<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
PORTFOLIO HIGHLIGHTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PORTFOLIO MANAGEMENT
--------------------
<S> <C>
Josephine Jimenez......... Senior Portfolio Manager
Bryan Sudweeks............ Senior Portfolio Manager
Thomas Haslett............ Senior Portfolio Manager
Angeline Ee............... Portfolio Manager
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
AGGREGATE TOTAL 12/08/95 THROUGH
RETURN ANALYSIS 6/30/96/1/
--------------- ----------------
<S> <C>
Montgomery Advisors Emerging Markets Fund................. 16.60%
IFC Global Composite Index................................ 16.73%
Lipper Emerging Markets Funds Average..................... 18.88%
</TABLE>
INVESTMENT REVIEW
Q: WHAT REGIONS PERFORMED BEST FOR THE FUND AND WHY?
A: The best region for the Fund during the period was Latin America, and the
Fund was overweight in its exposure to Brazil and Mexico (relative to the
index), both of which turned in strong results in the first six months of
1996. Brazil, which we believe has great promise and potential, is finally
beginning to deliver on that promise. Inflation is low and seems under
control, and the political situation is relatively stable. The country is
getting its act together, and its stock market began to reflect that over the
period. Mexico also began to recover during the period, and its economy is
showing real strength. Some Asian markets in the portfolio, particularly the
Philippines, also proved to be strong performers during the period.
Q: DID THE FUND'S STRATEGY CHANGE DURING THE PERIOD?
A: The strategy for the Advisors Emerging Markets Fund in terms of geographic
sectors changes constantly as our macroeconomic analysis suggests new
opportunities in the world's emerging markets. We also made shifts in terms of
the kind of stocks we invest in, favoring large companies over smaller ones
for much of the period. This shift was based on our belief that the larger,
more established companies would be most attractive as investment capital
returned to the emerging markets, generating a wave of liquidity. This shift
led to a reduced exposure in consumer stocks, which tend to be smaller
companies, in favor of the generally larger companies like financial services
firms which should also benefit from the ebbing of inflation in the emerging
markets.
In terms of portfolio diversification, we continue to stress a high degree of
diversity. As of June 30, 1996, the portfolio was exposed to approximately 20
different emerging markets with positions in approximately 60 different
companies.
Q: HOW HAVE YOU POSITIONED THE FUND FOR THE PERIOD AHEAD?
A: One guide for our investing in the year ahead is low inflation. In the
aggregate, inflation rates have declined to less than 10% annually. That may
seem high among emerging markets compared to inflation in the developed
economies, but it's very low on a historical basis in the emerging markets and
demonstrates the remarkable progress some of these economies have made in
recent years. Relatively low inflation suggests that high real interest rates
could decline in these markets, and that could be a positive for stocks.
We also believe that economic growth will continue at a sustainable pace in
the United States, Europe and Japan, which would be a positive for emerging
market companies with significant exports. On a regional basis, we remain
overweighted in Latin America, with a focus on Brazil and Mexico.
1
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG MONTGOMERY ADVISORS EMERGING MARKETS FUND,
IFC GLOBAL COMP AND LIPPER EMERGING
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
MONTGOMERY
ADVISORS
EMERGING
Measurement Period MARKETS IFC GLOBAL LIPPER
(Fiscal Year Covered) FUND COMP EMERGING
- ------------------- ---------- ---------- --------
<S> <C> <C> <C>
Measurement Pt-12/11/95 $10,000 $10,000 $10,000
FYE 12/95 $10,247 $10,290 $10,310
FYE 01/96 $10,973 $10,828 $11,193
FYE 02/96 $10,647 $10,760 $11,119
FYE 03/96 $10,967 $10,924 $11,193
FYE 04/96 $11,453 $11,738 $11,678
FYE 05/96 $11,747 $11,509 $11,825
FYE 06/96 $11,660 $11,673 $11,888
</TABLE>
- --------
/1/ Aggregate Total Return.
/2/ The IFC Global Composite Index is comprised of over 1,200 individual stocks
from 25 developing countries in Asia, Latin America, Middle East, Africa
and Europe.
/3/ Lipper's Emerging Markets Funds Average universe consists of 31 funds.
Note: The performance shown represents past performance and is not a guarantee
of future results.
2
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--85.5%
ARGENTINA--2.6%
1,900 Banco Frances, ADR (Banks).......................... $ 54,625
25,000 Cresud S.A.+ (Real Estate).......................... 50,019
9,000 Perez Companc, "B" Shares (Oil)..................... 58,972
20,200 Siderar S.A.+ (Steel)............................... 51,933
----------
215,549
----------
BRAZIL--7.7%
13,500 Brazil Fund, Inc. (Mutual Funds).................... 322,312
4,500 Telebras, ADR (Telephone/Networks).................. 313,313
----------
635,625
----------
CHILE--2.5%
2,100 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless)...................... 206,063
----------
CHINA--3.6%
3,100 Guanshen Railway Company, Ltd., ADR+ (Railroad)..... 59,287
6,200 Huaneng Power International, ADS+ (Electric
Utilities)......................................... 110,825
28,500 Johnson Electric Holdings, Ltd. (Electronics)....... 64,064
149,000 M.C. Packaging Hong Kong, Ltd. (Containers and
Packaging)......................................... 63,040
----------
297,216
----------
CZECH REPUBLIC--3.1%
5,300 PIF (Mutual Funds).................................. 105,179
600 SPT Telecom A.S. (Telephone/Networks)............... 73,274
8,000 The Czech Value Fund (Mutual Funds)................. 76,000
----------
254,453
----------
HONG KONG--2.5%
18,000 Guoco Group, Ltd. (Diversified Financial Services).. 85,806
3,600 HSBC Holdings (Banks)............................... 54,413
192,000 Joyce Boutique Holdings (Apparel and Textiles)...... 64,490
----------
204,709
----------
INDIA--7.4%
5,400 Bajaj Auto, Ltd., GDR** (Auto/Auto Parts)........... 206,550
4,100 Bajaj Auto, Ltd., GDS (Auto/Auto Parts)............. 156,825
14,000 Tata Engineering & Locomotive Company, GDR**
(Auto/Auto Parts).................................. 252,000
----------
615,375
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
INDONESIA--3.6%
10,000 Hanjaya Mandala Sampoerna (F) (Tobacco)............. $ 113,856
57,000 Mulia Industrindo (F) (Building Materials).......... 84,490
1,980 Telekomunikas Indonesia, ADR (Telephone/Regional--
Local)............................................. 58,905
25,000 Telekomunikas Indonesia (F) (Telephone/Regional--
Local) ............................................ 37,863
----------
295,114
----------
ISRAEL--1.0%
2,100 Teva Pharmaceuticals, ADR (Pharmacy/Drugs).......... 79,669
----------
KOREA--6.0%
8,300 Korea Electric Power Corporation, ADR (Electric
Utilities)......................................... 201,275
3,000 Korea Mobile Telecommunications, ADR+
(Telephone/Wireless)............................... 51,375
6,900 Korea Mobile Telecommunications, ADS+
(Telephone/Wireless)............................... 118,162
5,200 Pohang Iron & Steel Company, ADR (Steel) ........... 126,750
----------
497,562
----------
MALAYSIA--5.9%
24,000 Arab Malaysian Corporation (F) (Diversified
Financial Services)................................ 104,871
54,000 Petronas Gas (Oil).................................. 231,630
27,000 Resorts World Berhad (Leisure Time)................. 154,780
----------
491,281
----------
MEXICO--9.5%
37,000 Cementos Mexicanos S.A. (Building Materials)........ 131,220
29,000 Cementos Mexicanos S.A., Series B (Building
Materials)......................................... 112,597
256,000 Grupo Financiero Banamex, Series B (Banks).......... 531,913
7,680 Grupo Financiero Banamex, Series L (Banks).......... 14,580
----------
790,310
----------
PERU--2.1%
6,462 Credicorp, Ltd. (Banks) ............................ 128,432
23,300 Telefonica del Peru, Series B (Telephone/Networks).. 47,306
----------
175,738
----------
PHILIPPINES--4.0%
270,300 Aboitiz Equity Ventures+ (Conglomerates) ........... 50,552
190,500 Filinvest Land, Inc. (Real Estate) ................. 78,163
292,000 Metro Pacific, Inc. (Conglomerates)................. 86,931
1,930 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance).......................... 112,181
----------
327,827
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
PORTUGAL--2.7%
1,210 Capital Portugal Fund (Mutual Funds) ............. $ 119,416
3,900 Sonae Investmentos (Conglomerates)................ 101,393
----------
220,809
----------
SINGAPORE--0.7%
10,000 Far East Levingston (Heavy Construction) ......... 55,280
----------
SOUTH AFRICA--6.1%
1,500 Anglo American Gold Investment Company (Metals and
Mining).......................................... 130,164
6,100 Barlow, Ltd. (Building Materials)................. 63,703
65,100 Lonrho (Conglomerates) ........................... 184,047
11,362 Sasol, Ltd. (Metals and Mining) .................. 123,243
----------
501,157
----------
TAIWAN--4.8%
14,500 ASE, Ltd., GDR (Semiconductors)................... 125,062
700 China Steel Corporation, GDR** (Steel)............ 17,850
2,900 China Steel Corporation, GDS (Steel).............. 73,950
5,500 Taiwan Fund, Inc. (Mutual Funds).................. 132,000
6,000 Yageo Corporation, GDR+** (Electronics)........... 46,890
----------
395,752
----------
THAILAND--8.2%
6,700 Ban Pu Coal Public Company, Ltd. (F) (Coal) ...... 193,178
23,600 Bangkok Bank Public Company, Ltd. (F) (Banks)..... 223,020
16,000 Dhana Siam Finance and Securities Public Company
(F) (Diversified Financial Services)............. 88,861
15,000 Electricity Generating Public Company of Thailand
(F) (Electric Utilities)......................... 52,288
18,000 Phatra Thanakit Company, Ltd. (F) (Diversified
Financial Services).............................. 121,320
----------
678,667
----------
TURKEY--1.5%
285,000 Koc Holding (Holding)............................. 69,411
1,069,726 Trakya Cam Sanayil (Glass)........................ 58,619
----------
128,030
----------
TOTAL COMMON STOCKS
(Cost $6,651,773)................................ 7,066,186
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
PREFERRED STOCKS--7.3%
BRAZIL--7.3%
31,215,000 Banco Bradesco (Banks)........................... $ 254,905
720,000 Electrobras, Series B (Electric Utilities)....... 205,786
405,063 Telec do Rio Janeiro S.A. (Telephone/Networks)... 45,583
3,700,000 Uniao de Bancos Brasileiro (Banks)............... 100,187
----------
TOTAL PREFERRED STOCKS
(Cost $569,450)................................. 606,461
----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
CONVERTIBLE BOND--1.3% (Cost $107,720)
MEXICO--1.3%
$100,000 Alfa S.A. de C.V.**, 8.000% due 09/15/2000
(Steel)......................................... 108,000
----------
TOTAL SECURITIES
(Cost $7,328,943)............................... 7,780,647
----------
REPURCHASE AGREEMENT--10.1% (Cost $835,000)
835,000 Agreement with Bear Stearns Tri-Party, 5.600%
dated 06/28/96, to be repurchased at $835,390,
on 07/01/96, collateralized by $933,719 market
value of U.S. Government securities, having
various maturities and various interest rates... 835,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $8,163,943*)........................ 104.2 % 8,615,647
OTHER ASSETS AND LIABILITIES (Net).......................... (4.2) (346,171)
----- ----------
NET ASSETS.................................................. 100.0 % $8,269,476
===== ==========
</TABLE>
- --------
* Aggregate cost for Federal tax purposes was $8,183,308.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte and Touche
LLP.
Abbreviations:
ADR--American Depositary Receipt
ADS--American Depositary Share
(F)--Foreign or alien share.
GDR--Global Depositary Receipt
GDS--Global Depositary Share
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost
$8,163,943) (Note 1)
Securities.............................................. $7,780,647
Repurchase agreement.................................... 835,000
----------
Total Investments......................................... 8,615,647
Cash...................................................... 1,442
Forward foreign currency exchange contracts to buy, at
value (Contract cost $101,109) (Note 3).................. 100,943
Receivables:
Dividends............................................... 27,022
Shares of beneficial interest sold...................... 16,494
Expenses absorbed by Manager............................ 7,984
Interest................................................ 2,790
Other Assets:
Organization costs (Note 1).............................. 22,560
----------
Total Assets.............................................. 8,794,882
LIABILITIES:
Payable for forward foreign currency exchange contracts to
buy...................................................... $101,109
Payables:
Investment securities purchased......................... 393,379
Shares of beneficial interest redeemed.................. 9,686
Custodian fees.......................................... 3,227
Transfer agency and servicing fees...................... 1,286
Trustees' fees and expenses............................. 1,000
Administration fee...................................... 468
Accrued liabilities and expenses........................ 15,251
--------
Total Liabilities......................................... 525,406
----------
NET ASSETS................................................ $8,269,476
==========
NET ASSETS CONSIST OF:
Undistributed net investment income....................... $ 31,606
Accumulated net realized gain on securities sold, forward
foreign currency exchange contracts and foreign currency
transactions............................................. 383,301
Net unrealized appreciation of investments, forward
foreign currency exchange contracts and net other assets. 451,326
Shares of beneficial interest............................. 4,729
Additional paid-in capital................................ 7,398,514
----------
NET ASSETS................................................ $8,269,476
==========
Net Asset Value and offering price per share outstanding*
($8,269,476 / 472,939 shares of beneficial interest out-
standing)................................................ $ 17.49
==========
</TABLE>
- --------
* Redemption price per share is equal to Net Asset Value less any applicable
redemption fee (Note 4).
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996*
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $6,054)........ $ 65,733
Interest...................................................... 18,983
--------
Total Investment Income..................................... 84,716
EXPENSES:
Management fee (Note 2)....................................... $ 43,843
Registration and filing fees.................................. 16,566
Amortization of organization costs (Note 1)................... 14,978
Legal and audit fees.......................................... 11,529
Custodian fees................................................ 11,231
Trustees' fees and expenses................................... 4,565
Transfer agency and servicing fees............................ 3,367
Administration fee (Note 2)................................... 2,558
Other......................................................... 4,542
--------
Total Expenses................................................ 113,179
Fees deferred and expenses absorbed by Manager (Note 2)....... (60,069)
--------
Net Expenses................................................ 53,110
--------
NET INVESTMENT INCOME......................................... 31,606
--------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on:
Security transactions....................................... 390,084
Forward foreign currency exchange contracts................. (18,949)
Foreign currency transactions............................... 12,166
--------
Net realized gain on investments during the period............ 383,301
--------
Net change in unrealized appreciation/(depreciation) of:
Securities.................................................. 451,704
Forward foreign currency exchange contracts................. (166)
Net other assets............................................ (212)
--------
Net unrealized appreciation of investments during the period.. 451,326
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............... 834,627
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $866,233
========
</TABLE>
- --------
* The Montgomery Advisors Emerging Markets Fund commenced operations on
December 8, 1995.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JUNE 30, 1996*
<TABLE>
<S> <C>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income............................................... $ 31,606
Net realized gain on securities, forward foreign currency exchange
contracts and foreign currency transactions during the period...... 383,301
Net unrealized appreciation of securities, forward foreign currency
exchange contracts and net other assets during the period.......... 451,326
----------
Net increase in net assets resulting from operations................ 866,233
Net increase from beneficial interest transactions (Note 4)......... 7,403,243
----------
Net increase in net assets.......................................... 8,269,476
NET ASSETS:
Beginning of period................................................. --
----------
End of period....................................................... $8,269,476
==========
Undistributed net investment income................................. $ 31,606
==========
</TABLE>
- --------
* The Montgomery Advisors Emerging Markets Fund commenced operations on
December 8, 1995.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
MONTGOMERY ADVISORS EMERGING MARKETS FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE PERIOD ENDED:
<TABLE>
<CAPTION>
06/30/96*
---------
<S> <C>
Net asset value--beginning of period................................ $ 15.00
-------
Net investment income............................................... 0.07
Net realized and unrealized gain on investments..................... 2.42
-------
Net increase in net assets resulting from investment operations..... 2.49
-------
Net asset value--end of period...................................... $ 17.49
=======
Total return**...................................................... 16.60%
=======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)................................ $ 8,269
Ratio of net investment income to average net assets................ 0.87%+
Ratio of expenses to average net assets............................. 1.45%+
Portfolio turnover rate............................................. 53.50%
Average commission rate paid(a)..................................... $0.0014
Net investment loss before deferral of fees and absorption of ex-
penses by Manager.................................................. ($0.06)
Expense ratio before deferral of fees and absorption of expenses by
Manager............................................................ 3.10%+
</TABLE>
- --------
* The Montgomery Advisors Emerging Markets Fund commenced operations on
December 8, 1995.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
THE MONTGOMERY FUNDS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Funds (the "Trust") are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as diversified, open-end
management investment companies. As of June 30, 1996, the Trust had sixteen
publicly offered series: Montgomery Growth Fund, Montgomery Micro Cap Fund,
Montgomery Small Cap Fund, Montgomery Equity Income Fund, Montgomery Select 50
Fund, Montgomery Global Opportunities Fund, Montgomery Global Communications
Fund, Montgomery International Growth Fund, Montgomery International Small Cap
Fund, Montgomery Emerging Markets Fund, Montgomery Short Government Bond Fund,
Montgomery Government Reserve Fund, Montgomery California Tax-Free
Intermediate Bond Fund, Montgomery California Tax-Free Money Fund, Montgomery
Small Cap Opportunities Fund (formerly Montgomery Small Cap II Fund) and
Montgomery Advisors Emerging Markets Fund.
The Montgomery Funds were organized as a Massachusetts business trust on May
10, 1990 and commenced operations with the Montgomery Small Cap Fund. Prior to
the public offerings of shares of each Fund, a limited number of shares were
sold to Montgomery Asset Management, L.P. and/or affiliated persons of
Montgomery Asset Management in private placement offerings. Otherwise, no Fund
had any significant operations prior to the date on which it commenced
operations (i.e., commenced selling shares to the public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. Information
presented in these financial statements pertains to the Montgomery Advisors
Emerging Markets Fund (the "Fund"). The remaining Funds are presented under a
separate cover.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION--The Fund's 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.
The value of 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 value of such securities.
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
supervision of the Trust in accordance with methods which are authorized by
the Trust's Board of Trustees.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to
the Fund if acquired within 60 days of maturity or, if already held by the
Fund on the 60th day, based on the value determined on the 61st day.
b. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may engage in
forward foreign currency exchange contracts. Forward foreign currency exchange
contracts are valued at the forward rate and are marked-to-market daily. The
change in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. Forward foreign currency exchange
11
<PAGE>
THE MONTGOMERY FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
contracts have been used solely to establish a rate of exchange for settlement
of transactions. Although forward foreign currency exchange contracts limit
the risk of loss due to a decline in the value of the hedged currency, they
also limit any potential gain that might result should the value of the
currency increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their
contracts.
c. FOREIGN CURRENCY--Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing
at the end of the period, and purchases and sales of investment securities and
income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses which result from changes in foreign
currency exchange rates on investments have been included in the unrealized
appreciation/(depreciation) of securities. Net realized foreign currency gains
and losses resulting from movement in exchange rates include foreign currency
gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the
Fund and the amount actually received and the portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date.
d. REPURCHASE AGREEMENTS--The Fund may engage in repurchase agreement
transactions individually or jointly through a joint repurchase account with
other series of the Trust pursuant to a joint repurchase agreement. Under the
terms of a typical repurchase agreement, a Fund writes a financial contract
with a counterparty and takes possession of a government debt obligation as
collateral. The Fund also agrees with the counterparty to allow the
counterparty to repurchase the financial contract at a specified date and
price, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is
at least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There could be
potential loss to the Fund in the event the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during
the period while the Fund seeks to assert its rights. The Fund's investment
manager, acting under the supervision of the Board of Trustees, reviews the
value of the collateral and the creditworthiness of those banks and dealers
with which the Fund enters into repurchase agreements to evaluate potential
risks. The Fund may also participate on an individual or joint basis in tri-
party repurchase agreements which involve a counterparty and a custodian bank.
e. DIVIDENDS AND DISTRIBUTIONS--Dividends, if any, from net investment
income of the Fund are declared and paid at least annually.
Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional distributions of net
investment income and capital gains for the Fund may be made in order to avoid
the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
f. SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions
are recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend
income is recognized on the ex-dividend date. Dividend income on foreign
securities is recognized as soon as the Fund is informed of the ex-dividend
date. Interest income, including, where applicable, amortization of discount
on short-term investments, is recognized on the accrual basis.
12
<PAGE>
THE MONTGOMERY FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
g. FEDERAL INCOME TAXES -- The Fund has qualified and it is the intention of
the Fund to continue to qualify and elect treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve the Fund
from all or substantially all federal income taxes.
h. ORGANIZATION COSTS--Expenses incurred in connection with the organization
of the Fund are being amortized on a straight-line basis over a period of five
years from December 8, 1995.
i. EXPENSES--Most expenses of the Trust can be directly attributed to a
Fund. Expenses which cannot be directly attributed are apportioned between the
Funds in the Trust.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager").
The Manager, a California limited partnership, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The general partner of
the Manager is Montgomery Asset Management, Inc. The sole limited partner of
the Manager is Montgomery Securities, the Fund's principal underwriter and
distributor. Under the Advisers Act, both Montgomery Asset Management, Inc.
and Montgomery Securities may be deemed controlling persons of the Manager.
Although the operations and management of the Manager are independent from
those of Montgomery Securities, it is expected that the Manager may draw upon
the research and administrative resources of Montgomery Securities at its
discretion in a manner consistent with applicable regulations.
Pursuant to an investment management agreement ("Investment Management
Agreement"), 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
Trust with respect to the Manager's responsibilities under such agreement. The
Manager has agreed to reduce some or all of its management fee or absorb fund
expenses if necessary to keep the Fund's annual operating expenses, exclusive
of interest and taxes, at or below the maximum allowed by applicable state
expense limitations or 1.45% of the Fund's average net assets, whichever is
lower. Any reductions or absorptions made to the Fund by the Manager are
subject to recovery within the following two years provided the Fund is able
to affect such reimbursement and remain in compliance with applicable expense
limitations. The Manager may terminate these reductions or absorptions at any
time.
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 has accrued a monthly management and
administration fee (accrued daily) based upon the average daily net assets of
the Fund at the following effective annual rates:
<TABLE>
<CAPTION>
MANAGEMENT ADMINISTRATION
FEE FEE
---------- --------------
<S> <C> <C>
Montgomery Advisors Emerging Markets Fund........ 1.20% 0.07%
</TABLE>
For the period ended June 30, 1996, the Manager has deferred fees and/or
absorbed expenses as follows:
<TABLE>
<CAPTION>
FEES EXPENSES
DEFERRED ABSORBED
-------- --------
<S> <C> <C>
Montgomery Advisors Emerging Markets Fund................ $43,843 $16,226
</TABLE>
13
<PAGE>
THE MONTGOMERY FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1996, the amount of deferred management fees and absorbed
expenses subject to recoupment is $60,069.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or principal underwriter, "affiliated persons" as defined
in the 1940 Act. Each Trustee of the Montgomery Funds who is not an
"affiliated person" received an annual retainer and quarterly meeting fees
totaling $35,000 per annum, as well as reimbursement for expenses for service
as a Trustee of all three Trusts advised by the Manager ($25,000 of which was
allocated to The Montgomery Funds).
c. For the period ended June 30, 1996, the Fund's securities transactions
generated commissions of $57,620, none of which was paid to Montgomery
Securities.
d. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees to its distributor. Therefore, Montgomery Securities has received no
direct compensation for serving as the Fund's principal underwriter and
distributor.
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. Government securities, during the period ended June
30, 1996 were:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Montgomery Advisors Emerging Markets Fund.......... $10,724,504 $3,787,770
</TABLE>
b. At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess
of tax cost over value were as follows:
<TABLE>
<CAPTION>
TAX BASIS TAX BASIS
UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Montgomery Advisors Emerging Markets Fund........ $675,723 $243,384
</TABLE>
c. The Fund regularly trades forward foreign exchange contracts with off-
balance sheet risk in the normal course of its investing activities in order
to manage exposure to market risks such as interest rates and foreign currency
exchange rates.
The contractual amounts of these instruments represent the investment the
Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. Summaries of obligations
under these financial instruments at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
CONTRACT
VALUE VALUE
DATE (NOTE 1)
-------- --------
<S> <C> <C>
Forward Foreign Exchange Contracts to Buy:
(Contract cost $101,109)
101,362 Brazilian Real.................................. 07/01/96 $100,943
========
</TABLE>
14
<PAGE>
THE MONTGOMERY FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of beneficial
interest for the period indicated below were:
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1996*
-------------------
SHARES AMOUNT
------- ----------
<S> <C> <C>
MONTGOMERY ADVISORS EMERGING MARKETS FUND:
Shares Sold.............................................. 518,313 $8,165,835
Shares Redeemed.......................................... (45,374) (762,592)
------- ----------
Net Increase............................................. 472,939 $7,403,243
======= ==========
</TABLE>
- --------
* The Montgomery Advisors Emerging Markets Fund commenced operations on
December 8, 1995.
To the extent consistent with certain tax requirements, redemption expense
reimbursement fees of 1.00% may be imposed on the redemption of Fund shares.
Such fees reflected in the dollar amount above are made in cash. This
adjustment is not a sales charge. It is kept in the Fund for the benefit of
all shareholders. The purposes of the adjustment is to prevent the performance
of the Fund from being adversely affected by the transaction costs created by
the sale of securities to obtain cash.
5. FOREIGN SECURITIES:
The Fund may purchase securities on foreign security exchanges. Securities
of foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include re-evaluation of currencies, less
reliable information about issuers, different securities transactions
clearance and settlement practices, and future adverse political and economic
developments. These risks are heightened for investments in emerging market
countries. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the U.S.
government. The Fund invests at least 65% of its total assets in the equity
securities of companies in emerging market countries.
15
<PAGE>
THE MONTGOMERY FUNDS
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Montgomery Funds and the Shareholders of
Montgomery Advisors Emerging Markets Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Advisors Emerging
Markets Fund (a portfolio of The Montgomery Funds) as of June 30, 1996, and
the related statement of operations, the statement of changes in net assets
and financial highlights for the period from December 8, 1995 (commencement of
operations) to June 30, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at June 30, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Montgomery
Advisors Emerging Markets Fund as of June 30, 1996, the results of its
operations, the changes in its net assets, and its financial highlights for
the period from December 8, 1995 (commencement of operations) to June 30,
1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
August 16, 1996
16
<PAGE>
THE MONTGOMERY FUNDS
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED JUNE 30, 1996
For the fiscal year ended June 30, 1996, foreign income and foreign taxes
paid relating to foreign sources and possessions in the United States, on a
per share basis were as follows:
<TABLE>
<CAPTION>
FOREIGN FOREIGN
INCOME TAXES
------- -------
<S> <C> <C>
Montgomery Advisors Emerging Markets Fund.................... $0.0924 $0.0049
</TABLE>
Of the distributions to be made by the Fund from investment income, the
corresponding percentage represents the amount of the distribution which will
qualify for the dividends received deduction available to corporate
shareholders:
<TABLE>
<S> <C>
Montgomery Advisors Emerging Markets Fund.............................. 0.24%
</TABLE>
The above figures may differ from those cited elsewhere in this report due
to differences in the calculation of income and capital gains for Securities
and Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
17
