Rule 497(e)
33-69686 and 811-8064
FINAL
[LOGO]
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Prospectus
October 15, 1997
TABLE OF CONTENTS
Fees and Expenses of the Funds.............................3
Financial Highlights.......................................5
The Funds' Investment Objectives and Policies.............11
Portfolio Securities......................................16
Other Investment Practices................................20
Risk Considerations.......................................22
Management of the Funds...................................24
How to Contact the Funds..................................29
How to Invest in the Funds................................29
How to Redeem an Investment in the Funds..................32
Exchange Privileges and Restrictions......................34
Brokers and Other Intermediaries..........................35
How Net Asset Value Is Determined.........................35
Dividends and Distributions...............................36
Taxation..................................................36
General Information.......................................37
Backup Withholding........................................38
Glossary..................................................40
Each Fund's shares offered in this prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
("NAV") with no sales load, no commissions, and no redemption or exchange fees.
The Class P shares are subject to a Rule 12b-1 distribution fee as described in
this prospectus. The minimum initial investment in each Fund is $1,000, and
subsequent investments must be at least $100. The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies managed by Montgomery
Asset Management, LLC (the "Manager"), a subsidiary of Commerzbank AG. Funds
Distributor, Inc., which is not affiliated with the Manager, is the distributor
of the Funds (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be ensured.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated October 15,
1997, as may be revised, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated by this reference and is available without
charge by calling (800) 572-FUND (3863). If you are viewing the electronic
version of this prospectus through an online computer service, you may request a
printed version free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds and The Montgomery Funds II.
An investment in the Funds is neither insured nor guaranteed by the U.S.
government. There can be no assurance that Montgomery Government Reserve Fund
will be able to maintain a stable net asset value of $1 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>
The following 10 mutual funds (the "Funds") are offered in this prospectus:
-----------------------------------------------------
-----------------------------------------------------
Montgomery U.S. Equity Funds
-----------------------------------------------------
Growth Fund
-----------------------------------------------------
Small Cap Opportunities Fund
-----------------------------------------------------
Equity Income Fund
-----------------------------------------------------
Montgomery Foreign and Global Equity Funds
-----------------------------------------------------
International Growth Fund
-----------------------------------------------------
International Small Cap Fund
-----------------------------------------------------
Emerging Markets Fund
-----------------------------------------------------
Montgomery Multi-Strategy Funds
-----------------------------------------------------
Select 50 Fund
-----------------------------------------------------
U.S. Asset Allocation Fund
-----------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------
Short Duration Government Bond Fund
-----------------------------------------------------
Government Reserve Fund
-----------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having total market capitalizations of more than $1
billion.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
Montgomery Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies
having total market capitalizations of more than $1 billion.
Foreign and Global Equity Funds
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable price.
Montgomery International Small Cap Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable price.
Montgomery Emerging Markets Fund
Invests 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.
Multi-Strategy Funds
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
Montgomery U.S. Asset Allocation Fund
A fund-of-funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities and cash or cash
equivalents--using Funds from The Montgomery Funds family.
2
<PAGE>
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund
Invests primarily in U.S. government securities and 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 per share.
Montgomery Government Reserve Fund
Invests only 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 per share.
Fees and Expenses of the Funds
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Maximum Sales Load Imposed Maximum Sales Load Imposed Maximum Deferred Sales Redemption Fees+ Exchange Fees
on Purchases on Reinvested Dividends Load
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
None None None None None
-----------------------------------------------------------------------------------------------------------------------------
<FN>
+ 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. Shareholders who request redemption checks to be sent by Federal
Express may be required to pay a $10 fee 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets):
------------------------------------------------------------------------------------------------------------------------------
Other Expenses Total Fund
(after reimbursement Operating Expenses
Management Fee* 12b-1 Fees* unless noted)* (after reimbursement
unless noted)*
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
------------------------------------------------------------------------------------------------------------------------------
Growth Fund 0.92% 0.25% 0.33% 1.50%
------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 1.19% 0.25% 0.31% 1.75%
------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 0.60% 0.25% 0.25% 1.10%
------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
------------------------------------------------------------------------------------------------------------------------------
International Growth Fund 1.10% 0.25% 0.55% 1.90%
------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.05% 0.25% 0.55% 1.85%
------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 1.25% 0.25% 0.55% 2.05%
------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 0.00% 0.25% 1.30%#** 1.55%#
------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0.50% 0.25% 0.10% 0.85%
------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0.35% 0.25% 0.25% 0.85%
------------------------------------------------------------------------------------------------------------------------------
This table is intended to assist the investor in understanding the various expenses of each Fund. Operating expenses are paid
out of a Fund's assets and are factored into the Fund's share price. Each Fund estimates that it will have the expenses listed
(expressed as a percentage of average net assets) for the current fiscal year. Because Rule 12b-1 distribution charges are
accounted for on a class-level basis (and not an individual shareholder level basis), individual long-term investors in the
Class P shares of the Fund may over time pay more than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc. ("NASD"), even though all shareholders of that class in the aggregate
will not. This is recognized and permitted by the NASD.
<PAGE>
<FN>
* Expenses for the Funds are based on actual expenses and expense limitations for the fiscal year ended June 30, 1997, for
the Class P shares (or, if no Class P shares were outstanding, for another class of shares, but adjusted to include the
Rule 12b-1 fee). The Manager will reduce its fees and may absorb or reimburse a Fund for certain expenses to the extent
necessary to limit total annual Fund operating expenses to the amount indicated in the table. A Fund is required to
reimburse the Manager for any reductions in the Manager's fee only during the three years following that reduction and
only if such reimbursement can be achieved within the foregoing expense limits. The Manager generally seeks reimbursement
for the oldest reductions and waivers before payment for fees and expenses for the current year. Absent reduction and
including the Rule 12b-1 fee for the Class P shares, actual total Fund operating expenses for the period ended June 30,
1997 (annualized) would have been as follows: Montgomery Equity Income Fund, 1.71`% (0.86% other expenses); Montgomery
Small Cap Opportunities Fund, 2.00% (0.56% other expenses); Montgomery International Growth Fund, 2.62% (1.27% other
expenses); Montgomery International Small Cap Fund, 2.85% (1.35% other expenses); Montgomery U.S. Asset Allocation Fund,
1.74% (1.49% other expenses); Montgomery Select 50 Fund, 2.17% (0.67% other expenses); Montgomery Short Duration
Government Bond Fund, 2.30% (1.55% other expenses);and Montgomery Government Reserve Fund, 0.87% (0.27% other expenses).
The Manager may terminate these voluntary reductions at any time. See "Management of the Funds."
** Estimated expenses of Montgomery U.S. Asset Allocation Fund (excluding Rule 12b-1 fees and expenses related to the
Underlying Funds and after reimbursement) are 0.25%. Estimated expenses related to the Underlying Funds for Montgomery
U.S. Asset Allocation Fund are 1.05%.
# Even if the total expenses of the Underlying Funds exceed 1.05% for the Montgomery U.S. Asset Allocation Fund, the Manager
has agreed to limit the Montgomery U.S. Asset Allocation Fund's total Fund operating expenses to 1.55%. The total
expenses for the Underlying Funds for the Montgomery U.S. Asset Allocation Fund (currently estimated to be 1.05%) will
depend on the actual expenses of the Underlying Funds and how the Fund's assets are allocated among those Underlying
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>
------------------------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
------------------------------------------------------------------------------------------------------------------------------
Growth Fund $15 $47 $ 82 $178
------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund $18 $55 $ 95 $205
------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund $11 $35 $ 61 $134
------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
------------------------------------------------------------------------------------------------------------------------------
International Growth Fund $19 $60 $102 $221
------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund $22 $67 $115 $247
------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund $19 $58 $100 $216
------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund $21 $64 $110 $237
------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund $16 $49 $ 84 $184
------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund $ 9 $27 $ 47 $105
------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund $ 9 $27 $ 47 $105
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
4
<PAGE>
<TABLE>
Financial Highlights
Selected Per-Share Data and Ratios
The following financial information for the periods ended June 30, 1992, through June 30, 1997, was audited by Deloitte & Touche
LLP, whose report, dated August 8, 1997, appears in the 1997 Annual Report of the Funds. The financial information for periods
indicated with the note "R" relate to another class of shares of the Funds not subject to the Class P Rule 12b-1 fee because
Class P shares were not offered during those periods.
<CAPTION>
Growth Fund
Selected Per-Share Data for the Year Ended: Fiscal Year Ended June 30
1997## 1996 1995R 1994(a)R
<S> <C> <C> <C> <C>
Net asset value--beginning of year $21.94 $19.22 $ 15.27 $ 12.00
Net investment income/(loss) 0.09 0.03 0.12 0.04
Net realized and unrealized gain/(loss) on investments 3.96 2.69 3.91 3.31++
Net increase/(decrease) in net assets resulting from
investment operations 4.05 2.72 4.03 3.35
Distributions:
Dividends from net investment income (0.10) -- (0.07) (0.01)
Distributions from net realized capital gains (2.77) -- (0.07) --
Distributions in excess of net realized capital gains -- -- -- (0.07)
Total distributions (2.87) -- (0.14) (0.08)
Net asset value--end of year $23.12 $21.94 $ 19.16 $ 15.27
Total return** 20.41% 14.15% 26.53% 27.98%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000s) $212 $82 $878,776 $149,103
Ratio of net investment income/(loss) to average net
assets 0.44% 0.53%+ 0.98% 1.09%+
Net investment income/(loss) before deferral of fees by
Manager -- -- -- $ 0.03
Portfolio turnover rate 61.10% 118.14% 128.36% 110.65%
Average commission rate paid+++ $ 0.0595 $0.0596 N/A N/A
Expense ratio before deferral of fees by Manager -- -- -- 1.79%+
Expense ratio including interest expense 1.52% 1.60%+ 1.50% 1.49%+
<FN>
(a) The Growth Fund's Class R shares and Class P shares commenced operations on September 30, 1993, and January 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the period may not be in accord with the net
realized and unrealized gain/(loss) for the period because of the timing of purchases and withdrawal of shares in
relation to the fluctuating market values of the portfolio.
++ Average commission rate paid per share of securities purchased and sold by the Fund.
## Per-share numbers have been calculated using the average 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.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Small Cap
Opportunities Fund Equity Income Fund
Selected Per-Share Data for the Year Ended: Fiscal Year Ended June 30 Fiscal Year Ended June 30
1997 1996(a)##R 1997## 1996 1995(b)R
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 14.37 $ 12.00 $16.09 $15.66 $12.00
Net investment income/(loss) (0.11) 0.02 0.44 0.08 0.31
Net realized and unrealized gain/(loss) on investments 3.27 3.78++ 3.35 0.35 1.38
Net increase/(decrease) in net assets resulting from
investment operations 3.16 3.80 3.79 0.43 1.69
Distributions:
Dividends from net investment income (0.00)# -- (0.42) -- (0.31)
Distributions in excess of net investment income -- -- (1.56) -- --
Distributions from net realized capital gains -- -- -- -- --
Distributions in excess of net realized capital gains -- -- -- ---
Distributions from capital -- -- -- -- --
Total distributions (0.00)# -- (1.98) -- (0.31)
Net asset value--end of year $ 17.53 $ 15.80 $17.90 $16.09 $13.38
Total return** 22.09% 31.67% 25.64% 2.75% 14.26%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000s) $ 9 $136,140 $ 868 $ 2 $6,383
Ratio of net investment income/(loss) to average net assets (1.11)%+ 0.23%+ 2.68% 2.78%+ 4.06%+
Net investment income/(loss) before deferral of fees by
Manager $ (0.14) $ (0.04) $ 0.34 $ 0.06 $ 0.13
Portfolio turnover rate 154.50% 81.29% 62.31% 89.77% 29.46%
Average commission rate paid+++ $ 0.0562 $ 0.0578 $ 0.0598 $ 0.0423 N/A
Expense ratio before deferral of fees by Manager 2.00%+ 2.16%+ N/A N/A N/A
Expense ratio excluding interest expense N/A N/A 1.11% 1.10%+ 0.84%+
Expense ratio before deferral of fees by Manager, including
interest expense N/A N/A 1.71% 1.70%+ 3.16%+
Expense ratio including interest expense 1.75%+ 1.50%+ -- -- --
<FN>
(a) The Small Cap Opportunities Fund's Class R shares and Class P shares commenced operations on December 29, 1995, and July
29, 1996, respectively.
(b) The Equity Income Fund's Class R shares and Class P shares commenced operations on September 30, 1994, and March 12,
1996, respectively.
(c) The International Growth Fund's Class P shares commenced operations on March 12, 1996.
(d) The International Small Cap Fund's Class R shares and Class P shares commenced operations on September 30, 1993, and
June 9, 1997, respectively.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
International Growth Fund International Small Cap Fund
Fiscal Year Ended June 30 Fiscal Year Ended June 30
1997## 1996(c) 1997 1996R 1995R 1994(d)R
<S> <C> <C> <C> <C> <C> <C>
$15.31 $13.66 $16.96 $ 11.75 $ 12.02 $ 12.00
0.05 0.00# 0.00# 0.03 0.12 0.00#
2.54 1.65 0.20 3.10 (0.39) 0.02
2.59 1.65 0.20 3.13 (0.27) 0.02
-- -- -- (0.02) (0.00)# --
(1.68) -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
(1.68) -- -- (0.02) (0.00)# --
$16.22 $15.31 $17.16 $ 14.86 $ 11.75 $ 12.02
19.13% 12.08% 1.18% 26.68% (2.23)% 0.17%
$ 5 $ 1 $15 $41,640 $ 28,516 $ 34,555
0.32% 0.01%+ (0.59)%+ 0.20% 0.95% 0.04%+
$(0.06) $(0.05) $(0.01) $ (0.08) $ 0.05 $ (0.02)
95.02% 238.91% 84.91% 177.36% 156.13% 123.50%
$ 0.0217 N/A $ 0.0157 $ 0.0123 N/A N/A
N/A N/A N/A N/A N/A N/A
1.91% 1.90%+ 2.15%+ 1.90% 1.90% 1.90%+
2.62% 3.16%+ 2.85%+ 2.76% 2.50% 2.32%+
-- -- 2.15%+ 1.96% 1.91% 1.99%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+Annualized.
++ The amount shown in this caption for each share outstanding throughout the period may not be in accord with the net
realized and unrealized gain/(loss) for the period because of the timing of purchases and withdrawal of shares in
relation to the fluctuating market values of the portfolio.
+++ Average commission rate paid per share of securities purchased and sold by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share
data for the period, since the use of the undistributed income method did not accord with the results of operations.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
Emerging Markets Fund
<CAPTION>
Selected Per-Share Data for the Year Ended:
Fiscal Year Ended June 30
1997 1996 1995##R 1994R 1993R 1992(a)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 14.19 $ 12.62 $ 13.68 $ 11.07 $ 9.96 $ 10.00
Net investment income/(loss) 0.06 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 2.58 1.56 0.25++ 2.92 1.05 (0.07)
Net increase/(decrease) in net assets resulting from
investment operations 2.64 1.57 0.28 2.89 1.12 (0.04)
Distributions:
Dividends from net investment income (0.06) -- -- -- (0.01) --
Distributions in excess of net investment income -- -- -- -- -- --
Distributions from net realized capital gains -- -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- -- (0.37) -- -- --
Total distributions (0.06) -- (0.79) (0.28) (0.01) --
Net asset value--end of year $ 16.77 $ 14.19 $ 13.17 $ 13.68 $ 11.07 $ 9.96
Total return** 18.62% 12.44% 1.40% 26.10% 11.27% (0.40)%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000s) $607 $ 2 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) to average net asset s 0.23% 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
Net investment income/(loss) before deferral of fees
by Manager -- -- -- -- $ 0.06 $0.01
Portfolio turnover rate 83.08% 109.92% 92.09% 63.79% 21.40% 0.19%
Average commission rate paid+++ $ 0.0011 $ 0.0007 N/A N/A N/A N/A
Expense ratio including interest expense -- -- -- -- -- --
Expense ratio before deferral of fees by Manager, including -- -- -- -- 1.93% 2.80%+
interest expense
Expense ratio excluding interest expense 1.92% 1.97%+ 1.80% 1.85% 1.90% 1.90%+
<FN>
(a) The Emerging Markets Fund's Class R shares and Class P shares commenced operations on March 1, 1992, and March 12, 1996,
respectively.
(b) The Select 50 Fund's Class R shares and Class P shares commenced operations on October 2, 1995, and December 12, 1996,
respectively.
(c) The U.S. Asset Allocation Fund's Class R shares and Class P shares commenced operations on March 31, 1994, and January
3, 1996, respectively.
(d) The Short Duration Government Bond Fund's Class R shares and Class P shares commenced operations on December 18, 1992,
and March 12, 1996, respectively.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
Select 50 Fund U.S. Asset Allocation Fund Short Duration Government Bond Fund
<CAPTION>
Fiscal Year Ended
June 30 Fiscal Year Ended June 30 Fiscal Year Ended June 30
1997## 1996(b)R 1997## 1996 1995R 1994(c)R 1997## 1996 1995R 1994R 1993(d)R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.89 $ 12.00 $ 19.33 $ 17.86 $ 12.24 $ 12.00 $ 9.92 $ 9.98 $ 9.80 $ 10.23 $ 10.00
(0.02) 0.06 0.43 0.09 0.25 0.06 0.59 0.16 0.62 0.61 0.33
4.11 4.45 2.13 1.38 4.11 0.18 0.06 (0.05) 0.16 (0.34) 0.23
4.09 4.51 2.56 1.47 4.36 0.24 0.65 0.11 0.78 0.27 0.56
-- (0.04) (0.34) -- (0.17) -- (0.58) (0.17) (0.62) (0.56) (0.33)
-- -- -- -- -- -- (0.00)# -- -- (0.07) --
-- -- (1.66) -- (0.10) -- -- -- -- -- --
-- (0.01) -- -- -- -- -- -- -- (0.07) --
-- -- -- -- -- -- -- -- (0.01) -- (0.00)#
-- (0.05) (2.00) -- (0.27) -- (0.58) (0.17) (0.63) (0.70) (0.33)
$19.98 $ 16.46 $ 19.89 $19.33 $ 16.33 $ 12.24 $ 9.99 $ 9.92 $ 9.95 $ 9.80 $ 10.23
25.74% 37.75% 14.35% 8.23% 35.99% 2.00% 6.69% 1.12% 8.28% 2.49% 5.66%
$ 9 $77,955 $ 74 $ 43 $60,234 $ 1,548 $ 0 $ 1 $ 17,093 $21,937 $ 22,254
(0.21)%+ 0.42%+ 2.30% 1.60%+ 3.43% 2.54%+ 5.62% 5.63%+ 6.41% 5.93% 6.02%+
$(0.03) $ 0.02 $ 0.42 $ 0.08 $ 0.19 $ (0.11) $ 0.54 $ 0.14 $ 0.54 $ 0.51 $ 0.27
157.93% 105.98% 168.51% 225.91% 95.75% 190.94% 450.98% 349.62% 284.23% 603.07% 213.22%
$ 0.0011 $ 0.0097 $ 0.0448 $ 0.0595 N/A N/A N/A N/A N/A N/A N/A
-- -- 1.68% 1.67%+ 1.31% 1.43%+ 1.80% 1.80%+ 1.38% 0.71% --
2.17%+ 2.11%+ 1.74% 1.80%+ 2.07% 9.00%+ 2.30% 2.56%+ 2.23% 1.75% 2.07%+
2.07%+ 1.80%+ 1.56% 1.55%+ 1.30% 1.30%+ 0.85% 0.85%+ 0.47% 0.25% 0.22%+
<FN>
(a) The Government Reserve Fund's Class R shares and Class P shares commenced operations on September 14, 1992, and March
12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by the Fund.
# Amount represents less than $0.01 per share.
## 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.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
Government Reserve Fund
<CAPTION>
Selected Per-Share Data for the Year Ended: Fiscal Year Ended June 30
1997 1996 1995R 1994R 1993(a)R
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income/(loss) 0.048 0.014 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on investments 0.000### 0.000### 0.000### 0.000### 0.000###
Net increase/(decrease) in net assets resulting from investment
operations 0.048 0.014 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.048) (0.014) (0.049) (0.029) (0.024)
Total distributions (0.048) (0.014) (0.049) (0.029) (0.024)
Net asset value--end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return** 4.88% 1.38% 4.97% 2.96% 2.41%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000s) $ 0 $ 1 $258,956 $211,129 $124,795
Ratio of net investment income/(loss) to average net sales 4.68% 4.91%+ 4.92% 2.99% 2.96%+
Net investment income/(loss) before deferral of fees by
Manager $ 0.048 $ 0.013 $ 0.047 $ 0.028 $ 0.013
Portfolio turnover rate -- -- -- -- --
Average commission rate paid+++ N/A N/A N/A N/A N/A
Expense ratio including interest expense -- -- 0.63% -- --
Expense ratio before deferral of fees by Manager, including
interest expense 0.87% 0.99%+ 0.79% 0.71% 0.77%+
Expense ratio excluding interest expense 0.85% 0.85%+ 0.60% 0.60% 0.38%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by the Fund.
## 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.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<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." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investments in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used in the
prospectus are defined in the glossary at the end of this prospectus.
<TABLE>
Summary Comparison of Funds
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Exposure Exposure Focus Portfolio Companies
-----------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund 65 to 100% 35% Growth More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 65 to 100% 35% Small-cap Less than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 65 to 100% 35% Large-cap dividend More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
International Growth Fund 65 to 100% 35% Foreign growth More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 65 to 100% 35% Foreign small-cap Less than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 65 to 100% 35% Foreign emerging growth Any size
-----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
-----------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 65 to 100% 35% Capital appreciation Any size
-----------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 20 to 80% 20 to 80% U.S. balanced Any size
-----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond 0% 100% Total return N/A
Fund
-----------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0% 100% Income N/A
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Equity Funds
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions, it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock, but also
invests in other types of equity securities and equity-derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in investment-grade debt
securities or in foreign securities. See "Portfolio Securities." The Manager
does not expect the Growth Fund to be consistently fully invested in equity
securities. During periods that the Manager deems appropriate, the Fund may take
a more defensive position and be significantly invested in cash and cash
equivalents.
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental values and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis, focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund
11
<PAGE>
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Opportunities Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in companies having total market capitalizations of $1 billion or more
and in investment-grade debt securities and foreign companies. The Fund invests
primarily in common stock. It also may invest in other types of equity
securities and equity-derivative securities. See "Portfolio Securities." Current
income from dividends, interest and other sources is only incidental.
The Small Cap Opportunities Fund seeks growth at a reasonable value, identifying
companies with sound fundamental values and potential for substantial growth.
The Fund selects its investments based on a combination of quantitative
screening techniques and fundamental analysis. The Fund initially identifies a
universe of investment candidates by screening companies based on changes in
rates of growth and valuation ratios such as price to sales, price to earnings
and price to cash flows. Through this process the Fund seeks to identify rapidly
growing companies with reasonable valuations and accelerating growth rates, or
having low valuations and initial signs of growth. The Fund then subjects these
companies to a rigorous fundamental analysis, focusing on balance sheets and
income statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having total
market capitalizations 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 investment-grade debt
instruments. The Fund attempts to achieve low price volatility through its
investment in mature companies. 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."
Foreign and Global Equity Funds
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion. The 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" and "Risk Considerations."
The 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 with 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.
12
<PAGE>
The 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 United States, but no country may represent more
than 40% of its total assets. The Manager uses its financial expertise and
research capabilities in markets throughout the world in attempting to identify
those countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner, but may
invest those assets in equity securities of U.S. companies, in companies having
market capitalizations of $1 billion or more, or in debt securities, including
up to 5% of its total assets in debt securities rated below investment grade.
See "Portfolio Securities" and "Risk Considerations."
The 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 with 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.
The 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 United States, but no country may represent more
than 40% of its total assets. The Manager uses its financial expertise and
research capabilities in markets throughout the world in attempting to identify
those countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of emerging markets companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging markets countries at all times and invests no more than 35% of its
total assets in any one emerging markets country. The Manager currently regards
the following to be emerging markets countries: Latin America (Argentina,
Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay and Venezuela); Asia (Bangladesh, China/Hong Kong, India, Indonesia,
Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan,
Thailand and Vietnam); southern and eastern Europe (the Czech Republic, Greece,
Hungary, Kazakstan, Poland, Portugal, Romania, Russia, Slovakia, Slovenia,
Turkey and Ukraine); the Middle East (Israel and Jordan); and Africa (Egypt,
Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia and
Zimbabwe). In the future the Fund may invest in other emerging markets
countries.
The Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percentage of assets to invest in each country
to maximize expected returns for a given risk level. The Fund's aims are to
invest in those countries that are expected to have the highest risk/reward
trade-off when incorporated into a total portfolio context. This "top-down"
country selection is combined with "bottom-up" fundamental industry analysis and
stock selection based on original research and publicly available information
and company visits.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 35% of its total
assets in 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.
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging markets companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity-derivative securities. See "Portfolio
Securities."
13
<PAGE>
Multi-Strategy Funds
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
The Fund invests primarily in 10 equity securities selected by each of the
Manager's five different equity disciplines. These five disciplines, which may
be adjusted from time to time, include U.S. Growth Equity, U.S.
Smaller-Capitalization Companies, U.S. Equity Income, and International and
Emerging Markets. See "Management of the Funds." The Manager's Equity teams
select those securities based on the potential for capital appreciation.
The Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation, but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
The 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 United States, but no country other
than the United States may represent more than 40% of its total assets. The
Manager uses its financial expertise and research capabilities in markets
throughout the world in attempting to identify those countries, currencies and
companies in which this Fund may invest. See "Risk Considerations."
Montgomery U.S. Asset Allocation Fund (the "U.S. Asset Allocation Fund,"
formerly called the "Montgomery Asset Allocation Fund")
The investment objective of the U.S. Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The Fund is a "fund-of-funds," which means that the Fund will not
invest directly in securities but will instead invest in a diversified group of
Funds from The Montgomery Funds family (each, an "Underlying Fund") that the
Manager considers to be appropriate investments for achieving the U.S. Asset
Allocation Fund's investment objective. The U.S. Asset Allocation Fund adjusts
the proportion of its investments in each of these categories as needed to
respond to current market conditions, primarily by changing its allocation
percentage among the different Underlying Funds. The following table illustrates
the anticipated allocation methodology.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund Allocation
---------------------------------------------------------------------------------------------------------------
Investment Focus Anticipated Range of Asset Underlying Fund
Allocation
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic stocks 20 to 80% Growth Fund; After November 30, 1997, this
may include other domestic equity funds
advised by the Manager.
---------------------------------------------------------------------------------------------------------------
Debt instruments 20 to 80% Total Return Bond Fund or other general
investment-grade bond funds advised by the
Manager
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0 to 50% Government Reserve Fund
---------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Characteristics of the Underlying Funds
The characteristics of the Growth Fund and the Government Reserve Fund are
discussed elsewhere in this prospectus. The following summarizes the
characteristics of the Total Return Bond Fund and its investment objective and
policies.
14
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Anticipated Maximum Debt Focus Typical Market Capitalization of
Equity Exposure Exposure Portfolio Companies
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund 0% 100% Total return N/A
------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment objective of the Total Return Bond Fund is to seek maximum total
return (which consists of both income and capital appreciation), consistent with
preservation of capital and prudent investment management. Under normal
conditions, the Fund seeks to achieve its objective by investing at least 65%
(and typically more than 90%) of its total assets in a broad range of
investment-grade bonds, including marketable corporate bonds, U.S. government
securities, mortgage-related securities, other asset-backed securities, and cash
or money market instruments. The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies and may invest beyond this limit in
U.S. dollar-denominated securities of foreign issuers. The portfolio securities
that the Total Return Bond Fund may invest in, the other investment practices of
the Total Return Bond Fund and the risks involved with an investment in the
Total Return Bond Fund are similar to those of the Short Duration Government
Bond Fund with the following exceptions:
o the Total Return Bond Fund may invest more than 10% of its total assets in
stripped mortgage securities,
o it may use leverage even 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,
o it may invest in forward currency contracts, and
o it may invest up to 20% of its net assets in foreign securities.
As with the Short Duration Government Bond Fund, the portfolio turnover rate of
the Total Return Bond Fund is expected to exceed 100% annually. See "Portfolio
Securities," "Other Investment Practices" and "Risk Considerations."
Duration of the Total Return Bond Fund. The Total Return Bond Fund may purchase
individual securities of any maturity. The Fund, however, seeks to maintain an
average portfolio duration of between four and five and a half years.
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund (the "Short Bond Fund, " formerly
called the "Short Government Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. Because the Manager seeks to
manage interest rate risk by limiting effective duration, the Fund may invest in
securities of any maturity.
The 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 the
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 of $1 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Bond Fund may purchase individual
securities of any maturity, and the dollar-weighted average maturity (or period
until the next interest rate reset date) of its portfolio securities may exceed
three years. The Fund, however, seeks to maintain an average portfolio duration
comparable to or less than that of three-year U.S. Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital which, under normal conditions, it seeks
by investing exclusively in U.S. government securities, repurchase agreements
for U.S.
15
<PAGE>
government securities, and other money market funds investing in U.S. government
securities and those repurchase agreements. The Fund seeks to maintain a stable
net asset value of $1 per share in compliance with Rule 2a-7 under the
Investment Company Act and, pursuant to procedures adopted under such Rule,
limits its investments to those U.S. government securities that the Board of
Trustees (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 the
securities in its portfolio of 90 days or less.
Portfolio Securities
The following describes portfolio securities in which the Funds may invest.
Investors in the U.S. Asset Allocation Fund should note that the portfolio
securities of the U.S. Asset Allocation Fund consist of the portfolio securities
of each of its Underlying Funds.
Equity Securities
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund emphasize investments in common stock. These Funds may also invest in other
types of equity securities (such as preferred stocks or convertible securities)
and equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund may invest in ADRs, EDRs, GDRs and convertible securities which the Manager
regards as a form of equity security. These Funds may also invest up to 5% of
its net assets in warrants.
Privatizations
The Foreign and Global Equity Funds and the Select 50 Fund believe that foreign
governmental programs of selling interests in government-owned or -controlled
enterprises ("privatizations") may represent opportunities for significant
capital appreciation, and these Funds may invest in privatizations. The ability
of U.S. entities, such as these Funds, to participate in privatizations may be
limited by local law, or the terms for participation may be less advantageous
than for local investors. There can be no assurance that privatization programs
will be successful.
Special Situations
The Foreign and Global Equity Funds and the Select 50 Fund 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 Foreign and Global Equity 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 Foreign and Global Equity
Funds also may incur tax liability to the extent that 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 Funds do not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
16
<PAGE>
Debt Securities
All 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 35% of the U.S. Equity Funds', the
Foreign and Global Equity Funds' and the Select 50 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, the Foreign
and Global Equity Funds and the Select 50 Fund may invest up to 5% of their
total assets in debt securities rated lower than investment grade. Subject to
this limitation, each of these Funds may invest in any debt security, including
securities in default. After its purchase by a Fund, a debt security may cease
to be rated or its rating may be reduced below that required for purchase by the
Fund. A security downgraded below the minimum level may be retained if
determined by the Manager and the Board to be in the best interests of the Fund.
See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit quality standards of each Fund and will be limited to 5%
of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the Equity Income Fund and the Foreign and Global Equity
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, government entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. Government Securities
All Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and mortgage-related securities of the GNMA, are issued
or guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Funds' shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The U.S. Fixed-Income and Money Market 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" under "Other Investment Practices" for a discussion of
other reasons why these Funds invest in derivative securities.
Agency Mortgage-Related Securities
Investors in the Reserve Fund and the Short Bond Fund should note that the
dominant issuers or guarantors of mortgage-related securities today are GNMA,
FNMA and the FHLMC. GNMA creates pass-through securities from pools of
government-guaranteed or -insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not
17
<PAGE>
backed by the full faith and credit of the U.S. government but are generally
considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The U.S. Fixed-Income and Money Market Funds consider GNMA-, FNMA- and
FHLMC-issued pass-through certificates, Collateralized Mortgage Obligations
("CMOs") and other mortgage-related securities to be U.S. government securities
for purposes of their investment policies. The Reserve Fund does not invest in
stripped mortgage securities, however, and the Short Bond Fund limits its
stripped mortgage securities investments to 10% of total assets. The liquidity
of interest-only bonds ("IOs") and principal-only bonds ("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 U.S. Fixed-Income
and Money Market Funds' limitation on illiquid securities. The Short Bond Fund
may invest in derivative securities known as "floaters" and "inverse floaters,"
the values of which vary in response to interest rates. These securities may be
illiquid and their values may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives
The Short Bond Fund 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 and multifamily or commercial mortgage loans.
Privately issued 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. Many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal, however. The Short Bond Fund may purchase some mortgage-related
securities through private placements that are restricted as to further sale.
See illiquid securities in the Glossary. The value of these securities may be
very volatile.
Structured Notes and Indexed Securities
The Funds may invest in structured notes and indexed securities. Structured
notes are debt securities, the interest rate or principal of which is determined
by an unrelated indicator. Indexed securities include structured notes as well
as securities other than debt securities, the interest rate or principal of
which is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent a
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Variable-Rate Demand Notes
The U.S. Fixed-Income and Money Market Funds may invest in variable-rate demand
notes ("VRDNs").
Zero Coupon Bonds
The U.S. Fixed-Income and Money Market Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market 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.
18
<PAGE>
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the Short Bond Fund) of its
total assets in asset-backed securities. Like mortgage-related securities, these
securities are subject to the risk of prepayment. See "Risk Considerations."
19
<PAGE>
Other Investment Practices
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary at the end of this prospectus briefly describes each of the investment
techniques summarized below. The Statement of Additional Information, under the
heading "Investment Objectives and Policies of the Funds," contains
more-detailed information about certain of these practices, including
limitations designed to reduce risks.
<TABLE>
<CAPTION>
=====================================================================================================================
Foreign and Global
U.S. Equity Funds Equity Funds
- ---------------------------------------------------------------------------------------------------------------------
Growth Small Equity
Cap Income International International Emerging
Opportunities Growth Small Markets
Cap
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Repurchase agreements1 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions1
- ---------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total x x x x x x
Fund assets
- ---------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Dollar roll transactions
- ---------------------------------------------------------------------------------------------------------------------
Leverage x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total x x x x x x
Fund assets
- ---------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Forward currency contracts4 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies5 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices5 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Write covered call options5 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Write covered put options5 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts6 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures6 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Equity swaps7 x x x x x x
- ---------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of Fund's
net assets)
- ---------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of Fund's x x x x x x
=====================================================================================================================
net assets)
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================
Multi- U.S. Fixed-
Strategy Income and Money
Funds Market Funds
- ---------------------------------------------------------------------------------------------------
Select U.S. Short
50 Asset Duration Government
Allocation Government Reserve
Bond
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Repurchase agreements1 x * x x
- ---------------------------------------------------------------------------------------------------
Reverse dollar roll transactions1 * x
- ---------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total x * x x
Fund assets
- ---------------------------------------------------------------------------------------------------
Reverse repurchase agreements x * x x
- ---------------------------------------------------------------------------------------------------
Dollar roll transactions * x
- ---------------------------------------------------------------------------------------------------
Leverage x * x2
- ---------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total x * x x
Fund assets
- ---------------------------------------------------------------------------------------------------
When-issued and forward commitment securities x * x3 x
- ---------------------------------------------------------------------------------------------------
Forward currency contracts4 x *
- ---------------------------------------------------------------------------------------------------
Purchase options on securities and currencies5 x * x
- ---------------------------------------------------------------------------------------------------
Purchase options on securities indices5 x *
- ---------------------------------------------------------------------------------------------------
Write covered call options5 x * x
- ---------------------------------------------------------------------------------------------------
Write covered put options5 x * x
- ---------------------------------------------------------------------------------------------------
Interest rate futures contracts6 x * x
- ---------------------------------------------------------------------------------------------------
Futures and swaps and options on futures6 x * x
- ---------------------------------------------------------------------------------------------------
Equity swaps7 x *
- ---------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of Fund's * x
net assets)
- ---------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of Fund's x * x
net assets)
===================================================================================================
<FN>
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying 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.
20
<PAGE>
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than
that of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 AFund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
5 AFund will not enter into any options on securities, securities indices
or currencies or related options (including options on futures) if the
sum of the initial margin deposits and premiums paid for any such option
or options would exceed 5% of its total assets, and it will not enter
into options with respect to more than 25% of its total assets.
6 AFund 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.
7 AFund that may invest in equity swaps may invest up to 10% of its total
assets in such investment. *To the extent allowed in each Underlying
Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further a 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 markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. Even when portfolio turnover exceeds 100% for a Fund, that
Fund does not regard portfolio turnover as a limiting factor. Portfolio turnover
in excess of 100% is considered high, increases brokerage costs incurred by a
Fund and may cause recognition of gain by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Reserve Fund) may employ certain risk management practices using certain
derivative securities and techniques (known as "derivatives"). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate, and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
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
21
<PAGE>
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 goals. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has 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
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund should note the risks involved with
each Underlying Fund, because the U.S. Asset Allocation Fund is a
"fund-of-funds."
Small Companies
The Small Cap Opportunities Fund and the International Small Cap Fund emphasize,
and the Growth Fund, the International Growth Fund, the Emerging Markets Fund
and the Select 50 Fund may make investments in, smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Foreign and Global Equity Funds, particularly the Emerging
Markets Fund, and the Select 50 Fund may invest in securities of companies
domiciled in, and in markets of, so-called emerging markets 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 United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, these Funds may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts. Additional risk
factors, including use of domestic and foreign custodian banks and depositories,
are described elsewhere in the prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the United States.
Foreign markets have different clearance and settlement procedures from those in
the United States, and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions. The inability of a
Fund to make intended security purchases due to settlement difficulties could
cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund. In certain countries there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the United States. 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 United States.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions among 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
22
<PAGE>
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 also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Foreign and Global Equity Funds and the Select 50 Fund are
permitted to invest in medium-quality debt securities, but do not invest more
than 5% of their total assets in high-risk debt securities below
investment-grade quality (sometimes called "junk bonds").
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. 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. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates, and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities, but may not be attractive to as many
buyers. Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less-diversified
mutual funds may be more sensitive to changes in the market value of a single
issuer or industry. The Select 50 Fund may present greater risk than is usually
associated with widely diversified mutual funds, because it may invest in the
securities of as few as 50 issuers. Therefore, the Select 50 Fund is not
appropriate as your sole investment.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value, and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other
23
factors, including general economic conditions and the underlying location and
age of the mortgage. In periods of rising interest rates, the prepayment rate
tends to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends to
increase, shortening the average life of a pool. Because prepayments of
principal generally occur when interest rates are declining, it is likely that a
U.S. Fixed-Income and Money Market Fund, to the extent that it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments. If this occurs,
that 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 U.S. Fixed-Income and
Money Market Funds purchase mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, result in a loss equal to any
unamortized premium. Duration is one of the fundamental tools used by the
Manager in managing interest rate risks including prepayment risks. See duration
in the Glossary.
Equity Swaps
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Funds may invest in equity swaps. Equity swaps are derivatives, and their values
can be very volatile. To the extent that the Manager does not accurately analyze
and predict the potential relative fluctuation of the components swapped with
another party, a Fund may suffer a loss. The value of some components of an
equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults. See equity swaps in the
Glossary.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees (a "Board") 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, LLC, is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG ("Commerzbank").
The Manager was formed in February 1997 as an investment adviser registered as
such with the SEC under the Investment Advisers Act of 1940, as amended. It
advises private accounts as well as the Funds. Commerzbank, one of the largest
publicly held commercial banks in Germany, has total assets of approximately
$268 billion. Commerzbank and its affiliates had more than $79 billion in assets
under management as of June 30, 1997. Commerzbank's asset management operations
involve more than 1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager of the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997, for an initial two-year period.
Portfolio Managers
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Roger W. Honour is a senior portfolio manager and principal. 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.
Kathryn M. Peters is a portfolio manager and principal. From 1993 to 1995, Ms.
Peters was an associate in the investment banking division of Donaldson, Lufkin
& Jenrette in New York, where she evaluated prospective equity investments for
the merchant banking fund and processed investment banking transactions,
including equity and high-yield offerings. Prior to that, she analyzed mezzanine
investments for Barclays de Zoete Wedd in New York. From 1988 to 1990, Ms.
Peters worked in the leveraged buyout group of Marine Midland Bank.
Andrew G. Pratt, CFA, is a portfolio manager and principal. He joined Montgomery
Asset Management from Hewlett-Packard Company, where he was an equity analyst,
managed a portfolio of small-capitalization technology companies, and
24
<PAGE>
researched private placement and venture capital investments. From 1983 through
1988, he worked in the Capital Markets Group at Fidelity Investments in Boston.
Montgomery Equity Income Fund
John H. Brown, CFA, is a senior portfolio manager and principal. Preceding his
arrival at the Manager in May 1994, Mr. Brown was an analyst and portfolio
manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, a founding partner of the emerging markets
discipline, is a senior portfolio manager and principal responsible for
strategic research and qualitative analysis of countries and industries. From
1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C., as senior analyst
and portfolio manager in charge of investments in Latin America, the Philippines
and Portugal. From 1984 through 1987, she was an Investment Officer at Shawmut
Corporation where she designed a stock valuation model for hyper-inflationary
economies, which has served as the foundation for most of her work since that
time.
Bryan L. Sudweeks, Ph.D., CFA, a founding partner of the emerging markets
discipline, is a senior portfolio manager and principal responsible for all
quantitative modeling as it relates to the investment process. From 1988 until
joining the Manager in 1991, he was a senior analyst and portfolio manager at
Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. specializing in Asia, Greece, Jordan and Turkey. He was
instrumental in the design and implementation of the firm's asset allocation
model. Previously, Dr. Sudweeks 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. Dr. Sudweeks is fluent in
Mandarin Chinese.
Angeline Ee is a portfolio manager and principal focusing on Southeast Asian
investments. From 1990 until joining the Manager in July 1994, Ms. Ee was an
investment manager with AIG Investment Corp. in Hong Kong responsible for US$110
million invested in Singapore, Malaysia and Thailand. From June 1989 until
September 1990, Ms. Ee was co-manager of a portfolio of Asian equities and bonds
at Chase Manhattan Bank in Singapore.
Frank Chiang is a portfolio manager and principal responsible for North Asian
markets. From 1993 until joining the Manager in 1996, Mr. Chiang was managing
director and portfolio manager with TCW Asia Ltd., Hong Kong, responsible for
TCW's Asian Equity strategy. While at TCW, Mr. Chiang co-managed US$1.3 billion
invested throughout the Asian Pacific Region. Prior to TCW Asia, he was an
associate director and portfolio manager for Wardley Investment Services, Hong
Kong, where he created and managed three dedicated China Funds. Mr. Chiang is
fluent in three Chinese dialects: Mandarin, Shanghainese and Cantonese.
Jesus Isidoro Duarte is a portfolio manager and principal for the Manager,
responsible for the Latin American markets. From 1993 until joining the Manager
he was director and vice president of Latinvest Management Co. in Brazil, where
he was responsible for research and portfolio management for the firm's Latin
American funds. From 1989 to 1992, Mr. Duarte worked at W.I. Carr in Tokyo as a
securities analyst of Japanese equities. He is fluent in Spanish and Japanese,
and conversant in French and Portuguese.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
John D. Boich, CFA, is a senior portfolio manager and principal. 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 advisor with Prudential-Bache
Securities and E.F. Hutton & Company.
Oscar A. Castro, CFA, is a senior portfolio manager and principal. 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.
25
<PAGE>
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. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers" section
and below.
Kevin T. Hamilton, CFA, chair of the Manager's Investment Oversight Committee
and executive vice president, is responsible for coordinating and implementing
the investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
U.S. Asset Allocation Fund and the Global Asset Allocation Fund. 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. The portfolio management teams responsible for the different
disciplines used in the Select 50 Fund are described throughout this "Portfolio
Managers" section.
Nancy Kukacka is a portfolio manager and principal. Prior to joining the
Manager, Ms. Kukacka worked at CS First Boston Investment from April 1994
through April 1995, where she was an equity research analyst covering consumer
cyclical and non-durable sectors. Previously, Ms. Kukacka was an equity research
analyst at RCM Capital Management from April 1990 through March 1994, providing
fundamental-based analysis for more than US$12 billion in equity investments.
Ms. Kukacka holds a bachelor of arts degree in economics with minors in
chemistry and biology from Bucknell University. She is a Level III CFA
candidate.
Montgomery U.S. Asset Allocation Fund
The U.S. Asset Allocation Fund invests its assets in three separate Funds,
representing three different investment disciplines.
Kevin T. Hamilton, CFA, is responsible for selecting the Funds to be included in
each fund-of-funds structure and also for coordinating and implementing the
investment decisions of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund. For the background and business experience of Kevin T.
Hamilton, see the discussion under the Montgomery Select 50 Fund, above.
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
William C. Stevens is a senior portfolio manager and principal. 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, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager and principal. Mr. Wilson joined the
Manager's Fixed-Income team in April 1994. From 1992 to 1994, he was an
associate in the Fixed-Income Client Services Department of BARRA in Berkeley,
California. At BARRA, Mr. Wilson directed research and development teams on
mortgage, CMO and other fixed-income projects. Prior to that he was an associate
in the Structured Finance Department at Security Pacific Merchant Bank as well
as on the mortgage trading desk at Chemical Bank.
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.
The management fees for Funds are higher than for most mutual funds.
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<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------- --------------------------------- ------------------------
Average Daily Net Assets Management Fee
(annual rate)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Equity Funds
--------------------------------------------------------- --------------------------------- ------------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
More than $1 billion 0.80%
--------------------------------------------------------- --------------------------------- ------------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
More than $500 million 1.00%
--------------------------------------------------------- --------------------------------- ------------------------
Equity Income Fund First $500 million 0.60%
More than $500 million 0.50%
--------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
--------------------------------------------------------- --------------------------------- ------------------------
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
--------------------------------------------------------- --------------------------------- ------------------------
International Small Cap Fund First $250 million 1.25%
More than $250 million 1.00%
--------------------------------------------------------- --------------------------------- ------------------------
Emerging Markets Fund First $250 million 1.25%
More than $250 million 1.00%
--------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
--------------------------------------------------------- --------------------------------- ------------------------
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
More than $500 million 0.90%
--------------------------------------------------------- --------------------------------- ------------------------
U.S. Asset Allocation Fund All amounts 0.00%*
--------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
--------------------------------------------------------- --------------------------------- ------------------------
Short Duration Government Bond Fund First $500 million 0.50%
More than $500 million 0.40%
--------------------------------------------------------- --------------------------------- ------------------------
Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
More than $500 million 0.20%
--------------------------------------------------------- --------------------------------- ------------------------
<FN>
* This amount represents only the management fee of the U.S. Asset Allocation Fund and does not include management fees
attributable to the Underlying Funds, which ultimately are to be borne by shareholders of the U.S. Asset Allocation
Fund.
</FN>
</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 and Equity Income
Funds pays seven one-hundredths of one percent (0.07%) of average daily net
assets (0.06% of average daily net assets over $500 million); each of the Small
Cap Opportunities, International Growth, International Small Cap, Emerging
Markets and Select 50 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 Bond and Reserve Funds pays five one-hundredths of one percent (0.05%)
of average daily net assets (0.04% of average daily net assets over $500 million
for the Short Bond Fund and over $250 million for the Reserve Fund). In the case
of the U.S. Asset Allocation Fund, the Administrator does not charge a fee for
performing administrative services for those Funds, although it charges a fee
for such services performed for the Underlying Funds, which ultimately are borne
by shareholders of the U.S. Asset Allocation Fund.
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.
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<PAGE>
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Distributor, as the distribution coordinator, for the Class P
shares. Under the Plan, each Fund will pay distribution fees to the Distributor
at an annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares, to reimburse the Distributor for its
distribution costs with respect to that class.
The Plan provides that the Distributor may use the distribution fees received
from the class to pay for the distribution expenses of that class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct-mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that class; (ii) costs
of printing and distributing prospectuses, Statements of Additional Information
and reports of the Funds to prospective investors in that class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that class; and (iv) costs involved in obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that class. Distribution fees are accrued daily and paid
monthly and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares. The Class P shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
was terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the class to the Distributor.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Distributor to compensate those persons on an ongoing basis in
connection with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses (excluding the Rule 12b-1 fee)
at or below the following percentages of each Fund's average net assets: the
Growth Fund, one and five-tenths of one percent (1.50%); the Small Cap
Opportunities Fund, one and five-tenths of one percent (1.50%); the Equity
Income Fund, eighty-five one-hundredths of one percent (0.85%); the
International Growth Fund, one and sixty-five one-hundredths of one percent
(1.65%); the International Small Cap and Emerging Markets Funds, one and
nine-tenths of one percent (1.90%); the Select 50 Fund, one and eight-tenths of
one percent (1.80%); the U.S. Asset Allocation Fund, one and three-tenths of one
percent (1.30%) through limits in the Underlying Funds; the Short Bond Fund,
seven-tenths of one percent (0.70%); and the Reserve Fund, six-tenths of one
percent (0.60%). The Manager also may voluntarily reduce additional amounts to
increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following three years,
provided that the Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Funds
for fees and expenses for the current year.
28
<PAGE>
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. 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
that 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. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How to Contact the Funds
For information on the Funds or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
- ----------------------------------- ---------------------------------------
Regular Mail Express Mail or Overnight Service
- ----------------------------------- ---------------------------------------
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- ----------------------------------- ---------------------------------------
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Funds Distributor, Inc., the Funds' Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-FUND 3863, and through selected
securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds, by the close of trading (generally, 4:00 p.m. eastern time, except when
the market closes earlier due to a holiday) on any day that the New York Stock
Exchange (the "NYSE") is open, Fund shares will be purchased at the Fund's
next-determined net asset value. Orders and payment for the Reserve Fund must be
received by 12:00 noon, eastern time or earlier if the market closes earlier due
to a holiday. Orders for Fund shares received after the Funds' cutoff times will
be purchased at the next-determined net asset value after receipt of the order.
Shares of the U.S. Fixed-Income and Money Market Funds will not be priced on
national bank holidays.
29
<PAGE>
The minimum initial investment in each Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. If you buy shares through a broker or investment
adviser instead of directly from the Distributor, different minimum investment
requirements may apply. The Funds do not accept third-party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the United States. Purchases may also be made in
certain circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum initial investment (including IRAs) ..............................$1,000
Initial Investments by Check
Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
A charge may be imposed on checks that do not clear.
Dividends do not begin to accrue on the U.S. Fixed-Income and Money Market
Funds until your check has cleared.
Initial Investments by Wire
Call the Transfer Agent to tell it 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. It will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
Request your bank immediately transmit 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]
Your bank may charge a fee for any wire transfers.
The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
You must be a shareholder in another Montgomery Fund.
You must have been a shareholder for at least 30 days.
Your existing account registration will be duplicated in the new Fund.
Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
The Fund reserves the right to collect any losses to the Fund from the
shareholder's existing account(s) that result from a telephone purchase not
funded within three business days.
30
<PAGE>
Subsequent Investments
Minimum subsequent investment (including IRAs) .............................$100
Subsequent Investments by Check
Make your check payable to The Montgomery Funds. Enclose an investment
stub with your check. If you do not have an investment stub, mail your
check with written instructions indicating the Fund name and account
number to which your investment should be credited.
A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
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," above.
Subsequent Investments by Telephone
Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund cutoff time.
Shares for IRAs may not be purchased by phone.
The maximum telephone purchase is an amount up to five times your account
value on the previous day.
Payments for shares purchased must be received by the Transfer Agent
within three business days after the purchase request. Write your
confirmed purchase number on your check or include it in your wire
instructions.
You should do one of the following to ensure that 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 second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under the above section titled
"Initial Investments by Wire."
Automatic Account Builder ("AAB")
AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
Your bank must be a member of the Automated Clearing House.
To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your Montgomery account from your checking or savings
account.
Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th of each month will be selected.
You should allow 20 business days for this service to become effective.
You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account.
The minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
You may automatically deposit a designated amount of your paycheck
directly into a Montgomery Funds account.
31
<PAGE>
Please call the Transfer Agent for instructions on establishing this
service.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued by the
Funds at any time upon 30-days' written notice, or by you at any time by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
an authorization number or other personal information not likely to be known by
others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Shares of the Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Certain of the Funds are
available for purchase through administrators for retirement plans. Investors
who purchase shares as part of a retirement plan should address inquiries and
seek investment servicing from their plan administrators. Plan administrators
may receive compensation from the Funds for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
noncertificated 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 U.S. Fixed-Income and Money
Market 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 other agents of the Funds. 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 Securities and
Exchange Commission. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until 15 days from the purchase date. Shares tendered for redemptions through
brokers or dealers (other than the Distributor) may be subject to a service
charge by such brokers or dealers. Procedures for requesting a redemption are
set forth below.
Redeeming by Written Instruction
Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you
wish to redeem.
The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
32
<PAGE>
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 a national securities exchange. Contact the
Transfer Agent for more information.
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 at the Manager's discretion.
Redeeming by Check
Checkwriting is available on the Government Reserve and Short Duration
Government Bond Funds.
Checkwriting is not available for IRA accounts.
The minimum amount per check is $250. A check for less may be returned to
you.
All checks will require only one signature unless otherwise indicated.
You should not write a check to close your U.S. Fixed-Income and Money
Market Funds account.
Checks will be returned to you at the end of each month.
A charge may be imposed for any stop payments requested.
Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for IRA accounts.
If you included bank wire information on your New 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.
Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
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
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Funds will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
33
<PAGE>
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Funds (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Funds are
responsible only for mailing the distribution or redemption checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Funds, the Funds will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make such 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 to at least the minimum investment required to
open an account before the Fund takes any action.
Exchange Privileges and Restrictions
You may exchange shares from another Fund with the same registration, Taxpayer
Identification Number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of telephone procedures and
limitations of liability under "Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
You are automatically eligible to make telephone exchanges with your
Montgomery Funds account.
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'
cutoff times.
Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
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.
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.
Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-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 U.S. Fixed-Income and Money Market 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 U.S. Fixed-Income and Money Market
Funds into any other Fund. The minimum exchange is $100. Periodically investing
a set dollar amount into a Fund is also referred to as dollar-cost averaging,
because the number of shares purchased will vary depending on the price per
share. Your account with the recipient Fund must meet the minimum investment of
$1,000. Exchanges out of the U.S. Fixed-Income and Money Market Funds are exempt
from the four-exchanges limit policy.
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<PAGE>
Directed Dividend Service
If you own shares of the U.S. Fixed-Income and Money Market Funds, you may elect
to use your monthly dividends to automatically purchase additional shares of
another Fund. Your account with the recipient Fund must meet the minimum
investment of $1,000.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from 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. Some of these agents may appoint subagents.
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 before the relevant Fund's daily cutoff time. 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 Funds, they may receive fees from the Funds or the Manager for such
services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the applicable Fund's cutoff time 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 the Fund's
cutoff time on each day that the NYSE is open for trading (but not on bank
holidays for the U.S. Fixed-Income and Money Market Funds). Generally, this is
4:00 p.m. eastern time (12:00 noon for the Reserve Fund), or earlier when
trading closes earlier. The Short Bond Fund will determine its net asset value
earlier when the fixed-income markets close earlier. Per-share net asset value
is calculated by dividing the value of each Fund's total net assets by the total
number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed- income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
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Dividends and Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------------- ---------------------------------------
Income Dividends Capital Gains
-------------------------------------- ---------------------------------------------- ---------------------------------------
<S> <C> <C>
Equity Funds Declared and paid in the last quarter of Declared and paid in the last quarter
(except Equity Income Fund) each year* of each year*
-------------------------------------- ---------------------------------------------- ---------------------------------------
Equity Income Fund Declared and paid on or about the last Declared and paid in the last quarter
business day of each quarter of each year*
-------------------------------------- ---------------------------------------------- ---------------------------------------
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last quarter
each year* of each year*
-------------------------------------- ---------------------------------------------- ---------------------------------------
U.S. Fixed-Income and Declared daily and paid monthly on or about Declared and paid in the last quarter
Money Market Funds the last business day of each month of each year*
-------------------------------------- ---------------------------------------------- ---------------------------------------
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a
Fund.
</FN>
</TABLE>
Unless you request cash distributions in writing at least seven business days
before a distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to your account at the closing net asset value on
the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks. See
"Uncashed Distribution or Redemption Checks" above.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by distributing substantially all of its
net investment income and net capital gains to its shareholders and meeting
other requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that their earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code. If a Fund is unable to meet certain
Code requirements, it may be subject to taxation as a corporation. Funds
investing in foreign securities also may incur tax liability to the extent that
they invest in "passive foreign investment companies." See "Portfolio
Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to
36
<PAGE>
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 gains over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trusts
All of the Funds with the exception of the U.S. Asset Allocation Fund are series
of The Montgomery Funds, a Massachusetts business trust organized on May 10,
1990. The U.S. Asset Allocation Fund is a series of The Montgomery Funds II, a
Delaware business trust organized on September 10, 1993. The Agreement and
Declarations of Trust of both Trusts permit their Boards to issue an unlimited
number of full and fractional shares of beneficial interest, $0.01 par value, in
any number of series. The assets and liabilities of each series within either of
the two Trusts are separate and distinct from each other series.
This prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may, in the future, designate
other classes of shares for specific purposes. The other classes of shares may
have different fees and expenses that may affect performance. For information
concerning the other classes of shares not offered in this prospectus, call The
Montgomery Funds at (800) 572-FUND (3863) or contact sales representatives or
financial intermediaries who offer those classes.
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 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. Although the
Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust, for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated 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 either a 7-day period or a 30-day period. For
yield computed from a 7-day period, base period return is simply annualized by
multiplying the base period return by 365 / 7; the effective yield
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<PAGE>
computed from a 7-day period is calculated by adding 1 to the base period return
and raising the result to the (365 / 7)th power and then subtracting 1. When the
yield is computed from a 30-day period, the yield is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered 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 (3863).
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
1099 tax form(s) are mailed by January 31.
Annual updated prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address, regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification Number ("TIN") section of the
New Account application when you open an account. Federal tax law requires that
a Fund withhold 31% of taxable dividends, capital-gains distributions and
redemption and exchange proceeds from accounts (other than those of certain
exempt payees) without a certified Social Security or Taxpayer Identification
Number and certain other certified information or upon notification from the
Internal Revenue Service ("IRS") or a broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Additional rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item on the New 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.
38
<PAGE>
A shareholder who 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, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
-------------------------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, 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.
39
<PAGE>
Glossary
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g., credit
card) agreements.
cash equivalents. These 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.
collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
Collateralized Mortgage Obligations (CMOs). These 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) whereas 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.
convertible security. This 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.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the Fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the Fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar
instruments. Depositary receipts are receipts typically issued in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
dollar roll transaction. This is similar to a reverse repurchase agreement
except that it requires a Fund to repurchase a similar rather than the same
security.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates. "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities provide
interest ("coupon") payments in addition to a final ("par") payment at maturity,
and some securities have call provisions allowing the issuer to repay the
instrument in full before maturity date, each of which affect the security's
response to interest rate changes. "Duration" is considered a more precise
measure of interest rate risk than "term to maturity." Determining duration may
involve the Manager's estimates of future economic parameters, which may vary
from actual future values. Fixed-income securities with effective durations of
three years are more responsive to interest rate fluctuations than those with
effective durations of one year. For example, if interest rates rise by 1%, the
value of securities having an effective duration of three years will generally
decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or from
sales made in such emerging markets 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 markets country. An
emerging markets country is one having an economy and market that are or would
be considered by the
40
<PAGE>
World Bank or the United Nations to be emerging or developing.
equity derivative securities. These include, among other things, options on
equity securities, warrants and futures contracts on equity securities.
equity swaps. These allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swap transactions may be volatile and may present a Fund with
counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The Funds generally do not enter into forward contracts with terms
greater than one year. A Fund generally enters into forward contracts only under
two circumstances. First, if a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second, if
the Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency approximating the value of some or all of a
Fund's portfolio securities denominated in such currency. A Fund will not enter
into a forward contract if, as a result, it would have more than one-third of
total assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate segregable assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect a Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell interest
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. Each
Fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA. The Government National Mortgage Association.
illiquid securities. The Funds treat any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa), or unrated debt securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board of Trustees.
leverage. Some Funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
options on securities, securities indices and currencies. A Fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industrywide stock price fluctuations.
repurchase agreement. With 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.
reverse dollar roll transactions. When a Fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees to
resell a similar security to that institution at a later date at an agreed-upon
price.
reverse repurchase agreement. In a reverse repurchase agreement, a Fund sells to
a financial institution a security
41
<PAGE>
that it holds and agrees to repurchase at an agreed-upon price and date.
S&P 500. Standard & Poor's 500 Composite Price Index.
securities lending. A Fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
variable-rate demand notes (VRDNs). These are instruments with rates of interest
adjusted periodically or that "float" continuously according to specific
formulas and often have a demand feature entitling the purchaser to resell the
securities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a Fund will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities. No income accrues on securities that
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a Fund. At the time a Fund enters into a transaction on a
when-issued or forward commitment basis, it supports its obligation with
collateral assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily. There
is a risk that the securities may not be delivered and that the Fund may incur a
loss.
zero coupon bonds. These 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.
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<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64v141-6073
(800) 572-3863
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
43
