[LOGO]
Rule 497(e)
33-34841 and 811-6011
Prospectus
July 31, 1997
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
TABLE OF CONTENTS
- --------------------------------------------
The Montgomery Funds ........................................................1
Fees and Expenses of the Funds...............................................4
Financial Highlights.........................................................6
The Funds' Investment Objectives and Policies...............................12
Portfolio Securities........................................................16
Other Investment Practices..................................................20
Risk Considerations.........................................................22
Management of the Funds.....................................................24
How To Contact the Funds....................................................28
How To Invest in the Funds..................................................29
How To Redeem an Investment in the Funds....................................31
Exchange Privileges and Restrictions........................................33
Brokers and Other Intermediaries............................................34
How Net Asset Value is Determined...........................................34
Dividends and Distributions.................................................35
Taxation....................................................................36
General Information.........................................................36
Backup Withholding .........................................................38
Glossary ...................................................................39
Each Fund's shares offered in this Prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
with no sales load, no commissions, and no 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, and managed by
Montgomery Asset Management, LLC (the "Manager"), a subsidiary of Commerzbank
AG. Fund Distributors, 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 assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated July 31, 1997, as may be revised,
has been filed with the Securities and Exchange Commission, is incorporated by
this reference and is available without charge by calling (800) 572-FUND (3863).
If you are viewing the electronic version of this prospectus through an on-line
computer service, you may request a printed version free of charge by calling
(800) 572-FUND (3863).
The Internet address for The Montgomery Funds is
www.xperts.montgomeryfunds.com/1. 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 $1.00 per Share.
These Securities Have Not Been Approved or Disapproved by the Securities and
Exchange Commission or Any State Securities Commission Nor Has the Securities
and Exchange Commission or Any State Securities Commission Passed upon the
Accuracy or Adequacy of this Prospectus. Any Representation to the Contrary Is a
Criminal Offense.
<PAGE>
The following ten mutual funds (the "Funds") are offered in this Prospectus:
Fund
Number
Montgomery Emerging/
International Markets Funds
Emerging Markets Fund..................................................618
International Growth Fund..............................................623
International Small Cap Fund...........................................628
Montgomery Multi-Strategy Funds
Asset Allocation Fund..................................................624
Select 50 Fund.........................................................629
Montgomery U.S. Equity Funds
Equity Income Fund.....................................................622
Growth Fund............................................................621
Small Cap Opportunities Fund...........................................625
Montgomery U.S. Fixed-Income and
Money Market Funds
Government Reserve Fund................................................619
Short Duration Govt Bond Fund..........................................620
2
<PAGE>
The Emerging/International Market Funds
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.
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 U.S. having
total market capitalizations of less than $1 billion, sound fundamental values
and potential for long-term growth at a reasonable price.
The Multi-Strategy Funds
Montgomery 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.
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
The U.S. Equity Funds
Montgomery Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies.
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having a total market capitalization of $1 billion or more.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
The Fixed-Income Funds
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 $1.00 per share.
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 $1.00 per share.
3
<PAGE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Imposed
Imposed on Purchases on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
<S> <C> <C> <C> <C>
None None None None None
<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>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Other
Expenses
(after Total Fund Operating Expenses
reimbursement (after reimbursement
Management Fee* 12b-1 Fee unless noted)* unless noted)*
<S> <C> <C> <C> <C>
The Emerging/International Markets Funds
Emerging Markets Fund 1.06% 0.25% 0.66%+ 1.97%+
International Growth Fund 1.10% 0.25% 0.55% 1.90%
International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
The Multi-Strategy Funds
Asset Allocation Fund 0.00% 0.25% 1.30%#** 1.55%#
Select 50 Fund 1.25% 0.25% 0.55% 2.05%
The U.S. Equity Funds
Equity Income Fund 0.60% 0.25% 0.25% 1.10%
Growth Fund 0.96% 0.25% 0.39%+ 1.60%+
Small Cap Opportunities Fund 1.20% 0.25% 0.30% 1.75%
The Fixed-Income and Money Market Funds
Government Reserve Fund 0.38% 0.25% 0.22% 0.85%
Short Duration Government Bond Fund 0.50% 0.25% 0.20% 0.95%
This table is intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year. Because Rule 12b-1 distribution charges are accounted for
on a class-level basis (and not on an individual shareholders-level basis),
individual long-term investors in the Class P shares of the Fund may over time
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD"), even
though all shareholders of that Class in the aggregate will not. This is
recognized and permitted by the NASD.
<FN>
+ These figures show actual expenses; no reimbursements or waivers applied.
# Even if the total expenses of the Underlying Funds exceed 1.10% for the
Montgomery Asset Allocation Fund, the Manager has agreed to limit the
Montgomery Asset Allocation Fund's Total Fund Operating Expenses to 1.55%.
The total expenses for the Underlying Funds for the Montgomery Asset
Allocation Fund (currently estimated to be 1.10%) will depend on the actual
expenses of the Underlying Funds and how the Funds' assets are allocated
among those Underlying Funds.
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996 for the Class P shares (or, if no
Class P shares were outstanding, for another class of shares but adjusted
to include the Rule 12b-1 fee.) The Manager will reduce its fees and may
4
<PAGE>
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 for a Fund. 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, 1996 (annualized) would have been as follows: Montgomery Equity
Income Fund, 1.70% (0.85% other expenses); Montgomery Small Cap
Opportunities Fund, 2.41% (0.96% other expenses); Montgomery International
Growth Fund, 3.16% (1.81% other expenses); Montgomery International Small
Cap Fund, 3.01% (1.53% other expenses); Montgomery Asset Allocation Fund,
1.80% (0.95% other expenses); Montgomery Select 50 Fund, 2.36% (0.86% other
expenses); Montgomery Short Duration Government Bond Fund, 2.50% (1.05%
other expenses) and Montgomery Government Reserve Fund, 0.99% (0.34% other
expenses). The Manager may terminate these voluntary reductions at any time.
See "Management of the Funds."
** Estimated expenses of Montgomery Asset Allocation Fund (excluding Rule
12b-1 fees and expenses related to the Underlying Funds and after
reimbursement) is 0.20%. Estimated expenses related to the Underlying Funds
for Montgomery Asset Allocation Fund is 1.10%.
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
The Emerging/International Markets Funds
Emerging Markets Fund $20 $62 $106 $230
International Growth Fund $19 $60 $103 $222
International Small Cap Fund $22 $67 $115 $248
The Multi-Strategy Funds
Asset Allocation Fund $16 $49 $84 $185
Select 50 Fund $21 $64 $110 $238
The U.S. Equity Funds
Equity Income Fund $11 $35 $61 $134
Growth Fund $16 $50 $87 $190
Small Cap Opportunities Fund $18 $55 $95 $206
The Fixed-Income and Money Market Funds
Government Reserve Fund $9 $27 $47 $105
Short Duration Government Bond Fund $10 $30 $53 $117
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
5
<PAGE>
<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. The financial
information for periods indicated with the note "R" relate to another class of
shares of the Funds not subject to the Class P Rule 12b-1 fee because the Class
P shares were not offered during those periods.
<CAPTION>
EMERGING MARKETS FUND
Period Ending FISCAL YEAR ENDED JUNE 30
December 31,------------------------------------------------------------
SELECTED PER SHARE DATA FOR THE 1996
YEAR OR PERIOD ENDED: (UNAUDITED) 1996(a) 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) 0.01 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss)
on investments (0.31) 1.56 0.25## 2.92 1.05 (0.07)
Net increase/(decrease) in net assets resulting
from investment operations (0.30) 1.57 0.28 2.89 1.12 (0.04)
Distributions:
Dividends from net investment income (0.06) -- -- -- (0.01) --
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 $13.83 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** (2.12)% 12.44% 1.40% 26.10% 11.27% (0.40)%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of year (in 000's) $ 7 $ 2 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) (0.22)%+ 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
to average net assets
Ratio of expenses to average net assets 1.92%+ 1.97%+ 1.80% 1.85% 1.90% 1.90%+
Portfolio turnover rate 36.30% 109.92% 92.09% 63.79% 21.40% 0.19%
Average commission rate paid+++ $ 0.0007 $ 0.0007 N/A N/A N/A N/A
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager -- -- -- -- $0.06 $0.01
Expense ratio before deferral of fees by Manager
including interest expense -- -- -- -- 1.93% 2.80%+
Expense ratios including interest expense -- -- -- -- -- --
<FN>
(a) The Emerging Markets Fund's Class R and Class P Shares commenced operations
on March 1, 1992 and March 12, 1996, respectively.
(b) The International Growth Fund's Class P Shares commenced operations on
March 12, 1996.
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
INTERNATIONAL GROWTH INTERNATIONAL SMALL CAP FUND
FUND
<CAPTION>
Period Ending Fiscal Year Ended Period Ending FISCAL YEAR ENDED JUNE 30
December 31, 1996 June 30, December 31, ------------------------------
(UNAUDITED) 1996(a) 1996R
(UNAUDITED) 1996R 1995R 1994(b)R
<S> <C> <C> <C> <C> <C>
$15.31 $13.66 $14.86 11.75 $12.02 $12.00
0.00 0.00# (0.06) 0.03 0.12 0.00#
0.77 1.65 0.33 3.10 (0.39) 0.02
0.77 1.65 0.27 3.13 (0.27) 0.02
-- -- -- (0.02) (0.00)# --
(1.68) -- -- -- -- --
-- -- -- -- -- --
(1.68) -- -- (0.02) (0.00)# --
$14.40 $15.31 $15.13 14.86 $11.75 $12.02
5.71% 12.08% 1.82% 26.68% (2.23)% 0.17%
$ 1 $ 1 $40,500 $41,640 $28,516 $34,555
(0.20)%+ 0.01%+ (0.78)%+ 0.20% 0.95% 0.04%+
1.91%+ 1.90%+ 1.91%+ 1.90% 1.90% 1.90%+
42.35% 238.91% 37.79% 177.36% 156.13% 123.50%
$ 0.0227 N/A $ 0.0142 $ 0.0123 N/A N/A
$(0.08) ($0.05) (0.16) ($0.08) $0.05 ($0.02)
3.01%+ 3.16%+ 3.16% 2.76% 2.50% 2.32%+
-- -- -- 1.96% 1.91% 1.99%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ 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.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
ASSET ALLOCATION FUND SELECT 50 FUND
<CAPTION>
FISCAL YEAR ENDED
PERIOD ENDING JUNE 30 PERIOD ENDING
SELECTED PER SHARE DATE FOR THE DECEMBER 31, DECEMBER 31, FYE
YEAR OR PERIOD ENDED: 1996(d) ------------------------------ 1996(b) June 30
(UNAUDITED) 1996(c) 1995R 1994(c)R (UNAUDITED) 1996(b)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $19.33 $17.86 $12.24 $12.00 $15.89 $12.00
Net investment income/(loss) 0.21 0.09 0.25 0.06 -- 0.06
Net realized and unrealized gain (loss) on investments 0.58 1.38 4.11 0.18 0.14 4.45
Net increase (decrease) in net assets resulting
from investment operations 0.79 1.47 4.36 0.24 0.14 4.51
Distributions:
Dividends from net investment income (0.34) -- (0.17) -- -- (0.04)
Distributions from net realized capital gains (1.66) -- (0.10) -- -- --
Distribution in excess of net realized capital gains -- -- -- -- -- (0.01)
Total distributions (2.00) -- (0.27) -- -- (0.05)
Net asset value -- end of year $18.12 $19.33 $16.33 $12.24 $16.03 $16.46
Total return** 4.18% 8.23% 35.99% 2.00% 0.88% 37.75%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $48 $43 $60,234 $1,548 $51 $77,955
Ratio of net investment income (loss) 2.37%+ 1.60%+ 3.43% 2.54%+ (0.46)%+ 0.42%+
to average net assets
Ratio of expenses to average net assets, 1.55%+ 1.55%+ 1.30% 1.30%+ 2.06%+ 1.80%+
excluding interest expense
Portfolio turnover rate 93.70% 225.91% 95.75% 190.94% 85.34% 105.98%
Average commission rate paid+++ $ 0.0603 $ 0.0595 N/A N/A $ 0.0070 $ 0.0097
Net investment income/(loss) before deferral of
fees and absorption of expenses by Manager $ 0.20 $ 0.08 $ 0.19 $(0.11) $(0.01) $ 0.02
Expense ratio before deferral of fees and absorption of
expenses by Manager, including interest expense 1.84%+ 1.80%+ 2.07% 9.00%+ 2.32%+ 2.11%+
Expense ratios including interest expense 1.67%+ 1.67%+ 1.31% 1.43%+ -- --
<FN>
(a) The Asset Allocation Fund's Class R and Class P Shares commenced operations
on March 31, 1994 and January 3, 1996, respectively.
(b) The Select 50 Fund's Class R and Class P Shares commenced operations on
October 2, 1995 and December 12, 1996, respectively.
(c) The Equity Income Fund's Class R and Class P Shares commenced operations on
September 30, 1994 and March 12, 1996, respectively.
(d) The Growth Fund's Class R and Class P Shares commenced operations on
September 30, 1993 and January 12, 1996, respectively.
(e) The Small Cap Opportunities Fund's Class R and Class P Shares commenced
operations on December 29, 1995 and July 29, 1996, respectively.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
EQUITY INCOME FUND GROWTH FUND SMALL CAP
OPPORTUNITIES FUND
<CAPTION>
PERIOD ENDING FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 31, 1996 JUNE 30 PERIOD ENDING JUNE 30
(UNAUDITED) ------------------------- DECEMBER 31, ------------------------------------ Period Ending FYE
1996 December 31, 1996 June 30
1996(c) 1995(c)R (UNAUDITED) 1996(d) 1995R 1994(d)R (Unaudited)(e) 1996(e)#R
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.09 $15.66 $12.00 $21.94 $19.22 $15.27 $12.00 $14.37 $12.00
0.21 0.08 0.31 0.04 0.03 0.12 0.04 (0.08) 0.02
1.51 0.35 1.38 1.06 2.69 3.91 3.31++ 2.18 3.78++
1.72 0.43 1.69 1.10 2.72 4.03 3.35 2.10 3.80
(0.21) -- (0.31) (0.10) -- (0.07) (0.01) (0.00)## --
(1.56) -- -- (2.77) -- (0.07) -- -- --
-- -- -- -- -- -- (0.07) -- --
(1.77) -- (0.31) (2.87) -- (0.14) (0.08) (0.00)## --
$ 16.04 $16.09 $13.38 $20.17 $21.94 $19.16 $15.27 $16.47 $15.80
11.22% 2.75% 14.26% 5.04% 14.15% 26.53% 27.98% 14.64% 31.67%
$136 $ 2 $6,383 $139 $82 $878,779 $149,103 $ 6 $136,140
2.85%+ 2.78%+ 4.06%+ 0.44%+ 0.53%+ 0.98% 1.09%+ (1.19)%+ 0.23%+
1.10%+ 1.10%+ 0.84%+ 1.58%+ 1.60%+ 1.50% 1.49%+ 1.76%+ 1.50%+
26.46% 89.77% 29.46% 43.75% 118.14% 128.36% 110.65% 86.20% 81.29%
$ 0.0595 $ 0.0423 N/A $ 0.0594 $ 0.0596 N/A N/A $ 0.0556 $ 0.0578
$ 0.07 $ 0.06 $ 0.13 -- -- -- $ 0.03 ($0.10) ($0.04)
1.70%+ 1.70%+ 3.16%+ -- -- -- 1.79%+ 2.11%+ 2.16%+
-- -- -- -- -- -- -- -- --
<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.
# 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 $0.01 per share.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
GOVERNMENT RESERVE FUND
<CAPTION>
Period Ending Fiscal Year Ended June 30
December 31, 1996 -------------------------------------------------------------
Selected Per Share Data for the Year or (Unaudited) 1996(a) 1995R 1994R 1993(a)R
Period Ended:
<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 0.024 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 in net assets resulting
from investment operations 0.024 0.014 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.024) (0.014) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Distribution in excess of net realized capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions (0.024) (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** 2.48% 1.38% 4.97% 2.96% 2.41%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $1 $1 $258,956 $211,129 $124,795
Ratio of net investment income 4.66%+ 4.91%+ 4.92% 2.99% 2.96%+
to average net assets
Ratio of expenses to average net assets, 0.85%+ 0.85%+ 0.60% 0.60% 0.38%+
excluding interest expense
Portfolio turnover rate -- -- -- -- --
Net investment income before deferral of fees and
absorption of expenses by Manager $0.023 $0.013 $0.047 $0.028 $0.013
Expense rate before deferral of fees and absorption of
expenses by manager, including interest expense 0.97%+ 0.99%+ 0.79% 0.71% 0.77%+
Expense ratios including interest expense -- -- 0.63% -- --
<FN>
(a) The Government Reserve Fund's Class R and Class P Shares commenced
operations on September 14, 1992 and March 12, 1996, respectively.
(b) The Short Duration Government Bond Fund's Class R and Class P Shares
commenced operations on December 18, 1992 and March 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
SHORT DURATION GOVERNMENT BOND FUND
Period Ending FISCAL YEAR ENDED JUNE 30
December 31, 1996 -------------------------------------------------------------
(Unaudited) 1996(b) 1995R 1994R 1993(b)R
$ 9.92 $9.98 $9.80 $10.23 $10.00
0.28 0.16 0.62 0.61 0.33
0.11 (0.05) 0.16 (0.34) 0.23
0.39 0.11 0.78 0.27 0.56
(0.30) (0.17) (0.62) (0.56) (0.33)
-- -- -- (0.07) --
-- -- -- -- --
-- -- -- (0.07) --
-- -- (0.01) -- (0.00)#
(0.30) (0.17) (0.63) (0.70) (0.33)
$10.01 $9.92 $9.95 $ 9.80 $10.23
3.95% 1.12% 8.28% 2.49% 5.66%
$ 1 $1 $17,093 $21,937 $22,254
5.59%+ 5.63%+ 6.41% 5.93% 6.02%+
0.86%+ 0.85%+ 0.47% 0.25% 0.22%+
202.74% 349.62% 284.23% 603.07% 213.22%
$ 0.25 $0.14 $0.54 $ 0.51 $ 0.27
2.10%+ 2.56%+ 2.23% 1.75% 2.07%+
1.60%+ 1.80%+ 1.38% 0.71% --
11
<PAGE>
The Funds' Investment Objectives And Policies
<TABLE>
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 16. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 20. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 22. Certain Terms Used in the Prospectus Are
Defined in the Glossary Found at the End of this Prospectus.
<CAPTION>
SUMMARY COMPARISON OF FUNDS
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
<S> <C> <C> <C> <C>
The Emerging/International Market Funds
Emerging Markets Fund 65-100% 35% Foreign Emerging Growth Any size
International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
The Multi-Strategy Funds
Asset Allocation Fund 20-80% 20-80% Balanced Any size
Select 50 Fund 65-100% 35% Worldwide Growth Any size
The U.S. Equity Funds
Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
Growth Fund 65-100% 35% Growth Over $1 Billion
Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
The Fixed-Income and Money Market Funds
Government Reserve Fund 0% 100% Income N/A
Short Duration Government Bond Fund 0% 100% Income N/A
</TABLE>
The Emerging/International Markets Funds
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging market country. The Manager currently regards the
following to be emerging market countries: Latin America (Argentina, Brazil,
Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay, Venezuela); Asia (Bangladesh, China, India, Indonesia, Korea, Malaysia,
Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam);
southern and eastern Europe (Czech Republic, Greece, Hungary, Poland, Portugal,
Russia, Turkey); the Middle East (Israel, Jordan); and Africa (Egypt, Ghana,
Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the
future, the Fund may invest in other emerging market countries.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's aims are to invest
in those countries that are expected to have the highest risk/reward trade-off
when
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<PAGE>
incorporated into a total portfolio context. This "top-down" country selection
is combined with "bottom-up" fundamental industry analysis and stock selection
based on original research and publicly available information and company
visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity derivative securities.
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
The Multi-Strategy Funds
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The Fund is a "fund of funds" which means the Fund will not invest
directly in securities but will instead invest in a diversified group of three
Funds from The Montgomery Funds family (each, an "Underlying Fund") the Manager
considers to be
13
<PAGE>
appropriate investments for achieving the Asset Allocation Fund's investment
objective. The 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:
Asset Allocation Fund Allocation
- --------------------------------------------------------------------------------
Investment Anticipated Range of Underlying
Focus Asset Allocation Fund
- --------------------------------------------------------------------------------
Domestic stocks 20% to 80% Growth Fund
- --------------------------------------------------------------------------------
Debt instruments 20% to 80% Total Return Bond Fund or other
investment grade bond funds
advised by the Manager
- --------------------------------------------------------------------------------
Cash and cash equivalents 0% to 50% Government Reserve Fund
- --------------------------------------------------------------------------------
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
<TABLE>
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.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Anticipated Equity Maximum Debt Typical Market Capitalization
Fund Name Exposure Exposure Focus of Portfolio Companies
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund 0% 100% Income 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 investment 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. See "Portfolio
Securities."
Duration of the Total Return Bond Fund. The Total Return Bond Fund expects that,
under normal circumstances, the dollar-weighted average maturity (or period
until the next interest rate reset date) of its portfolio securities may be
longer than three years, but the Fund does not restrict its investments only to
individual securities that are below a specific maturity. The Fund, however,
seeks to maintain an average portfolio effective duration of between four to
five and a half years.
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment-grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
14
<PAGE>
The U.S. Equity Funds
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery 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. 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 value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those assets in domestic and foreign companies having total market
capitalizations of $1 billion or more. This Fund invests primarily in common
stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be
investment grade debt securities. See "Portfolio Securities." Current income
from dividends, interest and other sources is only incidental.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share
15
<PAGE>
for existing product lines. Using fundamental research, the Fund targets
businesses having positive internal dynamics that can outweigh unpredictable
macro-economic factors, such as interest rates, commodity prices, foreign
currency rates and overall stock market volatility. The Fund searches for
companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including regional firms that closely follow smaller capitalization companies
within their geographic regions.
The Fixed-Income and Money Market Funds
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. government securities, repurchase agreements for
U.S. government securities and other money market funds investing in U.S.
government securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
Montgomery Short Duration Government Bond Fund (formerly called the Short
Government Bond Fund) (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value of $1.00 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 expects that, under normal
circumstances, the dollar-weighted average maturity (or period until the next
interest rate reset date) of its portfolio securities may be longer than three
years but the maturity of individual securities may be up to 30 years. The Short
Bond Fund also seeks to maintain an average portfolio effective duration
comparable to or less than that of three-year U.S. Treasury notes.
Portfolio Securities
The following describes portfolio securities the Funds may invest. Investors in
the Asset Allocation Fund should note the portfolio securities of the Asset
Allocation Fund consists of the portfolio securities of each of the Underlying
Funds.
Equity Securities
The International/Emerging Markets Funds, the Select 50 Fund and the U.S. Equity
Funds 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.
16
<PAGE>
Depositary Receipts, Convertible Securities and Securities Warrants
The International/Emerging Markets Funds, the Select 50 Fund and the U.S. Equity
Funds may invest in ADRs, EDRs and GDRs and convertible securities which the
Manager regards as a form of equity security. Each such Fund may also invest up
to 5% of its net assets in warrants, including up to 2% of net assets for those
not listed on a securities exchange.
Privatizations
The Select 50 Fund and the International/Emerging Markets Funds believe that
foreign governmental programs of selling interests in government-owned or
controlled enterprises ("privatizations") may represent opportunities for
significant capital appreciation, and these Funds may invest in privatizations.
The ability of U.S. entities, such as these Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be successful.
Special Situations
The Select 50 Fund and the International/Emerging Markets Funds believe that
carefully selected investments in joint ventures, cooperatives, partnerships,
private placements, unlisted securities and similar vehicles (collectively,
"special situations") could enhance their capital appreciation potential. These
Funds also may invest in certain types of vehicles or derivative securities that
represent indirect investments in foreign markets or securities in which it is
impracticable for the Funds to invest directly. Investments in special
situations may be illiquid, as determined by the Manager based on criteria
reviewed by the Board. These Funds do not invest more than 15% of their net
assets in illiquid investments, including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International/Emerging Markets Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International/Emerging Markets
Funds also may incur tax liability to the extent they invest in the stock of a
foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds. See the Statement of Additional Information.
The Select 50 Fund, the International/Emerging Markets Funds, the Equity Funds
and Fixed Income Funds do not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, these Funds bear their ratable
share of that investment company's expenses, including advisory and
administration fees. The Manager has agreed to waive its own management fee with
respect to the portion of these Funds' assets invested in other open-end (but
not closed-end) investment companies.
Debt Securities
The Select 50 Fund and the International/Emerging Markets 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 Equity Income Fund's total assets. In selecting debt
securities, the Manager seeks out good credits and analyzes interest rate trends
and specific developments that may affect individual issuers. As an operating
policy which may be changed by the Board, each Fund will not invest more than 5%
of its 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 International/Emerging Markets Fund and the Equity
Income Fund may invest in external (i.e., to foreign lenders) debt obligations
issued by the governments, governmental entities and companies of emerging
market countries. The percentage distribution between equity and debt will vary
from country to country based on anticipated trends in inflation and interest
rates; expected rates of economic and corporate profits growth; changes in
government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
17
<PAGE>
U.S. Government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Fixed-Income Funds may invest in mortgage-related securities. A
mortgage-related security is an interest in a pool of mortgage loans and is
considered a derivative security. Most mortgage-related securities are
pass-through securities, which means that investors receive payments consisting
of a pro rata share of both principal and interest (less servicing and other
fees), as well as unscheduled prepayments, as mortgages in the underlying
mortgage pool are paid off by the borrowers. Certain mortgage-related securities
are subject to high volatility. These funds use these derivative securities in
an effort to enhance return and as a means to make certain investments not
otherwise available to the Funds. See "Hedging and Risk- Management Practices"
for a discussion of other reasons why these Funds invest in derivative
securities.
Agency Mortgage-Related Securities
Investors in the Reserve, Short Bond and Asset Allocation Funds should note that
the dominant issuers or guarantors of mortgage-related securities today are
GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from pools of
government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. Government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. government
securities for purposes of their investment policies. However, the Government
Reserve Fund does not invest in stripped mortgage securities, and the Short Bond
Fund limits its stripped mortgage securities investments to 10% of total assets.
The liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Short Bond and Total Return Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and Total Return 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, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Bond Fund may purchase some mortgage-related securities
through private and the Total Return Bond Fund
18
<PAGE>
placements that are restricted as to further sale. See "Illiquid Securities."
The value of these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
Variable Rate Demand Notes
The Fixed Income Fund may invest in variable rate demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income Funds may invest in zero coupon bonds. Zero coupon bond prices
are highly sensitive to changes in market interest rates. The original issue
discount on the zero coupon bonds must be included ratably in the income of the
Fixed Income Funds as the income accrues even though payment has not been
received. These Funds nevertheless intend to distribute an amount of cash equal
to the currently accrued original issue discount, and this may require
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the 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
<TABLE>
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
Short
Small Duration
International Cap Govern- Govern-
Emerging Internatonal Small Asset Select Equity Oppor- mental ment
Markets Growth Cap Allocation 50 Income Growth tunities Reserve Bond
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) X X X * X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions * X(1)
- ------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one- X X X * X X X X X X
third of total fund assets
- ------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement X X * X X X X X
- ------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * X
- ------------------------------------------------------------------------------------------------------------------
Leverage X X X * X X X(2)
- -----------------------------------------------------------------------------------------------------------------
Securities lending not to exceed X X X * X X X X X X
30% of total fund assets
- -----------------------------------------------------------------------------------------------------------------
When-issued and forward X X X * X X X X X X(3)
commitment securities
- -----------------------------------------------------------------------------------------------------------------
Forward currency contracts 6 X X X * X X X
- -----------------------------------------------------------------------------------------------------------------
Purchase options on securities X X X * X X X X X
and currencies 4
- -----------------------------------------------------------------------------------------------------------------
Purchase options on securities X X X * X X X X
indices 4
- -----------------------------------------------------------------------------------------------------------------
Write covered call options 4 X X X * X X X X X
- -----------------------------------------------------------------------------------------------------------------
Write covered put options 4 X X X * X X X X X
- -----------------------------------------------------------------------------------------------------------------
Interest rate futures contracts5 X X X * X X X X X
- -----------------------------------------------------------------------------------------------------------------
Futures and swaps and options on X X X * X X X X X
futures
- -----------------------------------------------------------------------------------------------------------------
Equity swaps X X X * X X X X
- -----------------------------------------------------------------------------------------------------------------
Illiquid securities (limited * X
to 10% of Fund's net assets)
- -----------------------------------------------------------------------------------------------------------------
Illiquid securities (limited X X X * X X X X X
to 15% of Fund's net assets)
- -----------------------------------------------------------------------------------------------------------------
20
<PAGE>
<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.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 A Fund will not enter into any options on securities, securities indices or
currencies or related options (including options on futures) if the sum of
the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
5 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
6 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
* 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 the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer 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
Government 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.
21
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
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 Asset Allocation Fund should note the risks involved with each
Underlying Fund, because the Asset Allocation Fund is a "Fund-of-Funds."
Small Companies
The Small Cap Opportunities and International Small Cap Funds emphasize, and the
Select 50, International Growth, Emerging Markets and Growth Funds may make
investments in, smaller companies that may benefit from the development of new
products and services. Such smaller companies may present greater opportunities
for capital appreciation but may involve greater risk than larger, more mature
issuers. Such smaller companies may have limited product lines, markets or
financial resources, and their securities may trade less frequently and in more
limited volume than those of larger, more mature companies. As a result, the
prices of their securities may fluctuate more than those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the Select 50 Fund and International and Emerging Markets
Funds have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Select 50 and International Funds, and particularly the
Emerging Markets 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 U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S.. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined, or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign
22
<PAGE>
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 Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower-Quality Debt
The Select 50, International and Emerging Markets Funds are authorized to invest
in medium-quality (rated or equivalent to BBB by S&P or Fitch's, or Baa by
Moody's) and in limited amounts of high-risk debt securities below
investment-grade quality. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds." The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
Funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual Funds, because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fixed-Income Fund to the extent it retains the
same percentage of debt securities, may have to reinvest the proceeds of
prepayments at lower interest rates than those of their previous investments. If
this occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
duration, although they may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that the Fixed-Income Funds
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
23
<PAGE>
one of the fundamental tools used by the Manager in managing interest rate risks
including prepayment risks. See Duration in the Glossary.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, LLC is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. 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, the third largest publicly held
commercial bank in Germany, has total assets of approximately $268 billion.
Commerzbank and its affiliates had over $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 to 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 Emerging Markets Fund
Josephine S. Jimenez, CFA, is a managing director and senior portfolio manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C., as senior analyst
and portfolio manager.
Bryan L. Sudweeks, Ph.D., CFA, is a managing director and senior portfolio
manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991.
Angeline Ee is a portfolio manager. From 1990 until joining the Manager in July
1994, Ms. Ee was an Investment Manager with AIG Investment Corp. in Hong Kong.
From June 1989 until September 1990, Ms. Ee was a co-manager of a portfolio of
Asian equities and bonds at Chase Manhattan Bank in Singapore.
Frank Chiang is a portfolio manager. From 1993 until joining the Manager in
1996, Mr. Chiang was managing director and portfolio manager at TCW Asia Ltd. in
Hong Kong.
Jesus Isidoro Duarte is a regional portfolio manager for the Manager responsible
for the Latin American markets. Mr. Duarte began his investment career in 1980.
He joined the Manager from Latinvest Management Co. in Brazil, where he was
Director and Vice President responsible for research and portfolio management
for the firm's Latin American Funds. Prior to Latinvest, 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. Mr. Duarte has a
Bachelor of Arts Degree in International Relations and a minor in Business
Administration from the University of Redlands in California and has
successfully completed the Japanese Language Institute's two-year program at the
Sophia University in Tokyo.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
John D. Boich, CFA, is a managing director and senior portfolio manager. From
1990 to 1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and co-
manager of The Common Goal World Fund, a global equity partnership. From 1987 to
1989, Mr. Boich worked as a financial advisor with Prudential-Bache Securities
and E.F. Hutton & Company.
Oscar A. Castro, CFA, is a managing director and senior portfolio manager.
Before joining the Manager, he was vice president/portfolio manager at G.T.
Capital Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder
and co-manager of The Common Goal World Fund, a global equity partnership. From
1987 to 1989, he was deputy portfolio manager/analyst at Templeton
International.
Nancy Kukacka is a portfolio manager and principal. Prior to joining Montgomery
Asset Management, Ms. Kukacka worked at CS First Boston Investment where she was
an Equity Research Analyst covering consumer cyclical and non-durable sectors.
Previously, Ms. Kukacka was an Equity Research at RCM Capital Management
providing fundamental-based analysis for over 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.
24
<PAGE>
For the background and business experience of Bryan L. Sudweeks, PhD., CFA, who
is a Portfolio Strategist for the International Growth Fund, see the discussion
under the Montgomery Emerging Markets Fund, above.
Montgomery Asset Allocation Fund
The 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 the Fund-of-Funds
structure, and also for coordinating and implementing the investment decisions
of the Asset Allocation Fund. For the background and business experience of
Kevin T. Hamilton, see the discussion under the Montgomery Select 50 Fund,
below.
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.
Kevin T. Hamilton, CFA, Chairman of the Manager's Investment Oversight Committee
and a managing director, is responsible for coordinating and implementing the
investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
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.
Montgomery Equity Income Fund
John H. Brown, CFA, is a managing director and senior portfolio manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets.
Kathryn M. Peters is a portfolio manager. 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 buy-out group of Marine Midland Bank.
Andrew G. Pratt, CFA, is a portfolio manager. He joined Montgomery Asset
Management from Hewlett-Packard Company, where he was an equity analyst, managed
a portfolio of small-capitalization technology companies and researched private
placement and venture capital investments. From 1983 through 1988, he worked in
the Capital Markets Group at Fidelity Investments in Boston.
Montgomery Government Reserve Fund
Montgomery Short Duration Government Bond Fund
Montgomery Total Return Bond Fund (an underlying Fund for the Asset Allocation
Fund)
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991; and while with Drexel Burnham Lambert from 1984 to 1990, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager. 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
25
<PAGE>
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.
<TABLE>
The management fees for the Domestic Equity, Select 50, International and
Emerging Markets Funds are higher than for most mutual Funds.
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
<S> <C> <C>
Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
Asset Allocation Fund All amounts 0.00%*
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Short Duration Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
<FN>
* This amount represents only the management fee of the Asset Allocation Fund
and does not include management fees attributable to the Underlying Funds
which ultimately are to be borne by shareholders of the 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, Select 50, Emerging Markets, International Small Cap and
International Growth Funds pays seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million); each of
the Short and Reserve Funds pays five one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of average daily net assets over $500 million
and the Reserve Fund over $250 million). In the case of the Asset Allocation
Fund, the Administrator does not charge a fee for performing administrative
services for the Fund, although it charges a fee for such services performed for
the Underlying Funds, which ultimately are borne indirectly by shareholders of
the Asset Allocation Fund.
26
<PAGE>
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 record keeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the 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 up to 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 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 Equity Income Fund,
eighty-five one-hundredths of one percent (0.85%); the Small Cap Opportunities
Fund, one and five-tenths of one percent (1.50%); the International Growth Fund,
one and sixty-five one-hundredths of one percent (1.65%); the Select 50 Fund,
one and eight-tenths of one percent
27
<PAGE>
(1.80%); the Emerging Markets and International Small Cap Funds, one and
nine-tenths of one percent (1.90%); the Asset Allocation Fund, one and
three-tenths of one percent (1.30%) through limits in the Underlying Funds; the
Short Government Bond Fund, seven-tenths of one percent (0.70%); and the
Government Reserve Fund, six-tenths of one percent (0.60%). The Manager also may
voluntarily reduce additional amounts to increase the return to a Fund's
investors. The Manager may terminate these voluntary reductions at any time. Any
reductions made by the Manager in its fees are subject to reimbursement by that
Fund within the following 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.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to: reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. 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 record keeping 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
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Fund Distributor, Inc., the Funds' Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor, or certain administrators of 401(k) and other retirement
plans by 4:00 p.m., New York time, on any day that the New York Stock
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<PAGE>
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Government
Reserve Fund must be received by 12:00 noon, New York time. Orders for Fund
shares received after the Funds' cutoff times will be purchased at the
next-determined net asset value after receipt of the order. Shares of the Fixed
Income Funds will not be priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. 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 U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum Initial Investment (including IRAs):..............................$1,000
Initial Investments by Check
o Complete the Account Application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
o Dividends do not begin to accrue on the Fixed Income Funds until your check
has cleared.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar
amount to be invested and Fund(s) in which you want to invest. They will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed Account Application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its FAX number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the new Fund.
o 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.
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<PAGE>
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o 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.
Subsequent Investments
Minimum Subsequent Investment (including IRAs):.............................$100
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and a
voided check or deposit slip (for a savings account) to the Transfer Agent.
o Send a check by overnight or 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 section titled "Initial
Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
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<PAGE>
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o 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.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish 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
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Shares of the Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Certain of the Funds are
available for purchase through administrators for retirement plans. Investors
who purchase shares as part of a retirement plan should address inquiries and
seek investment servicing from their plan administrators. Plan administrators
may receive compensation from the Funds for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed-Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, the securities dealer.
Payment of redemption proceeds
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<PAGE>
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 (SEC). 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
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all holders of the account must sign.
o Signature guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock broker, a savings
association or national securities exchange. Contact the Transfer Agent for
more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion.
Redeeming by Check
o Check writing is available on the Government Reserve and Short Government
Bond Funds.
o Check writing is not available for IRA accounts.
o The minimum amount per check is $250. A check for less may be returned to
you.
o All checks will require only one signature unless otherwise indicated.
o You should not write a check to close your Fixed Income Fund account.
o Checks will be returned to you at the end of each month.
o A charge may be imposed for any stop payments requested.
o 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
o 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.
o If you included bank wire information on your 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
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<PAGE>
least two business days for redemption proceeds to be credited to your bank
account. If you want to wire your redemption proceeds to arrive at your
bank on the same business day (subject to bank cutoff times), there is a
$10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be 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."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal marketactivity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make an involuntary redemption, the shareholder will first be
notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to the minimum investment required to open an
account before the Fund takes any action.
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."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Funds'
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this
Prospectus.
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<PAGE>
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 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 Fixed-Income Funds are exempt. A shareholder's
exchanges may be restricted or refused if a Fund receives, or the Manager
anticipates, simultaneous orders affecting significant portions of that
Fund's assets and, in particular, a pattern of exchanges coinciding with a
"market timing" strategy. The Trusts reserve the right to refuse exchanges
by any person or group if, in the Manager's judgment, a Fund would be
unable to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed-Income Funds into any other
Fund. The minimum exchange is $100. Periodically investing a set dollar amount
into a Fund is also referred to as dollar-cost averaging, because the number of
shares purchased will vary depending on the price per share. Your account with
the recipient Fund must meet the applicable minimum of $1,000. Exchanges out of
the Fixed-Income Funds are exempt from the four-exchanges limit policy.
Directed Dividend Service
If you own shares of the Fixed-Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000.
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. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4 p.m. (1 p.m. for the Government Reserve Fund), New York time, on
days that the Fund issues shares. Orders received after that time will be
purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Fund, they may receive
fees from the Fund for such services.
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 by 4 p.m., New York time (12 noon for the Government
Reserve Fund), on a day that the Fund redeems shares. Orders received after that
time are entitled to the net asset value next determined after receipt.
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<PAGE>
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4 p.m. (12 noon
for the Government Reserve Fund), New York time, on each day that the NYSE is
open for trading (except for bank holidays for the Fixed Income Funds).
Per-share net asset value is calculated by dividing the value of each Fund's
total net assets by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or 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.
Dividends And Distributions
<TABLE>
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:
<CAPTION>
Income Dividends Capital Gains
<S> <C> <C>
Equity Funds (except Equity Declared and paid in the last quarter of Declared and paid in the last
Income Fund) each year* quarter of each year*
Equity Income Fund Declared and paid on or about the last Declared and paid in the last
business day of each quarter. quarter of each year*
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last
each year* quarter of each year*
Fixed-Income Funds Declared daily and paid monthly on or Declared and paid in the last
about the last business day of each month quarter 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 investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional Class P
shares of the applicable Fund and credited to the shareholder's account at the
closing net asset value on the reinvestment date.
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<PAGE>
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 paid 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
Each Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
their earnings are not distributed or are distributed in a manner that does not
satisfy the requirements of the Code. If a Fund is unable to meet certain Code
requirements, it may be subject to taxation as a corporation. Funds investing in
foreign securities also may incur tax liability to the extent they invest in
"passive foreign investment companies." See "Portfolio Securities" and the
Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax 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 Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards to issue an unlimited number of full
and fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
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This Prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the trustees of that Trust.
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. Performance data may be quoted separately for the
Class P shares as for the other classes. Total return information generally will
include a Fund's average annual compounded rate of return over the most recent
four calendar quarters and over the period from the Fund's inception of
operations. A Fund may also advertise aggregate and average total return
information over different periods of time. Each Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
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 as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND (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:
o 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).
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o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated Prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-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 the Fund
to withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or Taxpayer Identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item 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.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
This Prospectus is not an offering of the securities herein described in any
state in which the 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.
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GLOSSARY
Asset-backed securities. Asset backed securities 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. Cash equivalents are short-term, interest-bearing instruments
or deposits and may include, for example, commercial paper, certificates of
deposit, repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank
money market deposit accounts, master demand notes and money market mutual
Funds. These consist of high-quality debt obligations, certificates of deposit
and bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
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 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 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. A dollar roll transaction 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. However, "term to maturity"
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
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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 World Bank or the United Nations to be emerging or
developing.
Equity derivative securities include, among other things, options on equity
securities, warrants and futures contracts on equity securities.
Equity swaps. Equity swaps allow the parties to exchange the dividend income or
other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. Equity swaps transitions may be volatile and may present the
Fund with counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency for
an agreed-upon price at a future date. The Funds generally do not enter into
forward contracts with terms greater than one year. A Fund generally enters into
forward contracts only under two circumstances. First, if a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency needed
to settle the transaction. Second, if the Manager believes that the currency of
a particular foreign country will substantially rise or fall against the U.S.
dollar, it may enter into a forward contract to buy or sell the currency
approximating the value of some or all of a Fund's portfolio securities
denominated in such currency. A Fund will not enter into a forward contract if,
as a result, it would have more than one-third of total assets committed to such
contracts (unless it owns the currency that it is obligated to deliver or has
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 in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
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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 industry wide 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 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). Variable-rate demand notes are instruments
with rates of interest adjusted periodically or that "float" continuously
according to specific formulae and often have a demand feature entitling the
purchaser to resell the securities.
A warrant. 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. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from face
value. The discount approximates the total interest the bonds will accrue and
compound
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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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Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
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
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