchange and
redemption services (quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semi-annual reports are mailed approximately 60 days after
June 30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-3863 or (800) 572-FUND.
33
<PAGE>
Backup Withholding
Tax identification number (TIN)
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by a Fund may be
subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Funds' official sales literature.
34
<PAGE>
Glossary
o Asset backed securities. Asset backed securities are secured by and payable
from, pools of assets, such as motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (e.g., credit card)
agreements.
o Cash equivalents. Cash equivalents are short-term, interest bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P
or Prime-1 by Moody's, or the issuer has an outstanding issue of debt
securities rated at least A by S&P or Moody's, or are of comparable quality
in the opinion of the Manager.
o Collateral assets include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Reserve Fund must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
o Collateralized Mortgage Obligations (CMOs). Derivative mortgage-related
securities that separate the cash flows of mortgage pools into different
classes or tranches. Stripped mortgage securities are CMOs that allocate
different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only or
"IO" class) while another may receive all of the principal (principal only
or "PO" class). The yield to maturity on any IO or PO class is extremely
sensitive not only to changes in interest rates but also to the rate of
principal payments and prepayments on underlying mortgages. In the most
extreme cases, an IO class may become worthless.
o Convertible security. A fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
o Covered call option. A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option, or owns an offsetting call option.
o Covered put option. A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds
a put option on the underlying security.
o Depositary receipts include American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
o Derivatives include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps
and options on futures contracts on U.S. Government and foreign government
securities and currencies.
o Dollar roll transaction. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a Fund to repurchase a similar
rather than the same security.
o Duration. Traditionally, a debt security's "term to maturity" characterizes
a security's sensitivity to changes in interest rates. However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of pre-maturity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a
more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Manager's estimates of future economic
parameters, which may vary from actual future values. Fixed-income
securities with effective durations of three years are more responsive to
interest rate fluctuations than those with effective durations of one year.
For example, if interest rates rise by 1%, the value of securities having an
effective duration of three years will generally decrease by approximately
3%.
o EAFE Index. The Morgan Stanley Capital International Europe, Australia, Far
East Index.
o Emerging Market Companies. A company is considered to be an emerging market
company if its securities are principally traded in the capital market of an
emerging market country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging market countries or
from sales made in such emerging market countries, regardless of where the
securities of such companies are principally traded; or it is organized
under the laws of, and with a principal office in, an emerging market
country. An emerging market country is one having an economy and market that
are or would be considered by the World Bank or the United Nations to be
emerging or developing.
o Equity derivative securities include, among other things, options on equity
securities, warrants and future contracts on equity securities.
o Equity swaps. Equity swaps allow the parties to exchange the dividend income
or other components of return on an equity investment (e.g., a group of
equity securities or an index) for a component of return on another
non-equity or equity investment. Equity swaps transitions may be volatile
and may present the Fund with counterparty risks.
A 1
<PAGE>
o FHLMC. The Federal Home Loan Mortgage Corporation.
o FNMA. The Federal National Mortgage Association.
o Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. The Funds generally do not enter
into forward contracts with terms greater than one year. A Fund generally
enters into forward contracts only under two circumstances. First, if a Fund
enters into a contract for the purchase or sale of a security denominated in
a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security by entering into a forward contract to buy the amount of a foreign
currency needed to settle the transaction. Second, if the Manager believes
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. A Fund will not enter
into a forward contract if, as a result, it would have more than one-third
of total assets committed to such contracts (unless it owns the currency
that it is obligated to deliver or has collateral assets sufficient to cover
its obligations). Although forward contracts are used primarily to protect a
Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
o Futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each Fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
o GNMA. The Government National Mortgage Association.
o Highly rated debt securities. Debt securities rated within the three highest
grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moody's
Investors Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services,
Inc. ("Fitch") (AAA to A), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. See the Appendix to the Statement of Additional Information for a
description of these ratings.
o Illiquid securities. The Funds treat any securities subject to restrictions
on repatriation for more than seven days and securities issued in connection
with foreign debt conversion programs that are restricted as to remittance
of invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under
the Securities Act of 1933 and that, subject to the review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid.
o Investment grade. Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB), Moody's (at least Baa) or
Fitch (at least Baa) or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees.
o Leverage. Some Funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. Leveraging also creates interest
expenses that can exceed the income from the assets retained.
o Options on securities, securities indices and currencies. A Fund may
purchase call options on securities which it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put
options on particular securities (or on currencies in which those securities
are denominated) in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid
for the option (or an adverse movement in the applicable currency relative
to the U.S. dollar). Prior to expiration, most options are expected to be
sold in a closing sale transaction. Profit or loss from the sale depends
upon whether the amount received is more or less than the premium paid plus
transaction costs. A Fund may purchase put and call options on stock indices
in order to hedge against risks of stock market or industry-wide stock price
fluctuations.
o Repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
Government security or other high-grade liquid debt instrument (for the
Reserve Fund, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
o Reverse dollar roll transactions. When a Fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at
an agreed-upon price.
o Reverse repurchase agreement. In a reverse repurchase agreement, a Fund
sells to a financial institution a security that it holds and agrees to
repurchase the same security at an agreed-upon price and date.
o S&P 500. Standard & Poor's 500 Composite Price Index.
o Securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss
of rights in collateral should the borrower fail financially.
o U.S. government securities include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
A 2
<PAGE>
o Variable rate demand notes. Variable rate demand notes ("VRDNs") are
instruments with rates of interest adjusted periodically or which "float"
continuously according to specific formulae and often have a demand feature
entitling the purchaser to resell the securities.
o A warrant typically is a long-term option that permits the holder to buy a
specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
o When-issued and forward commitment securities. The Funds may purchase U.S.
Government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a Fund
will enter into when-issued and forward commitments only with the intention
of actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a Fund. At the time a Fund enters
into a transaction on a when-issued or forward commitment basis, it supports
its obligation with collateral assets equal to the value of the when-issued
or forward commitment securities and causes the collateral assets to be
marked to market daily. There is a risk that the securities may not be
delivered and that the Fund may incur a loss.
o Zero coupon bonds. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will
accrue and compound over the period to maturity or the first
interest-payment date at a rate of interest reflecting the market rate of
interest at the time of issuance.
A 3
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Montgomery Institutional Series: Emerging Markets Portfolio
101 California Street
San Francisco, California 94111
(415) 248-6330
Prospectus
November 12, 1996
Montgomery Institutional Series: Emerging Markets Portfolio (the "Fund") seeks
capital appreciation for institutional investors by investing primarily in
equity securities of companies in countries having economies and markets that
are or would be considered by the World Bank or the United Nations to be
emerging or developing.
The Fund's shares are sold at net asset value with no sales load, no
commissions, no Rule 12b-1 fees, and no dividend reinvestment or exchange fees.
Purchases and redemptions may be made in certain circumstances with the payment
of securities. When purchases or redemptions are made in cash, the Fund charges
a fee to cover the expenses related to the investment of cash received by the
Fund or related to the sale of securities to obtain cash, as appropriate, in
order to prevent the dilution of the investments of existing shareholders.
Shares purchased after November 1, 1995 will not be subject to both fees. Shares
purchased by the Manager on behalf of advisory clients for which it has
investment discretion may not be subject to these fees. The Fund, rather than
the Manager, ultimately receives these fees. In general, the minimum initial
investment in the Fund is $2,000,000, and subsequent investments must be at
least $100,000. The Manager or the Distributor, in its discretion, may waive
these minimums. See "How to Invest in the Fund."
The Fund is managed by Montgomery Asset Management, L.P. (the "Manager"), an
affiliate of Montgomery Securities (the "Distributor"). The Fund is a series of
The Montgomery Funds II, an open-end management investment company, and is
intended primarily for institutional investors. As is the case for all mutual
funds, attainment of the Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated November 12, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (415)
248-6330. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (415) 248-6330.
The Internet address for the Montgomery Institutional Series: Emerging Markets
Portfolio is www.xperts.montgomery.com/1.
The Fund may offer other classes of shares to investors eligible to purchase
those shares. The other classes of shares may have different fees and expenses
than the class of shares offered in this Prospectus, and those different fees
and expenses may affect performance. To obtain information concerning the other
classes of shares not offered in this Prospectus, call The Montgomery Funds at
(415) 248-6330 or contact sales representatives or financial intermediaries who
offer those classes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
1
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Fees and Expenses of the Fund 3
Financial Highlights 4
The Fund's Investment Objective and Policies 5
Management of the Fund 5
How To Invest in the Fund 8
How To Redeem an Investment in the Fund 9
How Net Asset Value is Determined 10
Dividends and Distributions 11
Taxation 11
Portfolio Securities 11
Other Investment Practices 13
Risk Considerations 17
General Information 18
Backup Withholding Instructions 19
- --------------------------------------------------------------------------------
2
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Fees And Expenses Of The Fund
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of
the Fund in cash:
- -------------------------------------------------------------------------------
Maximum Sales Load Imposed on Purchases (as a percentage of offering None
price)
- ------------------------------------------------------------------------------
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of None
offering price)
- -------------------------------------------------------------------------------
Deferred Sales Load (as a percentage of original purchase price or None
redemption proceeds, as applicable)
- -------------------------------------------------------------------------------
Investment Expense Reimbursement Fee* .75%
- -------------------------------------------------------------------------------
Redemption Fees*+ (as a percentage of amount redeemed) .75%
- -------------------------------------------------------------------------------
Exchange Fees None
- -------------------------------------------------------------------------------
Annual Fund Operating Expenses (as a percentage of average net assets)
- -------------------------------------------------------------------------------
Management Fees** 1.25%
- -------------------------------------------------------------------------------
Rule 12b-1 Fees None
- -------------------------------------------------------------------------------
Other Expenses** None
- -------------------------------------------------------------------------------
Total Fund Operating Expenses** 1.25%
- -------------------------------------------------------------------------------
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
* Investment expense reimbursement fees and redemption expense reimbursement
fees are paid to the Fund to offset certain costs, such as brokers'
commissions, incurred by the Fund in either investing the cash received
from shareholders or selling securities to obtain cash to pay redemptions.
Charging these fees enhances the return of the Fund for all existing
shareholders. This fee will not be charged on investments made in the form
of securities acceptable to the Manager and will not be charged on
redemptions when the proceeds are paid in securities (although
reregistration fees may be incurred). Shares purchased after November 1,
1995 will not be subject to both fees. For those shares, shareholders may
elect which fee to pay. Shares purchased by the Manager on behalf of
advisory clients for which it has investment discretion may not be subject
to these fees. See "Management of the Fund - Investment Expense and
Redemption Expense Reimbursement Fees."
+ Redemptions effected via wire transfer may be required to pay a
third-party service provider charge that will be directly deducted from
redemption proceeds. This would be in addition to any redemption expense
reimbursement fee. See "How to Redeem an Investment in the Fund -
General."
** Expenses are based on actual expenses for the fiscal year ended June 30,
1996. The Manager will reduce its fees and may absorb or reimburse the
Fund for certain expenses to the extent necessary to limit total annual
fund operating expenses to the amount indicated in the table for the Fund,
subject to possible reimbursement by the Fund within the following three
years if such reimbursement can be achieved within the foregoing expense
limit. The Manager generally seeks reimbursement for the oldest reductions
and waivers before payment by the Fund for fees and expenses for the
current year. Absent the reduction, actual total Fund operating expenses
for the period ended June 30, 1996 (annualized) would have been 1.70%
(0.45% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Fund."
Example of Fund Expenses
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares (assuming application of the redemption expense reimbursement fee):
- --------------------------------------------------------------------
1 Year $20
- --------------------------------------------------------------------
3 Years $48
- --------------------------------------------------------------------
5 Years $78
- --------------------------------------------------------------------
10 Years $162
- --------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
- --------------------------------------------------------------------------------
3
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Selected Per Share Data and Ratios
<TABLE>
The following financial information was audited by Deloitte & Touche LLP, whose
report, dated August 16, 1996, appears in the Annual Report of the Fund.
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Per Share Data for the Year or Period Ended: June 30, 1996 June 30, 1995++ June 30, 1994*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $44.6 $43.71 $50.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income............................................................. 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on investments............................ 3.93 0.67 (6.67)
---- ---- ------
Net increase/(decrease) in net assets resulting from investment operations........ 4.43 0.80 (6.58)
---- ---- ------
Effect of redemption expense reimbursement fee.................................... 0.09 0.11 0.29
Distributions from net investment income.......................................... (0.04) (0.01) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year........................................................ $49.09 $44.61 $43.71
==================================================================================================================================
Total Return**...................................................................... 10.14% 2.09% (12.58)%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's).................................................. $270,878 $186,666 $127,085
Ratio of net investment income to average net assets................................ 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets......................................... 1.29% 1.40% 1.40%+
Portfolio turnover rate............................................................. 88% 101% 33%
Average commission rate paid(a)..................................................... $0.0007 N/A N/A
Net investment income/(loss) before deferral and/or
waiver of fees by Manager and/or administrator.................................... $0.33 $(0.05) $0.01
Ratio of expenses before deferral and/or waiver of fees
by Manager and/or administrator................................................... 1.70% 1.79% 1.81%+
<FN>
- --------------------
* The Montgomery Institutional Series: Emerging Markets Portfolio commenced
operations on December 17, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per share numbers have been calculated using the monthly average shares
method, which more appropriately represent the per share data for the year
since the use of the undistributed method did not accord with results of
operations.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
The Fund's Investment Objective And Policies
The Fund's investment objective and general investment policies are described
below. Specific portfolio securities that the Fund may purchase are described in
"Portfolio Securities," beginning on page 11. Specific investment practices that
the Fund may employ are described in "Other Investment Practices," beginning on
page 13. Certain risks associated with investments in the Fund are described in
those sections as well as in "Risk Considerations," beginning on page 17.
The Fund's investment objective is capital appreciation, which under normal
conditions it seeks by investing at least 85% of its total assets in equity
securities of companies in countries having emerging markets. For these
purposes, the Fund defines an emerging market country as any country whose
economy and market the World Bank or the United Nations considers to be emerging
or developing.
The Fund currently limits its investments to the following emerging market
countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay, Venezuela); Asia (China,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka,
Taiwan, Thailand); Southern and Eastern Europe (Czech Republic, Greece, Hungary,
Poland, Portugal, Turkey); Russia; Mid-East (Israel, Jordan); and Africa (Egypt,
Ghana, Ivory Coast, Kenya, Morocco, Nigeria, Tunisia, Zimbabwe). In the future,
the Fund may invest in other emerging market countries. Under normal conditions,
the Fund maintains investments in at least six emerging market countries at all
times and does not invest more than 25% of its total assets in any one emerging
market country.
The Fund considers emerging market companies to be companies whose securities
are principally traded in the capital market of an emerging market country; that
derive at least 50% of their total revenue from either goods produced or
services rendered in emerging market countries or from sales made in such
emerging market countries, regardless of where the securities of such companies
are principally traded; or organized under the laws of, and with a principal
office in, an emerging market country.
The Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's goals are to invest
in those countries that are expected to have the highest risk/reward tradeoff
when incorporated into a total portfolio context and to construct a portfolio of
emerging market investments that approximates the risk level of an
internationally diversified portfolio of securities in developed markets. This
"top-down" country selection is combined with "bottom-up" fundamental industry
analysis and stock selection based on original research, publicly available
information, and company visits.
The Fund invests primarily in common stocks, but it also may invest in other
types of equity and equity derivative securities. The Fund may invest up to 15%
of its total assets in debt securities, including up to 5% of its total assets
in debt securities rated below investment grade. See "Portfolio Securities,"
"Risk Considerations" and the Appendix in the Statement of Additional
Information.
The Fund may invest in certain debt securities issued by the governments of
emerging market countries that are or may be eligible for conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities.
See "Portfolio Securities."
Josephine Jimenez, CFA, Bryan L. Sudweeks, Ph.D., CFA, Thomas R. Haslett, CFA,
Angeline Ee and Frank Chiang are jointly responsible for managing the Fund's
portfolio. See "Management of the Fund."
Management Of The Fund
The Montgomery Funds II (the "Trust") has a Board of Trustees that establishes
the Fund's policies and supervises and reviews the management of the Fund. The
day-to-day operations of the Fund are administered by the officers of the Trust
and by the Manager pursuant to the terms of an Investment Management Agreement
with the Fund.
Montgomery Asset Management, L.P., is the Fund's Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts, the series of funds of
another registered investment company, The Montgomery Funds, as well as other
series of funds of the Trust. Its general partner is Montgomery Asset
Management, Inc., and its sole limited partner is Montgomery Securities, the
Fund's Distributor. Under the Investment Company Act, both Montgomery Asset
Management, Inc. and Montgomery Securities may be deemed control persons of the
Manager. Although the operations
- --------------------------------------------------------------------------------
5
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
and management of the Manager are independent from those of Montgomery
Securities, the Manager may draw upon the research and administrative resources
of Montgomery Securities in its discretion and consistent with applicable
regulations.
Portfolio Managers
Josephine S. Jimenez, CFA, is a Managing Director and Portfolio Manager in
charge of emerging markets investment research and is responsible for the Fund's
investments in Latin America, the Philippines, Portugal and Turkey. Ms. Jimenez
also is a portfolio manager for Montgomery Emerging Markets Fund (the
"Montgomery Emerging Markets Fund"), a series of The Montgomery Funds, which
commenced operations on March 1, 1992. From 1988 through 1991, Ms. Jimenez
worked at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. as senior analyst and portfolio manager in charge of managing
the investments in Latin America, the Philippines, and Portugal. From 1984
through 1987, she was an investment officer at Shawmut Corporation and, from
1982 through 1984, Ms. Jimenez was a securities analyst of U.S. equities at the
Massachusetts Mutual Life Insurance Company. Ms. Jimenez received a Master of
Science degree from the Massachusetts Institute of Technology in 1981 and a
Bachelor of Science degree from New York University in 1979. She became a
Chartered Financial Analyst in 1989.
Bryan L. Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio Manager in
charge of emerging markets asset allocation and is responsible for the Fund's
investments in Asia, and emerging Europe. Dr. Sudweeks also is a portfolio
manager for the Montgomery Emerging Markets Fund. Prior to joining the Manager,
he was a senior analyst and portfolio manager of investments in Asia, Greece and
Turkey at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of International
Finance and Investments at George Washington University and also served as an
Adjunct Professor of International Investments from 1988 until May 1991. Prior
to teaching, Dr. Sudweeks was a consultant at the International Finance
Corporation, the private sector arm of the World Bank, where he worked on
developing and expanding the IFC Emerging Markets Database. He has also worked
as a financial analyst at the Amdahl Corporation and at Utah International, a
former subsidiary of General Electric.
Thomas R. Haslett, CFA, is a Vice President and Portfolio Manager. From 1987
until joining the Manager in April 1992, Mr. Haslett was a Portfolio Manager at
Gannett, Welsh and Kotler in Boston, Massachusetts.
Angeline Ee is a Vice President and Portfolio Manager. From 1990 until joining
the Manager in July 1994, Ms. Ee was an Investment Manager with AIG Investment
Corp. in Hong Kong. From June 1989 until September 1990, Ms. Ee was a co-
manager of a portfolio of Asian equities and bonds at Chase Manhattan Bank in
Singapore.
Frank Chiang is a Vice President and Portfolio Manager. From 1993 until joining
the Manager in 1996, Mr. Chiang was Managing Director and Portfolio Manager at
TCW Asia Ltd. in Hong Kong.
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, including the placement of orders for
portfolio transactions, furnishes the Fund with office space and certain
administrative services, and provides the personnel needed by the Fund with
respect to the Manager's responsibilities under the Manager's Investment
Management Agreement with the Fund. The Manager also compensates the members of
the Trust's Board of Trustees who are interested persons of the Manager, and
assumes the cost of printing prospectuses and shareholder reports for
dissemination to prospective investors. As compensation, the Fund pays the
Manager a monthly management fee (accrued daily but paid when requested by the
Manager) based upon the value of the average daily net assets of the Fund, at
the annual rate of one and twenty-five one-hundredths percent (1.25%) of the
first $50 million in average daily net assets, one percent (1.00%) of the next
$50 million of daily net assets, and nine-tenths of one percent (.90%) of
amounts over $100 million in average daily net assets. The management fee for
the Fund is higher than for most mutual funds.
Montgomery Asset Management, L.P., serves as the Fund's Administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative operations. As compensation, the Fund pays
the Administrator a monthly fee at an annual rate of five one-hundredths of one
percent (0.05%) of average daily equity assets.
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage
and commission expenses, if any; interest charges on any borrowings; transfer
agent, custodian, administrator, legal and auditing fees; shareholder servicing
fees including fees to third party servicing agents; fees and expenses of
Trustees who are not interested persons of the Manager; salaries of certain
personnel; costs and expenses of calculating its daily net asset value; costs
and expenses of accounting, bookkeeping and recordkeeping required under the
Investment Company Act; insurance premiums; trade association dues; fees and
expenses of registering and maintaining
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
registrations of its shares for sale under federal and applicable state
securities laws; all costs associated with shareholders meetings and the
preparation and dissemination of proxy materials, except for meetings called
solely for the benefit of the Manager or its affiliates; printing and mailing
prospectuses, statements of additional information and reports to shareholders;
and other expenses relating to the Fund's operations, plus any extraordinary and
nonrecurring expenses which are not expressly assumed by the Manager.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below the lesser of the maximum allowable by
applicable state expense limitations or one and twenty-five one hundredths of
one percent (1.25%) of the Fund's average net assets. The Manager also may
voluntarily reduce additional amounts to increase the return to the Fund's
investors. The Manager may terminate those voluntary reductions at any time. Any
reductions made by the Manager in its fees are subject to reimbursement by the
Fund within the following three years provided the Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Fund for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers and other
financial intermediaries that distribute the Fund's shares as well as other
providers of shareholder and administrative services.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors include, but
are not limited to, the reasonableness of commissions, the quality of services
and execution and the availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider the sale of the Fund's shares as a factor in selecting broker-dealers
for the Fund's portfolio transactions.
It is anticipated that Montgomery Securities also may act as one of the Fund's
brokers in the purchase and sale of portfolio securities and, in that capacity,
will receive brokerage commissions from the Fund. The Fund will use Montgomery
Securities as its broker only when, in the judgment of the Manager and pursuant
to review and procedures adopted by the Board of Trustees of the Trust, that
firm will obtain for the Fund a price and execution at least as favorable as
that available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding the Fund's policies concerning the execution of portfolio
transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent"), and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
Investment Expense and Redemption Expense Reimbursement Fees
The Board of Trustees of the Trust and the Manager have determined that payment
of an investment expense reimbursement fee by certain investors is appropriate
to defray the significant costs, listed below, associated with investing the
proceeds received by the Fund and to offset the dilutive effect such costs would
otherwise have on the net asset value of shares held by existing shareholders.
Likewise, the redemption expense reimbursement fee is used to defray the
significant costs, listed below, associated with the sale of portfolio
securities needed to pay cash redemption requests. Therefore, the shares of the
Fund are sold at a public offering price which is equal to the net asset value
of such shares plus the investment expense reimbursement fee. In addition,
redemption requests are paid at net asset value less the redemption expense
reimbursement fee.
The amount of the reimbursement fees represents the Manager's estimate of the
costs reasonably anticipated to be associated with the purchase of securities
with cash received from investors and the sale of securities to obtain cash. The
fees are paid to the Fund and used by it to defray those costs. Those costs
include brokerage commissions on listed securities, imputed commissions on
over-the-counter securities, and, in the case of foreign countries, commissions,
duties and taxes (other than taxes based on net income) imposed on the purchase
or sale of securities. These costs do not include distribution-related expenses.
It is possible that the amount of the reimbursement fees will be more or less
than the actual costs they are intended to defray. The Fund will incur any extra
costs or receive any excess fees, as applicable.
- --------------------------------------------------------------------------------
7
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
The Fund charges an investment expense reimbursement fee of seventy-five
one-hundredths of one percent (0.75%) of the amount invested and a redemption
expense reimbursement fee of seventy-five one-hundredths of one percent (0.75%)
of the amount redeemed. Shares purchased after November 1, 1995 will not be
subject to both fees. For those shares, shareholders may elect which fee to pay.
Shares purchased by the Manager on behalf of advisory clients for which it has
investment discretion may not be subject to these fees. Reinvestments of
dividends, capital gains distributions paid by the Fund and investments in kind
are not subject to the expense reimbursement fees. Purchases and redemptions in
kind are not subject to the expense reimbursement fees. See "How To Invest In
The Fund - In Kind Purchases."
How To Invest In The Fund
The Fund's shares are offered directly to the public at their current net asset
value plus any applicable investment expense reimbursement fee, with no sales
load. The Fund's shares are offered for sale by Montgomery Securities, the
Fund's Distributor, 600 Montgomery Street, San Francisco, California 94111,
(415) 248-6330, and through selected securities brokers and dealers.
The minimum initial investment in the Fund is $2,000,000. Subsequent investments
for the Fund must be at least $100,000. The Manager or the Distributor, in its
discretion, may waive these minimums. Purchases may also be made in certain
circumstances by payment of securities. See "In Kind Purchases" below and the
Statement of Additional Information for further details.
Investing Directly By Check
Investors who desire to purchase shares directly from the Fund by check should:
Initial Investment
o Complete the Account Application.
o Make your check(s) payable to Montgomery Institutional Series:
Emerging Markets Portfolio.
o Mail or deliver the completed Account Application and your check(s)
to the Transfer Agent: Montgomery Institutional Series: Emerging
Markets Portfolio c/o DST Systems, Inc., P.O. Box 419073, Kansas
City, MO 64141-6073.
Subsequent Investments
o Detach and complete the stub attached to your account statement. If
you do not have an investment stub, mail your check with written
instructions indicating the Fund name and your account number.
o Make your check(s) payable to Montgomery Institutional Series:
Emerging Markets Portfolio.
o Write your shareholder account number on the check.
o Mail the check(s) and investment stub to the Transfer Agent:
Montgomery Institutional Series: Emerging Markets Portfolio c/o DST
Systems, Inc., P.O. Box 419073, Kansas City, MO 64141-6073.
Investing Directly By Wire
Investors who desire to purchase shares directly from the Fund by wire should:
Initial Investment
o Before wiring funds, call the Transfer Agent at 1-800-447-4210 to
advise the Transfer Agent that you intend to make an initial
investment by wire and to receive an account number.
o Provide the Transfer Agent with the name of the investor and the
dollar amount to be invested.
o Complete the Account Application. Be sure to include the date and
the account number. Mail or deliver the completed Account
Application to the appropriate address shown at the end of the
Account Application.
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Request the investor's bank to transmit immediately available funds by
wire for purchase of shares in the investor's name to the Transfer Agent's
affiliated bank, as follows:
Investors Fiduciary Trust Company
ABA # 101003621
For: DST Systems, Inc.
Account # 7526601
Attention: Montgomery Institutional Series:
Emerging Markets Portfolio
For credit to: Name of Shareholder:_____________________________
Shareholder Account Number:______________________
Subsequent Investments
o Instruct the bank to wire funds as indicated above. It is not
necessary to contact the Transfer Agent prior to making subsequent
investments by wire.
It is essential that complete information regarding your account be included in
all wire instructions in order to facilitate prompt and accurate handling of
investments. Investors may obtain further information about remitting funds in
this manner and any fees that may be imposed from their own banks.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the U.S. A charge may be imposed
if any check used for investment does not clear. The Fund and the Distributor
each reserve the right to reject any purchase order in whole or in part.
If an order, together with payment in proper form, is received by the Transfer
Agent or Montgomery Securities by 4:00 p.m., New York time, on any day that the
New York Stock Exchange ("NYSE") is open for trading, Fund shares will be
purchased at the Fund's next-determined net asset value. Orders for Fund shares
received after 4:00 p.m., New York time will be purchased at the next-determined
net asset value after receipt of the order.
In Kind Purchases
An investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. For purposes of in kind purchases, a security will be considered
"readily marketable" if it is in the process of undergoing customary settlement
and/or registration in its primary market. For the purposes of sales of shares
of the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares.
Purchases of the Fund's shares with acceptable securities will not be charged an
investment expense reimbursement fee. See "Fees and Expenses of the Fund" and
"Management of the Fund - Investment Expense and Redemption Expense
Reimbursement Fees."
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
How To Redeem An Investment In The Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share, less any redemption
expense reimbursement fee, next determined after the shares are validly tendered
for redemption and such request is received by the Transfer Agent or, in the
case of repurchase orders, Montgomery Securities or other securities dealers.
The procedures for requesting a redemption are set forth below.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Direct Redemption by Check or Wire
Redemptions can be requested in writing by letter directed to the Fund's
Transfer Agent. If you want to have redemption proceeds wired directly to your
bank account, include a voided check with your letter. Send your letter to
Montgomery Institutional Series: Emerging Markets Portfolio c/o DST Systems,
Inc., P.O. Box 419073, Kansas City, MO 64141-6073. The minimum amount that may
be wired is $100,000 (wire charges, if any, will be deducted from redemption
proceeds). The Fund reserves the right to permit lesser wire amounts or fees in
the Manager's discretion. The Transfer Agent requires that the signature(s) on
any written request be guaranteed by an eligible guarantor institution, such as
a commercial bank, a member firm of a domestic stock exchange or the National
Association of Securities Dealers, Inc., an authorized credit union, a national
securities exchange, a registered securities association, a clearing agency or a
savings association. Please contact the Transfer Agent for more information.
In Kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Fund, an investor may redeem shares of the Fund and receive securities from
the Fund's portfolio selected by the Manager in its sole discretion, provided
that such redemption is not expected to affect the Fund's ability to attain its
investment objective or otherwise materially affect its operations. For the
purposes of redemptions in kind, the redeemed securities shall be valued at the
identical time and in the identical manner that the other portfolio securities
are valued for purposes of calculating the net asset value of the Fund's shares.
Redemptions of the Fund's shares for securities will not be charged any
redemption expense reimbursement fee. See "Fees and Expenses of the Fund," and
"Management of the Fund - Investment Expense and Redemption Expense
Reimbursement Fees."
General
Payment of redemption proceeds is made promptly regardless of when redemption
occurs, but not later than three days after the receipt of all documents in
proper form, including a written redemption order with appropriate signature
guarantee. Redemption proceeds will be mailed or wired in accordance with the
shareholder's instructions on the Account Application to a predesignated
account. The minimum amount that may be wired is $100,000 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion. The Fund may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account is
less than $100,000. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than $100,000 and will be allowed 30 days to make
an additional investment to bring the value of that account to at least $100,000
before the Fund takes any action.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of 4:00 p.m., New
York time, on each day that the NYSE is open for trading. Net asset value is
calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board of Trustees of the Trust, respectively, in accordance
with methods which are specifically authorized by the Board of Trustees.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost as reflecting fair value.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets will have their value translated into U.S. dollars at the
last price of their respective currency denomination against U.S. dollars quoted
by a major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of net asset value unless the Manager, under supervision of the
Board of Trustees, determines that the particular event would materially affect
the Fund's net asset value.
Dividends And Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made on or about December 31 of
each year with respect to any undistributed capital gains earned during the
one-year period ended October 31 of such calendar year. Another distribution of
any undistributed capital gains will be made following the Fund's fiscal year
end (June 30). The amount and frequency of distributions by the Fund are not
guaranteed and are at the discretion of the Trust's Board of Trustees.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
Fund and credited to the shareholder's account at the closing net asset value on
the reinvestment date, without the imposition of an investment expense
reimbursement fee.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of its assets. Accordingly, the Fund generally will not be
liable for federal income tax or excise tax based on the net income except to
the extent its earnings are not distributed or are distributed in a manner that
does not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent it invests in "passive foreign investment companies."
See the Statement of Additional Information for further information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. A portion of the distributions paid by the Fund may not be eligible for
the dividends-received deduction allowed to corporate shareholders under the
Code. Distributions of the excess of net long-term capital gain over net
short-term capital loss from transactions of the Fund are treated by
shareholders as long-term capital gains regardless of the length of time the
Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt investors and non-U.S. investors) are
advised to consult their own tax advisers regarding the particular tax
consequences to them of an investment in shares of the Fund. Additional
information on tax matters relating to the Fund and its shareholders is included
in the Statement of Additional Information.
Portfolio Securities
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stocks. The Fund also may invest in other types of equity securities and equity
derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Depositary Receipts
The Fund also may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other depositary receipts. Depositary receipts are
receipts typically issued in connection with a U.S. or foreign bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Unsponsored depositary receipts programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored depositary receipts, and the prices of unsponsored
depositary receipts may be more volatile than if such depositary receipts were
sponsored by the issuer.
Convertible Securities
The Fund also may invest in convertible securities as a form of equity
securities. A convertible security is a fixed-income security (a bond or
preferred stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, and tends to decrease as the market value of the
underlying stock declines. For purposes of allocating the Fund's investments,
the Manager regards convertible securities as a form of equity securities.
Securities Warrants
The Fund may invest up to 5% of its net assets in warrants, including warrants
that are not listed on a securities exchange. A warrant typically is a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified number of shares of the underlying common stock of the issuer at a
specified exercise price at any time on or before an expiration date. Stock
index warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
Privatizations
The Fund believes that foreign governments' programs of selling all or part of
the interests in government-owned or controlled enterprises ("privatizations")
may represent opportunities for significant capital appreciation and may invest
in privatizations as it deems appropriate. The ability of U.S. entities such as
the Fund to participate in privatizations in certain foreign countries may be
limited by local law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that foreign governments will continue to sell their interests
in companies currently owned or controlled by them or that privatization
programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar vehicles (collectively, "special situations") could enhance the Fund's
capital appreciation potential. This Fund also may invest in certain types of
vehicles or derivative securities that represent indirect investments in foreign
markets or securities in which it is impracticable for the Funds to invest
directly. Investments in special situations may be illiquid, as determined by
the Manager based on criteria established by the Board of Trustees. The Fund
will not invest more than 15% of its total assets in all types of illiquid
investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies. Because of restrictions on direct investment by U.S. entities in
certain countries, investment in other investment companies may be the most
practical or only manner in which the Fund can invest in the securities markets
of those countries. Such investments may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities and are
subject to limitations under the Investment Company Act. The Fund also may incur
tax liability to the extent it invests in stock of a foreign issuer that
constitutes a "passive foreign investment company." See Statement of Additional
Information.
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The Fund does not intend to invest in other investment companies unless, in the
judgment of the Manager, the potential benefits of such investment exceed the
associated costs relative to the benefits and costs associated with direct
investments in the underlying securities. As a shareholder in an investment
company, the Fund would bear its ratable share of that investment company's
expenses, including its advisory and administration fees. In accordance with
applicable state regulatory provisions, the Manager has agreed to waive its
management fee with respect to the portion of the Fund's assets invested in
shares of other open-end investment companies. The Fund continues to pay its own
management fees and other expenses with respect to its investments in shares of
closed-end investment companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation, either through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels, or in the creditworthiness of
issuers. In selecting debt securities, the Manager will seek out good credits.
The Manager also 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 Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investor Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. Subject to this limitation, the Fund may invest in any debt security,
including securities in default. See "Risk Considerations."
In addition to traditional corporate, governmental and supranational debt
securities, the Fund may invest in external debt obligations issued by the
governments, governmental entities and companies of emerging market countries.
External debt obligations are those issued by an emerging market country or
company to foreign lenders.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rates of
economic growth and corporate profits growth; changes in governmental policies,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of governmental
finances; and the conditions of the balance of payments and changes in the terms
of trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain obligations, including U.S. Treasury Bills, Notes and Bonds,
and mortgage-related securities of the Government National Mortgage Association
("GNMA"), are issued or guaranteed by the U.S. Government. Other securities
issued by U.S. Government agencies or instrumentalities are supported only by
the credit of the agency or instrumentality, for example those issued by the
Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Fund's shares. Also, 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.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce these risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. Government security or other high grade
liquid debt instrument from a bank, a broker-dealer or other financial
institution that simultaneously agrees to repurchase the same security from the
Fund at a specified time and price. The repurchase price is in excess of the
purchase price by an amount which reflects an agreed-upon rate of return, which
is not determined by the coupon rate on the underlying security. Under the
Investment Company Act, repurchase agreements are considered to be loans by the
Fund and must be fully collateralized by cash, letters of credit, U.S.
Government securities or other liquid equity or debt securities
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Montgomery Institutional Series: Emerging Markets Portfolio
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("Collateral Assets") separately identified and rendered unavailable for
investment. If the seller defaults on its obligation to repurchase the
underlying security, the Fund may experience delay or difficulty in exercising
its rights to realize upon the security and might incur a loss if the value of
the security declines, as well as disposition costs in liquidating the security.
See the Statement of Additional Information for further information.
Borrowing
The Fund may borrow money from banks in an aggregate amount not to exceed 10% of
the Fund's total assets to meet temporary or emergency purposes, and the Fund
may pledge its assets in connection with such borrowings. The Fund will not
purchase any securities while any such borrowings exceed 5% of the Fund's total
assets.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 10% of the Fund's
total assets. Each securities loan is collateralized with Collateral Assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. If the seller should default on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security and might incur a loss if
the value of the security declines as well as disposition costs in liquidating
the security. See the Statement of Additional Information for further
information.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. Government or other securities on a "when-issued,"
and may purchase or sell securities on a "forward commitment" or "delayed
delivery," basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
seven to 15 days later. When-issued securities and forward commitments may be
sold prior to the settlement date, but the Fund will enter into when-issued and
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. No income accrues on securities which have
been purchased pursuant to a forward commitment or on a when-issued basis prior
to delivery to the Fund. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to collateralize the Fund's obligation
with Collateral Assets equal to the value of the when-issued or forward
commitment securities, marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in the financial
markets in which the Fund invests, or against currency exchange rate or interest
rate changes that are adverse to the present or prospective positions of the
Fund, the Fund may employ certain risk management practices using the following
derivative securities and techniques (known as "derivatives"): forward currency
exchange contracts, stock options, currency options, and stock and stock index
options, futures contracts, swaps and options on futures contracts on U.S.
Government and foreign government securities and currencies. The Board has
adopted derivatives guidelines that require the Board to review each new type of
derivative that may be used by the Fund. Some markets currently do not have
instruments available for hedging transactions relating to currencies or to
securities denominated in such currencies or to securities of issuers domiciled
or principally engaged in business in such markets. To the extent that such
markets do not exist, the Manager may not be able effectively to hedge its
investment in such countries. Furthermore, the Fund will engage in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment. The
Statement of Additional Information contains further information on the Fund's
hedging and risk management practices, including related risks and other special
considerations.
Forward Currency Contracts. A forward currency contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. The Fund normally conducts its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market at the time of the transaction, or through entering
into forward contracts to purchase or sell foreign currencies at a future date.
The Fund generally does not enter into a forward contract with a term greater
than one year.
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The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy or sell the amount of foreign currency needed to settle the
transaction. Second, if the Manager believes that the currency of a particular
foreign country may suffer or substantially benefit against the U.S. dollar, it
may enter into a forward contract to buy or sell the currency of such country
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The Fund will not enter into forward
contracts if, as a result, the Fund will have more than one-third of its total
assets committed to the consummation of such contracts or unless the Fund owns
the currency that it is obligated to deliver or has caused its custodian to
collateralize the Fund's obligation with Collateral Assets having a value
sufficient to cover its obligations to purchase the currency. Although forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be predicted accurately.
Options on Securities, Securities Indices and Currencies. The Fund also may
purchase put and call options on securities and currencies traded on U.S.
exchanges and, to the extent permitted by law, foreign exchanges, as well as in
the over-the-counter market. The Fund may purchase call options on securities
which it intends to purchase (or on currencies in which those securities are
denominated) in order to limit the risk of a substantial increase in the market
price of such security (or an adverse movement in the applicable currency
relative to the U.S. dollar). The Fund also may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value in the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). The ability to purchase put options allows the Fund to protect the
unrealized gain in an appreciated security in its portfolio without actually
selling the security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from such a sale will depend upon
whether the amount received is more or less than the premium paid for the option
plus the related transaction cost.
The Fund also may purchase put and call options on stock indices in order to
hedge against the risk of stock market or industry-wide stock price
fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
The Fund may purchase and write options in the over-the-counter market ("OTC
options") to the same extent that they may engage in transactions in
exchange-traded options. OTC options differ from exchange-traded options in that
they are negotiated individually and terms of the contract are not standardized
as is the case with exchange-traded options. Moreover, because there is no
clearing corporation involved in an OTC option, there is a risk of
non-performance by the counterparty to the option. However, OTC options
generally are much more available for securities in a wider range of expiration
dates and exercise prices than exchange-traded options. It is the current
position of the staff of the SEC that OTC options (and securities underlying the
OTC options) are illiquid securities except to the extent OTC options are
entered into with U.S. Government securities dealers designated by the Federal
Reserve Bank of New York under guidelines specified by the SEC staff.
Accordingly, the Fund will treat OTC options as subject to the Fund's
limitations on illiquid securities until such time as there is a change in the
SEC's position. State securities laws also may impose further limitations.
Futures and Options on Futures. To protect against the effect of adverse changes
in interest rates, the Fund may purchase and sell interest rate futures
contracts. An interest rate futures contract is an agreement by the Fund to
purchase or sell debt securities, usually U.S. Government securities, at a
specified date and price. The Fund may sell interest rate futures contracts
(i.e., enter into a futures contract to sell the underlying debt security) in an
attempt to hedge its portfolio against an anticipated increase in interest rates
and a corresponding decline in the Fund's portfolio debt securities. The Fund
may purchase an interest rate futures contract (i.e., enter into a futures
contract to purchase an underlying security) to hedge against an interest rate
decrease and corresponding increase in the value of debt securities it
anticipates purchasing. The Fund also may purchase and sell put and call options
on interest rate futures contracts in lieu of, and for the same purposes as,
entering into the underlying interest rate futures contracts. The Fund
collateralizes its obligation with Collateral Assets equal to the purchase price
of the portfolio securities represented by the underlying interest rate futures
contracts for which it has an obligation to purchase.
The Fund will not enter into any futures contracts or related options if the sum
of the initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options purchased by the Fund would exceed 5% of the value of
the Fund's total assets. The Fund will not purchase futures contracts or related
options if, as a result, more than one-third of the value of the Fund's total
assets would be so invested.
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Hedging Considerations. There can be no assurance that the Fund's hedging
transactions will be successful. The Fund also could be exposed to risks if it
could not close out its futures or options positions because of an illiquid
secondary market.
Futures, options and options on futures have effective durations which, in
general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (supported by
Collateral Assets) may lengthen the effective duration of the Fund's portfolio.
While utilization of options, futures contracts and related options and similar
instruments may be advantageous to the Fund, the Fund's performance will be
worse than if the Fund did not make such investments if the Manager is not
successful in employing such instruments in managing the Fund's investments or
in predicting changes in the market. In addition, the Fund pays commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return. A further discussion of the possible risks
involved in transactions in options and futures contracts and related options is
contained in the Statement of Additional Information.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund will treat any securities that are subject to restrictions on
repatriation for more than seven days, as well as any securities issued in
connection with foreign debt conversion programs that are restricted as to
remittance of invested capital or profit, as illiquid securities. The Fund also
treats repurchase agreements with maturities in excess of seven days as illiquid
securities. Illiquid securities do not include securities that are restricted
from trading on formal markets for some period of time but for which an active
informal market exists, or securities that meet the requirements of Rule 144A
under the Securities Act of 1933, as amended, and that, subject to review by the
Board and guidelines adopted by the Board, the Manager has determined to be
liquid. State securities laws may impose further limitations on the amount of
illiquid or restricted securities that the Fund may purchase.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
the erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies) such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it is appropriate,
regardless of how long the securities have been held by the Fund. The Manager
therefore changes the Fund's investments whenever it believes doing so will
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to the Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestment in other
securities. Portfolio turnover also may result in the recognition of capital
gains that may be distributed to shareholders. Portfolio turnover in excess of
100% is considered high and increases such costs. See the "Financial Highlights"
for the Fund's past portfolio turnover information. The annual portfolio
turnover for the Fund is anticipated to be less than 100%. However, the Manager
does not regard portfolio turnover as a limiting factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but unless otherwise stated, the Fund's other
investment policies may be changed by the Trust's Board of Trustees. If there is
a change in the investment objective or policies of the Fund, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then current financial positions and needs. The Fund is subject to
additional investment policies and restrictions described in the Statement of
Additional Information, some of which are fundamental.
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16
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Risk Considerations
Small Companies
While the Fund may invest in mature suppliers of products and services, and
technologies, the Fund also may invest in smaller companies that can benefit
from the development of new products and services. These smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than larger, mature issuers. Such smaller companies may have
limited product lines, markets or financial resources, and their securities may
trade less frequently and in more limited volume than the securities of larger,
more mature companies. As a result, the prices of the securities of such smaller
companies may fluctuate to a greater degree than the prices of the securities of
other issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should carefully consider 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.
Investments in securities of companies domiciled in, and markets of, emerging
market countries may be subject to higher risks than investments in more
developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments which could adversely
affect investment in securities of issuers in foreign nations. In addition,
there is often less publicly available information about foreign issuers than
those in the U.S. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to U.S. companies.
Further, the Fund may encounter difficulties or be unable to pursue legal
remedies and obtain judgments in foreign courts. Further risk factors, including
use of domestic and foreign custodian banks and depositories, are described
elsewhere in the Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services, and other costs relating to
investments by the Fund in other countries generally are greater than in the
U.S. Such markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to settle
certain transactions. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result either in loss to the Fund if the value of the
portfolio security subsequently declined or, if the Fund entered into a contract
to sell the security, could result in possible claims against the Fund. In
certain countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers, and listed companies
than in the U.S. The securities markets of many of the countries in which the
Fund may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.
Because the securities of the Fund may be denominated in foreign currencies, the
value of such securities to the Fund 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 will result in a corresponding change
in the U.S. dollar value of the Fund's securities denominated in the currency.
Such changes also will affect the Fund's income and distributions to
shareholders. The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, and the Fund therefore may engage in certain foreign currency
hedging strategies. Such strategies involve certain investment risks and
transaction costs to which the Fund might not otherwise be subject. These risks
include dependence on the Manager's ability to predict movements in exchange
rates, as well as the difficulty of predicting, and the imperfect movements
between, exchange rates and currency hedges.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not free-floating against the U.S. dollar. Further, certain
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated may
have a detrimental impact on the Fund.
- --------------------------------------------------------------------------------
17
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. 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,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Certain countries also limit the amount of foreign
capital that can be invested in their markets and local companies, creating a
"foreign premium" on capital investments available to foreign investors such as
the Fund. The Fund may pay a "foreign premium" to establish an investment
position which it cannot later recoup because of changes in that country's
foreign investment laws.
Lower Quality Debt
The Fund is authorized to invest in medium quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) or (in limited amounts) high risk, lower
quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. Medium quality debt securities have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade debt securities.
As an operating policy, which may be changed by the Board of Trustees without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's or, if unrated,
deemed to be of comparable quality as determined by the Manager using guidelines
approved by the Board of Trustees. The Board may consider a change in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high risk, lower quality debt securities would be
consistent with the interests of the Fund and its shareholders. Unrated debt
securities are not necessarily of lower quality than rated securities but they
may not be attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed by
the Manager to determine, to the extent reasonably possible, that the planned
investment is sound in the Manager's opinion. The Fund, from time to time, may
purchase defaulted debt securities if, in the opinion of the Manager, the issuer
may resume interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates; i.e., a decline in
interest rates produces an increase in market value, while an increase in
interest rates produces a decrease in market debt value, of these securities.
Moreover, the longer the remaining maturity of a security, the greater is the
effect of interest rate changes on the market value of the security. In
addition, changes in the ability of an issuer to make payments of interest and
principal and in the market's perception of an issuer's creditworthiness also
affect the market value of the debt securities of that issuer.
General Information
The Trust
The Fund is a separate series of The Montgomery Funds II, a Delaware business
trust which was organized on September 8, 1993. The Agreement and Declaration of
Trust permits the Board of Trustees to issue an unlimited number of full and
fractional shares of beneficial interest, $.01 par value, in any number of
series. The Fund is one of several series of the Trust, the assets and
liabilities of which are separate and distinct from each other.
As of August 24, 1995, all of the previously outstanding shares of each series
of the Trust were redesignated as Class R shares. That redesignation did not
affect the rights of holders of those shares. Other classes of shares were
designated simultaneously. This Prospectus relates only to the Class R shares of
the Fund. The Fund may in the future designate other classes of shares for
specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion, or subscription
rights. Each whole share shall be entitled to one vote as to any matter on which
it is entitled to vote and each fractional share shall be entitled to a
proportionate fractional vote. Shareholders have equal and exclusive rights as
to dividends and distributions as declared by the Fund and to the net assets of
the Fund upon liquidation or dissolution. The Fund, as a separate series of the
Trust, votes separately on matters affecting only the Fund (e.g., approval of
the Investment Management Agreement); all series of the Trust will vote as a
single class on matters affecting all series jointly or the Trust as a whole
(e.g., election or removal of Trustees). Voting rights are not
- --------------------------------------------------------------------------------
18
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
cumulative, so that the holders of more than 50% of the shares voting in any
election of Trustees can, if they so choose, elect all of the Trustees. While
the Trust is not required to and does not intend to hold annual meetings of
shareholders, such meetings may be called by the Trustees at their discretion,
or upon demand by the holders of 10% or more of the outstanding shares of the
Trust for the purpose of electing or removing Trustees. Shareholders may receive
assistance in communicating with other shareholders in connection with the
election or removal of Trustees pursuant to the provisions contained in Section
16(c) of the Investment Company Act.
Performance Information
From time to time, the Fund may publish its total return in advertisements and
communications to investors. Total return information generally will include the
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations.
The Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 cash investment that
includes capital appreciation and depreciation for the stated period according
to a specific formula, but is subject to the expense reimbursement fees
discussed elsewhere in this Prospectus. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against the Fund's income. See
"Performance Information" in the Statement of Additional Information.
The investment results of the Fund will fluctuate over time, and any
presentation of the Fund's total return for any prior period should not be
considered as a representation of what an investor's total return may be in any
future period.
Legal Opinion
The validity of shares of beneficial interest offered by this Prospectus will be
passed on by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material will be sent to each address regardless of the number of shareholders
or accounts at that address. Shareholder inquiries generally should be directed
to (415) 248- 6330.
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN, to check the appropriate boxes in the Account
Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gift to Minors Act, the
TIN of the minor should be furnished.
If a shareholder has been notified by the IRS that the shareholder is subject to
backup withholding because the shareholder failed to report all interest and
dividend income on his, her or its tax return and the shareholder has not been
notified by the IRS that such withholding should cease, the shareholder should
cross out the backup withholding certification in the signature portion of the
Account Application.
If a shareholder is a nonresident alien or foreign entity, a completed Form W-8
should be provided to the Fund in order to avoid backup withholding on
redemptions and other payments. Dividends paid to a shareholder account by the
Fund may be subject to up to 30% withholding instead of backup withholding.
If a shareholder is an exempt recipient, the shareholder should furnish a TIN.
Exempt recipients include: certain corporations, certain tax-exempt entities,
tax-exempt pension plans and IRAs, governmental agencies, financial
institutions, registered securities and commodities dealers and others.
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19
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
For further information regarding backup withholding, see Section 3406 of the
Code and consult with a tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Fund's official sales literature.
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20
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
(415) 248-6330
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
(415) 627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-447-4210
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
STATEMENT OF ADDITIONAL INFORMATION
November 12, 1996
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust with different series
of shares of beneficial interest. Montgomery Institutional Series: Emerging
Markets Portfolio (the "Fund") is a series of the Trust. The Fund is managed by
Montgomery Asset Management, L.P. (the "Manager") and its shares are distributed
by Montgomery Securities (the "Distributor"). This Statement of Additional
Information contains information in addition to that set forth in the Prospectus
for the Fund (the "Prospectus"), dated November 12, 1996, as may be revised from
time to time. The Prospectus provides the basic information a prospective
investor should know before purchasing shares of the Fund and may be obtained
without charge at the address or telephone number provided above. This Statement
of Additional Information is not a prospectus and should be read in conjunction
with the Prospectus.
TABLE OF CONTENTS
Page
----
The Trust...................................................................B- 2
Investment Objective and Policies of the Fund...............................B- 2
Risk Factors................................................................B-14
Investment Restrictions.....................................................B-16
Distributions and Tax Information...........................................B-19
Trustees and Officers.......................................................B-25
Investment Management and Other Services....................................B-31
Execution of Portfolio Transactions.........................................B-36
Additional Purchase and Redemption Information..............................B-40
Determination of Net Asset Value............................................B-42
Principal Underwriter.......................................................B-44
Performance Information.....................................................B-44
General Information.........................................................B-48
Financial Statements........................................................B-50
Appendix A..................................................................B-51
B-1
<PAGE>
THE TRUST
The Trust is an open-end management investment company
organized as a Delaware business trust on September 8, 1993, and registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Trust currently offers shares of beneficial interest, $.01 par value
per share, in various series. Each series offers three classes of shares (Class
R, Class P and Class L). This Statement of Additional Information pertains to
Montgomery Institutional Series: Emerging Markets Portfolio.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective and policies of the Fund are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
The Fund is a diversified series of the Trust, an open-end
management investment company offering redeemable shares of beneficial interest.
The achievement of the Fund's investment objective will depend on market
conditions generally and on the Manager's analytical and portfolio management
skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar instruments available in emerging markets, or other securities
convertible into securities of eligible issuers. These securities may not
necessarily be denominated in the same currency as the securities for which they
may be exchanged. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and other similar global instruments in bearer
form are designed for use in European securities markets. For purposes of the
Fund's investment policies, the Fund's investments in ADRs, EDRs, and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. The Fund may invest up to 10% of
its total assets in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either the Fund and affiliated persons
of the Fund
B-2
<PAGE>
not own together more than 3% of the total outstanding shares of any one
investment company at the time of purchase (and that all shares of the
investment company held by the Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or the Fund not invest more than 5% of
its total assets in any one investment company and the investment not represent
more than 3% of the total outstanding voting stock of the investment company at
the time of purchase. As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund bears directly in
connection with its own operations. In accordance with applicable regulatory
provisions of the State of California, the Manager has agreed to waive its
management fee with respect to assets of the Fund that are invested in other
investment companies.
U.S. Government Securities. Generally, the value of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities") held by the Fund will fluctuate
inversely with interest rates.
U.S. Government securities in which the Fund may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration ("FHA"), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Bank, Farm Credit System Financial Assistance Corporation, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate
Credit Banks, Federal Land Banks, Financing Corporation, Federal Financing Bank,
Federal National Mortgage Association ("FNMA"), Maritime Administration,
Tennessee Valley Authority, Resolution Funding Corporation, Student Loan
Marketing Association and Washington Metropolitan Area Transit Authority. Direct
obligations of the U.S. Treasury include a variety of securities that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, the Fund will not invest in obligations issued by an
instrumentality of the U.S. Government unless the Manager determines that the
instrumentality's credit risk makes its securities suitable for investment by
the Fund.
B-3
<PAGE>
Risk Factors/Special Considerations Relating to Debt Securities
The Fund may invest in debt securities which are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") or Fitch Investor Services ("Fitch"), or, if unrated, are
deemed to be of equivalent investment quality by the Manager. As an operating
policy, which may be changed by the Board of Trustees without shareholder
approval, the Fund will invest no more than 5% of its assets in debt securities
rated below Baa by Moody's or BBB by S&P or Fitch, 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. These
changes in market value will be reflected in the Fund's net asset value.
Bonds which are 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 or Fitch
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, 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 Fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect, and cause fluctuations in, the daily net
asset value of the Fund's shares.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of low
rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent it invests in low rated debt
securities, be more dependent upon such credit analysis than would be the case
if the Fund were investing in higher rated debt securities.
B-4
<PAGE>
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated debt securities, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a sharper decline in the prices of low
rated debt securities because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, the Fund
may incur additional expenses to seek financial recovery. The low rated bond
market is relatively new, and many of the outstanding low rated bonds have not
endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate
risks, the Fund may enter into forward foreign currency exchange contracts
("forward contracts") and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described below. The Fund
also may conduct its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
at the time of the transaction.
The Fund also may purchase other types of options and futures
and may, in the future, write covered options, as described below and in the
Prospectus.
Forward Contracts. The Fund may enter into forward contracts
to attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed-upon
price at a future date which is individually negotiated and privately traded by
currency traders and their customers.
The Fund may enter into a forward contract, for example, when
it enters into a contract for the purchase or sale of a security denominated in
a foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of the security or dividend or interest payment.
In addition, when the Fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a forward
contract to sell an amount of that foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency, or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
contract to buy that foreign currency for a fixed dollar amount.
B-5
<PAGE>
In connection with the Fund's forward contract transactions,
an amount of the Fund's assets equal to the amount of the Fund's commitments
will be held aside or segregated to be used to pay for the commitments.
Accordingly, the Fund always will have cash, cash equivalents or liquid equity
or debt securities denominated in the appropriate currency available in an
amount sufficient to cover any commitments under these contracts. Segregated
assets used to cover forward 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 forward
contracts. In such event, the Fund's ability to utilize forward contracts in the
manner set forth above 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 Fund than if it had not engaged in such
contracts. The Fund generally will not enter into a forward foreign currency
exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Fund may purchase and sell various kinds of futures contracts and
options on futures contracts. The Fund also may enter into closing purchase and
sale transactions with respect to any such contracts and options. Futures
contracts may be based on various securities (such as U.S. Government
securities), securities indices, foreign currencies and other financial
instruments and indices.
The Fund has filed a notice of eligibility for exclusion from
the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that the Fund will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
The Fund will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to
B-6
<PAGE>
purchase. The Fund's futures transactions generally will be entered into only
for traditional hedging purposes - i.e., futures contracts will be sold to
protect against a decline in the price of securities or currencies and will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may instead make or take delivery of the underlying securities
or currencies whenever it appears economically advantageous for it to do so. A
clearing corporation associated with the exchange on which futures on securities
or currencies are traded guarantees that, if still open, the sale or purchase
will be performed on the settlement date.
By using futures contracts to hedge its positions, the Fund
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, the
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, the Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The Fund
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that the Fund has acquired or
expects to acquire.
As part of its hedging strategy, the Fund also may enter into
other types of financial futures contracts if, in the opinion of the Fund's
Manager, there is a sufficient degree of correlation between price trends for
the Fund's portfolio securities and such futures contracts. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's securities portfolio. When
hedging of this
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character is successful, any depreciation in the value of the portfolio
securities can be substantially offset by appreciation in the value of the
futures position. However, any unanticipated appreciation in the value of the
Fund's portfolio securities could substantially be offset by a decline in the
value of the futures position.
The acquisition of put and call options on futures contracts
gives the Fund the right (but not the obligation), for a specified price, to
sell or purchase, respectively, the underlying futures contract at any time
during the option period. Purchasing an option on a futures contract gives the
Fund the benefit of the futures position if prices move in a favorable
direction, and limits its risk of loss, in the event of an unfavorable price
movement, to the loss of the premium and transaction costs.
The Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. The Fund's ability to establish and close
out positions on such options will be subject to the development and maintenance
of a liquid market.
Loss from investing in futures transactions by the Fund is
potentially unlimited.
The Fund will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The
Fund may purchase put and call options on securities in which it has invested,
on foreign currencies represented in its portfolio and on any securities index
based in whole or in part on securities in which the Fund may invest. The Fund
also may enter into closing sales transactions in order to realize gains or
minimize losses on options it has purchased.
The Fund normally will purchase call options in anticipation
of an increase in the market value of securities of the type in which it may
invest or a positive change in the foreign currency in which such securities are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified securities or a specified amount of a
foreign currency at a specified price during the option period.
The Fund may purchase and sell options that are traded on U.S.
and foreign exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than
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with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Trading
in OTC options is also subject to the risk that the other party will be unable
or unwilling to close out options purchased by the Fund.
Although the Fund will generally purchase only those options
for which there appears to be an active secondary market, there can be no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, the Fund
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which the Fund may invest. A
covered call option is an option where the Fund, in return for a premium, gives
another party the right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. A covered call
option serves as a partial hedge against the price of the underlying security
declining. However, by writing a covered call option, the Fund gives up the
opportunity, while the option is in effect, to realize gain from any price
increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction.
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The Fund also may write covered put options which give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. The Fund will receive a premium for writing a put
option but will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise for
as long as the option is outstanding. In order to "cover" the put options that
it has written, the Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other liquid equity or debt
securities with a value equal to or greater than the exercise price of the put
options. The Fund will not write put options if the aggregate value of the
obligations underlying the put options shall exceed 10% of the Fund's total
assets.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and thereby result in
the institution by an exchange of special procedures which may interfere with
the timely execution of the Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Fund
may enter into repurchase agreements. The Fund's repurchase agreements generally
will involve a short-term investment in a U.S. Government security or other high
grade liquid debt security, with the seller of the underlying security agreeing
to repurchase it from the Fund at a mutually agreed-upon time and price. The
repurchase price generally is higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price on the date of repurchase. In either case, the income
to the Fund is unrelated to the interest rate on the underlying security itself.
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 Fund enters into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Trust's Board of Trustees.
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The Fund generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Fund regards repurchase agreements
with maturities in excess of seven days as illiquid. The Fund 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 the Fund to the seller of
the security subject to the repurchase agreement. It is not clear whether a
court would consider the security acquired by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. If bankruptcy or insolvency proceedings are commenced with
respect to the seller of the security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or a decline in price of
the security. If a court characterizes such a transaction as a loan and the Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings,
the Fund also runs the risk that the seller may fail to repurchase the security.
However, the Fund always requires collateral for any repurchase agreement to
which it is a party in the form of securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the Fund plus
accrued interest, and the Fund makes payment against such securities only upon
physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement at all times equals or exceeds the repurchase price.
The Fund may participate in one or more joint accounts with
other funds of the Trust that may invest in repurchase agreements collateralized
either by (i) obligations issued or guaranteed as to principal and interest by
the U.S. Government or by one of its agencies or instrumentalities, or (ii)
privately issued mortgage-related securities that are in turn collateralized by
securities issued by GNMA, FNMA or FHLMC, and are rated in the
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highest rating category by a nationally recognized statistical rating
organization, or, if unrated, are deemed by the Manager to be of comparable
quality using objective criteria. Any such repurchase agreement will have, with
rare exceptions, an overnight, over-the-weekend or over-the-holiday duration,
and in no event will have a duration of more than seven days.
Lending of Portfolio Securities. Although the Fund does not
currently intend to do so, the Fund may lend its portfolio securities having a
value of up to 10% of its total assets in order to generate additional income.
Such loans may be made to broker-dealers or other financial institutions whose
creditworthiness is acceptable to the Manager. These loans would be required to
be secured continuously by collateral, including cash, cash equivalents,
irrevocable letters of credit, U.S. Government securities, or other high grade
liquid debt securities, maintained on a current basis (i.e., marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued interest. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of the Fund or the borrower at any time. Upon such
termination, the Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned, will receive proceeds from the investment of the collateral
and will continue to retain any voting rights with respect to the securities. As
with other extensions of credit, there are risks of delay in recovery or even
losses of rights in the securities loaned should the borrower of the securities
fail financially. However, the loans will be made only to borrowers deemed by
the Manager to be creditworthy, and when, in the judgment of the Manager, the
income which can be earned currently from such loans justifies the attendant
risk.
When-Issued and Forward Commitment Securities. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it
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will record the transaction and reflect the value of the security in determining
its net asset value. The market value of the when-issued securities may be more
or less than the settlement price. The Fund does not believe that its net asset
value will be adversely affected by its purchase of securities on a when-issued
or delayed delivery basis. The Fund causes its custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
Illiquid Securities. The Fund 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 Fund has valued the
securities and includes, among other things, purchased OTC options, repurchase
agreements maturing in more than seven days, certain restricted securities and
securities that are otherwise not freely transferable. Illiquid securities also
include shares of an investment company held by the Fund in excess of 1% of that
company's total outstanding shares. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial 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
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issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not determinative of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Board. The Manager takes into account a number of factors in
reaching liquidity decisions, including but not limited to (i) the frequency of
trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board of Trustees.
RISK FACTORS
Foreign Securities
Investors in the Fund should consider carefully the
substantial risks involved in securities of companies located or doing business
in, and governments of, foreign nations, which are in addition to the usual
risks inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. Many foreign markets have substantially less volume than either
the established domestic
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securities exchanges or the OTC markets. Securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
Emerging Market Countries
The Fund invests in securities of companies domiciled in, and
in markets of, so-called "emerging market countries." These investments may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict the Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain emerging market countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in certain emerging
market countries may be slowed or reversed by unanticipated political or social
events in such countries.
Exchange Rates and Polices
The Fund endeavors to buy and sell foreign currencies on
favorable terms. Some price spreads on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds from the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
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The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while the
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for the Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and the Fund may be exposed to risk of financial loss.
Perfect correlation between the Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by the Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of the Fund's outstanding
voting securities as defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government and its agencies
and instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such issuer.
There are no limitations
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with respect to the remaining 25% of its total assets, except to the extent
other investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 10% of its portfolio securities as described above
and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency
purposes from a bank, and then not in excess of 10% of the value of its total
assets (at the lower of cost or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset coverage of at least 300%
of all borrowings, and no additional investments may be made while any such
borrowings are in excess of 5% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
4. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
5. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however,
the Fund, to the extent not otherwise prohibited in the Prospectus or this
Statement of Additional Information, may invest in securities secured by real
estate or interests therein or issued by companies which invest in real estate
or interests therein, including real estate investment trusts, and may purchase
or sell currencies (including forward currency exchange contracts), futures
contracts and related options generally as described in the Prospectus and
Statement of Additional Information.
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
7. Invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record, together with its
predecessors, of at least three years of continuous operation. (This is an
operating policy which may be changed without shareholder approval.)
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8. Invest in securities of other investment companies, except
to the extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such securities
may be acquired as part of a merger, consolidation or acquisition of assets.
9. 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, subject
to the regulations of the State of Ohio), securities which are not otherwise
readily marketable, repurchase agreements that mature in more than seven days
and OTC options (and securities underlying such options) purchased by a Fund.
(This is an operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations.
10. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
11. Invest more than 25% of the market value of its total
assets in the securities of companies engaged in any one industry. (This does
not apply to investment in the securities of the U.S. Government, its agencies
or instrumentalities.) For purposes of this restriction, the Fund generally
relies on the U.S. Office of Management and Budget's Standard Industrial
Classifications.
12. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit the
Fund from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
13. Acquire or dispose of put, call, straddle or spread
options except as described herein and in the Prospectus and subject to the
following conditions:
(A) such options are written by other persons (except
as described herein or in the Prospectus), and
(B) the aggregate premiums paid on all such options
which are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder approval,
consistent with the regulations of the State of California.)
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14. Except as and unless described in the Prospectus and this
Statement of Additional Information, engage in short sales of securities. (This
is an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
15. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets. Included in such amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York Stock Exchange or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Texas.)
16. (a) Purchase or retain in the Fund's portfolio any
security if any officer, trustee or shareholder of the issuer is at the same
time an officer, trustee or employee of the Trust or of its investment adviser
and such person owns beneficially more than 1/2 of 1% of the securities and all
such persons owning more than 1/2 of 1% own more than 5% of the outstanding
securities of the issuer.
(b) Purchase more than 10% of the outstanding voting
securities of any one issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the regulations of the State of
Ohio.)
17. Invest in commodities, except for futures contracts or
options on futures contracts, if, as a result thereof, more than 5% of the
Fund's total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open futures
contracts and options on such contracts.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the Board 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 Fund will receive income in the form of
dividends and interest earned on its investments in securities. This income,
less the expenses incurred in its operations, is the
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Fund's net investment income, substantially all of which will be declared as
dividends to the Fund's shareholders.
The Fund also may derive capital gains or losses in connection
with sales or other dispositions of its portfolio securities. Any net gain the
Fund may realize from transactions involving investments held less than the
period required for long-term capital gain or loss recognition or otherwise
producing short-term capital gains and losses (taking into account any carryover
of capital losses from previous years), while a distribution from capital gains,
will be distributed to shareholders with and as a part of income dividends. If
during any year the Fund realizes a net gain on transactions involving
investments held more than the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time the Fund's shares may have been held.
Any dividend or distribution paid by the Fund reduces the
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.
As stated in the Prospectus, dividends and other distributions
will generally be made in the form of additional shares of the Fund. Investors
have the right to change their election with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
Tax Information. The Fund intends to continue to qualify and
elect to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its assets, and the timing of its distributions. The
Fund's policy is to distribute to its shareholders all of its investment company
taxable income and any net realized capital gains for each fiscal year in a
manner that complies with the distribution requirements of the Code, so that the
Fund will not be subject to any federal income or excise taxes based on net
income. However, the Board of Trustees may elect to pay such excise taxes
B-20
<PAGE>
if it determines that payment is, under the circumstances, in the best interests
of the Fund.
In order to qualify as a regulated investment company, the
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stock or securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, (b) derive less than 30% of its gross income each year from the sale
or other disposition of stock or securities (or options thereon) held less than
three months (excluding some amounts otherwise included in income as a result of
certain hedging transactions), and (c) diversify its holdings so that, at the
end of each fiscal quarter, (i) at least 50% of the market value of its assets
is represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited, for purposes
of this calculation, in the case of other securities of any one issuer to an
amount not greater than 5% of the Fund's assets or 10% of the voting securities
of the issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, the Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If the Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains will be taxable to shareholders whether made in cash or reinvested
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or the securities dealer effecting a redemption of
the Fund's shares by a shareholder will be required to file information reports
with the Internal Revenue Service ("IRS") with respect to distributions and
payments made to the shareholder. In addition, the Fund will be required to
withhold federal income tax at the rate of 31% on taxable dividends, redemptions
and other payments made to accounts of individual or other non-exempt
B-21
<PAGE>
shareholders who have not furnished their correct taxpayer identification
numbers and certain required certifications on the Account Application Form or
with respect to which the Fund or the securities dealer has been notified by the
IRS that the number furnished is incorrect or that the account is otherwise
subject to withholding.
The Fund intends to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, the Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Fund may receive dividend distributions from U.S.
corporations. To the extent that the Fund receives such dividends and
distributes them to its shareholders, and meets certain other requirements of
the Code, corporate shareholders of the Fund may be entitled to the "dividends
received" deduction. Availability of the deduction is subject to certain holding
period and debt-financing limitations.
If more than 50% in value of the total assets of the Fund at
the end of its fiscal year is invested in stock or securities of foreign
corporations, the Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of the Fund's foreign source income (including any foreign income
taxes paid by the Fund), and (ii) entitled either to deduct their share of such
foreign taxes in computing their taxable income or to claim a credit for such
taxes against their U.S. income tax, subject to certain limitations under the
Code. If not more than 50% in value of the Fund's total assets at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
will not be entitled under the Code to pass through to its shareholders their
pro rata share of the foreign taxes paid by the Fund. In this case, these taxes
will be taken as a deduction by the Fund. In either case, shareholders will be
informed by the Fund at the end of each calendar year regarding the availability
of any credits on and the amount of foreign source income (including or
excluding foreign income taxes paid by the Fund) to be included in their income
tax returns.
The Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. The Fund may invest up to 10% of its total assets in
B-22
<PAGE>
the stock of foreign investment companies that may be treated as "passive
foreign investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, the Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. The Fund will endeavor to limit its exposure
to the PFIC tax by investing in PFICs only where the election to be taxed
currently will be made. Because it is not always possible to identify a foreign
issuer as a PFIC in advance of making the investment, the Fund may incur the
PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the Fund purchases an option,
the premium paid by the Fund is recorded as an asset and is subsequently
adjusted to the current market value of the option. Any gain or loss realized by
the Fund upon the expiration or sale of such options held by the Fund generally
will be capital gain or loss.
Any security, option, or other position entered into or held
by the Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
B-23
<PAGE>
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, 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 the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code.
A shareholder who purchases shares of the Fund by tendering
payment for the shares in the form of other securities may be required to
recognize gain or loss for income tax purposes on the difference, if any,
between the adjusted basis of the securities tendered to the fund and the
purchase price of the Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities
must generally "mark to market" at the end of its taxable year all securities
which it owns. The resulting gain or loss is treated as ordinary (and not
capital) gain or loss, except to the extent allocable to periods during which
the dealer held the security for investment. The "mark to market" rules do not
apply, however, to a security held for investment which is clearly identified in
the dealer's records as being held for investment before the end of the day in
which the security was acquired. The IRS has issued guidance under Section 475
that provides that, for example, a bank that regularly originates and sells
loans is a dealer in securities, and subject to the "mark to market" rules.
Shares of the Fund held by a dealer in securities will be subject to the "mark
to market" rules unless they are held by the dealer for investment and the
dealer property identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in
gains or losses for tax purposes to the extent of the
B-24
<PAGE>
difference between the proceeds and the shareholder's adjusted tax basis for the
shares. Any loss realized upon the redemption or exchange of shares within six
months from their date of purchase will be treated as a long-term capital loss
to the extent of distributions of long-term capital gain dividends during such
six-month period. All or a portion of a loss realized upon the redemption of
shares may be disallowed to the extent shares are purchased (including shares
acquired by means of reinvested dividends) within 30 days before or after such
redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S.
investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Fund. The law firm of Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
TRUSTEES AND OFFICERS
The Trustees are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers, who administer the Fund's 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:
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Principal Financial and Accounting Officer and
Trustee (Age 56).*
101 California Street, San Francisco, California 94111.
Mr. Doyle has been the Chairman and a Director of Montgomery
Asset Management, Inc., the general partner of the Manager,
and Chairman of the Manager since April 1990. Mr. Doyle is a
managing director of the investment banking firm of Montgomery
Securities, the Fund's
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-25
<PAGE>
Distributor, and has been employed by Montgomery Securities
since October 1983.
Mark B. Geist, President (Age 43)
101 California Street, San Francisco, California 94111. Mr.
Geist has been the President and a Director of Montgomery
Asset Management, Inc. and President of the Manager since
April 1990. From October 1988 until March 1990, Mr. Geist was
a Senior Vice President of Analytic Investment Management.
From January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 49)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John T. Story, Executive Vice President (Age 56)
101 California Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978 to January 1994, he was
Managing Director - Senior Vice President of Alliance Capital
Management.
David E. Demarest, Chief Administrative Officer (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 44)
101 California Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her arrival at the Manager
in 1993, Ms. Fross was Financial Analyst/Senior Accountant
with Charles Schwab, San Francisco, California. From 1989 to
November 1990, Ms. Fross was Assistant Controller of Bay Bank
of Commerce, San Leandro, California.
B-26
<PAGE>
Roger W. Honour, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Roberts is a Managing Director and Portfolio Manager for the
Manager. For the five years prior to his start with the
Manager in 1990, Mr. Roberts was a portfolio manager and
analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the Manager. Before joining the Manager, he was vice
president/portfolio manager at G.T. Capital Management, Inc.
from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1989, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was vice president and
portfolio manager at The Boston Company Institutional
Investors Inc. from 1990 to 1993. From 1989 to 1990, Mr. Boich
was the founder and co-manager of The Common Goal World Fund,
a global equity partnership. From 1987 to 1989, Mr. Boich
worked as a financial adviser with Prudential-Bache Securities
and E.F. Hutton & Company.
Josephine S. Jimenez, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio
B-27
<PAGE>
Manager for the Manager. From 1988 through 1991, Ms. Jimenez
worked at Emerging Markets Investors Corporation/Emerging
Markets Management in Washington, D.C. as senior analyst and
portfolio manager.
Bryan L. Sudweeks, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 40)
101 California Street, San Francisco, California 94111. Mr.
Stevens is a Portfolio Manager and Managing Director for the
Manager. At Barclays de Zoete Wedd Securities from 1991 to
1992, he was responsible for starting its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage
securities and mortgage-related interest rate swaps for the
First Boston Corporation from 1990 to 1991 and while with
Drexel Burnham Lambert from 1984 to 1990. He was responsible
for the origination and trading of all derivative
mortgage-related securities with more than $10 billion in
total issuance.
John H. Brown, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Brown, CFA, is a Senior Portfolio Manager and Managing
Director for the Manager. Preceding his arrival at the Manager
in May 1994, Mr. Brown was an analyst and portfolio manager at
Merus Capital Management in San Francisco, California from
June 1986.
Thomas R. Haslett, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Haslett is a Vice President and Senior Portfolio Manager for
the Manager. From September 1987 until joining the Manager in
April 1992, Mr. Haslett was a Portfolio Manager with Gannett,
Welsh and Kotler in Boston, Massachusetts.
B-28
<PAGE>
Frank Chiang, Vice President (Age 47)
101 California Street, San Francisco, California 94111. Mr.
Chiang is a Vice President and Portfolio Manager for the
Manager. Before joining the Manager, Mr. Chiang was Managing
Director and Portfolio Manager at TCW Asia Ltd. in Hong Kong.
Angeline Ee, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Ms. Ee
is a Vice President and Portfolio Manager for the Manager.
From 1990 until joining the Manager in July, 1994, Ms. Ee was
an Investment Manager with AIG Investment Corp. in Hong Kong.
From June, 1989 until September, 1990, Ms. Ee was a co-manager
of a portfolio of Asian equities and bonds at Chase Manhattan
Bank in Singapore.
Michael Carmen, Vice President (Age 34)
101 California Street, San Francisco, California 94111.
Michael Carmen, CFA, is a Vice President and Senior Portfolio
Analyst for the Manager. From 1993 until joining the Manager
in 1996, he was a Vice President and Associate Portfolio
Manager with State Street Research and Management Company in
Boston where he assisted with the management of capital
appreciation and growth portfolios. Before then, he was a
Senior Equity Analyst with State Street and, from 1991 to
1992, with Cigna Investments in Hartford.
Jerome C. Philpott, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Jerome
C. (Cam) Philpott, CFA, is a Vice President and Portfolio
Manager for the Manager. Before joining the Manager, Mr.
Philpott was a securities analyst with Boettcher & Company in
Denver from 1988 to 1991.
Bradford D. Kidwell, Vice President (Age 39)
101 California Street, San Francisco, California 94111.
Bradford D. Kidwell is a Vice President and Portfolio Manager
for the Manager. Mr. Kidwell joined the Manager in 1991 from
the position he held since 1989 as the sole general partner
and portfolio manager of Oasis Financial Partners, an
affiliate of the Distributor that invested in savings and
loans. Before then, he covered the savings and loan industry
for Dean Witter Reynolds from 1987 to 1989.
B-29
<PAGE>
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California
94111. Mr. Farnsworth is a partner of Pearson, Caldwell &
Farnsworth, Inc., an executive search consulting firm. From
May 1988 to September 1991, Mr. Farnsworth was the Managing
Partner of the San Francisco office of Ward Howell
International, Inc., an executive recruiting firm. From May
1987 until May 1988, Mr. Farnsworth was Managing Director of
Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until
May 1987, Mr. Farnsworth served as a Senior Vice President of
Bank of America and head of the U.S. Private Banking Division.
Andrew Cox, Trustee (Age 52)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr.
Cox has been engaged as an independent investment consultant.
From September 1976 until June 1988, Mr. Cox was a Vice
President of the Founders Group of Mutual Funds, Denver,
Colorado, and Portfolio Manager or Co-Portfolio Manager of
several of the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 47)
2636 Vallejo Street, San Francisco, California 94123. Ms.
Herbert was Managing Director of Morgan Guaranty Trust
Company. From 1983 to 1991 she was General Manager of the
bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a
member of the Board of Schools of the Sacred Heart, and is a
member of the Archdiocese of San Francisco Finance Council,
where she chairs the Investment Committee.
Jerome S. Markowitz, Trustee (Age 57)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds II,
effective November 16, 1995. Mr. Markowitz has been the Senior
Managing Director of Montgomery Securities (the Distributor)
since January 1991. Mr. Markowitz joined Montgomery Securities
in December 1987.
<TABLE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive
B-30
<PAGE>
remuneration indirectly because the Manager will receive a management fee from
the Fund and Montgomery Securities will receive commissions for executing
portfolio transactions for the Fund. The Trustees who are not affiliated with
the Manager or the Distributor receive an annual retainer and fees and expenses
for each regular Board meeting attended. The aggregate compensation paid by the
Trust to each of the Trustees during the fiscal year ended June 30, 1996, and
the aggregate compensation paid to each of the Trustees during the fiscal year
ended June 30, 1996 by all of the registered investment companies to which the
Manager provides investment advisory services, are set forth below.
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II Expenses* Trust)
- --------------- ---------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
Jerome S. Markowitz None None -- None
John A. Farnsworth $25,000 $5,000 -- $32,500
Andrew Cox $25,000 $5,000 -- $32,500
Cecilia H. Herbert $25,000 $5,000 -- $32,500
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Fund by Montgomery Asset
Management, L.P., the Manager, pursuant to an Investment Management Agreement
dated November 18, 1993 (the "Agreement"). The Agreement is in effect with
respect to the Fund through May 23, 1996 and shall continue in effect thereafter
for periods not exceeding one year so long as such continuation is approved at
least annually by (i) the Board of Trustees of the Trust or the vote of a
majority of the outstanding shares of the Fund, and (ii) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case by a vote cast in person at a meeting called for the purpose of voting on
such approval. The Agreement may be terminated at any time, without penalty, by
the Fund or the Manager upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act.
B-31
<PAGE>
For services performed under the Agreement, the Fund pays the
Manager a monthly management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund, at the annual rate
of one and twenty-five one-hundredths of one percent (1.25%) of the first $50
million in average daily net assets, one percent (1.00%) of the next $50 million
in average daily net assets and nine-tenths of one percent (.90%) of amounts
over $100 million in average daily net assets.
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses
(excluding any Rule 12b-1 fees), expressed on an annualized basis, at or below
one and twenty-five one hundredths of one percent (1.25%) of the Fund's average
net assets. The Manager also may voluntarily reduce additional amounts to
increase the return to the Fund's investors. Any reductions made by the Manager
in its fees are subject to reimbursement by the Fund within the following three
years provided the Fund is able to effect such reimbursement and remain in
compliance with the foregoing expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Fund
for fees and expenses for the current year.
Operating expenses for purposes of the Agreement include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, if any, expenses incurred in connection with any merger or
reorganization, any extraordinary expenses such as litigation, and such other
expenses as may be deemed excludable with the prior written approval of any
state securities commission imposing an expense limitation. The Manager may also
at its discretion from time to time pay for other Fund expenses from its own
funds or reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the
Board of Trustees of the Trust at a duly called meeting. In considering the
Agreement, the Trustees specifically considered and approved the provision which
permits the Manager to seek reimbursement of any reduction made to its
management fee within the three-year period following such reduction subject to
the Fund's ability to effect such reimbursement and remain in compliance with
applicable expense limitations. The Trustees also considered that any such
management fee reimbursement will be accounted for on the financial statements
of the Fund as a contingent liability of the Fund and will appear as a footnote
to the Fund's financial statements until such time as it appears that the Fund
will be able to effect such reimbursement. At such time as it appears probable
that the Fund is able to effect such reimbursement, the amount of reimbursement
that the Fund is able to effect will be accrued as an expense of the Fund for
that current period.
B-32
<PAGE>
As compensation for its investment management services the
Fund paid the Manager investment advisory fees in the amounts specified below.
Additional investment advisory fees payable under the Agreement may have instead
been waived by the Manager, but may be subject to reimbursement by the Fund as
discussed previously.
Year or Period Ended June 30,
-----------------------------
1996 1995 1994
---- ---- ----
Emerging Markets Portfolio $2,827,007 $1,789,283 $587,523
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trust and who are also affiliated
persons of the Manager.
The use of the name "Montgomery" by the Trust and by the Fund
is pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing
Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant
to Rule 12b-1 under the Investment Company Act. The Manager serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Fund pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Fund offered only one class of
shares. On that date, 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 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the
Manager at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Manager for its expenses in connection with the
promotion and distribution of those Classes.
B-33
<PAGE>
The 12b-1 Plan provides that the Manager may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Class to the
Manager.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days' notice
by the Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Fund under the 12b-1 Plan
will be paid in accordance with Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as such
Section may change from time to time. Pursuant to the 12b-1 Plan, the Board of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
the Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder
Services Plan (the "Services Plan") with respect to the Fund. The Manager (or
its affiliate) serves as the service provider under the Services Plan and, as
such, receives any fees paid by the Fund pursuant to the Services Plan. The
Trust has not yet implemented the Services Plan for the Fund and has not set a
date for implementation. Affected shareholders will be notified at least 60 days
before implementation of the Services Plan.
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
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to the Services Plan (the "Independent Trustees"), at their regular quarterly
meeting, adopted the Services Plan for the newly designated Class P and Class L
shares of the Fund. The initial shareholder of the Class P and Class L shares,
if any, of the Fund approved the Services Plan covering each Class. Class R
shares are not covered by the Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of the Fund will pay a continuing service fee to the Manager, the Distributor or
other service providers, in an amount, computed and prorated on a daily basis,
equal to 0.25% per annum of the average daily net assets of Class P and Class L
shares of the Fund. Such amounts are compensation for providing certain services
to clients owning shares of Class P or Class L of the Fund, including personal
services such as processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and providing
other information and assistance with respect to the Fund, including responding
to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Fund on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Fund, including issuers of securities in which the
Fund may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Fund, and may restrict the
ability of the Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Fund's assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Manager determines which securities
are to be purchased and sold by the Fund and which broker-dealers are eligible
to execute the Fund's portfolio transactions, subject to the instructions of,
and review
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<PAGE>
by, the Fund and the Trust's 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
the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities
directly in the securities markets located in emerging or developing countries
or in the over-the-counter markets. The Fund may purchase ADRs and EDRs listed
on stock exchanges, or traded in the over-the-counter markets in the U.S. or
Europe, as the case may be. ADRs, like other securities traded in the U.S., will
be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which the Fund may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Fund will be holding, unless
better executions are available elsewhere. Dealers and underwriters usually act
as principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by the Fund, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Fund is
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Fund's shares as a factor in the selection of
broker-dealers to execute its portfolio transactions. The placement of portfolio
transactions with broker-dealers who sell shares of the Fund is subject to rules
adopted by the National Association of Securities Dealers, Inc. ("NASD").
While the Fund's general policy is to seek first to obtain the
most favorable price and execution available, in
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<PAGE>
selecting a broker-dealer to execute portfolio transactions, weight may also be
given to the ability of a broker-dealer to furnish brokerage, research and
statistical services to the Fund or to the Manager, even if the specific
services were not imputed just to the Fund and may be lawfully and appropriately
used by the Manager in advising other clients. The Manager considers such
information, which is in addition to, and not in lieu of, the services required
to be performed by it under the Agreement, to be useful in varying degrees, but
of indeterminable value. In negotiating any commissions with a broker or
evaluating the spread to be paid to a dealer, the Fund may therefore pay a
higher commission or spread than would be the case if no weight were given to
the furnishing of these supplemental services, provided that the amount of such
commission or spread has been determined in good faith by the Fund and the
Manager to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer, which services either produce
a direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund. The standard of reasonableness is to be measured
in light of the Manager's overall responsibilities to the Fund.
Investment decisions for the Fund are made independently from
those of other client accounts of the Manager or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at times
the same securities will be acceptable for the Fund and for one or more of such
client accounts. The Manager and its personnel may have interests in one or more
of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Fund and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the
Fund seek to acquire the same security at the same general time (especially if
the security is thinly traded or is a small cap stock), that Fund may not be
able to acquire as large a portion of such security as it desires, or it may
have to pay a higher price or obtain a lower yield for such security. Similarly,
the Fund may not be able to obtain as high a price for, or as large an execution
of, an order to sell any particular security at the same time. If one or more of
such client accounts simultaneously purchases or
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<PAGE>
sells the same security the Fund is purchasing or selling, each day's
transactions in such security generally will be allocated between the Fund and
all such client accounts in a manner deemed equitable by the Manager, taking
into account the respective sizes of the accounts, the amount being purchased or
sold and other factors deemed relevant by the Manager. In many cases, the Fund's
transactions are bunched with the transactions for other client accounts. It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Fund's account by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Board of Trustees that the Fund will not be materially
disadvantaged by any such trading preclusion and that the desirability of
continuing its advisory arrangements with the Manager and the Manager's
affiliation with Montgomery Securities and other affiliates of Montgomery
Securities outweigh any disadvantages that may result from the foregoing.
The Manager's sell discipline for the Fund's investment in
issuers is based on the premise of a long-term investment horizon; however,
sudden changes in valuation levels arising from, for example, new macroeconomic
policies, political developments, and industry conditions could change the
assumed time horizon. Liquidity, volatility, and overall risk of a position are
other factors considered by the Manager in determining the appropriate
investment horizon. The Fund will limit investments in illiquid securities to
15% of net assets.
Sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Because Montgomery Securities is a member of the NASD, it is
sometimes entitled to obtain certain fees when the Fund tenders portfolio
securities pursuant to a tender-offer solicitation. As a means of recapturing
brokerage commissions for the benefit of the
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<PAGE>
Fund, any portfolio securities tendered by the Fund will be tendered through
Montgomery Securities if it is legally permissible to do so. In turn, the next
management fee payable to the Fund's Manager (an affiliate of Montgomery
Securities) under the Agreement will be reduced by the amount of any such fees
received by Montgomery Securities in cash, less any costs and expenses incurred
in connection therewith.
Subject to the foregoing policies, the Fund may use Montgomery
Securities as a broker to execute portfolio transactions. In accordance with the
provisions of Section 17(e) of the Investment Company Act and Rule 17e-1
promulgated thereunder, the Trust has adopted certain procedures which are
designed to provide that commissions payable to Montgomery Securities are
reasonable and fair as compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on securities or options exchanges during a comparable period
of time. In determining the commissions to be paid to Montgomery Securities, it
is the policy of the Fund that such commissions will be, in the judgment of the
Manager, (i) at least as favorable as those which would be charged the Fund by
other qualified unaffiliated brokers having comparable execution capability, and
(ii) at least as favorable as commissions contemporaneously charged by
Montgomery Securities on comparable transactions for its most favored
unaffiliated customers, except for (a) accounts for which Montgomery Securities
acts as a clearing broker for another brokerage firm, and (b) any customers of
Montgomery Securities considered by a majority of the Trustees who are not
interested persons to be not comparable to the Fund. The Fund does not deem it
practicable and in its best interest to solicit competitive bids for commission
rates on each transaction. However, consideration is regularly given to
information concerning the prevailing level of commissions charged on comparable
transactions by other qualified brokers. The Board of Trustees reviews the
procedures adopted by the Trust with respect to the payment of brokerage
commissions at least annually to ensure their continuing appropriateness, and
determines, on at least a quarterly basis, that all such transactions during the
preceding quarter were effected in compliance with such procedures.
The Fund has also adopted certain procedures, pursuant to Rule
10f-3 under the Investment Company Act, which must be followed any time the Fund
purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the underwriting syndicate. The Board of Trustees of the Trust will
review such procedures at least annually for their continuing appropriateness
and determine, on at least a quarterly basis, that any such purchases made
during the preceding quarter were effected in compliance with such procedures.
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<PAGE>
For the year ended June 30, 1996, the Fund's total securities
transactions generated commissions of $2,251,340, none of which was paid to
Montgomery Securities. For the year ended June 30, 1995, the Fund's total
securities transactions generated commissions of $1,578,108, none of which was
paid to Montgomery Securities. For the year ended June 30, 1994, the Fund's
total securities transactions generated commissions of $614,484, none of which
was paid to Montgomery Securities.
The Fund does not effect securities transactions through
brokers in accordance with any formula, nor does it effect securities
transactions through such brokers solely for selling shares of the Fund.
However, as stated above, Montgomery Securities may act as one of the Fund's
brokers in the purchase and sale of portfolio securities, and other brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund
may or may not purchase securities with the expectation of holding them to
maturity, although its general policy is to hold securities to maturity. The
Fund may, however, sell securities prior to maturity to meet redemptions or as a
result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i)
suspend the continued offering of the Fund's shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may purchase shares of the Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable, their acquisition is consistent with the
Fund's investment objective and policies, and the tendered securities are
otherwise acceptable to the Fund's Manager. For the purposes of sales of shares
of the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed
directly from the Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that the Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange
("NYSE") is
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<PAGE>
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (b) an emergency exists as determined by the SEC (upon
application by the Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable; or (c) for such other period as the SEC may permit
for the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares
redeemed, but, as described below or under abnormal conditions that make payment
in cash unwise, the Fund may make payment partly in its portfolio securities
with a current amortized cost or market value, as appropriate, equal to the
redemption price. Although the Fund does not anticipate that it will normally
make any part of a redemption payment in securities, if such payment were made,
an investor may incur brokerage costs in converting such securities to cash. The
Trust has elected to be governed by the provisions of Rule 18f-1 under the
Investment Company Act, which require that the Fund pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may redeem shares of the Fund and receive
securities from the Fund's portfolio selected by the Manager in its sole
discretion, provided that such redemption is not expected to affect the Fund's
ability to attain its investment objective or otherwise materially affect its
operations. For the purposes of redemptions in kind, the redeemed securities
shall be valued at the identical time and in the identical manner that the other
portfolio securities are valued for purposes of calculating the net asset value
of the Fund's shares.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of the Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Fund generally will be determined at least once daily as of
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4:00 p.m., New York City time, on each day the NYSE is open for trading. It is
expected that the Exchange will be closed on Saturdays and Sundays and on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas. The Fund may, but does not expect to,
determine the net asset value of its shares on any day when the NYSE is not open
for trading if there is sufficient trading in its portfolio securities on such
days to materially affect the net asset value per share.
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 Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE which will not
be reflected in the computation of the Fund's net asset value unless the
Trustees or their delegates deem that such events would materially affect the
net asset value, in which case an adjustment would be made.
Generally, the Fund's investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board of Trustees.
The Fund's securities, including ADRs, EDRs and GDRs, which
are traded on securities exchanges are valued at the last sale price on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Securities that are traded on
more than one exchange, are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of 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 the
Fund if acquired within 60 days
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<PAGE>
of maturity or, if already held by the Fund on the 60th day, based on the value
determined on the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Fund are valued on the basis of valuations
provided by dealers in those instruments or by an independent pricing service,
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.
An option that is written by the Fund is generally valued at
the last sale price or, in the absence of the last sale price, the last offer
price. An option that is purchased by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last bid price. The
value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the current settlement price for a
like contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Trust's Board of Trustees.
If any securities held by the Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board of Trustees. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally determined
as the amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted
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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 Fund are valued in such manner as the
Board of Trustees in good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor acts as the Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, and is a member
of most of the principal securities exchanges in the U.S. and is a member of the
NASD. The Underwriting Agreement between the Fund and the Distributor is in
effect until May 23, 1996, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the Board of
Trustees of the Trust or the vote of a majority of the outstanding securities of
the Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement may be terminated without penalty by the
parties thereto upon 60 days' written notice, and is automatically terminated in
the event of its assignment as defined in the Investment Company Act. There are
no underwriting commissions paid with respect to sales of the Fund's shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate its past performance. Performance figures will be calculated
separately for Class R, Class P and Class L shares.
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for the Fund will be accompanied by information on
the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC, expressed as follows:
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P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
each respective period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. The Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in the
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of a l-, 5- or 10-year period at the end
of a l-, 5- or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions and complete redemption of
the hypothetical investment at the end of
the measuring period.
The Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. The total return information also assumes cash investments and
redemptions and, therefore, includes the applicable expense reimbursement fees
discussed in the Prospectus. Consequently, any given performance quotation
should not be considered representative of the Fund's performance for any
specified period in the future. In addition, because performance will fluctuate,
it may not provide a basis for comparing an investment in the Fund with certain
bank deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other investment
companies should give consideration to the quality and
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maturity of the respective investment companies' portfolio securities.
The average annual total return for the Fund for the periods
indicated was as follows:
Inception*
Year Ended through
June 30, 1996 June 30, 1996
--------------- -------------
Emerging Markets Portfolio 10.14% (0.68)%
* December 17, 1993
Comparisons. To help investors better evaluate how an
investment in the Fund might satisfy their investment objectives, advertisements
and other materials regarding the Fund may discuss various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. The
following publications, indices and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Fund.
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In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Fund's portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Fund to calculate its figures.
Investors should note that the investment results of the Fund
will fluctuate over time, and any presentation of the Fund's total return for
any period should not be considered as a representation of what an investment
may earn or what an investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time, the Fund may
publish or distribute information and reasons supporting the Manager's belief
that the Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, I/B/E/S Consensus Forecast,
Worldscope and Reuters as well as both local and international brokerage firms.
For example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth.
Research. Largely inspired by its affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the Manager has developed its own tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for the Fund work extensively on
developing an in-depth understanding of particular foreign markets and
particular companies. And they very often discover that they are the first
analysts from the United States to meet with representatives of foreign
companies, especially those in emerging markets nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that may be used for
the Fund.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market.
GENERAL INFORMATION
B-47
<PAGE>
Investors in the Fund will be informed of the Fund's progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; expenses incurred in
connection with the establishment and registration of shares of any other funds
constituting a separate series of the Trust will be assumed by each respective
series. The expenses incurred in connection with the establishment and
registration of shares of the Fund as a separate series of the Trust have been
assumed by the Fund and are being amortized over a period of five years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses after commencement of the Fund's
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the
"Custodian") acts as custodian of the securities and other assets of the Fund.
The Custodian does not participate in decisions relating to the purchase and
sale of securities by the Fund.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Fund's Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and
Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Fund.
The validity of shares offered hereby will be passed on by
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San
Francisco, California 94104.
Among the Trustees' powers enumerated in the Declaration of
Trust is the authority to terminate the Trust or any series of the Trust, or to
merge or consolidate the Trust or one or more of its series with another trust
or company without the need to seek shareholder approval of any such action.
B-48
<PAGE>
As of September 30, 1996, to the knowledge of the Fund, the
following shareholders owned of record 5% or more of the outstanding shares of
the Fund:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
----------------------- ------------ ----------
Pacific Gas & Electric Company 1,041,547 18.67
Retirement Plan
444 Market Street, Suite 1900
Mail Code T19A
P.O. Box 770000
San Francisco, CA 94177-0001
Leland Stanford Junior University 1,170,837 20.99
2770 Sand Hill Road
Menlo Park, CA 94025-7020
General Electric Pension Trust 520,824 9.34
3003 Summer Street
Stamford, CT 06905-4317
Chase Manhattan Bank Tr. 516,650 9.26
Reynolds Metals Retirement Trust
P.O. Box 27003
Richmond, VA 23261-7003
ASEA Brown Boveri Master Trust 606,596 10.87
c/o Eric W. Wood
P.O. Box 120071
Stanford, CT 06912-0071
Annuity Board of The Southern 383,652 6.88
Baptist Convention
P.O. Box 2190
Dallas, TX 75221-2190
Bank of New York Trust 290,462 5.21
Pacificcorp Retirement Trust
1 Wall Street
New York, NY 10005-2501
As of September 30, 1996, the Trustees and Officers of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
B-49
<PAGE>
The Trust is registered with the Securities and Exchange
Commission as a non-diversified management investment company, although the Fund
is a diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant period ended
June 30, 1996 for the Fund as contained in the Annual Report to Shareholders of
the Fund for the fiscal period ended June 30, 1996 (the "Report"), are
incorporated herein by reference to the Report.
B-50
<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
B-51
<PAGE>
Nonrated - where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the
B-52
<PAGE>
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds and notes
with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-53
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) For Montgomery Institutional Series: Emerging Markets
Portfolio:
(1) Portfolio Investments as of June 30, 1996; Statement of
Assets and Liabilities as of June 30, 1996; Statement of
Operations for the Year Ended June 30, 1996; Statement of
Changes in Net Assets for the year ended June 30, 1996;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996; Notes to
Financial Statements; Independent Auditor's Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Institutional Series: Emerging
Markets Portfolio for the year ended June 30, 1996.
(b) For Montgomery Asset Allocation Fund:
(1) Portfolio Investments as of June 30, 1996; Statement of
Assets and Liabilities as of June 30, 1996; Statement of
Operations for the Year Ended June 30, 1996; Statement of
Changes in Net Assets for the year ended June 30, 1996;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996; Notes to
Financial Statements; Independent Auditors' Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Asset Allocation Fund for the
year ended June 30, 1996.
C-1
<PAGE>
(b) Exhibits:
(1) Amended and Restated Agreement and Declaration of
Trust.D
(2) Amended and Restated By-Laws.D
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement.B
(5)(B) Form of Amendment to Investment Management
Agreement.E
(6) Form of Underwriting Agreement.A
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.E
(9)(A) Administrative Services Agreement.A
(9)(B) Form of Multiple Class Plan.F
(9)(C) Form of Shareholder Services Plan.F
(10) Consent and Opinion of Counsel as to legality of
shares.C
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Form of Subscription Agreement for initial shares.C
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing PlanF
(16)(A) Performance Computation for Montgomery Institutional
Series: Emerging Markets Portfolio.E
(16)(B) Performance Computation for Montgomery Asset
Allocation Fund.E
(27) Financial Data Schedule is incorporated by reference
to Form N-SAR filed for the period ended June 30,
1996.
- --------------
A Previously filed as part of Pre-Effective Amendment No. 2 to the
Registration Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the
Registration Statement, filed on November 15, 1993.
D Previously filed as part of Post-Effective Amendment No. 9 to the
Registration Statement, filed on November 1, 1994.
E Previously filed as part of Pre-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Pre-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited
partnership, is the manager of each series of the Registrant, of The Montgomery
Funds, a Massachusetts business trust, and of The Montgomery Funds III, a
Delaware business trust. Montgomery Asset Management, Inc., a California
corporation is the general partner of Montgomery Asset Management, L.P., and
Montgomery Securities is its sole limited partner. The Registrant, The
Montgomery Funds and The Montgomery Funds III are deemed to be under the common
control of each of those three entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of September 30, 1996
-------------- ------------------------
Montgomery Institutional Series: Emerging Markets Portfolio 39
Montgomery Asset Allocation Fund 9,779
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the
principal underwriter of The Montgomery Funds II, is the sole limited partner of
the investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The
general partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc.
("MAM, Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds II, is a Managing Director of
Montgomery Securities. R. Stephen Doyle is the
C-3
<PAGE>
Chairman and Chief Executive Officer of MAM, L.P.; Mark B. Geist is the
President; John T. Story is the Managing Director of Mutual Funds and Executive
Vice President; David E. Demarest is Chief Administrative Officer; Mary Jane
Fross is Manager of Mutual Fund Administration and Finance; and Josephine
Jimenez, Bryan L. Sudweeks, Stuart O. Roberts, John H. Brown, William C.
Stevens, Roger Honour, Oscar Castro, John Boich and Rhoda Rossman are Managing
Directors of MAM, L.P. Information about the individuals who function as
officers of MAM, L.P. (namely, R. Stephen Doyle, Mark B. Geist, John T. Story,
David E. Demarest, Mary Jane Fross and the eight Managing Directors) is set
forth in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The Montgomery
Funds II, the Montgomery Funds and the Montgomery Funds III.
Montgomery Securities acts as the principal underwriter, depositor
and/or investment adviser and/or trustee for The Montgomery Funds, an
investment company registered under the Investment Company Act of
1940, as amended, and for the following private investment
partnerships or trusts:
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited, Liquidating Trust
Montgomery Private Investments Partnership, Liquidating Trust
Pathfinder Montgomery Fund I, L.P., Liquidating Trust
Montgomery Growth Partners, L.P.
Montgomery Small Cap Partners II, L.P.
Montgomery Small Cap Partners III, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
<TABLE>
(b) The following information is furnished with respect to the officers
and general partners of Montgomery Securities:
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
Lewis W. Coleman Senior Managing Director None
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee
Karl L. Matthies Senior Managing Director None
J. Sanford Miller Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive None
Officer
Stephen T. Aiello Managing Director None
John A. Berg Managing Director None
C-4
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
Howard S. Berl Managing Director None
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
Jeffrey B. Child Managing Director None
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
David K. Crossen Managing Director None
Glen C. Dailey Managing Director None
Michael G. Dorey Managing Director None
Dennis Dugan Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
Paul G. Fox Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
Robert G. Goddard Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Brett A. Hodess Managing Director None
Ben Howe Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott C. Kovalik Managing Director None
Kurt H. Kruger Managing Director None
Guy A. Lampard Managing Director None
David S. Lehmann Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin, Esq. Managing Director Secretary
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
Michael G. Mueller Managing Director None
Bernard M. Notas Managing Director None
Bruce G. Potter Managing Director None
David B. Readerman Managing Director None
C-5
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
Rand Rosenberg Managing Director None
Alice S. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Peter B. Stoneberg Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
John Tinker Managing Director None
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
LWC Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
<FN>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
</FN>
</TABLE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., 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 600 Montgomery Street, San
Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
C-6
<PAGE>
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) 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.
(d) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and that the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Francisco and
State of California on this 28th day of October, 1996.
THE MONTGOMERY FUNDS II
By: R. Stephen Doyle*
---------------------------------
R. Stephen Doyle
Chairman and Principal Executive
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.
R. Stephen Doyle * Principal Executive October 28, 1996
- ------------------ Officer; Principal
R. Stephen Doyle Financial and Accounting
Officer; and Trustee
Andrew Cox * Trustee October 28, 1996
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee October 28, 1996
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee October 28, 1996
- --------------------
John A. Farnsworth
Jerome S. Markowitz * Trustee October 28, 1996
- ---------------------
Jerome S. Markowitz
* By: /s/ Julie Allecta
-------------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(11) Independent Auditors' Consent
Deloitte &
Touche LLP
- ------------ ---------------------------------------------------------------
[LOGO] 50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds II:
We consent to (a) the incorporation by reference in this Post-Effective
Amendment No. 18 to Registration Statement No. 33-69686 of The Montgomery Funds
II on Form N-1A of our reports dated August 16, 1996 incorporated by reference
in the Statements of Additional Information and (b) the reference to us under
the caption "Financial Highlights" appearing in the Combined Prospectuses which
also are a part of such Registration Statement.
/s/ Deloitte & Touche LLP
October 25, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
