Rule 497(e)
33-69686; 811-8064
Montgomery Institutional Series: Emerging Markets Portfolio
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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.
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1
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Montgomery Institutional Series: Emerging Markets Portfolio
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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
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2
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Montgomery Institutional Series: Emerging Markets Portfolio
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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:
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Maximum Sales Load Imposed on Purchases (as a percentage of offering price) None
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Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of None
offering price)
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Deferred Sales Load (as a percentage of original purchase price or None
Redemption proceeds, as applicable)
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Investment Expense Reimbursement Fee* .75%
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Redemption Fees*+ (as a percentage of amount redeemed) .75%
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Exchange Fees None
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Annual Fund Operating Expenses (as a percentage of average net assets)
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Management Fees** 1.25%
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Rule 12b-1 Fees None
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Other Expenses** None
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Total Fund Operating Expenses** 1.25%
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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
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3 Years $48
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5 Years $78
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10 Years $162
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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.
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3
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Montgomery Institutional Series: Emerging Markets Portfolio
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<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
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>
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Selected Per Share Data for the Year or Period Ended: June 30, 1996 June 30, 1995++ June 30, 1994*
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<S> <C> <C> <C>
Net asset value, beginning of year $ 44.61 $ 43.71 $ 50.00
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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) --
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Net asset value, end of year.................................................. $ 49.09 $44.61 $43.71
===========================================================================================================================
Total Return**................................................................ 10.14% 2.09% (12.58)%
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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%+
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<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>
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4
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Montgomery Institutional Series: Emerging Markets Portfolio
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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
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5
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Montgomery Institutional Series: Emerging Markets Portfolio
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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
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6
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Montgomery Institutional Series: Emerging Markets Portfolio
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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.
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7
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Montgomery Institutional Series: Emerging Markets Portfolio
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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.
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8
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Montgomery Institutional Series: Emerging Markets Portfolio
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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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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.
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Montgomery Institutional Series: Emerging Markets Portfolio
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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
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Montgomery Institutional Series: Emerging Markets Portfolio
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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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<PAGE>
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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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
