As filed with the Securities and Exchange Commission on January 24, 1996
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 16
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in its Charter)
600 Montgomery Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 627-2400
(Registrant's Telephone Number, Including Area Code)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
X on February 9, 1996 pursuant to Rule 485(b)
---
____ 60 days after filing pursuant to Rule 485(a)(1)
____ 75 days after filing pursuant to Rule 485(a)(2)
____ on _________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1995 was filed on August 28, 1995.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages 176. Exhibit Index appears at 175.
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:*
Facing Sheet
Contents of Registration Statement
Cross - Reference Sheet for Montgomery Asset Allocation Fund
Part A - Prospectus for Montgomery Asset Allocation
Part B - Statement of Additional Information for Montgomery Asset
Allocation Fund
Part C - Other Information
Signature Page
Exhibit
- --------
* This Amendment does not relate to the following documents: the
prospectuses for the Class R shares, Class P shares and Class L shares
for Montgomery Asset Allocation Fund; the prospectus and the statement
of additional information for Montgomery Institutional Series: Emerging
Markets Portfolio.
ii
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
-------------------------------------------------
(Prospectus for Montgomery Asset Allocation Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "The Multi-Strategy Funds," and "Fees and Expenses
of the Funds"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "The Multi-Strategy Funds,"
of Registrant "The Funds' Investment Objective and Policies,"
"Portfolio Securities," "Other Investment Practices,"
"Risk Considerations" and "General Information"
5. Management of "The Funds' Investment Objectives and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable (contained in the Fund's Annual
of Fund Performance Report)
6. Capital Stock and "Dividends and Distributions," "The Multi-Strategy
Other Securities Funds," "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Funds,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
iii
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
---------------------------------------------------
(Statement of Additional Information for Montgomery
Asset Allocation Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trusts" and "General Information"
and History
13. Investment Objectives "Investment Objective and Policies of the Funds,"
"Risk Considerations" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trusts" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of and "Determination of Net Asset Value"
Securities Being
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS
MONTGOMERY ASSET ALLOCATION FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
600 Montgomery Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
February 9, 1996
The following sixteen mutual funds (individually, a "Fund" and, collectively,
the "Funds") are offered in this Prospectus:
o Montgomery Growth Fund
o Montgomery Equity Income Fund
o Montgomery Small Cap Fund
o Montgomery Small Cap II Fund
o Montgomery Micro Cap Fund
o Montgomery Global Opportunities Fund
o Montgomery Global Communications Fund
o Montgomery International Small Cap Fund
o Montgomery International Growth Fund
o Montgomery Emerging Markets Fund
o Montgomery Select 50 Fund
o Montgomery Asset Allocation Fund
o Montgomery Short Government Bond Fund
o Montgomery Government Reserve Fund
o Montgomery California Tax-Free Intermediate Bond Fund
o Montgomery California Tax-Free Money Fund
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. In general, the minimum initial investment in each
Fund is $1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must
be at least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor,
in either's discretion, may waive these minimums. See "How to Invest in the
Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As is the case for all
mutual funds, attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated February 9, 1996, as may be revised,
has been filed with the Securities and Exchange Commission, is incorporated by
this reference and is available without charge by calling (800) 572-FUND. If you
are viewing the electronic version of this prospectus through an on-line
computer service, you may request a printed version free of charge by calling
(800) 572-FUND.
The Internet address for The Montgomery Funds is
http://www.xperts.montgomery.com/1.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONTGOMERY GOVERNMENT RESERVE FUND OR
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 5
Financial Highlights 7
The Funds' Investment Objectives and Policies 14
Portfolio Securities 22
Other Investment Practices 26
Risk Considerations 29
Management of the Funds 32
How To Invest in the Funds 36
How To Redeem an Investment in the Funds 40
Exchange Privileges and Restrictions 42
How Net Asset Value is Determined 43
Dividends and Distributions 44
Taxation 44
General Information 45
Backup Withholding Instructions 46
2
<PAGE>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 14, "Portfolio Securities"
beginning on page 22, "Other Investment Practices" beginning on page 26 and
"Risk Considerations" beginning on page 29 for more detailed information.
The Equity Funds
Montgomery Growth Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies of all sizes and emphasizes companies
having market capitalizations of $500 million or more.
Montgomery Equity Income Fund
Seeks current income and capital appreciation by investing primarily in
income-producing equity securities of domestic companies, with the goal to
provide significantly greater yield than the average yield offered by the stocks
of the Standard and Poor's 500 Composite Price Index ("S&P 500") and a low level
of price volatility.
Montgomery Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
Montgomery Small Cap II Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
Montgomery Micro Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies that have the potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having total market capitalizations that would place them in the
smallest 10% of market capitalization for domestic companies as measured by the
Wilshire 5000 Index.
Montgomery Global Opportunities Fund
Seeks capital appreciation by investing primarily in equity securities of
companies of all sizes throughout the world but emphasizes companies having
market capitalizations of $1 billion or more, sound fundamental values and
potential for long-term growth at a reasonable price.
Montgomery Global Communications Fund
Seeks capital appreciation by investing primarily in equity securities of
communications companies (i.e., companies primarily engaged in developing,
manufacturing or selling communications equipment or services) throughout the
world having sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the U.S. having total market capitalizations of less than $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery International Growth Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the United States having total market capitalizations over $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery Emerging Markets Fund
Seeks capital appreciation by investing primarily in equity securities of
companies in countries having economies and markets generally considered by the
World Bank or the United Nations to be emerging or developing.
The Multi-Strategy Funds
Montgomery Select 50 Fund
Seeks capital appreciation by investing primarily in at least 50 different
equity securities of companies of all sizes throughout the world. Each of the
Manager's five equity discipline management teams selects 10 equity securities
based on the potential for capital appreciation.
Montgomery Asset Allocation Fund
Seeks high total return, while also seeking to reduce risk, through a strategic
or active allocation of assets among domestic stocks, fixed-income securities
and cash or cash equivalents.
3
<PAGE>
The Fixed Income Funds
Montgomery Short Government Bond Fund
Seeks maximum total return consistent with preservation of capital and prudent
investment management by investing primarily in U.S. Treasury Bills, Notes,
Bonds and other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government securities") and, to manage
interest rate risk, maintains an average portfolio effective duration comparable
to or less than three-year U.S. Treasury Notes. It targets higher yields than
money market funds generally with less fluctuation in the value of its shares
than long-term bond funds. This Fund does not maintain a stable net asset value
of $1.00.
Montgomery Government Reserve Fund
This money market fund seeks current income consistent with liquidity and
preservation of capital by investing exclusively in U.S. Government securities,
repurchase agreements for U.S. Government securities and other money market
funds investing exclusively in U.S. Government securities and such repurchase
agreements. It seeks to maintain a stable net asset value of $1.00.
Montgomery California Tax-Free Intermediate Bond Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with preserving capital and prudent investment management. It
targets higher yields than tax-free money market funds but generally with less
fluctuation in the value of its shares than long-term tax-free bond funds. It
does not maintain a stable net asset value of $1.00.
Montgomery California Tax-Free Money Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with liquidity and preservation of capital. It seeks to
maintain a stable net asset value of $1.00.
The Funds 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
(800) 572-FUND or contact sales representatives or financial intermediaries who
offer those classes.
4
<PAGE>
<TABLE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
The Equity Funds
<CAPTION>
Montgomery Growth Montgomery Equity Montgomery Small Cap Montgomery Small Cap Montgomery Micro Cap
Fund Income Fund Fund II Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fee* 1.00% 0.60% 1.00% 1.20% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.50% 0.25% 0.37% 0.30% 0.35%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses (after 1.50% 0.85% 1.37% 1.50% 1.75%
reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Global Montgomery Global Montgomery Montgomery Montgomery
Opportunities Communications International Small International Growth Emerging Markets
Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fee* 1.25% 1.25% 1.25% 1.10% 1.07%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.65% 0.65% 0.65% 0.55% 0.73%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses 1.90% 1.90% 1.90% 1.65% 1.80%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The Multi-Strategy and Fixed Income Funds
<CAPTION>
Montgomery Montgomery
Montgomery Short Montgomery California Tax-Free California Tax-Free
Montgomery Select Montgomery Asset Government Bond Government Reserve Intermediate Bond Money
50 Fund Allocation Fund Fund Fund I Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management Fee* 1.25% 0.80% 0.50% 0.40% 0.50% 0.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.55% 0.50% 0.20% 0.20% 0.20% 0.20%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses (after 1.80% 1.30% 0.70% 0.60% 0.70% 0.60%
reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of each Fund. Operating expenses
are paid out of a Fund's assets and are factored into the Fund's share price.
Each Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. The Funds also reserve the
right to impose a $20 annual account maintenance fee on accounts that fall
below the minimum investment because of redemptions. See "How to Redeem an
Investment in the Funds."
5
<PAGE>
<FN>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1995. Expenses for the Montgomery
International Growth Fund and Montgomery Select 50 Fund are estimated. The
Manager will reduce its fees and may absorb or reimburse a Fund for certain
expenses to the extent necessary to limit total annual fund operating
expenses to the lesser of the amount indicated in the table for a Fund or
the maximum allowed by applicable state expense limitations. A Fund is
required to reimburse the Manager for any reductions in the Manager's fee
only during the two years (three years in the case of the Montgomery Asset
Allocation Fund) following that reduction and only if such reimbursement can
be achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for fees
and expenses for the current year. Absent reduction, actual total Fund
operating expenses for the period ended June 30, 1995 (annualized) would
have been as follows: Montgomery Equity Income Fund, 3.16% (2.56% other
expenses); Montgomery Micro Cap Fund, 2.07% (0.67% other expenses);
Montgomery Global Opportunities Fund, 2.99% (1.74% other expenses);
Montgomery Global Communications Fund, 2.08% (0.83% other expenses);
Montgomery International Small Cap Fund, 2.50% (1.25% other expenses);
Montgomery Asset Allocation Fund, 2.07% (1.27% other expenses); Montgomery
Short Government Bond Fund, 1.33% (0.83% other expenses); Montgomery
Government Reserve Fund, 0.79% (0.39% other expenses); Montgomery California
Tax-Free Intermediate Bond Fund, 1.41% (0.91% other expenses); and
Montgomery California Tax-Free Money Fund, 0.86% (0.46% other expenses).
Absent the reduction, actual total Fund operating expenses are estimated to
be as follows: Montgomery Small Cap II Fund, 3.10% (1.85% other expenses),
Montgomery International Growth Fund, 1.84% (0.74% other expenses) and
Montgomery Select 50 Fund, 2.40% (1.15% other expenses). The Manager may
terminate these voluntary reductions at any time. See "Management of the
Funds."
</FN>
</TABLE>
<TABLE>
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
Montgomery Growth Montgomery Equity Montgomery Small Cap Montgomery Small Cap Montgomery Micro Cap
Fund Income Fund Fund II Fund Fund
- -------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1 Year $15 $9 $14 $15 $18
- -------------------------------------------------------------------------------------------------------------------------------
3 Years $47 $27 $43 $47 $55
- -------------------------------------------------------------------------------------------------------------------------------
5 Years $82 N/A $75 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
10 Years $179 N/A $165 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Montgomery
Montgomery Global Montgomery Global International Small International Growth Montgomery Emerging
Opportunities Fund Communications Fund Cap Fund Fund Markets Fund
- ------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1 Year $19 $19 $19 $17 $18
- ------------------------------------------------------------------------------------------------------------------------------
3 Years $55 $60 $60 $52 $57
- ------------------------------------------------------------------------------------------------------------------------------
5 Years $95 $103 $103 N/A $97
- ------------------------------------------------------------------------------------------------------------------------------
10 Years $206 $222 $222 N/A $212
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Montgomery
Montgomery Montgomery Short Montgomery California Tax-Free California
Montgomery Select Asset Allocation Government Bond Government Intermediate Bond Tax-Free Money
50 Fund Fund Fund Reserve Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1 Year $18 $13 $7 $6 $7 $6
- ------------------------------------------------------------------------------------------------------------------------------
3 Years $57 $41 $22 $19 $22 $19
- ------------------------------------------------------------------------------------------------------------------------------
5 Years N/A $71 $39 $33 $39 N/A
- ------------------------------------------------------------------------------------------------------------------------------
10 Years N/A $157 $87 $75 $87 N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
6
<PAGE>
<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
The following financial information for the periods ended June 30, 1992 through
June 30, 1995 was audited by Deloitte & Touche LLP, whose report, dated August
11, 1995, appears in the 1995 Annual Report of the Funds.1
<CAPTION>
Montgomery Montgomery Equity
Growth Fund Income Fund
- ----------------------------------------------------------------------------------------------
Inception(2) Inception(11)
Year Ended through through
June 30, 1995 June 30, 1994 June 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year.......... $15.27 $12.00 12.00
- ----------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss).............. 0.12 0.04 0.31
Net realized and unrealized gain (loss) on
investments............................... 3.91 3.31* 1.38
---- ---- ----
Total from investment operations.......... 4.03 3.35 1.69
- ----------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ..... (0.07) (0.01) (0.31)
Distributions from net realized capital
gains (0.07) -- --
Distribution in excess of net realized
capital gains............................. -- (0.07) --
---- ------- ----
Total Distributions....................... (0.14) (0.08) (0.31)
- ----------------------------------------------------------------------------------------------
Net asset value, end of year................ $19.16 $15.27 $13.38
==============================================================================================
Total Return................................ 26.53% 27.98% 14.26%
- ----------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)... $878,776 $149,103 $6,383
Ratio of net operating expense to average
net assets
Before expense reimbursement....... ..... 1.50% 1.79%(3) 3.16%(3)
After expense reimbursement........ ..... 1.50% 1.49%(3) 0.84%(3)
Ratio of net investment income (loss) to
average net assets.......................... 0.98% 1.09%(3) 4.06%(3)
Portfolio turnover rate..................... 128.36% 110.65% 29.46%
- ----------------------------------------------------------------------------------------------
<FN>
* The amount may not accord with the change in the aggregate gains and losses in
portfolio securities because of the timing of purchases and redemptions.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Montgomery Small Cap Fund
Inception(1),(4)
Year Ended June 30, through
1995 1994 1993 1992 June 30, 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.... $15.15 $16.83 $12.90 $13.24 $10.62
- -----------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)........ (0.10) (0.12) (0.11) (0.06) (0.07)
Net realized and unrealized gain
(loss) on investments............... 3.04 (0.47) 4.04 3.25 2.71
---- ------ ---- ---- ----
Total from investment operations.... 2.94 (0.59) 3.93 3.19 2.64
- -----------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized
capital gains (0.98) (1.09) -- (2.75) (0.02)
Distributions from capital.......... -- -- -- (0.78) --
---- ---- ---- ------ ---
Total Distributions................. (0.98) (1.09) -- (3.53) (0.02)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of year.......... $17.11 $15.15 $16.83 $12.90 $13.24
===========================================================================================================
Total Return.......................... 20.12% (1.59%) 30.47% 27.69% 24.89%
- -----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)... $202,399 $209,063 $219,968 $176,588 $27,181
Ratio of net operating expense to
average net assets
Before expense reimbursement....... 1.37% 1.35% 1.40% 1.50% 1.45%(3)
After expense reimbursement........ 1.37% 1.35% 1.40% 1.50% 1.45%(3)
Ratio of net investment income (loss) to
average net assets.................... (0.57)% (0.68)% (0.69)% (0.44)% (0.45)%(3)
Portfolio turnover rate............... 85.07% 95.22% 130.37% 80.67% 188.16%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Montgomery
Micro Cap Fund
- ----------------------------------------------------------------
Inception (12)
through
June 30, 1995*
- ----------------------------------------------------------------
Net asset value, beginning of year.......... $12.00
- ----------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss).............. 0.09
Net realized and unrealized gain (loss) on
investments............................... 1.66
----
Total from investment operations.......... 1.75
- ----------------------------------------------------------------
Net asset value, end of year................ $13.75
================================================================
Total Return................................ 14.58%
- ----------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)......... $162,949
Ratio of net operating expense to average
net assets
Before expense reimbursement............. 2.07%(3)
After expense reimbursement.............. 1.75%(3)
Ratio of net investment income (loss) to
average net assets.......................... 40%(3)
Portfolio turnover rate..................... 36.81%
- ----------------------------------------------------------------
* Per share numbers have been calculated using the monthly average shares
method, which more appropriately represents per share data for the period
because the use of the undistributed income method did not accord with the
results of operations.
9
<PAGE>
<TABLE>
<CAPTION>
Montgomery Global Opportunities Montgomery Global Montgomery International
Fund Communications Fund Small Cap Fund
- --------------------------------------------------------------------------------------------------------------------------------
Inception(2) Inception(5) Year Ended Inception(2)
Year Ended through Year Ended June 30, through June 30, 1995 through
June 30, 1995 June 30, 1994 1995 1994 June 30, 1993 June 30, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year........ $12.92 $12.00 $14.20 $12.45 $12.00 $12.02 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations:
Net investment income
(loss)................ 0.13 0.01* (0.03) (0.05) 0.00 0.12 0.00+
Net realized and
unrealized gain (loss)
on investments....... 0.70 0.91 1.28 1.80*** 0.45 (0.39) 0.02
----- ------ ------ ----- ---- ------ -----
Total from investment
operations............ 0.83 0.92 1.25 1.75 0.45 (0.27) 0.02
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net
investment income..... -- -- -- -- -- (0.00)+ --
Distributions from net
realized capital gains (0.50) -- -- -- -- -- --
Distributions in excess of
net realized capital gains -- -- (0.03) -- -- -- --
------ ------ ------ ------- -----
Total Distributions... (0.50) -- (0.03) -- -- (0.00)+ --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $13.25 $12.92 $15.42 $14.20 $12.45 $11.75 $12.02
================================================================================================================================
Total Return............ 6.43% 7.67% 8.83% 14.06% 3.75% (2.23)% 0.17%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year
(thousands)............. $13,677 $12,504 $209,644 $234,886 $4,670 $28,516 $34,555
Ratio of net operating
expense to average net
assets
Before expense
reimbursement........ 2.99% 1.11%3 2.08% 1.99% 8.96%(3) 2.50% 2.32%(3)
After expense
reimbursement........ 1.91%** 1.99%3** 1.91%** 1.94%** 1.90%(3) 1.91%** 1.99%(3)**
Ratio of net investment
income (loss) to average 1.03%
net assets........... 0.02%(3) (0.10%) (0.46)% 0.05%(3) 0.95% 0.04%(3)
Portfolio turnover rate. 118.75% 67.22% 50.17% 29.20% 0.00% 156.13% 123.50%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Net investment loss before deferral of fees by Manager was $(0.05).
** Annualized e pense ratio excluding interest expense for the period or year
indicated was 1.90%.
*** The amount shown may not accord with the change in the aggregate gains and
losses in portfolio securities because of the timing of purchases and
redemptions.
+ Amount represents less than $0.01 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Montgomery Emerging
Markets Fund
- --------------------------------------------------------------------------------------------------------------------------------
Inception(6)
Year Ended June 30, through
1995* 1994 1993 June 30, 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year.................................. $13.68 $11.07 $9.96 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)...................................... 0.03 (0.03) 0.07* 0.03*
Net realized and unrealized gain (loss) on investments............ 0.25 ** 2.92 1.05 (0.07)
---- ------ ---- ------
Total from investment operations.................................. 0.28 2.89 1.12 (0.04)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.............................. -- -- (0.01) --
Distributions from net realized capital gains..................... (0.42) (0.28) -- --
Distributions in excess of net realized capital gains............. (0.37) -- -- --
---- ---- ---- ---
Total Distributions............................................... (0.79) (0.28) (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year........................................ $13.17 $13.68 $11.07 $9.96
================================================================================================================================
Total Return........................................................ 1.40% 26.10% 11.27% (0.40%)
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)................................. $998,083 $654,960 $206,617 $54,625
Ratio of net operating expense to average net assets
Before expense reimbursement..................................... 1.80% 1.85% 1.93% 2.80%(3)
After expense reimbursement...................................... 1.80% 1.85% 1.90% 1.90%(3)
Ratio of net investment income (loss) to average net assets......... 0.23% (0.14)% 0.66% 1.70%(3)
Portfolio turnover rate............................................. 92.09% 63.79% 21.40% 0.19%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Per share numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period since
the use of the undistributed income method did not accord with the results
of operations.
** The amount shown m y not accord with the change in the aggregate gains and
losses in portfolio securities because of the timing of purchases and
redemptions.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Montgomery Asset Allocation
Fund Montgomery Short Government Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
Inception(7) Inception(8)
Year Ended through Year Ended June 30, through
June 30, 1995 June 30, 1994 1995 1994 June 30, 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.............. $12.24 $12.00 $9.80 $10.23 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income......................... 0.25 0.06 0.62 0.61 0.33
Net realized and unrealized gain (loss) on
investments 4.11 0.18 0.16 (0.34) 0.23
---- ---- ---- ------ -----
Total from investment operations.............. 4.36 0.24 0.78 0.27 0.56
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.......... (0.17) -- (0.62) (0.56) (0.33)
Distributions from net realized capital gains. (0.10) -- -- (0.07) --
Distributions in excess of net realized
capital gains -- -- -- (0.07) --
Distributions from capital.................... -- -- (0.01) -- --
------ ----- ----- ------ -----
Total Distributions........................... (0.27) -- (0.63) (0.70) (0.33)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year.................... $16.33 $12.24 $9.95 $9.80 $10.23
==============================================================================================================================
Total Return.................................... 35.99% 2.00% 8.28% 2.49% 5.66%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)............. $60,234 $1,548 $17,093 $21,937 $22,254
Ratio of net operating expense to average
net assets
Before expense reimbursement................. 2.07% 8.86%(3) 1.33% 1.29% 2.07%(3)
After expense reimbursement.................. 1.31%* 1.43%(3)* 1.38%** 0.71%** 0.22%(3)
Ratio of net investment income to average
net assets 3.43% 2.54%(3) 6.41% 5.93% 6.02%(3)
Portfolio turnover rate......................... 95.75% 190.94% 284.23% 603.07% 213.22%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized expense ratios excluding interest expense for the year ended
June 30, 1995 and period ended June 30, 1994 were 1.30% and 1.30%,
respectively.
** Annualized expense ratios excluding interest expense for the year ended
June 30, 1995 and year ended June 30, 1994 were 0.47% and 0.25%,
respectively.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Montgomery Government Montgomery California Tax-Free
Reserve Fund Intermediate Bond Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Inception(9) Inception(10)
Year Ended June 30, through Year Ended through
1995 1994 June 30, 1993 June 30, 1995 June 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.............. $1.00 $1.00 $1.00 $11.79 $12.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income......................... 0.049 0.029 0.024 0.44 0.41
Net realized and unrealized gain on investments 0.000+ 0.000+ 0.000+ 0.25 (0.21)
------ ------ ----- --- ----
Total from investment operations.............. 0.049 0.029 0.024 0.69 0.20
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.......... (0.049) (0.029) (0.024) (0.44) (0.41)
Distributions from net realized capital gains. -- -- -- (0.00)+ --
------- ------- ------- -------- -------
Total Distributions........................... (0.049) (0.029) (0.024) (0.44) (0.41)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year.................... $1.00 $1.00 $1.00 $12.04 $11.79
=================================================================================================================================
Total Return.................................... 4.97% 2.96% 2.41% 6.03% 1.65%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)............. $258,956 $211,129 $124,795 $5,153 $11,556
Ratio of net operating expense to average net assets
Before expense reimbursement................. 0.79% 0.71% 0.77%(3) 1.41% 1.63%(3)
After expense reimbursement.................. 0.63%* 0.60% 0.38%(3) 0.56% 0.23%(3)
Ratio of net investment income to average net assets 4.92% 2.99% 2.96%(3) 3.71% 3.44%(3)
Portfolio turnover rate......................... N/A N/A N/A 37.93% 77.03%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized operating expense ratio excluding interest expense for the year
ended June 30, 1995 was 0.60%.
+ Amount represents less than $0.001 per share.
</FN>
</TABLE>
12
<PAGE>
Montgomery
California Tax-Free
Money Fund
- --------------------------------------------------------------------------------
Inception(11)
through
June 30, 1995
- --------------------------------------------------------------------------------
Net asset value, beginning of year.............. $1.00
- --------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income......................... 0.027
Net realized and unrealized gain on investments 0.000
-----
Total from investment operations.............. 0.027
- --------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.......... (0.027)
Dividends in excess of net investment income.. (0.000)+
-----
Total Distributions........................... (0.027)
- --------------------------------------------------------------------------------
Net asset value, end of year.................... $1.00
================================================================================
Total Return.................................... 2.68%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)............. $64,780
Ratio of net operating expense to average net
assets
Before expense reimbursement................. 0.86%(3)
After expense reimbursement.................. 0.33%(3)
Ratio of net investment income to average net
assets 3.55%(3)
Portfolio turnover rate......................... N/A
- --------------------------------------------------------------------------------
+ Amount represents less than $0.001 per share.
(1) The information for the fiscal period ended June 30, 1991 was audited by
other independent accountants whose report is not included herein.
(2) September 30, 1993 (3) Annualized (4) July 13, 1990
(5) June 1, 1993 (6) March 1, 1992 (7) March 31, 1994
(8) December 18, 1992 (9) September 14, 1992 (10) July 1, 1993
(11) September 30, 1994 (12) December 30, 1994
13
<PAGE>
The Funds' Investment Objectives And Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 22. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 26. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 29.
The Domestic Equity Funds
o Montgomery Growth Fund
o Montgomery Micro Cap Fund
The investment objective of Montgomery Growth Fund (the "Growth Fund") is
capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of domestic companies.
Although such companies may be of any size, the Fund targets companies having
total market capitalizations of $500 million or more. The Fund emphasizes
investments in common stock but also invests in other types of equity and equity
derivative securities (including options on equity securities, warrants and
futures contracts on equity securities). Current income from dividends, interest
and other sources is only incidental. The Fund also may invest up to 35% of its
total assets in debt securities rated within the three highest grades by
Standard & Poor's Corporation ("S&P") (AAA to A), Moody's Investors Services,
Inc. ("Moody's") (Aaa to A) or Fitch Investor Services, Inc. ("Fitch") (AAA to
A), or in unrated debt securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board of Trustees. See "Portfolio
Securities." An Appendix discussing these debt ratings is included in the
Statement of Additional Information.
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
The investment objective of Montgomery Micro Cap Fund (the "Micro Cap Fund") is
capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of domestic companies that
have potential for rapid growth and are micro-capitalization companies, which
the Fund currently considers to be companies having market capitalizations that
would place them in the smallest 10% of market capitalizations for domestic
companies as measured by the Wilshire 5000 Index. Currently, these companies
have market capitalizations of $425 million and less. The Micro Cap Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those in other equity securities and in debt instruments, including
foreign securities.
Any debt securities purchased by this Fund must be rated within the three
highest grades by S&P (AAA to A), Moody's (Aaa to A) or Fitch (AAA to A), or in
unrated debt securities deemed to be of comparable quality by the Manager using
guidelines approved by the Board of Trustees. See "Portfolio Securities."
Current income from dividends, interest and other sources is only incidental.
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The growth equity team is responsible for managing the Growth and Micro Cap
Funds' portfolios. Its key members are Roger W. Honour and Andrew Pratt. See
"Management of the Funds."
o Montgomery Equity Income Fund
The investment objective of Montgomery Equity Income Fund (the "Equity Income
Fund") is to provide current income and capital appreciation primarily through
investments in equity securities of domestic companies, with the goal that the
Fund provide a significantly greater yield than the average yield offered by the
stocks of the S&P 500 and a low level of price volatility.
14
<PAGE>
Under normal market conditions, the Equity Income Fund will invest at least 65%
of the value of its total assets in income-producing equity securities of
domestic companies, which include common stocks, preferred stocks and other
securities, and debt securities convertible into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. Cash equivalents are
short-term, interest bearing instruments or deposits and may include, for
example, commercial paper, certificates of deposit, repurchase agreements,
bankers' acceptances, U.S. Treasury Bills, bank money market deposit accounts,
master demand notes and money market mutual funds. These consist of high-quality
debt obligations, certificates of deposit and bankers' acceptances rated at
least A-1 by S&P or Prime-1 by Moody's, or the issuer has an outstanding issue
of debt securities rated at least A by S&P or Moody's, or are of comparable
quality in the opinion of the Manager. (See Appendix in the Statement of
Additional Information.) The Fund attempts to achieve low price volatility
through its investment in mature companies and by investing in cash and cash
equivalents.
In addition, the Fund may invest up to 20% of its total assets in the equity or
debt securities of foreign issuers. See "Portfolio Securities."
John H. Brown is responsible for managing the Equity Income Fund's portfolio.
See "Management of the Funds."
o Montgomery Small Cap Fund
The investment objective of Montgomery Small Cap Fund (the "Small Cap Fund") is
capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of small-capitalization
domestic companies, which the Fund currently considers to be companies having
total market capitalizations of less than $1 billion. The Small Cap Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those assets in companies having total market capitalizations of $1
billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity and equity derivative
securities (including options on equity securities, warrants and futures
contracts on equity securities) but limits to 5% of its total assets any single
other type of security. Any debt securities purchased by this Fund must be rated
within the three highest grades by S&P (AAA to A), Moody's (Aaa to A) or Fitch
(AAA to A), or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees. See "Portfolio
Securities." Current income from dividends, interest and other sources is only
incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund was closed to new investors on March 6, 1992.
Stuart O. Roberts is responsible for managing the Small Cap Fund's portfolio.
See "Management of the Funds."
15
<PAGE>
o Montgomery Small Cap II Fund
The investment objective of Montgomery Small Cap II Fund (the "Small Cap II
Fund") is capital appreciation, which under normal conditions it seeks by
investing at least 65% of its total assets in equity securities of
small-capitalization domestic companies, which the Fund currently considers to
be companies having total market capitalizations of less than $1 billion. The
Small Cap II Fund generally invests the remaining 35% of its total assets in a
similar manner but may invest those assets in domestic and foreign companies
having total market capitalizations of $1 billion or more. During the two to
three-month period following commencement of the Fund's operations, the Fund may
have its assets invested substantially in cash and cash equivalents.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of the companies' developments, such as the introduction of
new products, favorable management changes, new marketing opportunities or
increased market share for existing product lines. Using fundamental research,
the Fund targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
This Fund invests primarily in common stock. It also may invest in other types
of equity and equity derivative securities (including options on equity
securities, warrants and futures contracts on equity securities). Any debt
securities purchased by the Fund must be rated within the three highest grades
by Standard & Poor's Corporation (AAA to A), Moody's Investors Services, Inc.
(Aaa to A) or Fitch Investor Services, Inc. (AAA to A), or in unrated debt
securities deemed to be of comparable quality by the Manager using guidelines
approved by the Board of Trustees. See "Portfolio Securities." Current income
from dividends, interest and other sources is only incidental.
The Manager's Growth Equity Team is responsible for managing the Fund's
portfolio. See "Management of the Fund."
The Small Cap II, Small Cap, Equity Income, Micro Cap and Growth Funds together
are the "Domestic Equity Funds."
The International Funds
o Montgomery International Small Cap Fund
The investment objective of Montgomery International Small Cap Fund (the
"International Small Cap Fund") is capital appreciation, which under normal
conditions it seeks by investing at least 65% of its total assets in equity
securities of companies outside the United States having total market
capitalizations of less than $1 billion. The Fund generally invests the
remaining 35% of its total assets in a similar manner but may invest those
assets in companies having market capitalizations of $1 billion or more, or in
debt securities, including up to 5% of its total assets in debt securities rated
below investment grade. See "Portfolio Securities," "Risk Considerations" and
the Appendix in the Statement of Additional Information.
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Oscar A. Castro and John D. Boich are responsible for managing the International
Small Cap Fund's portfolio. See "Management of the Funds."
o Montgomery International Growth Fund
The investment objective of Montgomery International Growth Fund (the
"International Growth Fund") is capital appreciation, which under normal
conditions it seeks by investing at least 65% of its total assets in equity
securities of companies outside the United States having total market
capitalizations over $1 billion.
16
<PAGE>
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund generally invests the remaining 35% of its total assets in a similar
manner but may invest those assets in equity securities of U.S. companies, in
lower-capitalization companies or in debt securities, including up to 5% of its
total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Oscar A. Castro and John D. Boich are responsible for managing the International
Growth Fund's portfolio. Dr. Brian L. Sudweeks will provide the quantitative
country allocation component of the investment strategy. See "Management of the
Funds."
o Montgomery Emerging Markets Fund
The investment objective of Montgomery Emerging Markets Fund (the "Emerging
Markets Fund") is capital appreciation, which under normal conditions it seeks
by investing at least 65% of its total assets in equity securities of companies
in countries having emerging markets. For these purposes, this Fund defines an
emerging market country as having an economy and market that are or would be
considered by the World Bank or the United Nations to be emerging or developing.
This 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, Vietnam); Southern and Eastern Europe (Czech Republic, Greece,
Hungary, Poland, Portugal, Turkey); Mid-East (Israel, Jordan); and Africa
(Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia,
Zimbabwe). In the future, the Fund may invest in other emerging market
countries. Under normal conditions, the Emerging Markets Fund maintains
investments in at least six emerging market countries at all times and invests
no more than 35% of its total assets in any one emerging market country.
This Fund considers a company to be an emerging market company if its securities
are principally traded in the capital market of an emerging market country; it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging market countries or from sales made in such emerging market
countries, regardless of where the securities of such companies are principally
traded; or it is organized under the laws of, and with a principal office in, an
emerging market country.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's aims are to invest
in those countries that are expected to have the highest risk/reward trade-off
when incorporated into a total portfolio context and to construct a portfolio of
emerging market investments approximating 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 and publicly available information
and company visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities. This Fund
may invest no more than 20% of its total assets in the equity securities of
companies constituting the Morgan Stanley Capital International Europe,
Australia, Far East Index (the "EAFE Index"). See "Portfolio Securities." These
companies typically have larger average market capitalizations than the emerging
market companies in which this Fund generally invests. Accordingly, subject to
its investment objective, this Fund invests in EAFE Index companies for
temporary defensive strategies.
17
<PAGE>
Josephine Jimenez, CFA, Bryan L. Sudweeks, Ph.D., CFA, Thomas R. Haslett, CFA,
and Angeline Ee are jointly responsible for managing the Emerging Markets Fund's
portfolio. See "Management of the Funds."
The Emerging Markets, International Small Cap and International Growth Funds
together are the "International Funds."
The Global Funds
o Montgomery Global Opportunities Fund
o Montgomery Global Communications Fund
The investment objective of both Montgomery Global Opportunities Fund (the
"Opportunities Fund") and Montgomery Global Communications Fund (the
"Communications Fund") is capital appreciation. Under normal conditions, the
Opportunities Fund seeks to achieve its investment objective by investing at
least 65% of its total assets in equity securities of companies, which may be of
any size, throughout the world. While the Opportunities Fund emphasizes common
stocks of those companies having total market capitalizations of more than $1
billion, it also may invest in other types of equity and equity derivative
securities (including options on equity securities, warrants and futures
contracts on equity securities).
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
Oscar A. Castro and John D. Boich are responsible for managing the Opportunities
and Communications Funds' portfolios. See "Management of the Funds."
The Opportunities and Communications Funds together are the "Global Funds."
Each Global Fund may invest up to 35% of its total assets in debt securities,
including up to 5% in debt securities rated below investment grade. The Global
Funds invest in companies that, in the opinion of the Manager, have potential
for above-average, long-term growth in sales and earnings on a sustained basis
and that are reasonably priced. The Manager considers a number of factors in
evaluating potential investments, including a company's per-share sales and
earnings growth; return on capital; balance sheet; financial and accounting
policies; overall financial strength; industry sector; competitive advantages
and disadvantages; research, product development, and marketing; development of
new technologies; service; pricing flexibility; quality of management; and
general operating characteristics.
Each Global Fund may invest substantially in securities denominated in one or
more foreign currencies. Under normal conditions, each Global Fund invests in at
least three different countries, which may include the U.S., but no country,
other than the U.S., may represent more than 40% of its assets.
A significant portion of each Global Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities," "Risk Considerations" and the Statement of
Additional Information.
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The Multi-Strategy Funds
o Montgomery Select 50 Fund
The investment objective of the Montgomery Select 50 Fund (the "Select 50 Fund")
is capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in at least 50 different equity securities of
companies of all sizes throughout the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. See "Management of the Funds." The Manager's
equity teams select those securities based on the potential for capital
appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. During the two
to three-month period following commencement of the Fund's operations, the Fund
may have its assets invested substantially in cash or cash equivalents and in
fewer than 50 different equity securities. See "Portfolio Securities," "Risk
Considerations" and the Appendix in the Statement of Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Kevin T. Hamilton is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams. See "Management of the
Funds."
o Montgomery Asset Allocation Fund
The investment objective of Montgomery Asset Allocation Fund (the "Allocation
Fund") is to seek high total return, while also seeking to reduce risk, through
a strategic or active allocation of assets among domestic stocks, debt
instruments and cash or cash equivalents, coupled with active management of the
individual investments in each asset class. This Fund adjusts the proportion of
its investments in each of these categories as needed to respond to current
market conditions, maintaining from 20 to 80% of total assets in stocks, 20 to
80% of total assets in debt instruments of any remaining maturity, and 0 to 50%
of total assets in cash or cash equivalents. The Manager will implement its
allocation strategy with the use of a quantitative risk model and computer
optimization program. The Manager may temporarily increase the Fund's cash
allocation from its set strategy in order to meet anticipated redemptions. The
Manager seeks to reduce risk through investment in high-grade debt instruments
and cash or cash equivalents. Under normal conditions, at least 65% of the
Fund's total assets are invested in securities issued by domestic issuers.
The debt instruments in which this Fund invests include U.S. Treasury Bills,
Notes, Bonds and other obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities ("U.S. Government securities") and other debt
instruments rated within the three highest grades by S&P (AAA to A), Moody's
(Aaa to A) or Fitch (AAA to A), or, if unrated, deemed to be of comparable
quality by the Manager using guidelines approved by the Board. An appendix
discussing these debt ratings is included in the Statement of Additional
Information. This Fund expects that, under normal circumstances, the
dollar-weighted average maturity of its debt instruments (or period until next
interest rate reset date) may be longer than three years (see "Duration"
discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation) as well as warrants, rights and options. The Manager selects
equity securities of issuers exhibiting positive trends in revenue and earnings
that, in the opinion of the Manager, are sustainable. Among the Fund's equity
investments, the Fund may invest up to 35% of its total assets in foreign equity
securities of various countries, primarily those listed on foreign exchanges.
William C. Stevens is portfolio manager for the fixed-income and cash components
of the Fund's portfolio. The Manager's growth equity team manages the Fund's
equity component. The key members of that team are Roger W. Honour and Andrew
Pratt. That team and Mr. Stevens determine the strategic allocation of the
Fund's investments. See "Management of the Funds."
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The Fixed Income Funds
o Montgomery Short Government Bond Fund
The investment objective of Montgomery Short Government Bond Fund (the "Short
Fund") is to provide maximum total return consistent with preservation of
capital and prudent investment management. Total return consists of interest and
dividends from underlying securities, capital appreciation realized from the
purchase and sale of securities, and income from futures and options. Under
normal conditions, the Fund seeks to achieve its objective by investing at least
65% of the value of its total assets in U.S. Government securities. The Fund
seeks to maintain an average portfolio effective duration comparable to or less
than that of three-year U.S. Treasury Notes. Because the Manager seeks to manage
interest rate risk by limiting effective duration, the Fund may invest in
securities of any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value per share of $1.00. Consequently, this Fund
seeks to reduce such fluctuations by managing the effective duration, and thus
the interest rate risk, of its portfolio.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and high-grade liquid debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities, rated within the
three highest grades assigned by S&P (AAA, AA or A), Moody's (Aaa, Aa or A) or
Fitch (AAA, AA or A), or in unrated securities deemed by the Manager to be of
comparable quality using guidelines approved by the Board of Trustees. The Fund
also may invest in other investment companies investing primarily in U.S.
Government securities of appropriate duration. See "Portfolio Securities."
William C. Stevens is responsible for managing the portfolios for the Short
Fund. See "Management of the Funds."
Duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates. However, "term to maturity"
measures only the time until a debt security provides its final payment, taking
no account of pre-maturity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Standard duration accounts for the
time intervals between the present and scheduled payments (for a callable bond,
when expected to be received) but it does not properly reflect certain types of
interest rate risk. For example, floating and variable rate debt securities may
have final maturities of 10 or more years, yet their interest rate risk
corresponds to the frequency of the coupon reset. Similarly, with mortgage
"pass-through" securities, the stated final maturity is generally 30 years, but
current prepayment rates are more important. In such situations, the Manager
uses more sophisticated analytical techniques to arrive at an "effective"
duration to reflect interest rate risk. With "effective duration," an interest
rate change of one percent would generally result in a variation of two percent
by a security having an effective duration of two, and a variation of three
percent by a security having an effective duration of three. These techniques
may involve the Manager's estimates of future economic parameters, which may
vary from actual future values. The Short and Allocation Funds expect that,
under normal circumstances, the dollar-weighted average maturity (or period
until the next interest rate reset date) of their portfolio securities may be
longer than three years but the maturity of individual securities may be up to
30 years. However, of these two Funds, only the Short Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury Notes.
o Montgomery Government Reserve Fund
The investment objective of Montgomery Government Reserve Fund (the "Reserve
Fund") is current income consistent with liquidity and preservation of capital,
which under normal conditions it seeks by investing exclusively in U.S. Treasury
Bills, Notes, Bonds and other U.S. Government securities, repurchase agreements
for U.S. Government securities and other money market funds investing in U.S.
Government securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. Government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
William C. Stevens is responsible for managing the Reserve Fund's portfolio. See
"Management of the Funds."
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<PAGE>
o Montgomery California Tax-Free Intermediate Bond Fund
o Montgomery California Tax-Free Money Fund
The investment objective of Montgomery California Tax-Free Intermediate Bond
Fund (the "California Intermediate Bond Fund") is to provide maximum current
income exempt from federal and California personal income taxes consistent with
preservation of capital and prudent investment management, and that of
Montgomery California Tax-Free Money Fund (the "California Money Fund") is to
maintain a stable net asset value while maximizing current income exempt from
federal and California personal income taxes consistent with liquidity and
preservation of capital. These Funds together are the "Tax-Free Funds." Under
normal conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in debt securities, the interest from
which is, in the opinion of counsel to the issuer, exempt from federal personal
income tax ("Municipal Securities") and at least 65% of net assets in debt
securities, the interest from which is, in the opinion of counsel to the issuer,
also exempt from California personal income taxes ("California Municipal
Securities"). Under normal conditions, the California Intermediate Bond Fund
seeks to achieve its objective by investing at least 80% of its net assets in
California Municipal Securities. These investment policies are fundamental and
may not be changed without shareholder approval.
The California Intermediate Bond Fund is designed primarily for investors who
seek higher yields than tax-free money market funds generally offer and are
willing to accept some fluctuation in this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally change with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity to interest rate change.
See "Duration" above.) Under normal conditions, the average dollar-weighted
portfolio maturity of the California Intermediate Bond Fund is expected to stay
within a range of 5 to 10 years. However, this Fund may invest in securities of
any maturity. This Fund is also not suitable for investors who cannot benefit
from the tax-exempt character of its dividends, such as IRAs, qualified
retirement plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California Municipal Securities that at the time of purchase are
rated within the four highest ratings of municipal securities (AAA to BBB)
assigned by S&P, (Aaa to Baa) assigned by Moody's, or (AAA to BBB) assigned by
Fitch; or have S&P's short-term municipal rating of SP-2 or higher, or a
municipal commercial paper rating of A-2 or higher; Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, are deemed by the
Manager to be of comparable quality, using guidelines approved by the Board (but
not to exceed 20% of this Fund's net assets). Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. However, there is no assurance that any municipal issuers
will make full payments of principal and interest or remain solvent. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. See also "Risk Considerations."
Under normal conditions, the Tax-Free Funds seek to invest in California
Municipal Securities to the greatest extent practicable. Each of these Funds
may, however, invest in other Municipal Securities if in such Fund's opinion,
suitable California Municipal Securities are not available. See "Risk
Considerations," "Dividends and Distributions" and "Taxation." The California
Intermediate Bond Fund may invest up to 20%, and the California Money Fund may
invest 35%, of their respective total assets in cash, U.S. government
securities, and obligations of U.S. possessions, commercial paper, Municipal
Securities other than California Municipal Securities and other debt securities,
including corporate debt instruments or instruments the interest from which is
subject to the federal alternative minimum tax for individuals. For the
California Intermediate Bond Fund, these other securities may be rated within
the three highest grades assigned by S&P (AAA to A), Moody's (Aaa to A) or Fitch
(AAA to A), or, if unrated, deemed to be of comparable quality by the Manager
using guidelines approved by the Board.
Municipal Securities are obligations issued by, or on behalf of, states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, including
industrial development bonds, as well as obligations of certain agencies and
instrumentalities of the U.S. Government. Municipal Securities are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable from revenue
derived from a particular facility, class of facilities or the proceeds of a
special excise or other specific revenue source but not from the issuer's
general taxing power. Private activity bonds and industrial revenue bonds, in
most cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality but generally are guaranteed by the corporate entity on
whose behalf they are issued. From time to time, these Funds may invest more
than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California. Notes are short-term
instruments that are obligations of the issuing municipalities or agencies sold
in anticipation of a bond sale, collection of taxes or other receipt of
revenues.
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The California Money Fund seeks to maintain a stable net asset value per share
of $1.00 in compliance with Rule 2a-7 under the Investment Company Act and,
pursuant to procedures adopted under such Rule, the Fund limits its investments
to those securities that the Board determines present minimal credit risks and
have remaining maturities, as determined under the Rule, of 397 calendar days or
less. The Fund also maintains a dollar-weighted average maturity of its
portfolio securities of 90 days or less. The California Money Fund and the
Reserve Fund together are the "Money Market Funds."
William C. Stevens and Rhoda Rossman are responsible for managing the Tax-Free
Funds' portfolios. See "Management of the Funds."
The Short, Reserve, California Intermediate Bond and California Money Funds
together are the "Fixed Income Funds."
Portfolio Securities
Equity Securities
In seeking their respective investment objectives, the Domestic Equity, Select
50, International and Global Funds emphasize investments in common stock, and
common stock may constitute up to 80% of the Allocation Fund's portfolio. These
Funds may also 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.
Depositary Receipts
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest in both sponsored and unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and other similar global instruments. ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. EDRs, sometimes called
Continental Depositary Receipts, are issued in Europe, typically by foreign
banks and trust companies, and evidence ownership of either foreign or domestic
underlying securities. Unsponsored ADR and EDR programs are organized without
the cooperation of the issuer of the underlying securities. As a result,
available information concerning the issuer may not be as current as for
sponsored ADRs and EDRs, and the prices of unsponsored ADRs and EDRs may be more
volatile.
Convertible Securities
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest in convertible 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
stock in a corporation's capital structure but are usually subordinated to
similar non-convertible securities. Through their conversion feature, they
provide an opportunity to participate in capital appreciation resulting from a
market price advance in the underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the common stock's market value rises and decrease as the
common stock's market value declines. For purposes of allocating Fund
investments, the Manager regards convertible securities as a form of equity
security.
Securities Warrants
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest up to 5% of their net assets in warrants, including up to 2% of net
assets for those not listed on a securities exchange. A warrant typically is a
long-term option that permits the holder to buy a specified number of shares of
the issuer's underlying common stock at a specified exercise price by a
particular expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. A warrant not exercised or disposed of by its
expiration date expires worthless.
Privatizations
The Select 50, International and Global Funds believe that foreign government
programs of selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and these Funds may invest in privatizations. The ability of U.S.
entities, such as these Funds, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
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Special Situations
The Select 50, International and Global Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International and Global Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International and Global Funds
also may incur tax liability to the extent they invest in the stock of a foreign
issuer that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Funds. See the
Statement of Additional Information.
The Select 50, International, Global, Allocation, Equity Income and Fixed Income
Funds listed above do not intend to invest in other investment companies unless,
in the Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
In accordance with applicable state regulatory provisions, the Manager has
agreed to waive its own management fee with respect to the portion of these
Funds' assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Select 50, International and Global Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each of the
Select 50, Global and International Funds will not invest more than 5% of its
total assets in debt securities rated lower than BBB by S&P, Baa by Moody's or
BBB by Fitch, or in unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by their Board of Trustees, and the
Allocation and Equity Income Funds will not invest more than 5% of its total
assets in debt securities rated lower than A by S&P, A by Moody's and A by
Fitch, or in unrated securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board. Subject to this limitation, each
of these Funds may invest in any debt security, including securities in default.
After its purchase by a Fund a debt security may cease to be rated or its rating
may be reduced below that required for purchase by the Fund. Neither event would
require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
The debt instruments in which the Equity Income Fund invests are primarily cash
equivalents intended to provide income at money market rates while minimizing
risk of decline in value. Cash equivalents are short-term, interest-bearing
instruments or deposits and may include, for example, commercial paper
certificates of deposit, repurchase agreements, bankers acceptances, U.S.
Treasury Bills, bank money market deposit accounts, master demand notes and
money market funds.
In addition to traditional corporate, government and supranational debt
securities, each of the International, Global, Allocation and Equity Income
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging market
countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
each of these Funds' 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
government policy, including regulations governing industry, trade, financial
markets, and foreign and domestic investment; stability, solvency and expected
trends of government finances; and conditions of the balance of payments and
changes in the terms of trade.
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U.S. Government Securities
All Funds may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury Bills, Notes and
Bonds, and mortgage-related securities of the 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 Funds' shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Reserve, Tax-Free, Short and Allocation Funds may invest in mortgage-related
securities. A mortgage-related security is an interest in a pool of mortgage
loans and is considered a derivative security. Most mortgage-related securities
are pass-through securities, which means that investors receive payments
consisting of a pro rata share of both principal and interest (less servicing
and other fees), as well as unscheduled prepayments, as mortgages in the
underlying mortgage pool are paid off by the borrowers. Certain mortgage-related
securities are subject to high volatility. These funds use these derivative
securities in an effort to enhance return and as a means to make certain
investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities. Investors in the Reserve, Tax-Free, Short
and Allocation Funds should note that the dominant issuers or guarantors of
mortgage-related securities today are GNMA, FNMA and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA creates pass-through securities from pools
of government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. Government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. Government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
Collateralized mortgage obligations ("CMOs") are derivative mortgage-related
securities that separate the cash flows of mortgage pools into different classes
or tranches. Stripped mortgage securities are CMOs that allocate different
proportions of interest and principal payments on a pool of mortgages. One class
may receive all of the interest (the interest only or "IO" class) while another
may receive all of the principal (principal only or "PO" class). The yield to
maturity on any IO or PO class is extremely sensitive not only to changes in
interest rates but also to the rate of principal payments and prepayments on
underlying mortgages. In the most extreme cases, an IO class may become
worthless.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. Government
securities for purposes of their investment policies. However, the Money Market
Funds do not invest in stripped mortgage securities, and the Short Fund limits
its stripped mortgage securities investments to 10% of total assets. The
liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and Pos will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Allocation and Short Funds may invest in derivative securities
known as "floaters" and "inverse floaters," the values of which vary in response
to interest rates. These securities may be illiquid and their values may be very
volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short and
Allocation Funds may invest in mortgage-related securities offered by private
issuers, including pass-through securities for pools of conventional residential
mortgage loans; mortgage pay-through obligations and mortgage-backed bonds,
which are considered to be obligations of the institution issuing the bonds and
are collateralized by mortgage loans; and bonds and CMOs collateralized by
mortgage-related securities issued by GNMA, FNMA, FHLMC or by pools of
conventional mortgages, multi-family or commercial mortgage loans.
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Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Fund may purchase some mortgage-related securities through
private placements without right to registration under the Securities Act of
1933. See "Illiquid Securities." The value of these securities may be very
volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent either Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Funds' Investment Objectives and
Policies - Duration."
Zero Coupon Bonds
The Fixed Income and Allocation Funds may invest in zero coupon bonds, which are
debt obligations that do not pay current interest and are consequently issued at
a significant discount from face value. The discount approximates the total
interest the bonds will accrue and compound over the period to maturity or the
first interest-payment date at a rate of interest reflecting the market rate of
interest at the time of issuance. Zero coupon bond prices are highly sensitive
to changes in market interest rates. The original issue discount on the zero
coupon bonds must be included ratably in the income of the Fixed Income and
Allocation Funds as the income accrues even though payment has not been
received. These Funds nevertheless intend to distribute an amount of cash equal
to the currently accrued original issue discount, and this may require
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
Variable Rate Demand Notes
The Fixed Income and the Allocation Funds may invest in variable rate demand
notes ("VRDNs"), which are instruments with rates of interest adjusted
periodically or which "float" continuously according to specific formulae and
often have a demand feature entitling the purchaser to resell the securities at
an amount approximately equal to amortized cost or the principal amount plus
accrued interest. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. See "Illiquid Securities."
Asset-Backed Securities
Each of the Funds may invest up to 5% (25% in the case of the Allocation and
Short Funds) of its total assets in asset-backed securities, which represent a
direct or indirect participation in, or are secured by and payable from, pools
of assets, such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (e.g., credit card) agreements. Payments or distributions
of principal and interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters of
credit. Like mortgage-related securities, these securities are subject to the
risk of prepayment. See "Risk Considerations."
Participation Interests
The Tax-Free Funds may invest in participation interests, which are issued by
financial institutions and represent undivided interests in Municipal
Securities. Participation interests may have fixed, floating or variable rates
of interest. Some participation interests permit these Funds to demand payment
upon specified notice for all or any part of their interest in the underlying
Municipal Security plus accrued interest. Some participation interests are
subject to a "nonappropriation" or "abatement" feature by which, under certain
conditions, the issuer of the underlying Municipal Security, without penalty,
may terminate its payment obligation. In such event, the Funds must look to the
underlying collateral, often a municipal facility leased and used by the issuer.
The liquidity and valuation of participation interests collateralized by such
facilities and subject to "nonappropriation" or "abatement" features are
determined by the Manager.
Custodial Receipts
The California Intermediate Bond Fund may invest in custodial receipts, which
represent rights to receive certain future principal and interest payments on
Municipal Securities deposited with a custodian. Typically, two classes of
receipts are issued in a private placement, and the ownership and interest rates
of such classes are adjusted periodically through an auction mechanism. The
interest rate of the first class is similar to that of the underlying Municipal
Security, and the interest rate of the second changes inversely to changes in
the interest rate of the first class because the aggregate interest paid to both
classes cannot exceed the interest paid from the underlying Municipal Security.
Consequently, the value of the second class may be quite volatile.
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Tender Option Bonds
The Tax-Free Funds may invest in tender option bonds, which are Municipal
Securities, usually held pursuant to a custodial arrangement, that have a
relatively long maturity and bear interest at a fixed rate substantially higher
than the prevailing short-term tax-exempt rates, coupled with an option to
tender the securities to a bank, broker-dealer or other financial institution at
periodic intervals and in order to receive the securities' face value. In
consideration of the option, the holder of the securities pays the financial
institution a fee in an amount that causes the Municipal Securities to trade at
face value when the option is issued. Effectively, the security bears the
short-term tax-exempt rate at the time the option was issued.
Other Investment Practices
The Funds 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 Objectives and Policies of the
Funds," contains more detailed information about certain of these practices,
including limitations designed to reduce risks.
Repurchase Agreements and Reverse Dollar Roll Transactions
The Funds may enter into repurchase agreements, and the Allocation and Short
Funds may also enter into reverse dollar roll transactions. Pursuant to a
repurchase agreement, a Fund acquires a U.S. Government security or other
high-grade liquid debt instrument (for the Money Market Funds, the instrument
must be rated in the highest grade) from a financial institution that
simultaneously agrees to repurchase the same security at a specified time and
price. The repurchase price reflects an agreed-upon rate of return not
determined by the coupon rate on the underlying security. When the Allocation or
Short Fund engages in a reverse dollar roll, it purchases a security from a
financial institution and concurrently agrees to resell a similar security to
that institution at a later date at an agreed-upon price. Under the Investment
Company Act, repurchase agreements and reverse dollar roll transactions are
considered to be loans by a Fund and must be fully collateralized by cash,
letters of credit, U.S. Government securities or other high-grade liquid debt
securities (except that instruments collateralizing loans by the Money Market
Funds must be rated in the highest grade) ("Segregable Assets"), either placed
in a segregated account or separately identified and rendered unavailable for
investment. If the seller defaults on its obligation to repurchase the
underlying security, a Fund may experience delay or difficulty in exercising its
rights to realize upon the security, may incur a loss if the value of the
security declines and may incur disposition costs in liquidating the security.
See the Statement of Additional Information for further information.
Borrowing
The Growth, Small Cap, Emerging Markets and Money Market Funds may borrow money
from banks, each in an aggregate amount not to exceed 10%, and the Select 50,
International Small Cap, International Growth, Global, Allocation, Equity
Income, Micro Cap, Short and California Intermediate Bond Funds may borrow money
from banks, each in an aggregate amount not to exceed one-third, of the value of
the Fund's total assets for temporary or emergency purposes, and the Funds may
pledge their assets in connection with such borrowings. A Fund will not purchase
any securities while any such borrowings exceed 5% of its total assets
(excluding, in the case of the Short Fund, fully collateralized reverse
repurchase agreements and dollar roll transactions), except that the Growth,
Select 50, Allocation, Equity Income, International Small Cap, Technology and
Opportunities Funds may not purchase securities if such borrowings exceed 10% of
their total assets.
Reverse Repurchase Agreements and Dollar Roll Transactions
The Growth, Select 50, International, Global, Allocation, Equity Income, Micro
Cap, Short, Tax-Free and Reserve Funds may enter into reverse repurchase
agreements, and the Allocation and Short Funds may also enter into dollar roll
transactions. In a reverse repurchase agreement, a Fund sells to a financial
institution a security that it holds and agrees to repurchase the same security
at an agreed-upon price and date. A dollar roll transaction requires the Fund to
repurchase a similar rather than the same security. If a Fund fully
collateralizes a reverse repurchase agreement with Segregable Assets, it does
not aggregate that transaction with its bank borrowings in applying its
borrowing limit. See the Statement of Additional Information for further
information.
Leverage
The Growth, Select 50, International Small Cap, International Growth,
Opportunities, Allocation, Micro Cap, Short and California Intermediate Bond
Funds may leverage their portfolios in an effort to increase total return.
Although leverage creates an opportunity for increased income and gain, it also
creates special risk considerations. For example, leveraging may magnify changes
in the net asset values of a Fund's shares and in the yield on its portfolio.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value while the borrowing is outstanding. Leveraging creates interest
expenses that can exceed the income from the assets retained. To the extent
income derived from securities purchased with borrowed funds exceeds the
interest owed, a Fund's net income will be greater than if leveraging were not
used and, to the extent such income is less, a Fund's net income will be less
than if leveraging were not used. The Manager will not use
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leverage for the Short Fund if, as a result, the Fund's portfolio duration would
not be comparable to or less than that of three- year U.S. Treasury Notes.
Securities Lending
The Funds may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 10% of the value of a Fund's total
assets (30% of the Select 50, Global, International Growth, Allocation, Equity
Income, California or Short Funds' total assets). Each securities loan is
collateralized with Segregable Assets in an amount at least equal to the current
market value of the loaned securities, plus accrued interest. See Statement of
Additional Information for further information.
When-Issued and Forward Commitment Securities
The Funds may purchase U.S. Government or other securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally 7
to 15 days or, in the case of certain CMO issues, 45 to 60 days later.
When-issued securities and forward commitments may be sold prior to the
settlement date, but a Fund will enter into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. No income accrues on securities that have been purchased
pursuant to a forward commitment or on a when-issued basis prior to delivery to
a Fund. If a Fund disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it may incur a gain or loss.
At the time a Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable Assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
The Allocation and Short Funds also may enter into forward commitments to sell
high-grade liquid debt securities they do not own at the time of entering such
commitments. Although such forward commitments effectively constitute a form of
short sale, these Funds maintain the Segregable Assets as mentioned above. If a
Fund does not have cash available to purchase a security it has committed to
sell, i.e. when it has difficulty liquidating normally highly liquid securities
used as collateral, it may be required to liquidate other securities or borrow
cash under a reverse repurchase or other short-term arrangement. There is a risk
that the market price will increase for the security it must purchase.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Market Funds) 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 derivative guidelines that require the Board to review each new type
of derivative that may be used by these Funds. Markets in some countries
currently do not have instruments available for hedging transactions relating to
currencies or to securities denominated in such currencies or to securities of
issuers domiciled or principally engaged in business in such countries. To the
extent that such markets do not exist, the Manager may not be able to hedge its
investment effectively in such countries. Furthermore, a Fund engages in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment. See
the Statement of Additional Information for further information on related risks
and other special considerations.
Forward Currency Contracts. A forward currency contract is individually
negotiated and privately traded by currency traders and their customers and
creates an obligation to purchase or sell a specific currency for an agreed-upon
price at a future date. A Fund (except the Money Market Funds) normally conducts
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate in the foreign currency exchange market at the time of the
transaction, or through entering into forward contracts to purchase or sell
foreign currencies at a future date. These Funds generally do not enter into
forward contracts with terms greater than one year.
A Fund generally enters into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. A Fund will not enter into a
forward contract if, as a result, it would have more than one-third of total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate Segregable Assets
having a value sufficient to cover its obligations). Although forward contracts
are used
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primarily to protect a Fund from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
Options on Securities, Securities Indices and Currencies. The Funds (except the
Money Market Funds) may purchase put and call options on securities and
currencies traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges. A Fund may purchase call options on securities which it intends to
purchase (or on currencies in which those securities are denominated) in order
to limit the risk of a substantial increase in the market price of such security
(or an adverse movement in the applicable currency). A Fund may purchase put
options on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Put options allow a Fund to protect unrealized gain in an appreciated
security that it owns without selling that security. Prior to expiration, most
options are expected to be sold in a closing sale transaction. Profit or loss
from the sale depends upon whether the amount received is more or less than the
premium paid plus transaction costs.
The Domestic Equity, Select 50, Allocation, International and Global Funds also
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industry-wide stock price fluctuations. A 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 Domestic Equity, Select 50, Allocation, Short and California Intermediate
Bond Funds may seek to enhance income or hedge against a decrease in their
portfolio value by writing (i.e., selling) covered call options. A call option
is "covered" if the Fund owns the optioned securities or has the right to
acquire such securities without additional consideration, a Fund causes its
custodian to segregate Segregable Assets having a value sufficient to meet its
obligations under the option, or a Fund owns an offsetting call option.
Each of the Allocation, Short and California Intermediate Bond Funds may write
covered put options in an attempt to realize enhanced income when it is willing
to purchase the underlying security at the exercise price. A put option is
"covered" if the Fund causes its custodian to segregate Segregable Assets with a
value not less than the exercise price of the option or holds a put option on
the underlying security. These Funds also may purchase call options for the
purpose of acquiring the underlying securities for their portfolios or purchase
put options for hedging purposes. These Funds will not enter into any options on
securities, securities indices or currencies or related options (including
options on futures) if the sum of the initial margin deposits and premiums paid
for any such option or options would exceed 5% of their total assets, and they
will not enter into options with respect to more than 25% of their total assets.
Futures and Options on Futures. To protect against the effect of adverse changes
in interest rates, a Fund (except the Money Market Funds) may purchase and sell
interest rate futures contracts. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. Government
securities, at a specified date and price. A Fund may sell interest rate futures
contracts (i.e., enter into a futures contract to sell the underlying debt
security) in an attempt to hedge against an anticipated increase in interest
rates and a corresponding decline in debt securities it owns. Conversely, a Fund
may purchase an interest rate futures contract (i.e., enter into a futures
contract to purchase an underlying security) to hedge against interest rate
decreases and corresponding increases in the value of debt securities it
anticipates purchasing. In addition, a Fund may purchase and sell put and call
options on interest rate futures contracts in lieu of entering into the
underlying interest rate futures contracts. Each Fund segregates Segregable
Assets equal to the purchase price of the portfolio securities represented by
the underlying interest rate futures contracts it has an obligation to purchase.
A Fund does not enter into any futures contracts or related options if the sum
of initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options would exceed 5% of its total assets. A Fund does not
purchase futures contracts or related options if, as a result, more than
one-third of its total assets would be so invested.
Hedging Considerations. There can be no assurance that hedging transactions by
the Funds will be successful, and a Fund may be exposed to risk if it is unable
to close out its futures or options positions due to an illiquid secondary
market. Futures, options and options on futures have effective durations that,
in general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (backed by
Segregable Assets) lengthens the effective duration of a Fund's portfolio. While
the utilization of options, futures contracts and related options and similar
instruments may be advantageous to a Fund, its performance will be impaired if
the Manager is unsuccessful in employing such instruments or in predicting
market changes. In addition, a Fund pays commissions and other costs in
connection with such investments. Further discussion of the possible risks is
contained in the Statement of Additional Information.
Illiquid Securities
No Fund may invest more than 15% (10% for the Money Market Funds and 5% for the
Small Cap Fund) of its net assets in illiquid securities. The Funds treat any
securities subject to restrictions on repatriation for more than seven days and
securities
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issued in connection with foreign debt conversion programs that are restricted
as to remittance of invested capital or profit as illiquid. The Funds also treat
repurchase agreements with maturities in excess of seven days as illiquid.
Illiquid securities do not include securities that are restricted from trading
on formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under the
Securities Act of 1933 and that, subject to the review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid. State
securities laws may impose further limitations on the amount of illiquid or
restricted securities a Fund may purchase.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes a 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 a Fund, including brokerage commissions, dealer mark-ups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. Portfolio turnover in excess of 100% is
considered high and increases such costs. For the fiscal year ended June 30,
1995, the portfolio turnover for the Growth Fund was 128% (111% for 1994);
Equity Income Fund, 29%; Small Cap Fund, 85% (95% for 1994); Micro Cap Fund,
37%; Opportunities Fund, 119% (67% for 1994); Communications Fund, 50% (29% for
1994); International Small Cap Fund, 156% (124% for 1994); Emerging Markets
Fund, 92% (64% for 1994); Allocation Fund, 96% (191% for 1994); Short Fund, 284%
(603% for 1994); and California Intermediate Bond Fund, 38% (77% for 1994). The
annual portfolio turnover for the International Growth and Select 50 Funds is
expected to be less than 100%. The annual portfolio turnover for the Small Cap
II Fund is expected to be approximately 100%. However, even when portfolio
turnover exceeds 100% for a Fund that Fund does not regard portfolio turnover as
a limiting factor.
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The California Money, Equity Income, Select 50, Micro Cap and Small Cap II Funds
have reserved the right, if approved by the Board, to convert in the future to a
"feeder" fund that would invest all of its assets in a "master" fund having
substantially the same investment objective, policies and restrictions. At least
30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Small Companies
The Small Cap, Small Cap II, Micro Cap and International Small Cap Funds
emphasize, and the Select 50, other International, Growth, Allocation and Global
Funds may make investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than those of larger
issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds. The
Domestic Equity, Select 50, Allocation, International and Global Funds have the
right to purchase securities in foreign countries. Accordingly, shareholders
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks inherent
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in domestic investments. The Select 50, International and Global Funds,
particularly the Emerging Markets Fund, may invest in securities of companies
domiciled in, and in markets of, so-called "emerging market countries." These
investments may be subject to higher risks than investments in more developed
countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Domestic Equity, Select 50, Allocation, International and
Global Funds in other countries are generally greater than in the U.S. Foreign
markets, have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions and resulted in settlement
difficulty. The inability of a Fund to make intended security purchases due to
settlement difficulties could cause it to miss attractive investment
opportunities. Inability to sell a portfolio security due to settlement problems
could result in loss to the Fund if the value of the portfolio security declined
or result in claims against the Fund if it had entered into a contract to sell
the security. In certain countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers, and
listed companies than in the U.S. The securities markets of many of the
countries in which these Funds may invest may also be smaller, less liquid, and
subject to greater price volatility than those in the U.S.
Because the securities owned by the Domestic Equity, Select 50, Allocation,
International or Global Funds may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest may also have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Lower Quality Debt
The Select 50, International and Global Funds are authorized to invest in
medium-quality (rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's)
and in limited amounts of high-risk, 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 with higher grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities 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. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower quality debt securities would be consistent with
the interests of these Funds and their shareholders. Unrated debt securities are
not necessarily of lower quality than rated securities but may not be attractive
to as many buyers. Regardless of rating levels, all debt securities considered
for purchase (whether rated or unrated) are analyzed by the Manager to
determine, to the extent reasonably possible, that the planned investment is
sound. From time to time, these Funds may purchase defaulted debt securities if,
in the opinion of the Manager, the issuer may resume interest payments in the
near future.
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Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. For example,
telephone operating companies in the U.S. are subject to federal and state
regulation affecting permitted rates of return and determining the services that
may be offered. Competition for market share affects many sectors of the global
communications industry. Because this Fund must satisfy certain diversification
requirements in order to maintain its qualification as a regulated investment
company within the meaning of the Code, this Fund may not always be able to take
full advantage of opportunities to invest in certain communications companies.
Interest Rates
The market value of debt securities that are sensitive to prevailing interest
rates is inversely related to actual changes in interest rates. That is, an
interest rate decline produces an increase in a security's market value and an
interest rate increase produces a decrease in value. The longer the remaining
maturity of a security, the greater the effect of interest rate change. Changes
in the ability of an issuer to make payments of interest and principal and in
the market's perception of its creditworthiness also affect the market value of
that issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, affecting a Fund's yield. Because prepayments of principal
generally occur when interest rates are declining, it is likely that the Fixed
Income Funds, and the Allocation Fund, to the extent it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of their previous investments. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
duration, although they may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that the Fixed Income Funds or
the Allocation Fund purchase mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, result in a loss equal to any
unamortized premium.
Duration is one of the fundamental tools used by the Manager in managing
interest rate risks including prepayment risks. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. If interest rates
rise by 1%, the value of securities having an effective duration of three years
will decrease by 3%. See "The Funds' Investment Objectives and Policies."
Tax-Free Funds
Investing in California Municipal Securities. Because the Tax-Free Funds invest
primarily in California Municipal Securities, their performance may be
especially affected by factors pertaining to the California economy and other
factors specifically affecting the ability of issuers of California Municipal
Securities to meet their obligations. As a result, the value of the Tax-Free
Fund's shares may fluctuate more widely than the value of shares of a portfolio
investing in securities relating to a number of different states.
The ability of California state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amount of tax
and other revenues available to governmental issuers of California Municipal
Securities may be affected from time to time by economic, political, geographic
and demographic conditions. For example, in December 1994, Orange County filed
for bankruptcy protection. In addition, constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives may
limit a government's power to raise revenues or increase taxes and thus could
adversely affect the ability to meet financial obligations. The current State of
California general obligation bond ratings are S&P: A; Moody's: A1; and Fitch:
A; which reflects a downward change from ratings in prior years. Such ratings
and any further reductions may adversely affect the value
31
<PAGE>
of such obligations. The availability of federal, state and local aid to issuers
of California Municipal Securities also may affect their ability to meet their
obligations.
Payments of principal and interest on limited obligation securities will depend
on the economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political and demographic conditions in California. Any reduction in the actual
or perceived ability of an issuer of California Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could affect adversely the values of California Municipal
Securities as well. In recent years, "Proposition 13" and similar California
constitutional and statutory amendments and initiatives have restricted the
ability of California taxing entities to increase real property and other tax
revenues. Other initiative measures approved by California voters, through
limiting various other taxes, have resulted in a substantial reduction in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments. It is not possible to determine the impact
of these measures on the ability of California issuers to pay interest or repay
principal. In addition, from time to time, federal legislative proposals have
threatened the tax-exempt status or use of municipal securities.
Non-diversified Portfolio. The Tax-Free Funds are "non-diversified" investment
companies under the Investment Company Act. This means that, with respect to 50%
of their total assets, they may not invest more than 5% of their total assets in
the securities of any one issuer (other than the U.S. Government). The balance
of their assets may be invested in as few as two issuers. Thus, up to 25% of
each of these Fund's total assets may be invested in the securities of any one
issuer. For purposes of this limitation, a security is considered to be issued
by the governmental entity (or entities) the assets and revenues of which back
the security, or, with respect to an industrial development bond, that is backed
only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of Municipal Securities, a shareholder in
the Tax-Free Funds enjoys greater diversification than an investor holding a
single Municipal Security. However, the investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
issuers relative to the number of issuers held in a diversified portfolio. If
the financial condition or market assessment of certain issuers changes, these
Funds' policies of acquiring large positions in the obligations of a relatively
small number of issuers may affect the value of their portfolios to a greater
extent than if their portfolios were fully diversified.
Similar Projects. Although the Tax-Free Funds do not presently intend to do so
on a regular basis, they may invest more than 25% of their assets in California
Municipal Securities, the interest on which is paid solely from revenues on
similar projects, if such investment is deemed necessary or appropriate by the
Manager. To the extent that these Funds' assets are concentrated in California
Municipal Securities payable from revenues on similar projects, they will be
subject to the particular risks presented by such projects to a greater extent
than it would be if their assets were not so concentrated.
Ratings Change. After its purchase by one of these Funds, an issue of Municipal
Securities may cease to be rated or its rating may be reduced below that
required for purchase. Neither event would require the elimination of such an
obligation from these Funds' investment portfolio. However, the obligation
generally would be retained only if such retention were determined by the Board
to be in the best interests of these Funds.
Callable Securities. Callable Municipal Securities are Municipal Securities that
contain a provision in their indentures permitting the issuer to redeem such
securities prior to their maturity dates at a specific price that typically
reflects a premium over the securities' original issue price. These securities
generally have a call-protection (that is, a period of time during which the
securities may not be called), which usually lasts for 7 to 10 years, after
which time such securities may be called away. An issuer generally may be
expected to call securities during periods of declining interest rates, when
borrowings may be replaced at lower rates than those obtained in prior years.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
32
<PAGE>
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
Portfolio Managers
Montgomery Growth Fund
Montgomery Micro Cap Fund
The Growth and Micro Cap Funds are managed by the growth equity team, whose key
members are Roger W. Honour and Andrew Pratt.
Roger W. Honour is a Managing Director and Senior Portfolio Manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
Vice President and Portfolio Manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as Vice President and Portfolio
Manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a Vice
President with Merrill Lynch Capital Markets. Mr. Honour is the subject of a
settled SEC administrative proceeding (by Order dated September 29, 1995)
arising out of personal trading activities that created undisclosed conflicts of
interest. These activities occurred prior to Mr. Honour's joining Montgomery
Asset Management.
Andrew Pratt, CFA, is Senior Portfolio Analyst. He joined Montgomery Asset
Management from Hewlett-Packard Company, where he was an equity analyst, managed
a portfolio of small capitalization technology companies, and researched private
placement and venture capital investments. From 1983 through 1988, he worked in
the Capital Markets Group at Fidelity Investments in Boston, Massachusetts.
Montgomery Equity Income Fund
John H. Brown, CFA, is a Managing Director and Senior Portfolio Manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California from
June 1986.
Montgomery Small Cap Fund
Stuart O. Roberts is a Managing Director and Senior Portfolio Manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, Colorado, where he
managed three public mutual funds.
Montgomery Small Cap II Fund
The Manager's Growth Equity Team, which consists of many experienced investment
professionals working as an investment committee, is responsible for managing
the Fund's portfolio. In the future, the Manager may focus responsibility for
managing the Fund on one or two portfolio managers, but will notify Fund
shareholders in advance of that development.
Montgomery Global Opportunities Fund
Montgomery Global Communications Fund
Montgomery International Small Cap Fund
Montgomery International Growth Fund
Oscar A. Castro is a Managing Director and Portfolio Manager. Before joining the
Manager, he was vice president/portfolio manager at G.T. Capital Management,
Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and co-manager of
The Common Goal World Fund, a global equity partnership. From 1987 to 1989, he
was deputy portfolio manager/analyst at Templeton International.
John D. Boich is a Managing Director and Portfolio Manager. From 1990 to 1993,
he was vice president and portfolio manager at The Boston Company Institutional
Investors Inc. From 1989 to 1990, he was the founder and co-manager of The
Common Goal World Fund, a global equity partnership. From 1987 to 1989, Mr.
Boich worked as a financial adviser with Prudential-Bache Securities and E.F.
Hutton & Company.
For the background and business experience of Dr. Bryan L. Sudweeks, who is a
Portfolio Strategist for the International Growth Fund, see the discussion under
the Emerging Markets Fund.
33
<PAGE>
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a Managing Director and Portfolio Manager. From
1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior analyst
and portfolio manager.
Bryan L. Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio Manager.
Before joining the Manager, he was a senior analyst and portfolio manager at
Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991.
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.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. Except for the U.S. Small Cap discipline,
the portfolio management teams responsible for these disciplines are described
throughout this "Portfolio Managers" section.
Kevin T. Hamilton, Chairman of the Manager's Investment Oversight Committee and
a Managing Director, is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams. From 1985 until joining the
Manager in February 1991, Mr. Hamilton was a Senior Vice President responsible
for investment oversight at Analytic Investment Management in Irvine,
California.
Montgomery Asset Allocation Fund
William C. Stevens is the portfolio manager for the fixed-income and cash
components of the Fund's portfolio. The Manager's growth equity team manages the
equity component of the Fund's portfolio, whose current key members are Roger W.
Honour and Andrew Pratt. That team and Mr. Stevens determine the Fund's
strategic allocations. For the background and business experience of Roger W.
Honour and Andrew Pratt, see the discussion under the Growth Fund (above), and
for William C.
Stevens, see the discussion under the Fixed Income Funds (below).
Montgomery Short Government Bond Fund
Montgomery Government Reserve Fund
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
William C. Stevens is a Portfolio Manager and a Managing Director. At Barclays
de Zoete Wedd Securities from 1991 to 1992, he started its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Corporation from 1990
to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was responsible
for the origination and trading of all derivative mortgage-related securities.
Rhoda Rossman is a Portfolio Manager and Managing Director. From 1993 until
joining the Manager in April 1995, Ms. Rossman was a Senior Portfolio Manager at
Wells Fargo Bank specializing in tax-exempt investments. From 1987 to 1993, she
served as an Investment Counselor at Rosenberg Capital Management in San
Francisco.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
34
<PAGE>
<TABLE>
The management fees for the Domestic Equity, Select 50, Allocation,
International and Global Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Annual Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap II Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund First $500 million 0.80%
Over $500 million 0.65%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: each of the Growth, Equity Income,
Opportunities and Allocation Funds pays seven one-hundredths of one percent
(0.07%) of average daily net assets (0.06% of average daily net assets over $500
million); each of the Small Cap, Small Cap II, Select 50, Micro Cap, Emerging
Markets, International Small Cap, International Growth and Communications Funds
pays seven one-hundredths of one percent (0.07%) of average daily net assets
(0.06% of daily net assets over $250 million); each of the Short, Reserve and
Tax-Free Funds pays five one-hundredths of one percent (0.05%) of average daily
net assets (0.04% of average daily net assets over $500 million and the Reserve
Fund over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each
35
<PAGE>
Fund's average net assets: the Growth Fund, one and five-tenths of one percent
(1.50%); the Equity Income Fund, eighty-five one-hundredths of one percent
(0.85%); the Small Cap Fund, one and four-tenths of one percent (1.40%); the
Small Cap II Fund, one and five-tenths of one percent (1.50%); the Micro Cap
Fund, one and seventy-five one-hundredths of one percent (1.75%); the
International Growth Fund, one and sixty-five one-hundredths of one percent
(1.65%); the Select 50 Fund, one and eight-tenths of one percent (1.80%); the
Emerging Markets, International Small Cap, Communications and Opportunities
Funds, one and nine-tenths of one percent (1.90%); the Allocation Fund, one and
three-tenths of one percent (1.30%); the Short and California Funds,
seven-tenths of one percent (0.70%); and the Money Market Funds, six-tenths of
one percent (0.60%). The Manager also may voluntarily reduce additional amounts
to increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following two years (three
years for the Allocation Fund), provided that the Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Funds for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay in order to increase the return to that Fund's investors. To
the extent the Manager performs a service or assumes an operating expense for
which a Fund is obligated to pay and the performance of such service or payment
of such expense is not an obligation of the Manager under the Investment
Management Agreement, the Manager is entitled to seek reimbursement from that
Fund for the Manager's costs incurred in rendering such service or assuming such
expense. The Manager, out of its own funds, also may compensate broker-dealers
and other intermediaries that distribute a Fund's shares as well as other
service providers of shareholder and administrative services. In addition, the
Manager, out of its own funds, may sponsor seminars and educational programs on
the Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To Invest In The Funds
The Funds' shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Market
Funds must be received by 12:00 noon, New York time. Orders for Fund shares
received after 4:00 p.m., New York time, and for the Money Market Funds, after
12:00 noon, New York time, will be purchased at the next-determined net asset
value after receipt of the order. Shares of the Fixed Income Funds will not be
priced on a national bank holiday.
The minimum initial investment in each Fund other than the Micro Cap Fund is
$1,000 (including IRAs) and $100 for subsequent investments. The minimum initial
investment for the Micro Cap Fund is $5,000 (including IRAs) and $500 for
subsequent investments. Keogh plans, 401(k) plans and other retirement plans may
also be opened for $1,000 ($5,000 for the Micro Cap Fund), although the Funds do
not act as custodians for those accounts. For the Money Market Funds, the
minimum initial investment through an investor's brokerage account with
Montgomery Securities is $100. The Manager or the Distributor, in its
discretion, may waive these minimums. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
36
<PAGE>
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Funds and the Distributor
each reserve the right to reject any purchase order in whole or in part.
The Manager may close and reopen the Micro Cap Fund to new investors from time
to time at its discretion. If this Fund is closed, shareholders who maintain
open accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible. An account may be considered closed and subject to redemption by this
Fund if the value of the shares remaining after a transfer or redemption falls
below $5,000.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Minimum Initial Investment for the Micro Cap Fund (including IRAs): $5,000
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
- --------------------------------------------------------------------------------
Initial Investments by Check
- --------------------------------------------------------------------------------
o Complete the Account Application.
o Tell us in which Funds you want to invest and make your
check payable to The Montgomery Funds.
o We do not accept third party checks or cash investments.
Checks must be in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
- --------------------------------------------------------------------------------
Initial Investments by Wire
- --------------------------------------------------------------------------------
o Notify the Transfer Agent at (800) 572-3863 that you intend
to make your initial investment by wire. Provide the
Transfer Agent with your name, dollar amount to be invested
and Fund(s) in which you want to invest. They will provide
you with further instructions to complete your purchase.
o Request your bank to transmit immediately available funds
by wire for purchase of shares in your name to the
following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s)
account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
- --------------------------------------------------------------------------------
37
<PAGE>
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs): $500
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
- --------------------------------------------------------------------------------
Subsequent Investments by Check
- --------------------------------------------------------------------------------
o Make your check payable to The Montgomery Funds.
o Enclose an investment stub from your confirmation
statement.
o If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and
account number to which your investment should be
credited.
o We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees
and delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
- --------------------------------------------------------------------------------
Subsequent Investments by Wire
- --------------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to
making subsequent investments by wire. Instruct your
bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under "Initial
Investments by Wire."
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
Subsequent Investments by Telephone
- --------------------------------------------------------------------------------
o Shareholders are automatically eligible to make
telephone purchases by calling the Transfer Agent at
(800) 572-3863 before the Fund cutoff time.
o The maximum telephone purchase is an amount up to
five times your account value on the previous day.
o Payments for shares purchased must be received by the
Transfer Agent within three business days after the
purchase request.
o Shares of the Money Market Funds and shares for IRAs
are not eligible for telephone purchases.
o You should do one of the following to ensure payment
is received in time:
o Transfer funds directly from your bank
account by sending a letter and a voided
check or deposit slip (for a savings account)
to the Transfer Agent.
o Send a check by overnight or 2nd day courier
service. Address courier packages to The
Montgomery Funds, c/o DST Systems, Inc., 1004
Baltimore St., Kansas City, MO 64105.
o Instruct your bank to wire funds to the
Transfer Agent's affiliated bank by using the
bank wire information under the section
titled "Initial Investments by Wire."
- --------------------------------------------------------------------------------
Automatic Account Builder
Under the Automatic Account Builder plan, a shareholder may arrange to make
additional purchases (minimum $100) ($500 for the Micro Cap Fund) of shares
automatically on a monthly or quarterly basis by electronic funds transfer from
a checking or savings account, if the bank at which the account is maintained is
a member of the Automated Clearing House, or by preauthorized checks drawn on
the shareholder's bank account. A shareholder may terminate the program at any
time with seven business days' notice by delivering a written instruction to the
Transfer Agent. The Account Application contains the requirements for this
program. An initial investment in check form of at least $1,000 ($5,000 for the
Micro Cap Fund) must be submitted to the Transfer Agent to initiate this
program.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses that they may incur
in connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Funds upon 30-days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
Write your confirmed purchase number on any check. Although Fund shares are
priced at the net asset value next-determined after receipt of a purchase
request, shares are not purchased until payment is received. Should payment not
be received when required, the Transfer Agent will cancel the telephone purchase
request and you may be responsible for any losses incurred by a Fund. The Funds
employ reasonable procedures in an effort to confirm the authenticity of
telephone instructions, such as requiring the caller to give a special
authorization number. Provided these procedures are followed, the Funds and the
Transfer Agent shall not be responsible for any loss, expense or cost arising
out of any telephone instruction.
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<PAGE>
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
None of the Funds or the Manager administers retirement account plans. Certain
of the Funds are available for purchase through administrators for retirement
plans. Investors who purchase shares as part of a retirement plan should address
inquiries and seek investment servicing from their plan administrators. Plan
administrators may receive compensation from the Funds for performing
shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below. Shareholders should note that the
Funds reserve the right upon 60 days' advance notice to shareholders to impose a
redemption fee of up to 1.00% on shares redeemed within 90 days of purchase.
- --------------------------------------------------------------------------------
Redeeming by Written Instruction
- --------------------------------------------------------------------------------
o Write a letter indicating your name, account
number, the name of the Fund from which you wish
to redeem and the dollar amount or number of
shares you wish to redeem.
o Signature guarantee your letter if you want the
redemption proceeds to go to a party other than
the account owner(s), your predesignated bank
account or if the dollar amount of the redemption
exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such
as a commercial bank, an NASD member firm such as
a stock broker, a savings association or national
securities exchange. Contact the Transfer Agent if
you need more information.
o If you do not have a predesignated bank account
and want to wire your redemption proceeds, include
a voided check or deposit slip with your letter.
The minimum amount that may be wired is $500 (wire
charges, if any, will be deducted from redemption
proceeds). The Fund reserves the right to permit
lesser wire amounts or fees in the Manager's
discretion.
o Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
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<PAGE>
- --------------------------------------------------------------------------------
Redeeming by Check
- --------------------------------------------------------------------------------
o Checkwriting is available on the Government
Reserve, California Money, California Intermediate
Tax-Free Bond and Short Government Bond Funds.
o The minimum amount per check is $250.
o Checks should not be used to close accounts with
fluctuating net assets values (California
Intermediate Tax-Free Bond and Short Government
Bond Funds).
o Checkwriting privileges may not be available for
Montgomery Securities brokerage accounts.
- --------------------------------------------------------------------------------
Redeeming By Telephone
- --------------------------------------------------------------------------------
o Unless you have declined telephone redemption
privileges on your account application, you may
redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time.
o If you included bank wire information on your
account application or made subsequent
arrangements to accommodate bank wire redemptions,
you may request that the Transfer Agent wire your
redemption proceeds to your bank account. Allow at
least two business days for redemption proceeds to
be credited to your bank account. If you want to
wire your redemption proceeds to arrive at your
bank on the same business day (subject to bank
cutoff times), there is a $10 fee.
- --------------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone redemption instructions given by the shareholder's
designee. Telephone redemption privileges will be suspended for 30 days after
any address change. All redemption requests during this period must be submitted
in writing with the signature guaranteed. The Funds may change, modify or
terminate these privileges at any time upon 60 days' notice to shareholders. The
Funds will not be responsible for any loss, damage, cost or expense arising out
of any transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions."
Shareholders may decline telephone redemption privileges after an account is
opened by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire) of $100 or more from the shareholder's account in
that Fund on a monthly or quarterly basis. Depending on the form of payment
requested, shares will be redeemed up to five business days before the
redemption proceeds are scheduled to be received by the shareholder. The
redemption may result in the recognition of gain or loss for income tax
purposes. Dividends and distributions on shares held in a Systematic Withdrawal
Plan account will be reinvested in additional shares of that Fund at net asset
value.
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<PAGE>
Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action. The Money Market Funds are not subject to the account maintenance fee.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, taxpayer
identification number and address. You should note that an exchange may result
in recognition of a gain or loss for income tax purposes. See the discussion of
Fund telephone procedures and limitations of liability under "Telephone
Transactions."
- --------------------------------------------------------------------------------
Purchasing and Redeeming Shares by Exchange
- --------------------------------------------------------------------------------
o You are automatically eligible to make telephone exchanges with
your Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange
fee) after your request is received. Your request is subject to
the Funds' cut-off times.
o Exchange purchases must meet the minimum investment requirements
of the Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that
Fund's shares are qualified for sale and only for Funds offered
by this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the
Trusts reserve the right to terminate, either temporarily or
permanently, your exchange privileges if you make more than four
exchanges out of any one fund during a twelve-month period. The
Fund may also refuse an exchange into a Fund from which you have
redeemed shares within the previous 90 days (accounts under
common control and accounts with the same taxpayer identification
number will be counted together). Exchanges out of the Fixed
Income Funds are exempt. A shareholder's exchanges may be
restricted or refused if a Fund receives, or the Manager
anticipates, simultaneous orders affecting significant portions
of that Fund's assets and, in particular, a pattern of exchanges
coinciding with a "market timing" strategy. The Trusts reserve
the right to refuse exchanges by any person or group if, in the
Manager's judgment, a Fund would be unable to effectively invest
the money in accordance with its investment objective and
policies, or would otherwise be potentially adversely affected.
Although the Trusts attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose
these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans
to conform to plan exchange limits and U.S. Department of Labor
regulations (for those limits, see plan materials). The Trusts
reserve the right to terminate or modify the exchange privileges
of Fund shareholders in the future.
- --------------------------------------------------------------------------------
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed Income Funds into the
Domestic Equity, International, Global and Multi-Strategy Funds. The minimum
exchange is $100 ($500 for the Micro Cap Fund). Periodically investing a set
dollar amount into a Fund is also referred to dollar-cost averaging because the
number of shares purchased will vary depending on the price
42
<PAGE>
per share. Your account with the recipient Fund must meet the applicable minimum
of $1,000 or $5,000 for the Micro Cap Fund. Exchanges out of the Fixed Income
Funds are exempt from the exchange limit policy.
Directed Dividend Service
If you own shares of the Fixed Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of a Domestic Equity,
International, Global or Multi-Strategy Fund. Your account with the recipient
Fund must meet the applicable minimum of $1,000 or $5,000 for the Micro Cap
Fund.
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Money Market Funds
Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Market Fund when the free
credit balance in the investor's brokerage account (including deposits, proceeds
of sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Montgomery Securities as collateral for margin obligations to
Montgomery Securities) exceeds $100 on each day the NYSE is open for trading
other than national bank holidays. Upon request, a free credit balance in a
Montgomery Securities brokerage account also may be invested in shares of either
Money Market Funds following receipt by the Transfer Agent of investor
instructions. If such instructions are received after 12:00 noon, New York time,
Fund shares will be purchased at the next-determined asset value. Checkwriting
privileges may not be available for Montgomery Securities brokerage accounts.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Money Market Funds), New York time, on
days that the Fund issues shares. Orders received after that time will be
purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Fund, they may receive
fees from the Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account (Money Market
Funds Only)
If a shareholder wishes, the Transfer Agent will redeem shares of either of the
Money Market Funds automatically to satisfy debit balances in a shareholder's
Montgomery Securities brokerage account or to provide necessary cash collateral
for a shareholder's margin obligation to Montgomery Securities. Redemptions also
may be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected Money Market Fund, not to exceed the
number of shares in the shareholder's account, will be redeemed on the next day
the NYSE is open for trading to satisfy any remaining debits or amounts needed
for pending securities settlements.
Repurchase Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a repurchase order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Money Market Funds), on a day that the Fund redeems shares. Orders
received after that time are entitled to the net asset value next determined
after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Money Market Funds), New York time, on each day that the NYSE is
open for trading (except for bank holidays for the Fixed Income Funds).
Per-share
43
<PAGE>
net asset value is calculated by dividing the value of each Fund's total net
assets by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
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 Funds
determine their net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Funds calculate their net asset value may not be reflected in the Funds'
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect a Fund's net
asset value.
Dividends And Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Currently the Fixed Income Funds
declare income dividends daily and pay them monthly on or about the last
business day of each month. The Equity Income Fund declares and pays dividends
on or about the last business day of each quarter. Each Fund currently intends
to make one or, if necessary to avoid the imposition of tax on a Fund, more
distributions during each calendar year. A distribution may be made between
November 1 and 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 may also
be made following each Fund's fiscal year end (June 30). The amount and
frequency of Fund distributions are not guaranteed and are at the discretion of
the Board.
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
applicable Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Taxation
Except for the newer Funds that intend to qualify and elect as soon as possible,
each of the Funds has qualified and elected and intends to continue to qualify
and elect to be treated as a regulated investment company under Subchapter M of
the Code, by distributing substantially all of its net investment income and net
capital gains to its shareholders and meeting other requirements of the Code
relating to the sources of its income and diversification of assets.
Accordingly, the Funds generally will not be liable for federal income tax or
excise tax based on net income except to the extent their earnings are not
distributed or are distributed in a manner that does not satisfy the
requirements of the Code pertaining to the timing of distributions. If a Fund is
unable to meet certain Code requirements, it may be subject to taxation as a
corporation. The International, Global, Equity Income and Allocation Funds may
also incur tax liability to the extent they invest in "passive foreign
investment companies." See "Portfolio Securities" and the Statement of
Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time
44
<PAGE>
the Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The California Money Fund intends, and the California Intermediate Bond Fund
intends to continue, to qualify to pay "exempt-interest dividends" to their
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities. If
these Funds satisfy this requirement, distributions from net investment income
to shareholders will be exempt from federal income taxation to the extent net
investment income is represented by interest on tax-exempt securities.
Distributions from other net investment income, such as market discount on
municipal securities, and from certain other investment practices, such as
transactions in options, will be ordinary income. Shareholders generally will
not incur any federal income tax on the amount of exempt-interest dividends
received by them from these Funds, whether taken in cash or reinvested in
additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security benefits are
subject to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the Allocation Fund are series of The
Montgomery Funds, a Massachusetts business trust organized on May 10, 1990. The
Allocation Fund is a series of The Montgomery Funds II, a Delaware business
trust organized on September 10, 1993. The Agreement and Declarations of Trust
of both Trusts permit their Boards to issue an unlimited number of full and
fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
As of August 24, 1995, all of the previously outstanding shares of each Fund
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 those
Funds. The Funds may in the future designate other classes of shares for
specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. While
the Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
45
<PAGE>
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated in a similar manner,
except that the results are not annualized. Total return figures will reflect
all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. In the case of the
Tax-Free Funds, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) either Fund's
yield for an investor in stated federal income and California tax brackets.
See "Performance Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for most money market transactions (monthly) and pre-authorized automatic
investment and redemption services (quarterly). All transactions are recorded on
quarterly account statements which you will receive at the end of each calendar
quarter. Your fourth-quarter account statement will be a year-end statement,
listing all transaction activity for the entire year. Retain this statement for
your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND
(800-572-3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Funds with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Funds 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 Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate
46
<PAGE>
item in the Account Application. Dividends paid to a foreign shareholder's
account by a Fund may be subject to up to 30% withholding instead of backup
withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Funds' official sales literature.
47
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
600 Montgomery Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
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PART B
STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY ASSET ALLOCATION FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
---------------
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP II FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY ADVISORS EMERGING MARKETS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY ASSET ALLOCATION FUND
MONTGOMERY SHORT GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
600 Montgomery Street
San Francisco, California 94111
1-800-572-FUND
STATEMENT OF ADDITIONAL INFORMATION
February 9, 1996
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). The Funds are managed by Montgomery Asset
Management, L.P. (the "Manager") and distributed by Montgomery Securities (the
"Distributor"). This Statement of Additional Information contains information in
addition to that set forth in the combined prospectuses for all Funds (other
than the Montgomery Advisors Emerging Markets Fund) dated February 9, 1996 (with
respect to the Class R shares), dated November 13, 1995 (with respect to the
Class P shares) and dated November 13, 1995 (with respect to the Class L
shares), the prospectus for the Montgomery Advisors Emerging Markets Fund, dated
November 13, 1995 and as each prospectus may be revised from time to time (in
reference to the appropriate Fund or Funds, the "Prospectuses"). The
Prospectuses provide the basic information a prospective investor should know
before purchasing shares of any Fund and may be obtained without charge at the
address or telephone number provided above. This Statement of Additional
Information is not a prospectus and should be read in conjunction with the
appropriate Prospectuses.
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TABLE OF CONTENTS
Page
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The Trusts...........................................................B- 2
Investment Objectives and Policies of the Funds......................B- 3
Risk Factors.........................................................B-23
Investment Restrictions..............................................B-30
Distributions and Tax Information....................................B-35
Trustees and Officers................................................B-41
Investment Management and Other Services.............................B-46
Execution of Portfolio Transactions..................................B-52
Additional Purchase and Redemption Information.......................B-56
Determination of Net Asset Value.....................................B-58
Principal Underwriter................................................B-61
Performance Information..............................................B-62
General Information..................................................B-68
Financial Statements.................................................B-74
Appendix A...........................................................B-75
THE TRUSTS
The Montgomery Funds is an open-end management investment
company organized as a Massachusetts business trust on May 10, 1990, and The
Montgomery Funds II is an open-end management investment company organized as a
Delaware business trust on September 10, 1993. Both are registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trusts currently offer shares of beneficial interest, $.01 par value per share,
in various series. Each series (other than the Montgomery Advisors Emerging
Markets Fund) offers three classes of shares (Class R, Class P and Class L). As
of August 24, 1995, all of the previously outstanding shares of each series were
redesignated as Class R shares without any other changes.
This Statement of Additional Information pertains to sixteen
series of The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"),
Montgomery Equity Income Fund ("Equity Income Fund"), Montgomery Small Cap Fund
(the "Small Cap Fund"), Montgomery Small Cap II Fund (the "Small Cap II Fund"),
Montgomery Micro Cap Fund ("Micro Cap Fund"), Montgomery Global Opportunities
Fund (the "Opportunities Fund"), Montgomery Global Communications Fund (the
"Communications Fund"), Montgomery International Growth Fund (the "International
Growth Fund"), Montgomery International Small Cap Fund (the "International Small
Cap Fund"), Montgomery Emerging Markets Fund (the "Emerging Markets Fund"),
Montgomery Advisors Emerging Markets Fund (the "Advisors Fund"), Montgomery
Select 50 Fund (the "Select 50 Fund"), Montgomery Short Government Bond Fund
(the "Short Fund"), Montgomery Government Reserve Fund (the "Reserve Fund"),
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund") and Montgomery California Tax-Free Money Fund (the
"California Money Fund"); as well as one series of The Montgomery Funds II,
Montgomery Asset Allocation Fund (the "Allocation Fund").
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Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Small Cap,
Small Cap II, Micro Cap, Equity Income and Growth Funds as the "Domestic Equity
Funds"; the Emerging Markets, Advisors, International Small Cap and
International Growth Funds as the "International Funds"; the Opportunities and
Communications Funds as the "Global Funds"; the Short, Reserve, California
Intermediate Bond and California Money Funds as the "Fixed Income Funds"; the
California Intermediate Bond and California Money Funds as the "Tax-Free Funds";
the Reserve and California Money Funds as the "Money Market Funds"; and all of
the Funds other than the Tax-Free Funds as the "Taxable Funds."
Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The achievement of each Fund's investment objective will
depend upon market conditions generally and on the Manager's analytical and
portfolio management skills.
Portfolio Securities
Depositary Receipts. The Domestic Equity, Select 50,
Allocation, International and Global Funds may hold securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and other similar global instruments available in
emerging markets, or other securities convertible into securities of eligible
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and EDRs and
other similar global instruments in bearer form are designed for use in European
securities markets. For purposes of these Funds' investment policies, these
Funds' investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. Each of the Equity Income, Select
50, International, Global, Allocation and Fixed Income Funds may invest up to
10% of its total assets in securities issued by other investment companies
investing in securities in which the
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Fund can invest provided that such investment companies invest in portfolio
securities in a manner consistent with the Fund's investment objective and
policies, except for the Money Market Funds, which may so invest up to 35% of
their total assets (and, except for the Money Market Funds, not in money market
funds). Applicable provisions of the Investment Company Act require that a Fund
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 10% (or 35% for the Money Market Funds) of
the value of a Fund's total assets will be invested in the aggregate in
securities of investment companies as a group; and (b) either (i) a Fund and
affiliated persons of that Fund not own together more than 3% of the total
outstanding shares of any one investment company at the time of purchase (and
that all shares of the investment company held by that Fund in excess of 1% of
the company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that Fund bears directly in connection with its own operations.
In accordance with applicable regulatory provisions of the
State of California, the Manager has agreed to waive its management fee with
respect to assets of the Funds that are invested in other open-end investment
companies.
U.S. Government Securities. Because the Short and Reserve
Funds invest a substantial portion, if not all, of their net assets, and the
Income and Allocation Funds may invest a substantial portion of their net
assets, in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Generally, the value of U.S. Government securities held by the
Funds will fluctuate inversely with interest rates. U.S. Government securities
in which the Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
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Funding Corporation, Student Loan Marketing Association and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, a Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Manager determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
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Each FNMA pass-through security represents a proportionate
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (that is, mortgage loans that are not insured or guaranteed by any U.S.
Government agency). The loans contained in those pools consist of one or more of
the following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate
growing equity mortgage loans; (3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage
Corporation. FHLMC is a corporate instrumentality of the United States
established by the Emergency Home Finance Act of 1970, as amended. FHLMC was
organized primarily for the purpose of increasing the availability of mortgage
credit to finance needed housing. The operations of FHLMC currently consist
primarily of the purchase of first lien, conventional, residential mortgage
loans and participation interests in mortgage loans and the resale of the
mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between ten and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each mortgage loan must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in
the Prospectus, the Allocation and Short Funds may invest in mortgage-related
securities offered by private issuers, including pass-through securities
comprised of pools of conventional residential mortgage loans; mortgage-backed
bonds which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and collateralized
mortgage obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the collateral pool may cause the various classes of a CMO to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the collateral pool may be allocated
among the several classes of a CMO in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to some of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on mortgage-related securities. Certain classes of CMOs may have priority
over others with respect to the receipt of prepayments on the mortgages.
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These Funds may invest in, among other things, "parallel pay"
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class which, like the
other CMO structures, must be retired by its stated maturity date or final
distribution date, but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the
interest rates on the mortgages underlying adjustable-rate mortgage-related
securities ("ARMS") reset periodically, yields of such portfolio securities will
gradually align themselves to reflect changes in market rates. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, ARMS allow the Allocation and Short Funds to participate in increases in
interest rates through periodic adjustments in the coupons of the underlying
mortgages, resulting in both higher current yields and low price fluctuations.
Furthermore, if prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, these Funds may be able to reinvest
such amounts in securities with a higher current rate of return. During periods
of declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to these Funds. Further, because of this feature, the
value of ARMS is unlikely to rise during periods of declining interest rates to
the same extent as fixed rate instruments. For further discussion of the risks
associated with mortgage-related securities generally, see "Risk Considerations"
in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not
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to exceed seven. In addition, the Participating VRDN is backed by an irrevocable
letter of credit or guaranty of the institution. A Fund has an undivided
interest in the underlying obligation and thus participates on the same basis as
the institution in such obligation except that the institution typically retains
fees out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Funds may invest in such VRDNs, the issuers or underlying
institutions of which the Manager believes are creditworthy and satisfy the
quality requirements of the Funds. The Manager periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic
slowdown, together with the fiscal measures adopted by governmental authorities
to attempt to deal with them, interest rates have varied widely. While the value
of the underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the California Money Fund
invests at least 80% of its total assets in obligations either issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), or exempt from federal and
California personal income tax ("California Municipal Securities"), and the
California Money Fund invests at least 80% of its total assets in California
Municipal Securities, and may invest in Municipal Securities, these Funds
generally will have a lower yield than if they primarily purchased higher
yielding taxable securities, commercial paper or other securities with
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correspondingly greater risk. Generally, the value of the Municipal Securities
and California Municipal Securities held by these Funds will fluctuate inversely
with interest rates.
General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the principal security for
a revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control. These bonds also are used to finance public facilities, such
as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payment. As a result
of 1986 federal tax legislation, industrial revenue bonds may no longer be
issued on a tax-exempt basis for certain previously permissible purposes,
including sports and pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion
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that the Fund's participation interest bears to the total principal amount of
the Municipal Security. These instruments may have fixed, floating or variable
rates of interest. If the participation interest is unrated, it will be backed
by an irrevocable letter of credit or guarantee of a bank that the Board of
Trustees has approved as meeting the Board's standards, or, alternatively, the
payment obligation will be collateralized by U.S. Government securities.
For certain participation interests, these Funds will have the
right to demand payment, on not more than seven days' notice, for all or any
part of their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, these Funds intend to exercise their right to
demand payment only upon a default under the terms of the Municipal Securities,
as needed to provide liquidity to meet redemptions, or to maintain or improve
the quality of their investment portfolios. The California Fund will not invest
more than 15% of its total assets and the California Money Fund will not invest
more than 10% of its total assets in participation interests that do not have
this demand feature, and in other illiquid securities.
Some participation interests are subject to a
"nonappropriation" or "abatement" feature by which, under certain conditions,
the issuer of the underlying Municipal Security may, without penalty, terminate
its obligation to make payment. In such event, the holder of such security must
look to the underlying collateral, which is often a municipal facility used by
the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of
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the second class and similar securities should be expected to fluctuate more
than the value of a Municipal Security of comparable quality and maturity and
their purchase by one of these Funds should increase the volatility of its net
asset value and, thus, its price per share. These custodial receipts are sold in
private placements and are subject to these Funds' limitation with respect to
illiquid investments. The Tax-Free Funds also may purchase directly from
issuers, and not in a private placement, Municipal Securities having the same
characteristics as the custodial receipts.
Tender Option Bonds. The Tax-Free Funds may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, coupled with an agreement of
a third party, such as a bank, broker-dealer or other financial institution,
granting the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. The Manager, on behalf of a Tax-Free
Fund, considers on a periodic basis the creditworthiness of the issuer of the
underlying Municipal Security, of any custodian and of the third party provider
of the tender option. In certain instances and for certain tender option bonds,
the option may be terminable in the event of a default in payment of principal
or interest on the underlying Municipal Obligations and for other reasons. The
California Fund will not invest more than 15% of its total assets and the
California Money Market Fund more than 10% of its total assets in securities
that are illiquid (including tender option bonds with a tender feature that
cannot be exercised on not more than seven days' notice if there is no secondary
market available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may
purchase Municipal Securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the securities' maturity date. Although an obligation with a put attached is
not a put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue
ruling to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
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(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. The Allocation and Fixed Income Funds may
invest in zero coupon securities, which are debt securities issued or sold at a
discount from their face value and do not entitle the holder to any periodic
payment of interest prior to maturity, a specified redemption date or a cash
payment date. The amount of the discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. Zero coupon securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The market
prices of zero coupon securities are generally more volatile than the market
prices of interest-bearing securities and respond more to changes in interest
rates than interest-bearing securities with similar maturities and credit
qualities.
Risk Factors/Special Considerations Relating to Debt Securities
The Select 50, International and the Global Funds may invest
in debt securities that are rated below BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or, if unrated, are deemed to be of equivalent
investment quality by the Manager. As an operating policy, which may be changed
by the Board of Trustees without shareholder approval, these Funds will invest
no more than 5% of their assets in debt securities rated below Baa by Moody's or
BBB by S&P, or, if unrated, of equivalent investment quality as determined by
the Manager. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates,
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the value of such securities generally declines. The net asset value of these
Funds will reflect these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of these Funds to sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or financial markets and could adversely affect, and cause fluctuations
in, the per-share net asset value of these Funds.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of
low-rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of these Funds to
achieve their investment objectives may, to the extent they invest in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if these Funds invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
investment-grade securities. The prices of low-rated debt securities have been
found to be less sensitive to interest rate changes than higher-rated debt
securities but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low-rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low-rated debt securities defaults, these
Funds may incur additional expenses to seek financial recovery. The low-rated
bond market is relatively new, and many of the outstanding low-rated bonds have
not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate
risks, the Select 50, International, Global, Income and Allocation Funds may
enter into forward foreign currency exchange contracts ("forward contracts") and
foreign currency futures contracts, as
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well as purchase put or call options on foreign currencies, as described below.
These Funds also may conduct their foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
The Funds (except the Money Market Funds) also may purchase
other types of options and futures and may, in the future, write covered
options, as described below and in the Prospectus.
Forward Contracts. The Select 50, International, Global and
Allocation Funds may enter into forward contracts to attempt to minimize the
risk from adverse changes in the relationship between the U.S. dollar and
foreign currencies. A forward contract, which is individually negotiated and
privately traded by currency traders and their customers, involves an obligation
to purchase or sell a specific currency for an agreed-upon price at a future
date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that currency for a fixed dollar
amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or high-quality liquid debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Funds (except the Money Market Funds) may purchase and sell various
kinds of futures contracts and options on futures contracts. These Funds also
may enter into closing purchase and sale transactions with respect to any such
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contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
these Funds or which they expect to purchase. These Funds' futures transactions
generally will be entered into only for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect a Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated). All futures contracts entered into by these Funds
are traded on U.S. exchanges or boards of trade licensed and regulated by the
CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek,
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through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having that Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of a
Fund's portfolio securities could be offset substantially by a decline in the
value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
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Options on Securities, Securities Indices and Currencies.
These Funds may purchase put and call options on securities in which they have
invested, on foreign currencies represented in their portfolios and on any
securities index based in whole or in part on securities in which these Funds
may invest. These Funds also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although these Funds do not currently intend to do so, they
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which they may invest. A
covered call option involves a Fund's giving another party, in return for a
premium, the right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. A covered call option
serves as a partial hedge against the price decline of the underlying security.
However, by writing a covered call option, a Fund gives
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up the opportunity, while the option is in effect, to realize gain from any
price increase (above the option exercise price) in the underlying security. In
addition, a Fund's ability to sell the underlying security is limited while the
option is in effect unless the Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, a Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other high-grade liquid debt
securities with at least the value of the exercise price of the put options. In
segregating such assets, the custodian either deposits such assets in a
segregated account or separately identifies such assets and renders them
unavailable for investment. A Fund will not write put options if the aggregate
value of the obligations underlying the put options exceeds 25% of the Fund's
total assets.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds
may enter into repurchase agreements. A Fund's repurchase agreements will
generally involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Manager, acting under the supervision of
the Boards, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Funds enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Boards.
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<PAGE>
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest more
than 15% (10% in the case of the Money Market Funds) of the value of its net
assets in illiquid securities, including repurchase agreements with maturities
greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a Fund to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, the Funds always require collateral for any repurchase agreement to
which they are a party in the form of securities acceptable to them, the market
value of which is equal to at least 100% of the amount invested by the Funds
plus accrued interest, and the Funds make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), a Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price (including
interest) at all times.
The Funds may participate in one or more joint accounts with
each other and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of
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comparable quality using objective criteria. Any such repurchase agreement will
have, with rare exceptions, an overnight, over-the-weekend or over-the-holiday
duration, and in no event have a duration of more than seven days.
Reverse Repurchase Agreements. The Domestic Equity, Select 50,
International Opportunities, Allocation, Short, Reserve and Tax-Free Funds may
enter into reverse repurchase agreements, as set forth in the Prospectus. These
Funds typically will invest the proceeds of a reverse repurchase agreement in
money market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. This use of proceeds involves
leverage, and a Fund will enter into a reverse repurchase agreement for leverage
purposes only when the Manager believes that the interest income to be earned
from the investment of the proceeds would be greater than the interest expense
of the transaction. These Funds also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when sale of the
Fund's securities is disadvantageous.
These Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other high-grade liquid debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. In segregating such assets, the
custodian either places such securities in a segregated account or separately
identifies such assets and renders them unavailable for investment. Such assets
are marked to market daily to ensure that full collateralization is maintained.
Dollar Roll Transactions. The Allocation, Short and California
Intermediate Bond Funds may enter into dollar roll transactions, as discussed in
the Prospectus. A dollar roll transaction involves a sale by a Fund of a
security to a financial institution concurrently with an agreement by that Fund
to purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it
causes its custodian to segregate liquid assets such as cash, U.S. Government
securities or other high-grade liquid debt securities having a value equal to
the purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
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Lending of Portfolio Securities. Although the Funds currently
do not intend to do so, a Fund may lend its portfolio securities having a value
of up to 10% (30% in the case of the Select 50, Global, International Growth,
Equity Income, Allocation, Short and California Intermediate Bond Funds) of its
total assets in order to generate additional income. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high-grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. Loans are subject to termination at
the option of a Fund or the borrower at any time. Upon such termination, a Fund
is entitled to obtain the return of the securities loaned within five business
days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other high-grade liquid debt securities with a value
equal in value to commitments
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for when-issued or delayed delivery securities. The segregated securities either
will mature or, if necessary, be sold on or before the settlement date. To the
extent that assets of a Fund are held in cash pending the settlement of a
purchase of securities, that Fund will earn no income on these assets.
The Short Fund may seek to hedge investments or to realize
additional gains through forward commitments to sell high-grade liquid debt
securities it does not own at the time it enters into the commitments. Such
forward commitments effectively constitute a form of short sale. To complete
such a transaction, this Fund must obtain the security which it has made a
commitment to deliver. If this Fund does not have cash available to purchase the
security it is obligated to deliver, it may be required to liquidate securities
in its portfolio at either a gain or a loss, or borrow cash under a reverse
repurchase or other short-term arrangement, thus incurring an additional
expense. In addition, this Fund may incur a loss as a result of this type of
forward commitment if the price of the security increases between the date this
Fund enters into the forward commitment and the date on which it must purchase
the security it is committed to deliver. This Fund will realize a gain from this
type of forward commitment if the security declines in price between those
dates. The amount of any gain will be reduced, and the amount of any loss
increased, by the amount of the interest or other transaction expenses this Fund
may be required to pay in connection with this type of forward commitment.
Whenever this Fund engages in this type of transaction, it will segregate assets
as discussed above.
Illiquid Securities. A Fund may invest up to 15% (10% for the
Money Market Funds and 5% for the Small Cap Fund) of its net assets in illiquid
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Fund has valued the securities and
includes, among others, repurchase agreements maturing in more than seven days,
certain restricted securities and securities that are otherwise not freely
transferable. Illiquid securities also include shares of an investment company
held by a Fund in excess of 1% of the total outstanding shares of that
investment company. Restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Funds may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
a Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market
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conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities, however, could adversely affect the marketability of such portfolio
securities and result in a Fund's inability to dispose of such securities
promptly or at favorable prices.
The Boards of Trustees have delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Boards. The Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
Foreign Securities
Investors in the Select 50, International, Global and
Allocation Funds should consider carefully the substantial risks
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involved in securities of companies located or doing business in, and
governments of, foreign nations, which are in addition to the usual risks
inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are often not
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements often may not be comparable to those
applicable to U.S. companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Emerging Market Countries
The Select 50, International and Global Funds, particularly
the Emerging Markets and Advisors Funds, may invest in securities of companies
domiciled in, and in markets of, so-called "emerging market countries." These
investments may be subject to potentially higher risks than investments in
developed countries. These risks include (i) volatile social, political and
economic conditions; (ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which result
in a lack of liquidity and in greater price volatility; (iii) the existence of
national policies which may restrict these Funds' investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interests; (iv) foreign taxation; (v) the absence of developed
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (vi) the absence, until recently in
certain emerging market countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in certain emerging market countries may be slowed or
reversed by unanticipated political or social events in such countries.
Exchange Rates and Polices
The Select 50, International and Global Funds endeavor to buy
and sell foreign currencies on favorable terms. Some price spreads on currency
exchange (to cover service charges) may be incurred, particularly when these
Funds change investments from one country to another or when proceeds from the
sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would
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prevent these Funds from repatriating invested capital and dividends, withhold
portions of interest and dividends at the source, or impose other taxes, with
respect to these Funds' investments in securities of issuers of that country.
There also is the possibility of expropriation, nationalization, confiscatory or
other taxation, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Boards of both Trusts consider at least annually the
likelihood of the imposition by any foreign government of exchange control
restrictions that would affect the liquidity of the Funds' assets maintained
with custodians in foreign countries, as well as the degree of risk from
political acts of foreign governments to which such assets may be exposed. The
Boards also consider the degree of risk attendant to holding portfolio
securities in domestic and foreign securities depositories (see "Investment
Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for that Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
California Municipal Securities
The information set forth below is a general summary intended
to give a recent historical description. It is not a discussion of any specific
factors that may affect any particular issuer of California Municipal
Securities. The information is not
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intended to indicate continuing or future trends in the condition, financial or
otherwise, of California. Such information is derived from official statements
utilized in connection with securities offerings of the State of California that
have come to the attention of the Trusts and were available prior to the date of
this Statement of Additional Information. Such information has not been
independently verified by the Tax-Free Funds.
Because each Tax-Free Fund expects to invest substantially all
of its assets in California Municipal Securities, it will be susceptible to a
number of complex factors affecting the issuers of California Municipal
Securities, including national and local political, economic, social,
environmental and regulatory policies and conditions. These Funds cannot predict
whether or to what extent such factors or other factors may affect the issuers
of California Municipal Securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by these Funds to pay interest on, or principal of, such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible these Funds
will invest in obligations of particular issuers as to which such specific
factors are applicable.
From mid-1990 to late 1993, California suffered the most
severe recession in the State since the 1930s, with significant job losses
(particularly in the aerospace, other manufacturing, services and construction
sectors). The greatest effects of the recession were felt in Southern
California. While a steady recovery has been underway since 1994, pre-recession
employment levels are not expected to be reached until later in the decade.
The recession severely affected State revenues while the
State's health and welfare costs were increasing. Consequently, from the late
1980's until 1992-93, the State had a period of budget imbalance; the State's
accumulated budget deficit approached $2.8 billion at its peak at June 30, 1993.
Between Spring 1992 and Summer 1994, the State depended upon external borrowing,
including borrowings extending into the following fiscal year, to meet its cash
needs. The State anticipates that it will not need to use such "cross-year"
borrowing during the 1995-96 fiscal year. The 1993-94 Budget Act proposed to
repay the $2.8 billion deficit over two fiscal years, but as a result of the
recession the projected excess of revenues over expenditures did not
materialize. The accumulated budget deficit at June 30, 1994 was about $1.9
billion, and a second two-year plan was implemented in 1994-95 to eliminate the
budget deficit.
The 1994-95 Budget Act recognized that the accumulated $2
billion budget deficit could not be repaid in one year, and proposed a two-year
solution to eliminate the deficit with
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operating surpluses for 1994-95 and 1995-96. The 1994-95 Budget Act projected
revenues and transfers of $41.9 billion (up $2.1 billion from 1993-94, and
reflecting the Governor's forecast of an improving economy), and expenditures of
$40.9 billion (up $1.6 billion from 1993-94). Principal features of the 1994-95
Budget Act included:
1. Receipt of about $760 million of federal aid for certain
costs related to refugees and undocumented immigrants. The State
Department of Finance's analysis of the federal 1995 budget indicates,
however, that only about $98 million of this amount was appropriated
for California, and that about $33 million of this amount would be
received during 1994-95 with the balance to be received during 1995-96.
2. Reductions of about $1.1 billion in health and welfare
costs. A 2.3 percent reduction in Aid to Families with Dependent
Children has been enjoined pending further litigation, however.
3. An increase in Proposition 98 funding for K-14 schools of
$526 million.
4. Additional miscellaneous cuts and fund transfers of $755
million.
5. A further one-year suspension (for 1995) of the renter's
personal income tax credit.
The 1994-95 Budget Act contains no tax increases other than
the suspension of the renter's credit.
The 1995-96 Budget Act was enacted on August 3, 1995, 34 days
after the start of the fiscal year. The 1995-96 Budget Act contains a reforecast
of revenues and expenditures for the 1994-95 fiscal year, which estimates that
General Fund revenues and transfers will increase from the 1994-95 Budget Act
estimate of $41.9 billion to about $42.2 billion, but also estimates that
General Fund expenditures will increase to $41.7 billion from the 1994-95 Budget
Act estimate of $40.9 billion.
The 1995-96 Budget Act projects General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from 1994-95, and General
Fund expenditures of $43.4 billion, a 4 percent increase from 1994-95. Special
Fund revenues are estimated at $12.7 billion, and Special Fund expenditures of
$13 billion have been appropriated. The 1995-96 Budget Act projects that the
General Fund will end the 1995-96 fiscal year with a slight surplus at June 30,
1996, and that all of the accumulated budget deficits will have been repaid.
Principal features of the 1995-96 Budget Act include:
1. An increase in Proposition 98 funding for K-14
schools of about $1.2 billion.
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2. Reductions in health and welfare costs of about $900
million (about $500 million of which depends upon federal legislative
approval).
3. A 3.5 percent increase for the University of California and
the California State University system.
4. Receipt of an additional $473 million in federal aid for
costs of illegal immigrants, above commitments already made by the
federal government.
5. An increase of about 8 percent in General Fund support for
the Department of Corrections, reflecting estimates of an increased
prison population.
The foregoing discussion of the 1994-95 and 1995-96 fiscal
year budgets is based on the Budget Acts for those years, which include
estimates and projections of revenues and expenditures, and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation. There can be no assurance that the estimates will be
achieved.
Certain issuers of California Municipal Securities receive
subventions from the State which are eligible to be used to make payments on
such Securities. No prediction can be made as to what effect any decrease in
subventions may have on the ability of some issuers to make such payments.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A" by S&P, "A1" by Moody's and "A" by Fitch Investors Service, Inc.
It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash
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value" of property may be adjusted annually to reflect increases (not to exceed
two percent) or decreases, in the consumer price index or comparable local data,
or to reflect reductions in property value caused by substantial damage,
destruction or other factors, or when there is a "change in ownership" or "new
construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax
revenue caused by the passage of Proposition 13, the State enacted legislation
to provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits
the amount of appropriations of the State and of local governments to the amount
of appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute
known as Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. Several recent
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, however.
In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives changed
the State's appropriations limit under Article XIII B to (i) require that the
State set aside a prudent reserve fund for public education, and (ii) guarantee
a minimum level of State funding for public elementary and secondary schools and
community colleges.
The effect of constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
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remain solvent. For example, in December 1994, Orange County filed
for bankruptcy.
In addition, it is impossible to predict the time, magnitude,
or location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' concentration in California Municipal
Securities provides a greater level of risk than a fund that is diversified
across numerous states and municipal entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by each Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Fund's outstanding
voting securities as defined in the Investment Company Act. A Fund may not:
1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may invest in securities
of other investment companies as described above and consistent with restriction
number 9 below.
2. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government and its agencies
and instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of a Fund would be invested in such issuer.
There are no limitations with respect to the remaining 25% of its total assets,
except to the extent other investment restrictions may be applicable. This
investment restriction does not apply to the Tax-Free Funds.
3. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 10% (30% in the case of the Select 50 Fund, Global
Funds, International Growth Fund, Income Fund, Allocation Fund, Short Fund and
California Intermediate Bond Fund) of its portfolio securities as described
above and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement or a reverse dollar roll transaction is deemed to be a loan.
4. (a) For the Growth Fund, Small Cap II Fund, Select 50 Fund,
International Growth Fund, Equity Income Fund, Micro Cap Fund, International
Small Cap Fund, Opportunities Fund and Allocation Fund only: Borrow money,
except for temporary or emergency purposes from a bank, or pursuant to reverse
repurchase agreements or dollar roll transactions for a Fund that uses such
investment techniques and then not in excess of one-third (10% in the case of
the Growth Fund) of the value of its total assets (at
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the lower of cost or fair market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings, and no additional investments may be made while any such borrowings
are in excess of 10% of total assets.
(b) For the Small Cap Fund, Emerging Markets Fund, Advisors
Fund, Communications Fund, California Money Fund and Reserve Fund only: Borrow
money, except temporarily for extraordinary or emergency purposes from a bank
and then not in excess of 10% (one-third in the case of the Communications Fund)
of its total assets (at the lower of cost or fair market value). Any such
borrowing will be made only if immediately thereafter there is an asset coverage
of at least 300% of all borrowings, and no additional investments may be made
while any such borrowings are in excess of 5% of total assets.
(c) For the Short Fund and California Intermediate Bond
Fund only: Borrow money, except temporarily for extraordinary or emergency
purposes from a bank or pursuant to reverse repurchase or dollar roll
transactions and then not in excess of one-third of the value of its total
assets (at the lower of cost or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset coverage of at least 300%
of all borrowings, and no additional investments may be made while any
borrowings (excluding any permissible reverse repurchase agreements and dollar
roll transactions the Fund may enter into) are in excess of 5% of the Fund's
total assets.
(d) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude a Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
6. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however, a
Fund, to the extent not otherwise prohibited in the Prospectus or this Statement
of Additional Information, may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein, including real estate investment trusts, and may purchase or
sell currencies (including forward currency exchange contracts), futures
contracts and related options generally as described in the Prospectus and this
Statement of Additional Information. As an operating policy which may be changed
without shareholder approval, consistent with the laws of the State of Texas,
the Funds may invest in real estate investment trusts only up to 10% of their
total assets.
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7. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
8. Except for the California Intermediate Bond and Money
Market Funds, invest more than 5% of the value of its total assets in securities
of any issuer which has not had a record, together with its predecessors, of at
least three years of continuous operation. (This is an operating policy which
may be changed without shareholder approval consistent with the regulations of
the State of Arkansas.)
9. (a) Invest in securities of other investment companies,
except to the extent permitted by the Investment Company Act and discussed in
the Prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or acquisition of
assets.
(b) Invest in securities of other investment companies
except by purchase in the open market where no commission or profit to a sponsor
or dealer results from the purchase other than the customary broker's
commission, or except when the purchase is part of a plan of merger,
consolidation, reorganization or acquisition. (This is an operating policy which
may be changed without shareholder approval, consistent with the regulations of
the State of Ohio.)
10. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities, including (under current
SEC interpretations) restricted securities (excluding liquid Rule 144A-eligible
restricted securities), securities which are not otherwise readily marketable,
repurchase agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by a Fund. (This is
an operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations and the regulations of the State of Ohio). Pursuant to state law
restrictions, this limitation has been modified to 5% for the Small Cap Fund and
10% for the Opportunities Fund.
11. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
12. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest more than 25% of the
market value of its total assets in the securities of companies engaged in any
one industry. (This does not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California Municipal
Obligations for the Tax-Free Funds.) For purposes of this restriction, the Funds
generally rely on the U.S. Office of
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Management and Budget's Standard Industrial Classifications, except that the
Small Cap Fund, Micro Cap Fund and Income Fund consider the following to
constitute separate industries:
Banking (Income Fund only); Basic Industries (Income Fund
only); Biotechnology; Capital Goods; Chemicals (Income Fund only); Computer
Hardware; Consumer/Leisure Time Products; Computer Software; Drugs/Drug
Delivery; Durable Goods-Wholesale (Income Fund only); Electric/Electric
Machinery (Income Fund only); Electronics (Income Fund only); Energy Related;
Environmental Services/Pollution Control; Financial Services; Food; Forestry
(Income Fund only); Health Care Services; Household Products (Income Fund only);
Industrial Products; Information Business Services; Insurance; Manufacturing
(Income Fund only); Medical Products/Technology; Nondurable Goods-Consumer
(Income Fund only); Oil and Gas (Income Fund only); Paper Products (Income Fund
only); Publishing (Income Fund only); Restaurants; Retail; Rubber/Plastic
Products (Income Fund only); Telecommunications; Textile/Apparel; Tobacco
(Income Fund only); Transportation; and Utilities (Income Fund only).
13. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit a Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b) entering
into permissible repurchase and dollar roll transactions.
14. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options subject to the following conditions (for other than the Short Fund and
California Intermediate Bond Fund):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder approval,
consistent with state regulations.)
15. (a) Except as described in the Prospectus and this
Statement of Additional Information, engage in short sales of securities. (This
is an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
(b) A Fund may not invest more than 25% of its net assets
in short sales, and the value of the securities of any one issuer in which a
Fund is short may not exceed the lesser of 2% of the value of the Fund's net
assets or 2% of the securities of any class of any issuer. In addition, short
sales may be made only in those securities that are fully listed on a national
securities exchange. (This is an operating policy which may be changed
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without shareholder approval, consistent with the regulations of the State of
Texas.)
16. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of a Fund's net assets. Included in such amount,
but not to exceed 2% of the value of a Fund's net assets, may be warrants which
are not listed on the New York Stock Exchange or American Stock Exchange.
Warrants acquired by a Fund in units or attached to securities may be deemed to
be without value. This investment restriction does not relate to the Fixed
Income Funds. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Texas.)
17. (a) Purchase or retain in a Fund's portfolio any security
if any officer, trustee or shareholder of the issuer is at the same time an
officer, trustee or employee of the Trust or of its investment adviser and such
person owns beneficially more than 1/2 of 1% of the securities and all such
persons owning more than 1/2 of 1% own more than 5% of the outstanding
securities of the issuer.
(b) Purchase more than 10% of the outstanding voting
securities of any one issuer. This investment restriction does not relate to the
Fixed Income Funds. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Ohio.)
18. Enter into a futures contract or option on a futures
contract if, as a result thereof, more than 5% of a Fund's total assets (taken
at market value at the time of entering into the contract) would be committed to
initial deposits and premiums on open futures contracts and options on such
contracts. The Money Market Funds may not enter into a futures contract or
option on a futures contract regardless of the amount of the initial deposit or
premium.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to
value the assets of the Money Market Funds in accordance with Rule 2a-7 under
the Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions
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of Rule 2a-7 regarding the maturity and quality of each portfolio investment,
and the diversity of such investments. Thus, although the restrictions imposed
by Rule 2a-7 are not fundamental policies of these Funds, these Funds must
comply with these provisions unless their shareholders vote to change their
policies of being money market funds.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio securities. Any
net gain a Fund may realize from transactions involving investments held less
than the period required for long-term capital gain or loss recognition or
otherwise producing short-term capital gains and losses (taking into account any
carryover of capital losses from previous years), while a distribution from
capital gains, will be distributed to shareholders with and as a part of income
dividends. If during any year a Fund realizes a net gain on transactions
involving investments held for the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time that Fund's shares may have been held.
Any dividend or distribution per share paid by a Fund reduces
that Fund's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes (except for
distributions from the Tax-Free Funds to the extent not subject to income
taxes).
Dividends and other distributions will be reinvested in
additional shares of the applicable Fund unless the shareholder has otherwise
indicated. Investors have the right to change their
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election with respect to the reinvestment of dividends and distributions by
notifying the Transfer Agent in writing, but any such change will be effective
only as to dividends and other distributions for which the record date is seven
or more business days after the Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its assets, and the timing of its distributions. Each
Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that that Fund will not be subject to any federal income tax or excise
taxes based on net income. However, the Board of Trustees may elect to pay such
excise taxes if it determines that payment is, under the circumstances, in the
best interests of a Fund.
In order to qualify as a regulated investment company, each
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) derive less than 30% of its gross income each year
from the sale or other disposition of stock or securities (or options thereon)
held less than three months (excluding some amounts otherwise included in income
as a result of certain hedging transactions), and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
its assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
for purposes of this calculation, in the case of other securities of any one
issuer to an amount not greater than 5% of that Fund's assets or 10% of the
voting securities of the issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies). As
such, and by complying with the applicable provisions of the Code, a Fund will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Code. If a Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by a Fund will be taxable to shareholders whether made in cash or
reinvested in shares. In determining amounts of
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net realized capital gains to be distributed, any capital loss carryovers from
prior years will be applied against capital gains. Shareholders receiving
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of a Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Funds or any securities dealer effecting a redemption of
Funds' shares by a shareholder will be required to file information reports with
the IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which a Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, each Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
A Fund may receive dividend distributions from U.S.
corporations. To the extent that a Fund receives such dividends and distributes
them to its shareholders, and meets certain other requirements of the Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
In the case of the Select 50, International and Global Funds,
if more than 50% in value of the total assets of a Fund at the end of its fiscal
year is invested in stock or other securities of foreign corporations, that Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by that Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of any
foreign income taxes paid by that Fund, and (ii) entitled either to deduct their
share of such foreign taxes in computing their taxable income or to claim a
credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code. In this case, shareholders will be informed by that
Fund at the end of each calendar year regarding the availability of any
B-37
<PAGE>
credits on and the amount of foreign source income (including or excluding
foreign income taxes paid by that Fund) to be included in their income tax
returns. If 50% or less in value of that Fund's total assets at the end of its
fiscal year are invested in stock or other securities, securities of foreign
corporations, that Fund will not be entitled under the Code to pass through to
its shareholders their pro rata share of the foreign income taxes paid by that
Fund. In this case, these taxes will be taken as a deduction by that Fund.
The Select 50, International and Global Funds may be subject
to foreign withholding taxes on dividends and interest earned with respect to
securities of foreign corporations. These Funds may invest up to 10% of their
total assets in the stock of foreign investment companies. Such companies are
likely to be treated as "passive foreign investment companies" ("PFICs") under
the Code. Certain other foreign corporations, not operated as investment
companies, may nevertheless satisfy the PFIC definition. A portion of the income
and gains that these Funds derive from PFIC stock may be subject to a
non-deductible federal income tax at the Fund level. In some cases, these Funds
may be able to avoid this tax by electing to be taxed currently on their share
of the PFIC's income, whether or not such income is actually distributed by the
PFIC. These Funds will endeavor to limit their exposure to the PFIC tax by
investing in PFICs only where the election to be taxed currently will be made.
Because it is not always possible to identify a foreign issuer as a PFIC in
advance of making the investment, these Funds may incur the PFIC tax in some
instances.
The Tax-Free Funds. Provided that, as anticipated, each
Tax-Free Fund qualifies as a regulated investment company under the Code, and,
at the close of each quarter of its taxable years, at least 50% of the value of
the total assets of such Fund consists of obligations (including California
Municipal Securities) the interest on which is exempt from California personal
income taxation under the Constitution or laws of California or of the United
States, such Fund will be qualified to pay exempt-interest dividends to their
shareholders that, to the extent attributable to interest received by the Fund
on such obligations, are exempt from California personal income tax. The total
amount of exempt-interest dividends paid by these Funds to their shareholders
with respect to any taxable year cannot exceed the amount of interest received
by these Funds during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by
these Funds, such as income from options, repurchase agreements and market
discount on tax-exempt securities purchased by these Funds, will be taxable
distributions to its shareholders.
The Code may also subject interest received on certain
otherwise tax-exempt securities to an alternative minimum tax. In addition,
certain corporations which are subject to the alternative minimum tax may have
to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
B-38
<PAGE>
Exempt-interest dividends paid to shareholders that are
corporations subject to California franchise tax will be taxed as ordinary
income to such shareholders. Moreover, no dividends paid by these Funds will
qualify for the corporate dividends-received deduction for federal income tax
purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their tax advisers
before investing in these Funds.
Up to 85% of social security or railroad retirement benefits
may be included in federal (but not California) taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt sources
such as tax-exempt bonds and these Funds) plus 50% of their benefits exceeding
certain base amounts. Income from these Funds, and other funds like them, is
included in the calculation of whether a recipient's income exceeds these base
amounts, but is not taxable directly.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. It can be expected that similar
proposals may be introduced in the future. Proposals by members of state
legislatures may also be introduced which could affect the state tax treatment
of these Funds' distributions. If such proposals were enacted, the availability
of Municipal Securities for investment by these Funds and the value of these
Funds' portfolios would be affected. In such event, these Funds would reevaluate
their investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
B-39
<PAGE>
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's adjusted tax basis for the shares. Any loss
realized upon the redemption or exchange of
B-40
<PAGE>
shares within six months from their date of purchase will be treated as a
long-term capital loss to the extent of distributions of long-term capital gain
dividends with respect to such shares during such six-month period. Any loss
realized upon the redemption or exchange of shares of a Tax-Free Fund within six
months from their date of purchase will be disallowed to the extent of
distributions of exempt-interest dividends with respect to such shares during
such six-month period. All or a portion of a loss realized upon the redemption
of shares of a Fund may be disallowed to the extent shares of the same Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S.
investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Funds. The law firm of Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same
members on their Boards) are responsible for the overall management of the
Funds, including general supervision and review of their investment activities.
The officers (the two Trusts, as well as an affiliated Trust, The Montgomery
Funds III, have the same officers), who administer the Funds' daily operations,
are appointed by the Boards of Trustees. The current Trustees and officers of
the Trusts performing a policy-making function and their affiliations and
principal occupations for the past five years are set forth below:
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Principal Financial and Accounting Officer and
Trustee (Age 55).*
600 Montgomery Street, San Francisco, California 94111. Mr.
Doyle has been the Chairman and a Director of Montgomery Asset
Management, Inc., the general partner of
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-41
<PAGE>
the Manager, and Chairman of the Manager since April 1990. Mr.
Doyle is a managing director of the investment banking firm of
Montgomery Securities, the Fund's Distributor, and has been
employed by Montgomery Securities since October 1983.
Mark B. Geist, President (Age 42)
600 Montgomery Street, San Francisco, California 94111. Mr.
Geist has been the President and a Director of Montgomery
Asset Management, Inc. and President of the Manager since
April 1990. From October 1988 until March 1990, Mr. Geist was
a Senior Vice President of Analytic Investment Management.
From January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 47)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John T. Story, Executive Vice President (Age 55)
600 Montgomery Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978 to January 1994, he was
Managing Director - Senior Vice President of Alliance Capital
Management.
David E. Demarest, Chief Administrative Officer (Age 41)
600 Montgomery Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 43)
600 Montgomery Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her arrival at the Manager
in 1993, Ms. Fross was Financial Analyst/Senior Accountant
with Charles Schwab, San Francisco, California. From 1989 to
November 1990, Ms. Fross was Assistant Controller of Bay Bank
of Commerce, San Leandro, California.
B-42
<PAGE>
Roger W. Honour, Vice President (Age 41)
600 Montgomery Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 40)
600 Montgomery Street, San Francisco, California 94111. Mr.
Roberts is a Managing Director and Portfolio Manager for the
Manager. For the five years prior to his start with the
Manager in 1990, Mr. Roberts was a portfolio manager and
analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 40)
600 Montgomery Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the Manager. Before joining the Manager, he was vice
president/portfolio manager at G.T. Capital Management, Inc.
from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1989, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 34)
600 Montgomery Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was vice president and
portfolio manager at The Boston Company Institutional
Investors Inc. from 1990 to 1993. From 1989 to 1990, Mr. Boich
was the founder and co-manager of The Common Goal World Fund,
a global equity partnership. From 1987 to 1989, Mr. Boich
worked as a financial adviser with Prudential-Bache Securities
and E.F. Hutton & Company.
Josephine S. Jimenez, Vice President (Age 41)
600 Montgomery Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio Manager for
the Manager. From 1988 through 1991, Ms. Jimenez worked at
Emerging Markets Investors
B-43
<PAGE>
Corporation/Emerging Markets Management in Washington, D.C. as
senior analyst and portfolio manager.
Bryan L. Sudweeks, Vice President (Age 40)
600 Montgomery Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 39)
600 Montgomery Street, San Francisco, California 94111. Mr.
Stevens is a Portfolio Manager and Managing Director for the
Manager. At Barclays de Zoete Wedd Securities from 1991 to
1992, he was responsible for starting its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage
securities and mortgage-related interest rate swaps for the
First Boston Corporation from 1990 to 1991 and while with
Drexel Burnham Lambert from 1984 to 1990. He was responsible
for the origination and trading of all derivative
mortgage-related securities with more than $10 billion in
total issuance.
John H. Brown, Vice President (Age 34)
600 Montgomery Street, San Francisco, California 94111. Mr.
Brown, CFA, is a Senior Portfolio Manager and Managing
Director for the Manager. Preceding his arrival at the Manager
in May 1994, Mr. Brown was an analyst and portfolio manager at
Merus Capital Management in San Francisco, California from
June 1986.
Rhoda Rossman, Vice President (Age 36)
600 Montgomery Street, San Francisco, California 94111. Ms.
Rossman is a Portfolio Manager and Managing Director for the
Manager. From 1993 until joining the Manager in April 1995,
Ms. Rossman was a Senior Portfolio Manager at Wells Fargo Bank
specializing in tax-exempt investments. From 1987 to 1993, she
served as an Investment Counselor at Rosenberg Capital
Management in San Francisco.
Thomas R. Haslett, Vice President (Age 34)
600 Montgomery Street, San Francisco, California 94111. Mr.
Haslett is a Vice President and Portfolio Manager for the
Manager. From September 1987 until joining the Manager in
April 1992, Mr. Haslett was a Portfolio
B-44
<PAGE>
Manager with Gannett, Welsh and Kotler in Boston,
Massachusetts.
Angeline Ee, Vice President (Age 34)
600 Montgomery Street, San Francisco, California 94111. Ms. Ee
is a Vice President and Portfolio Manager for the Manager.
From 1990 until joining the Manager in July, 1994, Ms. Ee was
an Investment Manager with AIG Investment Corp. in Hong Kong.
From June, 1989 until September, 1990, Ms. Ee was a co-manager
of a portfolio of Asian equities and bonds at Chase Manhattan
Bank in Singapore.
John A. Farnsworth, Trustee (Age 53)
One California Street, Suite 1950, San Francisco, California
94111. Mr. Farnsworth is a partner of Pearson, Caldwell &
Farnsworth, Inc., an executive search consulting firm. From
May 1988 to September 1991, Mr. Farnsworth was the Managing
Partner of the San Francisco office of Ward Howell
International, Inc., an executive recruiting firm. From May
1987 until May 1988, Mr. Farnsworth was Managing Director of
Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until
May 1987, Mr. Farnsworth served as a Senior Vice President of
Bank of America and head of the U.S. Private Banking Division.
Andrew Cox, Trustee (Age 51)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr.
Cox has been engaged as an independent investment consultant.
From September 1976 until June 1988, Mr. Cox was a Vice
President of the Founders Group of Mutual Funds, Denver,
Colorado, and Portfolio Manager or Co-Portfolio Manager of
several of the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 46)
2636 Vallejo Street, San Francisco, California 94123. Ms.
Herbert was Managing Director of Morgan Guaranty Trust
Company. From 1983 to 1991 she was General Manager of the
bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a
member of the board of Schools of the Sacred Heart, and is on
the Archdiocese of San Francisco Finance Council, where she
chairs the Investment Committee.
B-45
<PAGE>
Jerome S. Markowitz, Trustee and Trustee-designate* (Age 56)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds II
and as a trustee-designate of The Montgomery Funds, effective
November 16, 1995. As a trustee- designate, Mr. Markowitz
attends meetings of the Board of Trustees of the Montgomery
Funds but is not eligible to vote. Mr. Markowitz has been the
Senior Managing Director of Montgomery Securities (the
Distributor) since January 1991. Mr. Markowitz joined
Montgomery Securities in December 1987.
<TABLE>
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers or partners of the Manager or the
Distributor may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Montgomery Securities will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for each regular Board meeting attended. The
aggregate compensation paid by each Trust to each of the Trustees during the
fiscal year ended June 30, 1995, and the aggregate compensation paid to each of
the Trustees during the fiscal year ended June 30, 1995 by all of the registered
investment companies to which the Manager provides investment advisory services,
are set forth below.
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II* Expenses** Trust)
- --------------- ---------------- ------------ ------------ --------------
<S> <C> <C> <C>
R. Stephen Doyle None None -- None
Jerome S. Markowitz None None -- None
John A. Farnsworth $30,000 $5,000 -- $35,000
Andrew Cox $30,000 $5,000 -- $35,000
Cecilia H. Herbert $30,000 $5,000 -- $35,000
<FN>
* This fee represents compensation for service as Trustees to both
The Montgomery Funds II and The Montgomery Funds III, another
Trust advised by the Manager.
** The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the
B-46
<PAGE>
Funds (except the Allocation Fund) by Montgomery Asset Management, L.P., the
Manager, pursuant to an Investment Management Agreement initially dated July 13,
1990; and to the Allocation Fund pursuant to an Investment Management Agreement
initially dated November 18, 1993 (together, the "Agreements"). The Agreements
are in effect with respect to each Fund for two years after the Fund's inclusion
in its Trust's Agreement (on or around its beginning of public operations) and
then continue for each Fund for periods not exceeding one year so long as such
continuation is approved at least annually by (1) the Board of the appropriate
Trust or the vote of a majority of the outstanding shares of that Fund, and (2)
a majority of the Trustees who are not interested persons of any party to the
relevant Agreement, in each case by a vote cast in person at a meeting called
for the purpose of voting on such approval. The Agreements may be terminated at
any time, without penalty, by a Fund or the Manager upon 60 days' written
notice, and are automatically terminated in the event of its assignment as
defined in the Investment Company Act.
<TABLE>
For services performed under the Agreements, each Fund pays
the Manager a management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund at the following
annual rates:
<CAPTION>
Fund Average Daily Net Annual
- ---- Assets Rate
----------------- ------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Small Cap II Fund First $200 million 1.00%
Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Global First $500 million 1.25%
Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global First $250 million 1.25%
Communications Fund Over $250 million 1.00%
Montgomery International First $250 million 1.25%
Small Cap Fund Over $250 million 1.00%
Montgomery International First $500 million 1.10%
Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
</TABLE>
B-47
<PAGE>
<TABLE>
<S> <C> <C>
Montgomery Emerging Markets First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Advisors Emerging First $300 million 1.20%
Markets Fund Next $700 million 1.00%
Over $1 billion 0.90%
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Asset Allocation First $500 million 0.80%
Fund Over $500 million 0.65%
Montgomery Short Government First $500 million 0.50%
Bond Fund Over $500 million 0.40%
Montgomery Government Reserve First $250 million 0.40%
Fund Next $250 million 0.30%
Over $500 million 0.20%
Montgomery California Tax- First $500 million 0.50%
Free Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax- First $500 million 0.40%
Free Money Fund Over $500 million 0.30%
</TABLE>
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the lesser of the maximum
allowable by applicable state expense limitations and the following percentages
of each Fund's average net assets (excluding Rule 12b-1 fees): Emerging Markets,
International Small Cap, Opportunities and Communications Funds, one and
nine-tenths of one percent (1.90%) each; Select 50 Fund, one and eight-tenths of
one percent (1.80%); Micro Cap Fund, one and three-fourths percent (1.75%);
International Growth Fund, one and sixty-five one-hundredths of one percent
(1.65%); Growth, Small Cap II and Advisors Funds, one and five-tenths of one
percent (1.50%); Small Cap Fund, one and four-tenths of one percent (1.40%);
Allocation Fund, one and three-tenths percent (1.30%); the Short and California
Intermediate Bond Funds, seven-tenths of one percent (0.70%) each; the Equity
Income Fund, eighty-five-one-hundredths of one percent (0.85%); and the Money
Market Funds, six-tenths of one percent (0.60%), each. Currently, the most
restrictive state limitation is two and one-half percent (2 1/2%) of the first
$30,000,000 of average net assets of a Fund, two percent (2%) of the next
$70,000,000, and one and one-half percent (1 1/2%) of the value of the remaining
average net assets. The Manager also may voluntarily reduce additional amounts
to increase the return to a Fund's investors. Any reductions made by the Manager
in its fees are subject to reimbursement by that Fund within the following two
years (three years for the Allocation Fund) provided the Fund is able to effect
such reimbursement and remain in compliance with the foregoing expense
limitations. The Manager generally seeks reimbursement for the oldest reductions
and waivers before payment by the Funds for fees and expenses for the current
year.
B-48
<PAGE>
Operating expenses for purposes of the Agreements include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, expenses incurred in connection with any merger or reorganization,
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also, at its
discretion from time to time, pay for other Fund expenses from its own funds or
reduce the management fee of each Fund in excess of that required.
The Agreements were approved with respect to each Fund by the
Board of the Trust at duly called meetings. In considering the Agreements, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reduction made to its management fee within
the two-year period (three-year period for the Allocation Fund) following such
reduction subject to each Fund's ability to effect such reimbursement and remain
in compliance with applicable expense limitations. The Boards also considered
that any such management fee reimbursement will be accounted for on the
financial statements of each Fund as a contingent liability of that Fund and
will appear as a footnote to that Fund's financial statements until such time as
it appears that such Fund will be able to effect such reimbursement. At such
time as it appears probable that a Fund is able to effect such reimbursement,
the amount of reimbursement that such Fund is able to effect will be accrued as
an expense of that Fund for that current period.
<TABLE>
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
Fund Year or Period Ended June 30,
- ----
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Montgomery Growth Fund $5,566,892 $ 290,908 NA
Montgomery Equity Income $ 12,589 NA NA
Fund
Montgomery Small Cap Fund $2,095,945 $2,368,563 $1,956,407
Montgomery Small Cap II NA NA NA
Fund
Montgomery Micro Cap Fund $ 703,124 NA NA
Montgomery Global $ 226,283 $ 99,102 NA
Opportunities Fund
Montgomery Global $2,952,058 $2,261,713 $ 2,458
Communications Fund
Montgomery International $ 473,200 $ 300,614 NA
Small Cap Fund
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Montgomery International NA NA NA
Growth Fund
Montgomery Emerging $9,290,178 $5,678,053 $1,396,384
Markets Fund
Montgomery Advisors NA NA NA
Emerging Markets Fund
Montgomery Select 50 Fund NA NA NA
Montgomery Asset $ 150,882 $ 2,232 NA
Allocation Fund
Montgomery Short $ 99,249 $ 117,470 NA
Government Bond Fund
Montgomery Government $1,440,964 $ 633,266 NA
Reserve Fund
Montgomery California Tax- $ 43,889 $ 49,676 NA
Free Intermediate Bond
Fund
Montgomery California Tax- $ 149,574 NA NA
Free Money Fund
</TABLE>
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Manager serves as
the distribution coordinator under the 12b-1 Plan and, as such, receives any
fees paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the Trusts, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Manager at an annual rate of 0.25% of the Fund's aggregate
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average daily net assets attributable to its Class P shares and at an annual
rate of 0.75% of the Fund's aggregate average daily net assets attributable to
its Class L shares, respectively, to reimburse the Manager for its expenses in
connection with the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Manager may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Class to the
Manager.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days' notice
by the Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan
will be paid in accordance with Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as such
Section may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related
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to the Services Plan (the "Independent Trustees"), at their regular quarterly
meeting, adopted the Services Plan for the newly designated Class P and Class L
shares of each Fund. The initial shareholder of the Class P and Class L shares,
if any, of each Fund approved the Services Plan covering each Class. Class R
shares are not covered by the Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund, including
responding to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Funds, including issuers of securities in which the
Funds may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
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The International and Global Funds contemplate purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Funds will be holding, unless
better executions are available elsewhere. Dealers and underwriters usually act
as principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than
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<PAGE>
would be the case if no weight were given to the furnishing of these
supplemental services, provided that the amount of such commission or spread has
been determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for the Funds are made independently from
those of other client accounts of the Manager or its affiliates. Nevertheless,
it is possible that at times the same securities will be acceptable for one or
more Funds and for one or more of such client accounts. The Manager and its
personnel may have interests in one or more of those client accounts, either
through direct investment or because of management fees based on gains in the
account. To the extent any of these client accounts and a Fund seek to acquire
the same security at the same time, that Fund may not be able to acquire as
large a portion of such security as it desires, or it may have to pay a higher
price or obtain a lower yield for such security. Similarly, a Fund may not be
able to obtain as high a price for, or as large an execution of, an order to
sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security will be
allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as that Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Funds' accounts by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Boards that the Funds will not be materially disadvantaged by
any such trading preclusion and that the desirability of continuing its advisory
arrangements with the Manager and the Manager's affiliation with Montgomery
Securities and other affiliates of Montgomery Securities outweigh any
disadvantages that may result from the foregoing.
The Manager's sell discipline for the Domestic Equity, Select
50, Allocation, International and Global Funds' investment in issuers is based
on the premise of a long-term investment horizon; however, sudden changes in
valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate
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<PAGE>
investment horizon. These Funds will limit investments in illiquid securities to
15% of net assets.
For the Select 50, International and Global Funds, sell
decisions at the country level are dependent on the results of the Manager's
asset allocation model. Some countries impose restrictions on repatriation of
capital and/or dividends which would lengthen the Manager's assumed time horizon
in those countries. In addition, the rapid pace of privatization and initial
public offerings creates a flood of new opportunities which must continually be
assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Because Montgomery Securities is a member of the National
Association of Securities Dealers, Inc., it is sometimes entitled to obtain
certain fees when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage commissions for the benefit of
the Funds, any portfolio securities tendered by a Fund will be tendered through
Montgomery Securities if it is legally permissible to do so. In turn, the next
management fee payable to a Fund's Manager (an affiliate of Montgomery
Securities) under the Agreement will be reduced by the amount of any such fees
received by Montgomery Securities in cash, less any costs and expenses incurred
in connection therewith.
Subject to the foregoing policies, the Funds may use
Montgomery Securities as a broker to execute portfolio transactions. In
accordance with the provisions of Section 17(e) of the Investment Company Act
and Rule 17e-1 promulgated thereunder, the Trust has adopted certain procedures
designed to provide that commissions payable to Montgomery Securities are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on securities or options exchanges during a comparable period
of time. In determining the commissions to be paid to Montgomery Securities, it
is the policy of the Funds that such commissions will be, in the judgment of the
Manager, (i) at least as favorable as those which would be charged the Funds by
other qualified unaffiliated brokers having comparable execution capability, and
(ii) at least as favorable as commissions contemporaneously charged by
Montgomery Securities on comparable transactions for its most favored
unaffiliated customers, except for (a) accounts for which Montgomery Securities
acts as a clearing broker for another brokerage firm, and (b) any customers of
Montgomery Securities considered by a majority of the Trustees who are not
interested persons to be not comparable to the Fund. The Funds do not deem it
practicable and in their best interests to solicit competitive bids for
commission rates on each transaction. However, consideration is regularly given
to information concerning the prevailing level of commissions charged on
comparable transactions by other qualified brokers. The Boards review the
procedures adopted by the Trusts with respect to the payment of
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<PAGE>
brokerage commissions at least annually to ensure their continuing
appropriateness, and determine, on at least a quarterly basis, that all such
transactions during the preceding quarter were effected in compliance with such
procedures.
The Trusts have also adopted certain procedures, pursuant to
Rule 10f-3 under the Investment Company Act, which must be followed any time a
Fund purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the underwriting syndicate. The Boards determine, on at least a
quarterly basis, that any such purchases made during the preceding quarter were
effected in compliance with such procedures.
For the year ended June 30, 1995, the Funds' total securities
transactions generated commissions of $11,840,329, of which $74,850 was paid to
Montgomery Securities. For the year ended June 30, 1994, the Funds' total
securities transactions generated commissions of $586,092, of which $168 was
paid to Montgomery Securities. For the year ended June 30, 1993, the Funds paid
no commissions to Montgomery Securities for their securities transactions.
The Funds do not effect securities transactions through
brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, as stated above, Montgomery Securities may act as one of the Funds'
brokers in the purchase and sale of portfolio securities, and other brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, the
Funds may or may not purchase securities with the expectation of holding them to
maturity, although their general policy is to hold securities to maturity. The
Funds may, however, sell securities prior to maturity to meet redemptions or as
a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i)
suspend the continued offering of its Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best
interests of a Fund, an investor may purchase shares of that Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable (e.g., the Funds will not acquire restricted
securities), their acquisition is consistent with that Fund's investment
objective and policies, and the tendered securities are otherwise acceptable to
that Fund's Manager. Such securities are acquired by that Fund only for the
purpose of investment and not for resale. For the purposes of sales of shares of
that Fund for such securities, the tendered
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<PAGE>
securities shall be valued at the identical time and in the identical manner
that the portfolio securities of that Fund are valued for the purpose of
calculating the net asset value of that Fund's shares. A shareholder who
purchases shares of a Fund by tendering payment for the shares in the form of
other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
Payments to shareholders for shares of a Fund redeemed
directly from that Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that a Fund may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by a Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Funds may make payment partly in their portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available
for purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable
Funds through an IRA, there is available through these Funds a prototype
individual retirement account and custody agreement. The custody agreement
provides that DST Systems, Inc. will act as custodian under the plan, and will
furnish custodial services for an annual maintenance fee per participating
account of $10. (These fees are in addition to the normal custodian charges paid
by these Funds and will be deducted automatically from each
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Participant's account.) For further details, including the right to appoint a
successor custodian, see the plan and custody agreements and the IRA Disclosure
Statement as provided by these Funds. An IRA that invests in shares of these
Funds may also be used by employers who have adopted a Simplified Employee
Pension Plan. Individuals or employers who wish to invest in shares of a Fund
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
The IRA Disclosure Statement available from the Taxable Funds
contains more information on the amount investors may contribute and the
deductibility of IRA contributions. In summary, an individual may make
deductible contributions to the IRA of up to 100% of earned compensation, not to
exceed $2,000 annually (or $2,250 to two IRAs if there is a non-working spouse).
An IRA may be established whether or not the amount of the contribution is
deductible. Generally, a full deduction for federal income tax purposes will
only be allowed to taxpayers who meet one of the following two additional tests:
(A) the individual and the individual's spouse are each
not an active participant in an employer's qualified retirement
plan, or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less for married
couples filing jointly, or (ii) $25,000 or less for single individuals. The
maximum deduction is reduced for a married couple filing jointly with a combined
adjusted gross income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m.
(12:00 noon for the Money Market Funds), New York City time, on each day the
NYSE is open for trading (except national bank holidays for the Fixed Income
Funds). It is expected that the NYSE will be closed on Saturdays and Sundays and
on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas. The national bank holidays, in
addition to New Year's Day, Presidents' Day, Good Friday,
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Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas,
include January 2, Martin Luther King Day, Good Friday, Columbus Day, Veteran's
Day and December 26. The Funds may, but do not expect to, determine the net
asset values of their shares on any day when the NYSE is not open for trading if
there is sufficient trading in their portfolio securities on such days to affect
materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs and EDRs, which are
traded on securities exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Boards.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to a
Fund if acquired within 60 days of maturity or, if already held by a Fund on the
60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Funds are valued on the basis of valuations
provided by dealers in those instruments, by an independent pricing service,
approved by the appropriate Board, or at fair value as determined in good faith
by procedures approved by the Boards. Any such pricing service, in determining
value, will
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use information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities and yield to
maturity information.
An option that is written by a Fund is generally valued at the
last sale price or, in the absence of the last sale price, the last offer price.
An option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trusts'
Pricing Committees determine their fair value, following procedures approved by
the Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the
Boards in good faith deem appropriate to reflect their fair value.
B-60
<PAGE>
The Money Market Funds value their portfolio instruments at
amortized cost, which means that securities are valued at their acquisition
cost, as adjusted for amortization of premium or discount, rather than at
current market value. Calculations are made at least weekly to compare the value
of these Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were anticipated to increase, above $1.00 (computed using
amortized cost), the Board might supplement dividends in an effort to maintain
the net asset value at $1.00 per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with respect to each Fund may be terminated
without penalty by the parties thereto upon 60 days' written notice and is
automatically
B-61
<PAGE>
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield is computed
by determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
Effective Yield = [(Base Period Return + 1)365/7] -1
The Short Fund and California Intermediate Bond Fund. These
Funds' 30-day yield figure described in the Prospectus is calculated according
to a formula prescribed by the SEC, expressed as follows:
YIELD=2[(a-b +1)6-1]
---
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula
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<PAGE>
generally calls for amortization of the discount or premium; the amortization
schedule will be adjusted monthly to reflect changes in the market values of the
debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund that invests in tax-exempt obligations. The tax equivalent yield for one of
the Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields, these Funds assume an effective tax rate
(combining federal and California tax rates) of 46.24%. The effective rate used
in determining such yield does not reflect the tax costs resulting from the loss
of the benefit of personal exemptions and itemized deductions that may result
from the receipt of additional taxable income by taxpayers with adjusted gross
incomes exceeding certain levels. The tax equivalent yield may be higher than
the rate stated for taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended
June 30, 1995, were as follows:
<CAPTION>
Tax- Tax-
Equiv. Current Equiv.
Yield Effective Effective Yield Yield*
(7- Yield Yield* (30- (30-
Fund day) (7-day) (7-Day) day) day)
- ---- ----- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Montgomery Short NA NA NA 6.18% NA
Government Bond
Fund
Montgomery 5.50% 5.65% NA NA NA
Government
Reserve Fund
Montgomery NA NA NA 4.14% 7.70%
California Tax-
Free
Intermediate
Bond Fund
</TABLE>
B-63
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Montgomery 3.40% 3.46% 6.44% NA NA
California Tax-
Free Money Fund
<FN>
* Calculated using a combined federal and California income tax rate of
46.24%.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year
period at the end of each respective
period (or fractional portion thereof),
assuming reinvestment of all dividends
and distributions and complete
redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. A Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in that
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000 investment made at
the beginning of a l-, 5- or 10-year
period at the end of a l-, 5- or 10-year
period (or fractional portion thereof),
assuming reinvestment of all dividends
and distributions and complete
redemption of
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<PAGE>
the hypothetical investment at the end
of the measuring period.
Each Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
<TABLE>
The average annual total return for each Fund for the periods
indicated was as follows:
<CAPTION>
Year Inception*
Ended Through
Fund June 30, 1995 June 30, 1995
---- ------------- -------------
<S> <C> <C>
Montgomery Growth Fund 26.53% 31.71%
Montgomery Equity Income NA 14.26%
Fund
Montgomery Small Cap Fund 20.12% 19.87%
Montgomery Small Cap II NA NA
Fund
Montgomery Micro Cap Fund NA 14.58%
Montgomery Select 50 Fund NA NA
Montgomery Global
Opportunities Fund 6.43% 8.09%
Montgomery Global
Communications Fund 8.83% 12.93%
Montgomery International
Small Cap Fund (2.23)% (1.19)%
Montgomery International NA NA
Growth Fund
Montgomery Emerging
Markets Fund 1.40% 11.03%
Montgomery Advisors NA NA
Emerging Markets Fund
Montgomery Allocation Fund 35.99% 29.92%
Montgomery Short
Government Bond Fund 8.28% 6.48%
</TABLE>
B-65
<PAGE>
<TABLE>
<S> <C> <C>
Montgomery Government
Reserve Fund 4.97% 3.70%
Montgomery California Tax- 6.03% 3.85%
Free Intermediate Bond
Fund
Montgomery California Tax- NA 2.68%
Free Money Fund
- ----------------
<FN>
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were:
Growth Fund, September 30, 1993; Small Cap Fund, July 13, 1990;
Opportunities Fund, September 30, 1993; Global Communications Fund,
June 1, 1993; International Small Cap Fund, September 30, 1993;
Emerging Markets Fund, March 1, 1992; Allocation Fund, March 31, 1994;
Short Government Bond Fund, December 18, 1992; Government Reserve Fund,
September 14, 1992; California Intermediate Bond Fund, July 1, 1993;
Income and California Money Funds, September 30, 1994; Micro Cap Fund,
December 30, 1994; International Growth Fund, June 30, 1995; Select 50
Fund, October 27, 1995; Advisors Fund, November 13, 1995 and Small Cap
II Fund, December 29, 1995.
</FN>
</TABLE>
Comparisons. To help investors better evaluate how an
investment in the Funds might satisfy their investment objectives,
advertisements and other materials regarding the Funds may discuss various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
The following publications, indices and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report -- Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors
B-66
<PAGE>
of the money, government agency, futures, options, mortgage, corporate, Yankee,
Eurodollar, municipal, and preferred stock markets. This publication also
summarizes changes in banking statistics and reserve aggregates.
f) Lehman Brothers indices -- Lehman Brothers fixed-income indices may
be used for appropriate comparisons.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Funds' portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Funds to calculate their figures.
The Funds may also publish their relative rankings as
determined by independent mutual fund ranking services like Lipper Analytical
Services, Inc. and Morningstar, Inc.
Investors should note that the investment results of the Funds
will fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time the Funds
may publish or distribute information and reasons why the Manager believes
investors should invest in the Funds. For example, the Funds that invest
internationally may refer to the belief that over two-thirds of the world's
investment opportunities are to be found outside of the United States, compared
to approximately 30% twenty years ago. In addition, the Manager may state that
the International Small Cap Fund attempts to find and invest in certain of those
opportunities, such as in Latin America where the growth rates for the economies
of the region now exceed the economic growth rate in the United States. The
Manager may also state that the Funds are "performance-oriented portfolios."
Research. Largely inspired by its affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the Manager has developed its own tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for Montgomery's global and
international Funds work extensively on developing an in-depth understanding of
particular foreign markets and particular
B-67
<PAGE>
companies. And they very often discover that they are the first analysts from
the United States to meet with representatives of foreign companies, especially
those in emerging markets nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that crosses a number
of the Funds and is reflected in the number of Funds oriented towards lower
capitalization businesses.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market. The growth equity team, for example, has developed its own strategy for
analyzing the growth potential of U.S. companies, often large, well-known
companies.
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian")
acts as custodian of the securities and other assets of the Funds. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Funds' Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419958, Kansas City, Missouri 64141, the Funds' Transfer and
Dividend Disbursing Agent.
B-68
<PAGE>
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San
Francisco, California 94104.
The shareholders of The Montgomery Funds (but not The
Montgomery Funds II) as shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Agreement and Declaration of Trust
("Declaration of Trust") contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses out of the Funds' assets for any
shareholder held personally liable for obligations of the Funds or Trust. The
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Declaration of Trust further provides that the
Trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Trust as an investment
company as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
Among the Boards' powers enumerated in the Agreements and
Declaration of Trust is the authority to terminate the Trusts or any of their
series, or to merge or consolidate the Trusts or one or more of their series
with another trust or company without the need to seek shareholder approval of
any such action.
As of December 31, 1995, to the knowledge of the Funds, the
following shareholders owned of record 5% or more of the outstanding shares of
the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Charles Schwab & Co., Inc. 16,486,470 36.86
101 Montgomery Street
San Francisco, CA 94104-4122
B-69
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 5,337,282 11.93
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
Boston Safe Deposit & Trust Co. 2,022,105 15.64
Trust for the Eastman Kodak
Employee Savings and
Investment Plan
P.O. Box 3198
Pittsburgh, PA 15230-3198
Charles Schwab & Co., Inc. 1,551,198 11.99
101 Montgomery Street
San Francisco, CA 94104-4122
The Trust Co. of Knoxville 775,050 5.99
620 Market Street No. 300
Knoxville, TN 37902-2232
Boston Safe Deposit & Trust Co. 722,362 5.59
Trust ADT Security Systems
Mutual Fund Operations
P.O. Box 3198
Pittsburg, PA 15230-3198
Global Opportunities Fund
Charles Schwab & Co., Inc. 276,499 24.07
101 Montgomery Street
San Francisco, CA 94104-4122
Wayne Boich 121,389 10.57
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 5,986,178 44.49
101 Montgomery Street
San Francisco, CA 94104-4122
International Small Cap Fund
Charles Schwab & Co., Inc. 1,100,560 41.85
101 Montgomery Street
San Francisco, CA 94104-4122
FTC & Co. 143,972 5.47
Attn: Datalynx, No. 184
P.O. Box 173736
Denver, CO 80217-3736
B-70
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
International Growth Fund
Charles Schwab & Co., Inc. 52,666 8.13
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley Schwartz TR 49,038 7.57
U/A Dec. 20, 1988 Stanley Schwartz
Rev Living Trust
Montgomery Asset Management
Attn: S. Wang
600 Montgomery Street
San Francisco, CA 94111-2702
Stanley S. Schwartz TR 44,320 6.84
U/A December 20, 1988 Stanley S.
Schwartz Rev Living Trust/Arista
Foundation
Montgomery Asset Management
Attn: S. Wang
600 Montgomery Street
San Francisco, CA 94111-2702
Emerging Markets Fund
Charles Schwab & Co., Inc. 30,272,381 44.17
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 3,670,374 5.36
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-71
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Allocation Fund
Charles Schwab & Co., Inc. 2,239,832 33.14
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 915,765 13.55
For the Exclusive Benefit of Our
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Short Government Bond Fund
Charles Schwab & Co., Inc. 559,667 31.52
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 106,060 5.97
110-36831-14
Attn: Mutual Funds, 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
Montgomery Securities 89,680 5.05
401K Deferred Compensation Plan
For the Exclusive Benefit of
Clients
Att: Jeanette Harrison
600 Montgomery Street
San Francisco, CA 94111-2702
California Tax-Free Intermediate Bond
Fund
Charles Schwab & Co., Inc. 165,699 21.58
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 66,572 8.67
106-02832-13
600 Montgomery Street
San Francisco, CA 94111-2777
Collier Kimball 61,536 9.50
Montgomery Asset Management
Attn: S. Wang
600 Montgomery Street
San Francisco, CA 94111-2702
Bruce L. Cromander 45,008 5.86
Montgomery Asset Management
Attn: S. Wang
600 Montgomery Street
San Francisco, CA 94111-2702
B-72
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Government Reserve Fund
Montgomery Asset Management 23,412,592 7.78
A/C Montgomery Capital Partners
Attn Susan Hallgren, 15th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Equity Income Fund
Charles Schwab & Co., Inc. 632,934 51.16
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 124,257 10.04
For the Exclusive Benefit of our
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Micro Cap Fund
Charles Schwab & Co., Inc. 6,953,637 38.93
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,013,606 5.68
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
California Tax-Free Money Fund
E. Floyd Kvamme and Jean Kvamme, 7,347,717 8.09
Comm. Prop.
19490 Glen Una Drive
Saratoga, CA 95070-6412
Pleasant Travel Services DBA 5,757,437 6.34
Pleasant Hawaiian Holidays
Attn Ed Hogan
2404 Townsgate Road
Westlake Village, CA 91361-2505
B-73
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Montgomery Select 50 Fund
Charles Schwab & Co., Inc. 327,875 17.69
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 169,005 9.12
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Montgomery Advisors Emerging Markets
Fund
Charles Schwab & Co., Inc. 288,182 97.92
101 Montgomery Street
San Francisco, CA 94104-4122
As of December 31, 1995, the Trustees and officers of the
Trusts, as a group, owned less than 1% of the outstanding shares of each Fund
except the Opportunities and International Growth Funds. As of December 31,
1995, the Trustees and officers of the Trusts, as a group, owned approximately
1.9 percent of the Opportunities Fund and approximately 1.5 percent of the
International Growth Fund.
The Trusts are registered with the Securities and Exchange
Commission as non-diversified management investment companies, although each
Fund, except for the Tax-Free Funds, is a diversified series of the Trust. Such
a registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending
June 30, 1995, for the Growth, Micro Cap, Small Cap, Equity Income,
Opportunities, Communications, International Small Cap, Emerging Markets, Short,
Reserve, California Intermediate Bond and California Money Funds, as contained
in the Annual Report to Shareholders of such Funds for the fiscal year ended
June 30, 1995 (the "Report"), are incorporated herein by reference to the
Reports.
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<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
B-75
<PAGE>
Nonrated - where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such
B-76
<PAGE>
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds and notes
with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-77
<PAGE>
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A- 1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-78
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) For Montgomery Institutional Series: Emerging Markets
Portfolio: Portfolio Investments as of June 30, 1995;
Statement of Assets and Liabilities as of June 30, 1995;
Statement of Operations for the Year Ended June 30, 1995;
Statement of Changes in Net Assets for the year ended June 30,
1995; Financial Highlights for a Fund share outstanding
throughout each year, including the year ended June 30, 1995;
Notes to Financial Statements; Independent Auditor's Report on
the foregoing, all incorporated by reference to the Annual
Report to Shareholders of Montgomery Institutional Series:
Emerging Markets Portfolio for the year ended June 30, 1995.
For Montgomery Asset Allocation Fund: Portfolio Investments as
of June 30, 1995; Statement of Assets and Liabilities as of
June 30, 1995; Statement of Operations for the Year Ended June
30, 1995; Statement of Changes in Net Assets for the year
ended June 30, 1995; Financial Highlights for a Fund share
outstanding throughout each year, including the year ended
June 30, 1995; Notes to Financial Statements; Independent
Auditors' Report on the foregoing, all incorporated by
reference to the Annual Report to Shareholders of Montgomery
Asset Allocation Fund for the year ended June 30, 1995.
C-1
<PAGE>
(b) Exhibits:
(1) Amended and Restated Agreement and Declaration of Trust.D
(2) Amended and Restated By-Laws.D
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement.B
(5)(B) Form of Amendment to Investment Management Agreement.E
(6) Form of Underwriting Agreement.A
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.E
(9)(A) Administrative Services Agreement.A
(9)(B) Form of Multiple Class Plan.F
(9)(C) Form of Shareholder Services Plan.F
(10) Consent and Opinion of Counsel as to legality of shares.C
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Form of Subscription Agreement for initial shares.C
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing PlanF
(16)(A) Performance Computation for Montgomery Institutional Series:
Emerging Markets Portfolio.E
(16)(B) Performance Computation for Montgomery Asset Allocation Fund.E
(27) Financial Data Schedule
- ---------------------------
A Previously filed as part of Pre-Effective Amendment No. 2 to the
Registration Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the
Registration Statement, filed on November 15, 1993.
D Previously filed as part of Post-Effective Amendment No.9 to the
Registration Statement, filed on November 1, 1994.
E Previously filed as part of Post-Effective Amendment No.11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited
partnership, is the manager of each series of the Registrant, of The Montgomery
Funds, a Massachusetts business trust, and of The Montgomery Funds III, a
Delaware business trust. Montgomery Asset Management, Inc., a California
corporation is the general partner of Montgomery Asset Management, L.P., and
Montgomery Securities is its sole limited partner. The Registrant, The
Montgomery Funds and The Montgomery Funds III are deemed to be under the common
control of each of those three entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of December 31, 1995
-------------- -----------------------
Montgomery Institutional Series:
Emerging Markets Portfolio 26
Montgomery Asset Allocation Fund 6,607
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the
principal underwriter of The Montgomery Funds II, is the sole limited partner of
the investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The
general partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc.
("MAM, Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds II, is a Managing Director of
Montgomery Securities. R. Stephen Doyle is the
C-3
<PAGE>
Chairman and Chief Executive Officer of MAM, L.P.; Mark B. Geist is the
President; John T. Story is the Managing Director of Mutual Funds and Executive
Vice President; David E. Demarest is Chief Administrative Officer; Mary Jane
Fross is Manager of Mutual Fund Administration and Finance; and Josephine
Jimenez, Bryan L. Sudweeks, Stuart O. Roberts, John H. Brown, William C.
Stevens, Roger Honour, Oscar Castro, John Boich and Rhoda Rossman are Managing
Directors of MAM, L.P. Information about the individuals who function as
officers of MAM, L.P. (namely, R. Stephen Doyle, Mark B. Geist, John T. Story,
David E. Demarest, Mary Jane Fross and the ten Managing Directors) is set forth
in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The
Montgomery Funds II, the Montgomery Funds and the Montgomery
Funds III. Montgomery Securities acts as the principal
underwriter, depositor and/or investment adviser and/or
trustee for The Montgomery Funds, an investment company
registered under the Investment Company Act of 1940, as
amended, and for the following private investment partnerships
or trusts:
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited
Montgomery Private Investments Partnership
Pathfinder Montgomery Fund I, L.P.
Montgomery Growth Partners, L.P.
Montgomery Growth Partners II, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
<TABLE>
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee
Karl L. Matthies Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Alan L. Stein Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive None
Officer
John A. Berg Managing Director None
Howard S. Berl Managing Director None
Ralph E. Blair Managing Director None
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
Dennis Dugan Managing Director None
Michael Dovey Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
R. Brandon Fradd Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott Kovalik Managing Director None
David Lehman Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin Managing Director Secretary
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
J. Sanford Miller Managing Director None
Michael G. Mueller Managing Director None
Daniel J. Murphy Managing Director None
Bernard M. Notas Managing Director None
Joseph J. Piazza Managing Director None
Bruce G. Potter Managing Director None
David B. Renderman Managing Director None
Alice A. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
David M. Traversi Managing Director None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
George M. Vetter, III Managing Director None
James F. Wilson Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
P.J.J. Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
</TABLE>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., P.O. Box 1004 Baltimore,
Kansas City, Missouri 64105, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which will be kept by the Registrant at 600 Montgomery Street, San
Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's last annual
report to Shareholders, upon request and without charge.
C-6
<PAGE>
(d) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and that the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Francisco and
State of California on this 22nd day of January, 1996.
THE MONTGOMERY FUNDS II
By: R. Stephen Doyle*
---------------------------------
R. Stephen Doyle
Chairman and Principal Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
R. Stephen Doyle * Principal Executive January 22, 1996
- ------------------
R. Stephen Doyle Officer; Principal
Financial and Accounting
Officer; and Trustee
Andrew Cox * Trustee January 22, 1996
- ----------------------
Andrew Cox
Cecilia H. Herbert * Trustee January 22, 1996
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee January 22, 1996
- --------------------
John A. Farnsworth
Jerome S. Markowitz * Trustee January 22, 1996
- ---------------------
Jerome S. Markowitz
* By: /s/ Julie Allecta
-----------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(11) Independent Auditors' Consent ____
Deloitte &
Touche LLP
- ----------- -----------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds II:
We consent to (a) the incorporation by reference in this Post-Effective
Amendment No. 16 to Registration Statement No. 33-69686 of The Montgomery Funds
II on Form N-1A of our report dated August 11, 1995 incorporated by reference in
the Statement of Additional Information of Montgomery Asset Allocation Fund and
(b) the reference to us under the caption "Financial Highlights" appearing in
the Prospectus of Montgomery Asset Allocation Fund, which is also a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
January 19, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
