The Montgomery Funds
Supplement dated June 30, 1997
To Prospectus dated June 30, 1997
For Investors in the Montgomery Latin America Fund
In addition to the risks discussed in the prospectus on page 34, there are
special risks involved with investments in Brazil. The Brazilian government has
often drastically changed monetary, credit, tax and other policies to influence
the course of Brazil's economy. It has also used wage and price controls as well
as other interventionist measures, such as freezing bank accounts and imposing
capital controls.
The Brazilian political environment has been very volatile since the country
returned to civilian rule in 1985 after 20 years of military government. This
historically has resulted in the absence of a coherent and sustained policy to
confront Brazil's economic problems.
Brazil also has historically experienced extremely high rates of inflation.
Inflation itself, as well as certain governmental measures to combat inflation,
has in the past had significant negative effects on the Brazilian economy. These
have in the past caused great economic uncertainty in Brazil and volatility in
the Brazilian securities markets. These various factors might negatively affect
the Brazilian political or economic situation and thereby affect the value of
the Fund's investment in Brazilian securities.
<PAGE>
[LOGO] ------------------
Rule 497(e)
Prospectus 33-69686; 811-8064
June 30, 1997 ------------------
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds .................................................3
Fees and Expenses of the Funds........................................6
Financial Highlights..................................................8
The Funds' Investment Objectives and Policies........................12
Portfolio Securities.................................................21
Other Investment Practices...........................................24
Risk Considerations..................................................26
Management of the Funds..............................................28
How To Contact the Funds.............................................33
How To Invest in the Funds...........................................33
How To Redeem an Investment in the Funds.............................36
Exchange Privileges and Restrictions.................................38
How Net Asset Value is Determined....................................40
Dividends and Distributions..........................................40
Taxation.............................................................41
General Information..................................................42
Backup Withholding ..................................................43
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. The minimum initial investment in each Fund is
$1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must be at
least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As 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 June 30, 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. If you
are viewing the electronic version of this prospectus through an on-line
computer service, you may request a printed version free of charge by calling
(800) 572-FUND.
The Internet address for The Montgomery Funds is www.xperts.montgomery.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,
Montgomery Federal Tax-free Money Fund and Montgomery California Tax-Free Money
Fund will be able to maintain a stable net asset value of $1.00 per share.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any State securities commission nor has the Securities
and Exchange Commission or any State securities commission passed upon the
accuracy or adequacy of this prospectus. any representation to the contrary is a
criminal offense.
1
<PAGE>
The following twenty-one mutual funds (the "Funds") are offered in this
Prospectus:
Fund Stock
Number Ticker
Montgomery Emerging/Global/
International Markets Funds
Emerging Asia Fund................................648..................MNEAX
Emerging Markets Fund.............................277..................MNEMX
Global Communications Fund........................280..................MNGCX
Global Opportunities Fund.........................285..................MNGOX
International Growth Fund.........................296..................MNIGX
International Small Cap Fund......................283..................MNISX
Latin America Fund................................652..................N/A
Montgomery Multi-Strategy Funds
Asset Allocation Fund.............................291..................MNAAX
Global Asset Allocation Fund......................649..................N/A
Select 50 Fund....................................295..................MNSFX
Montgomery U.S. Equity Funds
Equity Income Fund................................293..................MNEIX
Growth Fund.......................................284..................MNGFX
Micro Cap Fund....................................294..................MNMCX
Small Cap Fund....................................276..................MNSCX
Small Cap Opportunities Fund......................645..................MNSOX
Montgomery U.S. Fixed-Income and
Money Market Funds
California Tax-Free
Intermediate Bond Fund........................281..................MNCTX
California Tax-Free Money Fund....................292..................MCFXX
Federal Tax-Free Money Fund.......................647..................MFFXX
Government Reserve Fund...........................278..................MNGXX
Short Duration Govt Bond Fund.....................279..................MNSGX
Total Return Bond Fund............................650..................N/A
2
<PAGE>
The Emerging/Global/International Market Funds
Montgomery Emerging Asia Fund
Invests primarily in the equity securities of emerging Asia companies.
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 Global Communications Fund
Invests primarily in equity securities of communications companies throughout
the world having sound fundamental values and potential for long-term growth at
a reasonable price.
Montgomery Global Opportunities Fund
Invests primarily in equity securities of companies of all sizes throughout the
world with sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations 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.
Montgomery Latin America Fund
Invests primarily in the equity securities of companies in Latin America.
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 Global Asset Allocation Fund
A Fund of Funds that allocates its investments among five asset
classes--domestic stocks, international developed markets stocks, emerging
markets stocks, domestic dollar-denominated debt instruments and cash or cash
equivalents using specific Montgomery Funds, each of which focuses on separate
investment disciplines.
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 Micro Cap Fund
Invests primarily in equity securities of domestic companies that have the
potential for rapid growth and are micro-capitalization companies. (Closed to
new investors.)
Montgomery Small Cap Fund
Invests primarily in equity securities, usually common stocks, of
small-capitalization domestic companies (less than $1 billion). (Closed to new
investors.)
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
3
<PAGE>
The Fixed-Income Funds
Montgomery California Tax-Free Intermediate Bond Fund
Invests primarily in federal and state tax-exempt California municipal
securities. It targets higher yields than tax-free money market funds but
generally with less fluctuation in the value of its shares than long-term
tax-free bond funds. It does not maintain a stable net asset value of $1 per
share. This Fund is available to California residents only.
Montgomery California Tax-Free Money Fund
Invests primarily in federal and state tax-exempt California municipal
securities. It seeks to maintain a stable net asset value of $1 per share. This
Fund is available to California residents only.
Montgomery Federal Tax-Free Money Fund
Invests primarily in federal tax-exempt municipal securities. It seeks to
maintain a stable net asset value of $1 per share.
Montgomery Government Reserve Fund
Invests only in U.S. government securities, repurchase agreements for U.S.
government securities and other money market funds investing exclusively in U.S.
government securities and such repurchase agreements. It seeks to maintain a
stable net asset value of $1.00 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.
Montgomery Total Return Bond Fund
Invests primarily in a broad range of fixed income securities, including
marketable corporate debt securities, U.S. government securities,
mortgage-related securities, other asset-backed securities and cash or money
market instruments. It seeks higher yields than money market funds generally and
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.
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
Prospectus, call The Montgomery Funds at (800) 572-FUND (3863) or contact sales
representatives or financial intermediaries who offer those classes.
4
<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
</TABLE>
+ 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.
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Other Expenses Total Fund Operating Expenses
(after reimbursement (after reimbursement
The Equity Funds Management Fee* unless noted)* unless noted)*
- ---------------- --------------- -------------- --------------
<S> <C> <C> <C>
The Emerging/Global/International Markets Funds
Emerging Asia Fund 1.25% 0.65% 1.90%
Emerging Markets Fund 1.06% 0.66%+ 1.72%+
Global Communications Fund 1.25% 0.65% 1.90%
Global Opportunities Fund 1.25% 0.65% 1.90%
International Growth Fund 1.10% 0.55% 1.65%
International Small Cap Fund 1.25% 0.65% 1.90%
Latin America Fund 1.25% 0.65% 1.90%
The Multi-Strategy Funds
Asset Allocation Fund 0.00% 1.30%#** 1.30%#
Global Asset Allocation Fund 0.20% 1.55%#** 1.75%#
Select 50 Fund 1.25% 0.55% 1.80%
The U.S. Equity Funds
Equity Income Fund 0.60% 0.25% 0.85%
Growth Fund 0.96% 0.39%+ 1.35%+
Micro Cap Fund 1.36% 0.39% 1.75%
Small Cap Fund 1.00% 0.24%+ 1.24%+
Small Cap Opportunities Fund 1.20% 0.30% 1.50%
The Fixed-Income and Money Market Funds
California Tax-Free Intermediate Bond Fund 0.50% 0.11% 0.61%
California Tax-Free Money Fund 0.40% 0.19% 0.59%
Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
Government Reserve Fund 0.38% 0.22% 0.60%
Short Duration Government Bond Fund 0.50% 0.20% 0.70%
Total Return Bond Fund 0.50% 0.20% 0.70%
</TABLE>
5
<PAGE>
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.
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996. Expenses for the Montgomery
Emerging Asia Fund, Montgomery Latin America Fund, Montgomery Global Asset
Allocation Fund, Montgomery Total Return Bond Fund and Montgomery Federal
Tax-Free Money Fund are estimated. The Manager will reduce its fees and may
absorb or reimburse a Fund for certain expenses to the extent necessary to
limit total annual fund operating expenses to the lesser of the amount
indicated in the table for a Fund or the maximum allowed by applicable
state expense limitations. A Fund is required to reimburse the Manager for
any reductions in the Manager's fee only during the 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, actual total Fund operating expenses for
the period ended June 30, 1996 (annualized) would have been as follows:
Montgomery Equity Income Fund, 1.45% (0.85% other expenses); Montgomery
Small Cap Opportunities Fund, 2.16% (0.96% other expenses); Montgomery
Micro Cap Fund, 1.79% (0.39% other expenses); Montgomery Global
Opportunities Fund, 2.05% (0.80% other expenses); Montgomery Global
Communications Fund, 2.01% (0.76% other expenses); Montgomery International
Growth Fund, 2.91% (1.81% other expenses); Montgomery International Small
Cap Fund, 2.76% (1.53% other expenses); Montgomery Asset Allocation Fund,
1.55% (0.95% other expenses); Montgomery Select 50 Fund, 2.11% (0.86% other
expenses); Montgomery Short Government Bond Fund, 2.31% (1.81% other
expenses); Montgomery Government Reserve Fund, 0.74% (0.36% other
expenses); Montgomery California Tax-Free Intermediate Bond Fund, 1.43%
(0.93% other expenses); and Montgomery California Tax-Free Money Fund,
0.80% (0.40% other expenses). Absent the reduction, actual total Fund
operating expenses are estimated to be as follows: Montgomery Total Return
Bond Fund, 1.50% (1.00 other expenses); Montgomery Federal Tax-Free Money
Fund, 1.00%(0.60% other expenses); Montgomery Emerging Asia Fund, 3.25%
(2.00% other expenses); Montgomery Latin America Fund, 3.25% (2.00% other
expenses); and Montgomery Global Asset Allocation Fund, 2.50% (0.60% other
expenses and 1.70% Underlying Fund expenses). The Manager may terminate
these voluntary reductions at any time. See "Management of the Funds."
+ 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 (1.25% for the Montgomery Global Asset
Allocation Fund), the Manager has agreed to limit the Montgomery Asset
Allocation Fund's Total Fund Operating Expenses to 1.30% and the Montgomery
Global Asset Allocation Fund's Total Fund Operating Expenses to 1.75%,
respectively. The total expenses for the Underlying Funds for the
Montgomery Asset Allocation Fund (currently estimated to be 1.10%) and the
total expenses for the Underlying Funds for the Montgomery Global Asset
Allocation Fund (currently estimated to be 1.25%), will depend on the
actual expenses of the respective Underlying Funds and how the Funds'
assets are allocated among those Underlying Funds.
** Estimated expenses of Montgomery Asset Allocation Fund and Montgomery
Global Asset Allocation Fund (excluding expenses related to the Underlying
Funds and after reimbursement) is 0.20% for the Montgomery Asset Allocation
Fund and 0.30% for the Montgomery Global Asset Allocation Fund. Estimated
expenses related to the Underlying Funds for Montgomery Asset Allocation
Fund is 1.10% and the estimated expenses related to the Underlying Funds
for Montgomery Global Asset Allocation Fund is 1.25%.
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
The Emerging/Global/International Markets Funds
Emerging Asia Fund $19 $60 N/A N/A
Emerging Markets Fund $17 $54 $93 $203
Global Communications Fund $19 $60 $103 $222
Global Opportunities Fund $19 $60 $103 $222
International Growth Fund $17 $52 $90 $195
International Small Cap Fund $19 $60 $103 $222
Latin America Fund $19 $60 N/A N/A
The Multi-Strategy Funds
Asset Allocation Fund $13 $41 $71 $157
Global Asset Allocation Fund $18 $55 N/A N/A
Select 50 Fund $18 $57 $97 $212
The U.S. Equity Funds
Equity Income Fund $9 $27 $47 $105
Growth Fund $14 $43 $74 $162
Micro Cap Fund $18 $55 $95 $206
Small Cap Fund $13 $39 $68 $150
Small Cap Opportunities Fund $15 $47 $82 $179
6
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Fixed-Income and Money Market Funds
California Tax-Free Intermediate Bond Fund $6 $20 $34 $76
California Tax-Free Money Fund $6 $19 $33 $74
Federal Tax-Free Money Fund $6 $19 N/A N/A
Government Reserve Fund $6 $19 $33 $75
Short Duration Government Bond Fund $7 $22 $39 $87
Total Return Bond Fund $7 $22 N/A N/A
</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.
7
<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 information
for the period ended June 30, 1991 was audited by other independent accountants
whose report is not included herein.
<CAPTION>
EMERGING
ASIA FUND EMERGING MARKETS FUND
Period Ending
Period Ending December 31, FISCAL YEAR ENDED JUNE 30
SELECTED PER SHARE DATA FOR THE December 31, 1996(A) 1996 ------------------------------------------------
YEAR OR PERIOD ENDED: (UNAUDITED) (UNAUDITED) 1996 1995++ 1994 1993 1992(B)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $12.00 $14.19 $13.17 $13.68 $11.07 $9.96 $10.00
Net investment income/(loss) 0.02 0.01 0.08 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss)
on investments 2.51 (0.26) 0.94 0.25## 2.92 1.05 (0.07)
Net increase/(decrease) in net assets
resulting from investment operations 2.53 (0.25) 1.02 0.28 2.89 1.12 (0.04)
Distributions:
Dividends from net investment income (0.03) (0.07) -- -- -- (0.01) --
Distributions in excess of net
investment income -- -- -- -- -- -- --
Distributions from net realized
capital gains -- -- -- (0.42) (0.28) (0.00)# --
Distributions in excess of net
realized capital gains -- -- -- (0.37) -- -- --
Distributions from capital -- -- -- -- -- -- --
Total distributions (0.03) (0.07) -- (0.79) (0.28) (0.01) --
Net asset value-- end of year $14.50 $13.87 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** 21.06% (1.77%) 7.74% 1.40% 26.10% 11.27% (0.40)%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of year (in 000's) $18,931 $911,258 $994,378 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) 1.05%+ 0.03%+ 0.58% 0.23% (0.14)% 0.66% 1.70%+
to average net assets
Ratio of expenses to average net assets 1.07%+ 1.67%+ 1.72% 1.80% 1.85% 1.90% 1.90%+
excluding interest expense
Portfolio turnover rate 4.24% 36.30% 109.92% 92.09% 63.79% 21.40% 0.19%
Average commission rate paid+++ $0.0123 $0.0007 $0.0007 N/A N/A N/A N/A
Net investment income/(loss) before
deferral of fees a absorption of
expenses by Manager $(0.01) -- -- -- -- $0.06 $0.01
Expense ratio before deferral of fees
by Manager including interest expense 2.52%+ -- -- -- -- 1.93% 2.80%+
Expense ratios including interest expense -- -- -- -- -- -- --
<FN>
(A) The Emerging Asia Fund's Class R Shares commenced operations on September
30, 1996.
(B) The Emerging Market Fund's Class R Shares commenced operations on March 1,
1992.
** 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.
# 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.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS FUND
Period Ending FISCAL YEAR ENDED JUNE 30
December 31, 1996 ------------------------------------------------------
SELECTED PER SHARE DATA FOR THE (UNAUDITED) 1996 1995 1994 1993(A)
YEAR OR PERIOD ENDED:
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $18.05 $15.42 14.20 $12.45 $12.00
Net investment income/(loss) (0.12) (0.20) (0.03) (0.05) 0.00#
Net realized and unrealized gain/(loss) on investments (0.28) 2.83 1.28 1.80++ 0.45
Net increase/(decrease) in net assets resulting
from investment operations (0.40) 2.63 1.25 1.75 0.45
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (0.91) -- -- -- --
Distributions in excess of net realized capital gains -- -- (0.03) -- --
Distributions from capital -- -- -- -- --
Total distributions (0.91) -- (0.03) -- --
Net asset value-- end of year $16.74 $18.05 $15.42 $14.20 $12.45
Total return** (2.22)% 17.06% 8.83% 14.06% 3.75%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of year (in 000's) $164,982 $206,671 $209,644 $234,886 $4,670
Ratio of net investment income/(loss) (1.41)%+ (1.01)% (0.10)% (0.46)% (0.05)%+
to average net assets
Ratio of expenses to average net assets 1.91%+ 1.90% 1.90% 1.90% 1.90%+
excluding interest expense
Portfolio turnover rate 41.14% 103.73% 50.17% 29.20% 0.00%
Average commission rate paid +++ $0.0075 $0.0129 N/A N/A N/A
Net investment income/(loss) before deferral of fees $(0.14) ($0.22) ($0.07) ($0.06) ($0.04)
by Manager
Expense ratio before deferral of fees by Manager
including interest expense 2.07%+ 2.11% 2.09% 2.04% 8.96%+
Expense ratios including interest expense
-- 2.01% 1.91% 1.94% --
<FN>
(A) The Global Communications Fund's Class R Shares commenced operations on
June 1, 1993.
(B) The Global Opportunities Fund's Class R Shares commenced operations on
September 30, 1993.
(C) The International Growth Fund's Class R Shares commenced operations on July
3, 1995.
(D) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
** 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 wit the net realized and unrealized gain/(loss)
for the period because of the timing of purchases and withdrawal of shares
in relation to the fluctuating market values of the portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH INTERNATIONAL SMALL CAP FUND
GLOBAL OPPORTUNITIES FUND FUND
Period Ending Period Fiscal Year Period Ending
December 31, Ending Ended June 30, December 31,
1996 Fiscal Year Ended June 30 December 31, 1996(C) 1996 Fiscal Year Ended June 30
(UNAUDITED) -------------------------------- 1996 (UNAUDITED) ----------------------------------------
1996 1995 1994(B) (UNAUDITED) 1996 1995 1994(D)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$16.96 $13.25 $12.92 $12.00 $15.31 $12.00 $14.86 11.75 $12.02 $12.00
(0.06) (0.06) 0.13 0.01 0.00# 0.02 (0.06) 0.03 0.12 0.00#
0.65 3.84 0.70 0.91 0.77 3.29 0.33 3.10 (0.39) 0.02
-- -- -- -- -- -- -- -- -- --
0.59 3.78 0.83 0.92 0.77 3.31 0.27 3.13 (0.27) 0.02
-- -- -- -- -- -- -- -- -- --
-- (0.07) -- -- -- -- -- (0.02) (0.00)# --
-- -- -- -- -- -- -- -- -- --
(0.82) -- (0.50) -- (1.68) -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
(0.82) (0.07) (0.50) -- (1.68) -- -- (0.02) (0.00)# --
$16.73 $16.96 $13.25 $12.92 $14.40 $15.31 $15.13 14.86 $11.75 $12.02
3.60% 28.64% 6.43% 7.67 5.63% 27.58% 1.82% 26.68% (2.23)% 0.17%
$29,307 $28,496 $13,677 $12,504 $26,155 $18,303 $40,500 $41,640 $28,516 $34,555
(0.82)%+ (0.56)% 1.03% 0.02%+ 0.05%+ 0.26%+ (0.78)%+ 0.20% 0.95% 0.04%+
1.90%+ 1.90% 1.90% 1.90%+ 1.66%+ 1.65%+ 1.91% 1.90% 1.90% 1.90%+
53.45% 163.80% 118.75% 67.22% 42.35% 238.91% 37.79% 177.36% 156.13% 123.50%
$0.0187 $0.0235 N/A N/A $0.0227 $0.0176 $0.0142 $0.0123 N/A N/A
$(0.16) ($0.16) ($0.01) ($0.05) $(0.08) ($0.07) (0.16) ($0.08) $0.05 ($0.02)
3.15%+ 3.10% 2.99% 2.75%+ 2.76%+ 2.91%+ 3.16% 2.76% 2.50% 2.32%+
-- 2.05% 1.91% 1.99%+ -- -- -- 1.99% 1.91% 1.96%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
ASSET ALLOCATION FUND ASSET SELECT 50 FUND
ALLOCATION
FUND
PERIOD ENDING
PERIOD ENDING FISCAL YEAR ENDED JUNE 30 PERIOD ENDING DECEMBER 31, FYE
SELECTED PER SHARE DATE FOR THE DECEMBER 31, 1996 --------------------------- APRIL 30, 1997(B) 1996 June-30
YEAR OR PERIOD ENDED: (UNAUDITED) 1996 1995 1994(A) (UNAUDITED) (UNAUDITED) 1996(C)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $19.33 $16.33 $12.24 $12.00 $12.00 $16.46 $12.00
Net investment income/(loss) 0.23 0.26 0.25 0.06 0.04 (0.01) 0.06
Net realized and unrealized gain (loss) 0.58 3.54 4.11 0.18 0.35 0.20 4.45
on investments
Net increase (decrease) in net assets
resulting from investment operations 0.81 3.80 4.36 0.24 0.39 0.19 4.51
Distributions:
Dividends from net investment income (0.39) (0.25) (0.17) -- -- (0.02) (0.04)
Distributions in excess of net investment -- -- -- -- -- -- --
income (1.66) (0.55) (0.10) -- -- (0.60) --
Distributions from net realized
capital gains -- -- -- -- -- -- (0.01)
Distribution in excess of net realized -- -- -- -- -- -- --
capital gains
Distributions from capital
Total distributions (2.05) (0.80) (0.27) -- -- (0.62) (0.05)
Net asset value-- end of year $18.09 $19.33 $16.33 $12.24 $12.39 $16.03 $16.46
Total return** 4.27% 23.92% 35.99% 2.00% 3.25%** 1.22% 37.75%
Ratios to Average Net Assets/Supplemental
Data:
Net assets, end of year (in 000's) $142,293 $132,511 $60,234 $1,548 $1,475 $89,618 $77,955
Ratio of net investment income(loss) 2.62%+ 1.85% 3.43% 2.54%+ 1.35%+ (0.21)%+ 0.42%+
to average net assets
Ratio of expenses to average net assets, 1.30%+ 1.30% 1.30% 1.30%+ 0.46%+ 1.81%+ 1.80%+
excluding interest expense
Portfolio turnover rate 93.70% 225.91% 95.75% 190.94% 62.00% 85.34% 105.98%
Average commission rate paid+++ $0.0603 $0.0595 N/A N/A N/A $0.0070 $0.0097
Net investment income/(loss) before
deferral of fees and absorption of $0.22 $0.24 $0.19 $(0.11) (0.01) $(0.03) $0.02
expenses by Manager
Expense ratio before deferral of fees and
absorption oexpenses by Manager, 1.59%+ 1.55% 2.07% 9.00%+ 3.62%+ 2.07%+ 2.11%+
including interest expense
Expense ratios including interest expense 1.42%+ 1.42% 1.31% 1.43%+ -- -- --
<FN>
(A) The Asset Allocation Fund's Class R Shares commenced operations on March
31, 1994.
(B) The Global Asset Allocation Fund's Class R Shares commenced operations on
January 2, 1997.
(C) The Select 50 Fund's Class R Shares commenced operations on October 2,
1995.
(D) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994.
(E) The Growth Fund's Class R Shares commenced operations on September 30,
1993.
(F) The Micro Cap Fund's Class R Shares commenced operations on December 30,
1994.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND GROWTH FUND MICRO CAP FUND
Fiscal Year Ended
June 30
Period Ending Fiscal Year Ended Period Ending Fiscal Year Ended June 30 Period Ending ---------------------
December 31, June 30 December 31, 1996 ----------------------------- December 31, 1996
1996 --------------------- (UNAUDITED) 1996 1995 1994(E) (UNAUDITED) 1996 1995(F)#
(UNAUDITED) 1996 1995(D)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$16.09 $13.38 $12.00 $21.94 $19.16 $15.27 $12.00 $17.82 $13.75 $12.00
0.23 0.43 0.31 0.07 0.17 0.12 0.04 (0.06) (0.04) 0.09
1.51 2.82 1.38 1.06 4.32 3.91 3.31++ 0.38 4.26 1.66
-- -- -- -- -- -- -- -- -- --
1.74 3.25 1.69 1.13 4.49 4.03 3.35 0.32 4.22 1.75
-- -- -- -- -- -- -- -- -- --
(0.23) (0.42) (0.31) (0.15) (0.17) (0.07) (0.01) -- (0.04) --
-- -- -- -- -- -- -- -- -- --
(1.56) (0.12) -- (2.77) (1.54) (0.07) -- (1.23) (0.11) --
-- -- -- -- -- -- (0.07) -- -- --
-- -- -- -- -- -- -- -- -- --
(1.79) (0.54) (0.31) (2.92) (1.71) (0.14) (0.08) (1.23) (0.15) --
$16.04 $16.09 $13.38 $20.15 $21.94 $19.16 $15.27 $16.91 $17.82 $13.75
11.36% 24.56% 14.26% 5.19% 24.85% 26.53% 27.98% 2.14% 30.95% 14.58%
$31,034 $19,312 $6,383 $995,738 $926,382 $878,776 $149,103 $298,643 $306,217 $162,949
3.10%+ 3.03% 4.06%+ 0.69%+ 0.78% 0.98% 1.09%+ (0.70)%+ (0.11)% 1.40%+
0.85%+ 0.85% 0.84%+ 1.33%+ 1.35% 1.50% 1.49%+ 1.75% 1.75%+ 1.75%+
26.46% 89.77% 29.46% 43.75% 118.14% 128.36% 110.65% 55.91% 88.98% 36.81%
$0.0595 $0.0423 N/A $0.0594 $0.0596 N/A N/A $0.0563 $0.0573 N/A
$0.18 $0.34 $0.13 -- -- -- $0.03 -- ($0.05) $0.07
1.45%+ 1.45% 3.16%+ -- -- -- 1.79%+ 1.75%+ 1.79% 2.07%+
-- -- -- -- -- -- -- -- -- --
<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.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP FUND
Selected Per Share Data for the Year or Period Ending Fiscal Year Ended June 30
Period Ended: December 31, ------------------------------------------------------------------
1996
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1991(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $10.05 $10.62
Net investment income/(loss) (0.08) (0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07)
Net realized and unrealized gain/(loss)
on investments 0.21 6.31 3.04 (0.47) 4.04 3.25 3.27 2.71
Net increase/(decrease) in net assets
resulting from investment operations 0.13 6.22 2.94 (0.59) 3.93 3.19 3.21 2.64
Distributions:
Dividends from net investment income -- -- -- -- -- -- -- --
Distributions in excess of net
investment income -- -- -- -- -- -- -- --
Distributions from net realized
capital gains (3.28) (1.78) (0.98) (1.09) -- (2.75) (0.02) (0.02)
Distribution in excess of net realized
capital gains -- -- -- -- -- -- -- --
Distributions from capital -- -- -- -- -- (0.78) -- --
Total distributions (3.28) (1.78) (0.98) (1.09) -- (3.53) (0.02) (0.02)
Net asset value-- end of year $18.40 $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24
Total return** 0.68% 39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $220,684 $275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181
Ratio of net investment income/(loss) (0.74)%+ (0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+
to average net assets
Ratio of expenses to average net assets, 1.23%+ 1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+
excluding interest expense
Portfolio turnover rate 28.63% 80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16%
Average commission rate paid+++ $0.0524 $0.0529 N/A N/A N/A N/A N/A N/A
Net investment income/(loss) before deferral
of fees and absorption by Manager -- -- -- -- -- -- -- --
Expense ratio before deferral of fees and
absorption of expenses by Manager,
including interest expense -- -- -- -- -- -- -- --
Expense ratio including interest expense -- -- -- -- -- -- -- --
<FN>
(A) The Small Cap Fund's Class R Shares became available for investment by the
public on July 13, 1990.
(B) The Small Cap Opportunities Fund's Class R Shares commenced operations
on December 29, 1995.
(C) The California Tax-Free Intermediate Bond Fund's Class R Shares commenced
operations on July 1, 1993.
(D) The California Tax-Free Money Fund's Class R Shares commenced operations on
September 30, 1994.
(E) The Federal Tax-Free Money Fund's Class R Shares commenced operations on
July 15, 1996.
** 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 wit 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.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Small Cap California Tax-free California Tax-free Federal Tax-free
Opportunities Fund Intermediate Bond Fund Money Fund Money Fund
Period Ending Period Ending Fiscal Year Ended June 30 Fiscal Year
December 31, FYE December 31, ---------------------------- Period Ending Ended Period Ending
1996 June 30 1996 December 31, 1996 June 30 December 31, 1996
(Unaudited) 1996(B) (Unaudited) 1996 1995 1994(C) (Unaudited) 1996 1995(D) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.80 $12.00 $12.23 $12.04 $11.79 $12.00 $1.00 $1.00 $1.00 $1.00
(0.07) 0.02 0.27 0.54 0.44 0.41 0.014 0.030+ 0.027 0.017
0.74 3.78++ 0.24 0.19 0.25 (0.21) 0.000 0.000## 0.000+ 0.000
0.67 3.80 0.51 0.73 0.69 0.20 0.014 0.030 0.027 0.017
(0.00)## -- (0.27) (0.54) (0.44) (0.41) (0.014) (0.030) (0.027) (0.017)
-- -- -- -- -- -- -- -- (0.000)+ --
-- -- -- -- (0.00)## -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
(0.00)## -- (0.27) (0.54) (0.44) (0.41) (0.014) (0.030) (0.027) (0.017)
$16.47 $15.80 $12.47 $12.23 $12.04 $11.79 $1.00 $1.00 $1.00 $1.00
4.26% 31.67% 4.19% 6.11% 6.03% 1.65% 1.45% 3.03% 2.68% 1.66%
$200,745 $136,140 $18,735 $13,948 $5,153 $11,556 $116,505 $98,134 $64,780 $100,586
(0.94)%+ 0.23%+ 4.28%+ 4.34% 3.71% 3.44% 2.86%+ 2.99% 3.55%+ 3.54%+
1.51%+ 1.50%+ 0.68%+ 0.61% 0.56% 0.23% 0.58%+ 0.59% 0.33%+ 0.00%+
86.20% 81.29% 13.89% 58.11% 37.93% 77.03% -- -- -- --
$0.0556 $0.058 -- -- -- -- -- -- -- --
($0.09) ($0.04) $0.24 $0.43 $0.34 $0.25 $0.013 $0.028 $0.023 $0.013
1.86%+ 2.16%+ 1.18%+ 1.43% 1.41% 1.63% 0.89%+ 0.80% 0.86%+ 0.81%+
-- -- -- -- -- -- -- -- -- --
<FN>
# Per shares 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.
+ Amount represents less than $0.001 per share.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Government Reserve Fund
Period Ending Fiscal Year Ended June 30
December 31, 1996 -----------------------------------------------------------
Selected Per Share Data for the Year or (Unaudited) 1996 1995 1994 1993(A)
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/(loss) 0.025 0.052 0.049 0.029 0.024
Net realized and unrealized gain (loss) on investments 0.000## 0.000## 0.000## 0.000## 0.000##
Net increase (decrease) in net assets resulting
from investment operations 0.025 0.052 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.025) (0.052) (0.049) (0.029) (0.024)
Dividends 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 (0.025) (0.052) (0.049) (0.029) (0.024)
Net asset value-- end of year $1.00 $1.00 $1.00 $1.00 $1.00
Total return** 2.50% 5.28% 4.97% 2.96% 2.41%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $446,518 $439,423 $258,956 $211,129 $124,795
Ratio of net investment income/loss 4.91%+ 5.17% 4.92% 2.99% 2.96%+
to average net assets
Ratio of expenses to average net assets, 0.60%+ 0.60% 0.60% 0.60% 0.38%+
excluding interest expense
Portfolio turnover rate -- -- -- -- --
Average commission rate paid+++ -- -- -- -- --
Net investment income/(loss) before deferral of fees
and absorption of expenses by Manager $0.024 $0.050 $0.047 $0.028 $0.013
Expense rate before deferral of fees and absorption of
expenses by manager, including interest expense 0.72%+ 0.74% 0.79% 0.71% 0.77%+
Expense ratios including interest expense -- -- 0.63% -- --
<FN>
(A) The Government Reserve Fund's Class R Shares commenced operations on
September 14, 1992.
(B) The Short Duration Government Bond Fund's Class R Shares commenced
operations on December 18, 1992.
** Total return represents aggregate total return for the periods indicated.
+ Annualized
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
15
<PAGE>
Short Duration Government Bond Fund
Period Ending Fiscal Year Ended June 30
December 31, 1996 ------------------------------------------------------------
(Unaudited) 1996 1995 1994 1993(B)
$9.92 $9.95 $9.80 $10.23 $10.00
0.29 0.60 0.62 0.61 0.33
0.08 (0.04) 0.16 (0.34) 0.23
0.37 0.56 0.78 0.27 0.56
(0.29) (0.59) (0.62) (0.56) (0.33)
-- (0.00)# -- (0.07) --
-- -- -- -- --
-- -- -- (0.07) --
-- -- (0.01) -- (0.00)#
(0.29) (0.59) (0.63) (0.70) (0.33)
$10.00 $9.92 $9.95 $9.80 $10.23
3.82% 5.74% 8.28% 2.49% 5.66%
$39,408 $22,681 $17,093 $21,937 $22,254
5.84%+ 5.88% 6.41% 5.93% 6.02%+
0.61%+ 0.60% 0.47% 0.25% 0.22%+
202.74% 349.62% 284.23% 603.07% 213.22%
-- -- -- -- --
$0.29 $0.52 $0.54 $0.51 $0.27
1.85%+ 2.31% 2.23% 1.75% 2.07%+
1.35%+ 1.55% 1.38% 0.71% --
16
<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 27. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 31. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 33. 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/Global/International Market Funds
Emerging Asia Fund 65-100% 35% Asian Growth Any size
Emerging Markets Fund 65-100% 35% Foreign Emerging Growth Any size
Global Communications Fund 65-100% 35% Worldwide Communication Any size
Global Opportunities Fund 65-100% 35% Worldwide 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
Latin America Fund 65-100% 35% Latin American Growth Any size
The Multi-Strategy Funds
Asset Allocation Fund 20-80% 20-80% Balanced Any size
Global Asset Allocation Fund 10-95% 100% Worldwide 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
Micro Cap Fund 65-100% 35% Micro-Cap Less than $600 Million
Small Cap Fund 80-100% 35% Small-Cap Less than $1 Billion
Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
The Fixed-Income and Money Market Funds
California Tax-Free Intermediate Bond Fund 0% 100% California Tax-Free Income N/A
California Tax-Free Money Fund 0% 100% California Tax-Free Income N/A
Federal Tax-Free Money Fund 0% 100% Federal Tax-Free Income N/A
Government Reserve Fund 0% 100% Income N/A
Short Duration Government Bond Fund 0% 100% Income N/A
Total Return Bond Fund 0% 100% Total Return N/A
</TABLE>
17
<PAGE>
The Emerging/Global/International Markets Funds
Montgomery Emerging Asia Fund (the "Emerging Asia Fund")
The investment objective of the Montgomery Emerging Asia Fund is long-term
capital appreciation which, under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of companies that have their
principal activities in emerging Asia. The Fund currently considers the
following to be emerging Asian countries: Bangladesh, China and Hong Kong (the
Fund considers China and Hong Kong to be one single emerging Asia country),
India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri
Lanka, Taiwan and Thailand. The Fund does not expect to invest in Japanese
securities, however. In the future, the Fund may invest in other countries in
Asia when their markets become sufficiently developed. Under normal conditions,
the Fund maintains investments in at least three emerging Asian countries at all
times and invests no more than one-third of its total assets in any one emerging
Asian country (other than China and Hong Kong or Malaysia where the Fund may
invest without being subject to the one-third of total assets limit). As part of
the remaining 35% of its total assets, the Fund may invest in more developed
Asian countries, such as Japan and Hong Kong, that may serve defensive purposes
in an Asian portfolio. Alternatively, companies in more developed Asian markets
may have significant operations in emerging Asian countries.
The Fund considers a company to be an emerging Asian company if its securities
are principally traded in the capital market of an emerging Asian country; it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging Asian countries or from sales made in such emerging Asian
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, an
emerging Asian country.
Emerging Asian countries are in various stages of economic development with most
being considered emerging markets. Each country has its unique risks. Most
emerging Asian countries are heavily dependent on international trade. Some have
prosperous economies, but are sensitive to world commodity prices. Others are
especially vulnerable to recession in other countries. Some emerging Asian
countries have experienced rapid growth, although many suffer from obsolete
financial systems, economic problems, or archaic legal systems. The return of
Hong Kong to Chinese dominion will affect the entire Pacific region. For
information on risks, see "Portfolio Securities," "Risk Considerations" and the
Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in high yield debt securities, including up to 5% in high yield debt
securities rated below investment grade (also known as "junk bonds"). See
"Portfolio Securities" and "Risk Considerations."
The Fund may invest in certain debt securities issued by the governments of
emerging Asian countries that are, or may be eligible for, conversion into
investments in emerging Asian companies under debt conversion programs sponsored
by such governments. The Fund deems securities that are convertible to equity
investments to be equity derivative securities. See "Portfolio Securities."
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 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.
18
<PAGE>
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 Global Communications Fund (the "Communications Fund")
The investment objective of the Communications Fund is capital appreciation.
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
The Communications Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Communication Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Communications Fund may invest substantially in securities denominated in
one or more foreign currencies. Under normal conditions, the Communications Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Communications Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities" and "Risk Considerations."
Montgomery Global Opportunities Fund (the "Opportunities Fund")
The investment objective of the Opportunities Fund is capital appreciation.
Under normal conditions, the Opportunities Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
companies, which may be of any size, throughout the world. The Opportunities
Fund emphasizes common stocks of those companies.
The Opportunities Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Opportunities Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Opportunities Fund may invest substantially in securities denominated in one
or more foreign currencies. Under normal conditions, the Opportunities Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Opportunities Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities
are outside the U.S. The Manager uses its financial expertise and research
capabilities in markets located throughout the world in attempting to identify
securities
19
<PAGE>
providing the greatest potential for long-term capital appreciation. For
information on risks, see "Portfolio Securities" and "Risk Considerations."
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."
Montgomery Latin America Fund (the "Latin America Fund")
The investment objective of the Latin America Fund is long-term capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies that have their principal
activities in Latin America. The Latin America Fund currently considers Mexico,
Central America, South America and the islands of the Caribbean to be in Latin
America. Under normal conditions, the Fund maintains investments in at least
three Latin America countries at all times and invests no more than one-half of
its total assets in any one Latin America country (other than Brazil and Mexico
where the Fund may invest up to 75% and 67% of its assets, respectively). In
order to avoid disproportionate concentration of the Fund's total assets in any
one Latin America country, the Manager currently expects to limit the Fund's
investment in
20
<PAGE>
any one Latin America country to 10 times that country's relative market
capitalization as reflected in a broad-based Latin America equity index. As of
December 31, 1996, the relative market capitalization of the top five Latin
America markets are as follows:
Country Market Capitalization (in US$ millions)*
------- ----------------------------------------
Brazil $169,100
Mexico $92,583
Chile $49,961
Argentina $44,163
Venezuela $7,207
* Investors should note that given the volatile nature of the stock markets in
most Latin America countries, the market capitalization shown above can, and
will, change frequently and dramatically.
The Fund considers a company to be a Latin American company if its securities
are principally traded in the capital market of a Latin American country; it
derives at least 50% of its total revenues from either goods produced or
services rendered in Latin American countries or from sales made in such Latin
American countries, regardless of where the securities of such company are
primarily traded; or it is organized under the laws of, and with a principal
office in, a Latin American country.
The Manager believes that investment opportunities may result from recent trends
in Latin America encouraging greater market orientation and less government
intervention in economic affairs. However, Latin American countries are in
various stages of economic development and are considered emerging markets. Each
country has its unique risks. For information on risks, see "Portfolio
Securities," "Risk Considerations" and the Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity derivative securities. It also may invests up to 35% of its total assets
in high-yield debt securities, including up to 15% in high-yield debt securities
rated below investment grade (also known as "junk bonds"). The debt securities
may be dollar-denominated U.S. securities or debt securities of companies or
governments of Latin America. See "Portfolio Securities" and "Risk
Considerations." During the two-to-three month period following the commencement
of the Fund's operations, the Fund may have its assets invested substantially in
cash and cash equivalents.
The Fund may invest in certain debt securities issued by the governments of
Latin American countries that are, or may be eligible for, conversion into
investments in Latin American companies under debt conversion programs sponsored
by such governments. The Fund deems securities that are convertible to equity
investments to be equity derivative securities. See "Portfolio Securities."
The Multi-Strategy Funds
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
<TABLE>
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 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:
<CAPTION>
Asset Allocation Fund Allocation
- ----------------------------------------------------------------------------------------------------------
Investment Anticipated Range of Underlying
Focus Asset Allocation Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Manager will implement its allocation strategy with the use of a
quantitative risk model and computer optimization program. The Manager may
temporarily increase the Fund's cash allocation from its set strategy in order
to meet anticipated redemptions.
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<PAGE>
Montgomery Global Asset Allocation Fund (the "Global Asset Allocation Fund")
<TABLE>
The Investment objective of the Global Asset Allocation Fund is to seek high
total return, while also seeking to reduce risk, through a strategic or active
allocation of assets among investments in five asset classes -- domestic stocks,
international developed markets stocks, emerging markets stocks, domestic
dollar-denominated 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 five funds from The Montgomery
Funds family (each, an "Underlying Fund") which the Manager considers to be
appropriate investments for achieving the Fund's investment objective. The 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:
<CAPTION>
Global Asset Allocation Fund Allocation
- ------------------------------------------------------------------------------------------------------------------------
Investment Anticipated Range of Underlying
Focus Asset Allocation Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic Stocks 5% to 60% Growth Fund
- ------------------------------------------------------------------------------------------------------------------------
International Developed Markets Stocks 5% to 60% International Growth Fund
- ------------------------------------------------------------------------------------------------------------------------
Emerging Markets Stocks 0% to 20% Emerging Markets Fund
- ------------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated Debt Instruments 10% to 70% Total Return Bond Fund or other general investment
grade bond funds advised by the Manager
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0% to 100% Government Reserve Fund
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager will implement its allocation strategy with the use of a
quantitative risk model and computer optimization program. The Manager may
temporarily increase the Fund's cash allocation from its set strategy in order
to meet anticipated redemptions.
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."
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
22
<PAGE>
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 Micro Cap Fund (the "Micro Cap Fund")
The investment objective of the Micro Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of domestic companies that have potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having market capitalizations that would place them in the smallest
10% of market capitalizations for domestic companies as measured by the Wilshire
5000 Index. Currently, these companies have market capitalizations of $600
million and less. Current income from dividends, interest and other sources is
only incidental. The Micro Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those in other equity securities
and in debt instruments, including foreign securities. Any debt securities
purchased by this Fund must be investment grade debt securities. See "Portfolio
Securities."
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The Micro Cap Fund is currently closed to new investors. The Manager may,
however, reopen and close the Micro Cap Fund to new investors from time to time
at its discretion. If this Fund is closed, shareholders who maintain open
accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible.
Montgomery Small Cap Fund (the "Small Cap Fund")
The investment objective of the Small Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those assets in companies having
total market capitalizations of $1 billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity securities and equity
derivative securities but limits to 5% of its total assets any single other type
of security. Any debt securities purchased by this Fund must be investment grade
debt securities. See "Portfolio Securities." Current income from dividends,
interest and other sources is only incidental.
23
<PAGE>
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with this Fund may make additional
investments. Once your account is closed, additional investments in this Fund
may not be possible. An Account may be considered closed and subject to
redemption by this Fund if the value of the shares remaining after a transfer or
redemption falls below $1,000. This Fund may resume sales of shares to new
investors at some future date, but it has no present intention to do so.
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 for existing product lines. Using fundamental research, the Fund
targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
The Fixed-Income and Money Market Funds
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund")
Montgomery California Tax-Free Money Fund (the "California Money Fund")
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund")
The investment objective of the California Intermediate Bond Fund is to provide
maximum current income exempt from federal income and California personal income
taxes consistent with preservation of capital and prudent investment management.
The investment objective of the California Money Fund is to maintain a stable
net asset value while maximizing current income exempt from federal and
California personal income taxes consistent with liquidity and preservation of
capital. The investment objective of the Federal Money Fund is to maintain a
stable net asset value while maximizing current income exempt from federal
income tax consistent with liquidity and preservation of capital. Under normal
conditions, the Federal Money Fund seeks to achieve its objective by investing
at least 80% of its net assets in municipal securities, the interest from which
is, in the opinion of counsel to the issuer, exempt from federal income tax.
Under normal conditions, the California Money Fund seeks to achieve its
objective by investing at least 80% of its net assets in municipal securities
and at least 65% of net assets in debt securities, the interest from which is,
in the opinion of counsel to the issuer, also exempt from California personal
income taxes ("California municipal securities"). Under normal conditions, the
California Intermediate Bond Fund seeks to achieve its objective by investing at
least 80% of its net assets in California municipal securities. The above
investment objectives and percentage requirements are fundamental and may not be
changed without shareholder approval.
The California Intermediate Bond Fund is designed primarily for investors who
seek higher yields than tax-free money market funds generally offer and are
willing to accept some fluctuation in this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally changes with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity
24
<PAGE>
to interest rate change. See "Duration" in the Glossary.) Under normal
conditions, the average dollar-weighted portfolio maturity of the California
Intermediate Bond Fund is expected to stay within a range of 5 to 10 years.
However, this Fund may invest in securities of any maturity. This Fund is not
suitable for investors who cannot benefit from the tax-exempt character of its
dividends, such as IRAs, qualified retirement plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California municipal securities that at the time of purchase are
rated investment grade, that is, within the four highest ratings of municipal
securities (AAA to BBB) assigned by S&P, (Aaa to Baa) assigned by Moody's, or
(AAA to BBB) assigned by Fitch; or have S&P's short-term municipal rating of
SP-2 or higher, or a municipal commercial paper rating of A-2 or higher; Moody's
short-term municipal securities rating of MIG-2 or higher, or VMIG-2 or higher,
or a municipal commercial paper rating of P-2 or higher; or have Fitch's
short-term municipal securities rating of FIN-2 or higher, or a municipal
commercial paper rating of Fitch-2 or higher; or if unrated by S&P, Moody's or
Fitch, are deemed by the Manager to be of comparable quality, using guidelines
approved by the Board (but not to exceed 20% of this Fund's net assets). Debt
securities rated in the lowest category of investment grade debt may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than is the case with higher grade bonds. However, there is no
assurance that any municipal issuers will make full payments of principal and
interest or remain solvent. For a description of the ratings, see the Appendix
in the Statement of Additional Information. See also "Risk Considerations."
Under normal conditions, the California Intermediate Bond Fund and the
California Money Fund seek to invest in California municipal securities to the
greatest extent practicable, but they may, however, invest in other municipal
securities if in such Fund's opinion, suitable California municipal securities
are not available. The California Intermediate Bond Fund may invest up to 20%,
and the Federal Money and California Money Funds may invest up to 35%, of their
respective total assets in cash, U.S. government securities, and obligations of
U.S. possessions, commercial paper and other investment grade debt securities,
including corporate debt instruments or instruments the interest from which is
subject to the federal alternative minimum tax for individuals. Additionally,
the California Intermediate Bond Fund may invest up to 20% and the California
Money Fund may invest 35%, of their respective total assets in investment grade
municipal securities other than California municipal securities. From time to
time, the California Intermediate Bond and the California Money Funds may invest
more than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California.
The Federal Money and California Money Funds seek 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, limit their
investments to those securities that the Board determines present minimal credit
risks and have remaining maturities, as determined under the Rule, of 397
calendar days or less. These Funds also maintain a dollar-weighted average
maturity of their portfolio securities of 90 days or less.
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.
25
<PAGE>
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.
Montgomery Total Return Bond Fund (the "Total Return Bond Fund")
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 4 to five
and a half years.
Manager Investment Returns for the Total Return Bond Fund
Set forth in the table below is certain performance data provided by the Manager
relating to a performance record of the Manager for three investment advisory
accounts utilizing the specific investment approach specified for the Montgomery
Total Return Bond Fund under "Investment Objective and Policies." These three
investment advisory accounts constitute all of the accounts managed by the
Manager that have an identical or similar investment objective or investment
approach as the Total Return Bond Fund. The Montgomery Core Fixed Income
Performance Record (the "Performance Record") is comprised of three separate
accounts, two of which have since closed. From July 1, 1992 through February 28,
1994, the Manager managed a separate fixed income account (the "1992 Account").
From March 1, 1994 to September 30, 1994, the Manager managed the Intermediate
Duration Fund. Starting October 1, 1994, the Manager also manages the fixed
income component of the Montgomery Asset Allocation Fund. The Montgomery Asset
Allocation Fund had two separate investment components (each can be regarded as
a separate account) -- an equity account and a fixed income account. The 1992
Account, the Montgomery Intermediate Duration Fund and the fixed income account
of the Asset Allocation Fund are collectively called the "Account." The Account
has been managed with investment objective and investment policies and
strategies substantially similar to those to be employed by the portfolio
managers in managing the Fund. The results presented are not intended to predict
or suggest the return to be experienced by the Fund or the return an investor
might achieve by investing in the Fund. Investors should not rely on the
following performance data as an indication of future performance of the Manager
or of the Fund.
INVESTMENT TOTAL RETURNS
- --------------------------------------------------------------------------------
Year Ended June 30,
----------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
- --------------------------------------------------------------------------------
Montgomery Core Fixed Income 4.51% 12.53% -0.71% 14.31%*
Performance Record
Lehman Brothers Aggregate Bond Index 5.01% 12.55% -1.31% 11.79%
- --------------------------------------------------------------------------------
* The 1992 Account commenced operations on July 1, 1992.
Please read the following important notes concerning the Account.
1. The results account for both income and capital appreciation or
depreciation (total return). Returns are time-weighted and net of all
applicable fees and expenses.
2. Annual rate of return is calculated using the modified Dietz method, which
is defined as the portfolio gain (including all realized and unrealized
gains and losses as well as all income) over the average capital for the
period. Average capital is the beginning market value plus/minus weighted
subscriptions/redemptions. Calculation is done monthly, but is subject to
revaluation during the month when there is a cash flow that exceeds 10% of
the beginning market value of the Account.
26
<PAGE>
3. Investors should note that the Fund will compute and disclose its average
annual compounded rate of return using the standard formula set forth in
Securities and Exchange Commission ("SEC") rules, which differs in certain
respects from returns for the Account noted above. The SEC total return
calculation method calls for computation and disclosure of an average
annual compounded rate of return for one, five and ten year periods or
shorter periods from inception. The SEC formula provides a rate of return
that equates a hypothetical initial investment of $1,000 to an ending
redeemable value. The returns shown for the Account are net of advisory
fees in accordance with the SEC calculation formula, which requires that
returns be shown for the Fund be net of advisory fees as well as all other
applicable Fund operating expenses.
4. When calculating the performance of the fixed income account of the Asset
Allocation Fund, all fund level fees and expenses are apportioned pro rata
according to relative net assets of the different accounts of the Asset
Allocation Fund.
5. The Performance Record includes the three accounts managed by the Manager
that meets the Manager's criteria for inclusion in the Performance Record
for each period presented.
6. The Lehman Brothers Aggregate Bond Index includes fixed-rate debt issues
rated investment grade or higher by Moody's, S&P or Fitch.
7. Accounts in the Performance Record were valued on a trade date basis.
Portfolio Securities
The following describes portfolio securities the Funds may invest. Investors in
the Asset Allocation Fund and the Global Asset Allocation Fund should note the
portfolio securities of the Asset Allocation Fund and the Global Asset
Allocation Fund, respectively, consists of the portfolio securities of each of
the Underlying Funds.
Equity Securities
The Global/International/Emerging Markets Fund, 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.
Depositary Receipts, Convertible Securities and Securities Warrants
The Global/International/Emerging Markets Fund, 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 Global/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 Global/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 Global/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/Global/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.
27
<PAGE>
The Select 50 Fund, the Global/International/Emerging Markets, 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, Global/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 Global/International/Emerging Markets, and the Equity
Income Funds may invest in external (i.e., to foreign lenders) debt obligations
issued by the governments, governmental entities and companies of emerging
market countries. The percentage distribution between equity and debt will vary
from country to country based on anticipated trends in inflation and interest
rates; expected rates of economic and corporate profits growth; changes in
government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, 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, Tax-Free, Short Bond and Total Return Bond 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
28
<PAGE>
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 Money Market
Funds do 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 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 Fund 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 and Asset Allocation Funds as the income accrues even though
payment has not been received. These Funds nevertheless intend to distribute an
amount of cash equal to the currently accrued original issue discount, and this
may require liquidating securities at times they might not otherwise do so and
may result in capital loss. See "Tax Information" in the Statement of Additional
Information.
Asset-Backed Securities, Custodial Receipts, Participation Interests and Tender
Option Bonds
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." The
California Intermediate Bond Fund may invest in custodial receipts. The Tax-Free
Funds may invest in participation interests and tender option bonds.
29
<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>
========================================================================================================
E E G G I I L A G S E G M S S C C F G S T
M M L L N N A S L E Q R I M M A A E O H O
E E O O T T T S O L U O C A A L L D V O T
R R B B E E I E B E I W R L L I I E E R A
G G A A R R N T A C T T O L L F F R R T L
I I L L N N L T Y H . O A N
N N A A A A C C C R L M G R
G G C O T T M L A 5 I A A A T N E O E
O P I I E L S 0 N P P P A I T N V T
A M M P O O R O S C X A A T E U
S A M O N N I C E O O - X R R
I R U R A A C A T M P F T - R N N
A K N T L L A T E P R A F E M
E I U I A O E X R S E B
T C N G S O L R E - E E N O
S A I R M N L T F E R T N
T T O A O U I R V D
I I W L C N N E M E B
O E T L A I T E O O
N S T T E N N
S C I I R M E D
A O E M O Y
P N S E N
D E
I Y
A
T
E
B
O
N
D
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreements/1 x x x x x x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions x x x x
- --------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of x x x x x x x x x x x x x x x x x x x x x
total fund assets
- --------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Dollar roll transactions x x x x
- --------------------------------------------------------------------------------------------------------
Leverage x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% x x x x x x x x x x x x x x x x x x x x x
of total fund assets
- --------------------------------------------------------------------------------------------------------
When-issued and forward x x x x x x x x x x x x x x x x x x
commitment securities
- --------------------------------------------------------------------------------------------------------
Forward currency contracts/6 x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Purchase options on securities and x x x x x x x x x x x x x x x x x x
currencies/4
- --------------------------------------------------------------------------------------------------------
Purchase options on securities indices/4 x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Write covered call options/4 x x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Write covered put options/4 x x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Interest rate futures contracts/5 x x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Futures and swaps and options on x x x x x x x x x x x x x x x x x
futures
- --------------------------------------------------------------------------------------------------------
Equity swaps x x x x x x x x x x x x x x x x
- --------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of x x x x x
Fund's net assets)
- --------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of x x x x x x x x x x x x x x x x x x x x x
Fund's net assets)
========================================================================================================
<FN>
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
30
<PAGE>
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 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. The annual portfolio turnover rate for the Global Asset
Allocation Fund and the Total Return Bond Fund are expected to be approximately
125% and 100% respectively, and the annual portfolio turnover rate for the Latin
America Fund is not expected to exceed 100%. 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
Money Funds) may employ certain risk management practices using certain
derivative securities and techniques (known as "derivatives"). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate, and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-
31
<PAGE>
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 and the Global Asset Allocation Fund
should note the risks involved with each Underlying Fund, because the Asset
Allocation Fund and the Global Asset Allocation Fund are "Funds-of-Funds."
Small Companies
The Small Cap, Small Cap Opportunities, Micro Cap and International Small Cap
Funds emphasize, and the Select 50, International, Emerging Markets, Growth and
Global Funds may make investments in, smaller companies that may benefit from
the development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, 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, International, Emerging Markets and
Global Funds have the right to purchase securities in foreign countries.
Accordingly, shareholders should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks of loss inherent in
domestic investments. The Select 50, International, Emerging Markets and Global
Funds, particularly the Emerging Asia Fund, Emerging Markets Fund and Latin
America 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 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
32
<PAGE>
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, Emerging Markets and Global Funds are authorized
to invest in medium-quality (rated or equivalent to BBB by S&P or Fitch's, or
Baa by Moody's) and in limited amounts of high-risk 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 (other than the Latin America Fund) 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.
Below Investment Grade Debt Securities
The Latin America Fund may invest in debt securities that are below investment
grade (sometimes called "junk bonds"). These debt securities have greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
Funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual Funds, because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual Funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because this Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the
Internal Revenue Code ("the Code"), this Fund may not always be able to take
full advantage of opportunities to invest in certain communications companies.
Concentration in Securities of Emerging Asian Companies
The Emerging Asia Fund concentrates its investments in companies that have their
principal activities in emerging Asian countries. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
geographic concentration. The value of the Fund's shares may vary in response to
political and economic factors affecting issuers in emerging Asian countries.
Although the Fund normally does not expect to invest in Japanese companies, some
emerging Asian economies are directly affected by Japanese capital investment in
the region and by Japanese consumer demands. Many of the emerging Asian
countries are developing both economically and politically. Emerging Asian
countries may have relatively unstable governments, economies based on only a
few commodities or industries, and securities markets trading infrequently or in
low volumes. Some emerging Asian countries restrict the extent to which
foreigners may invest in their securities markets. Securities of issuers located
33
<PAGE>
in some emerging Asian countries tend to have volatile prices and may offer
significant potential for loss as well as gain. Further, certain companies in
emerging Asian may not have firmly established product markets, may lack depth
of management or may be more vulnerable to political or economic developments
such as nationalization of their own industries. Moreover, so long as the Fund
invests in at least three emerging Asian countries, it may invest more than 90%
of its assets in China and Hong Kong. Alternatively, it may invest more than 90%
of its assets in Malaysia. Such a heavy concentration of investment in a few
countries may make the Fund's share value extremely volatile and, in the event
of any economic downturn or other events adversely affecting those countries,
such events' impact on the Fund will be more magnified than if the Fund did not
have such a narrow concentration.
Concentration in Securities of Latin American Companies
The Latin America Fund concentrates its investments in companies that have their
principal activities in Latin American countries. Consequently, the Latin
America Fund's share value may be more volatile than that of investment
companies not sharing this geographic concentration. The value of the Latin
America Fund's shares may vary in response to political and economic factors
affecting issuers in Latin American countries. Investors should be aware that
the Latin American economies have experienced considerable difficulties in the
past decade. Although there have been significant improvements in recent years,
the Latin American economies continue to experience challenging problems,
including high inflation rates and high interest rates relative to the U.S.. The
emergence of the Latin American economies and securities markets will require
continued economic and fiscal discipline which has been lacking at times in the
past, as well as stable political and social conditions. Recovery may also be
influenced by international economic conditions, particularly those in the U.S.,
and by world prices for oil and other commodities. There is no assurance that
recent economic initiatives will be successful.
Certain risks associated with international investments and investing in
smaller, developing capital markets are heightened for investments in Latin
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of these currencies periodically. In
addition, although there is a trend toward less government involvement in
commerce, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government still owns or controls many companies,
including some of the largest in the country. Accordingly, government actions in
the future could have a significant effect on economic conditions in Latin
American countries, which could affect private sector companies and the Fund, as
well as the value of securities in the Fund's portfolio.
Most Latin American countries have experienced substantial, and in some periods,
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain Latin American
countries.
Certain Latin American countries are among the largest debtors to commercial
banks and foreign governments. Some of these countries have in the past
defaulted on their sovereign debt. Holders of sovereign debt (including the
Latin America Fund) may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
The limited size of many Latin American securities markets and limited trading
volume in issuers compared with the volume of trading in U.S. securities could
cause prices to be erratic for reasons apart from factors that affect the
quality of securities.
Please note the particular risks of investing in Brazil and Mexico because the
Fund may emphasize these countries (up to 75% and 67% of assests, respectively).
The Fund's investments in Brazilian securities involve certain risks, including
Brazil's control on foreign investment and the Fund's limited ability to
exchange Brazilian reals for U.S. dollars. There is also no liquid secondary
market for certain Brazilian debt securities. This may affect the Fund's ability
to obtain accurate market quotations for portfolio valuation. It may also
adversely affect the market price for such securities.
The Fund's investments in Mexican securities also involve certain risks,
including the Mexican governments's control over the Mexican economy.
Accordingly, Mexican government actions concerning the economy and state-owned
enterprises could have a significant impact on market conditions, prices, and
returns on Mexican securities. The Fund's investments in Mexico may also be
affected by currency fluctuations, economic instability, bank loan shortages,
and other political or economic developments in or affecting Mexico. The Mexican
economy has experienced in the past economic crises characterized by exchange
rate volatility and large-scale devaluation of the peso against foreign
currencies as well as negative economic growth.
The portion of the Latin America Fund's assets invested directly in Chile may be
less than the portions invested in other countries in Latin America because, at
present, capital invested in Chile normally cannot be repatriated for as long as
five years. As such, direct investments in Chile will be limited by the Latin
America Fund's nonfundamental policy of not investing more than 15% of total
assets in illiquid securities.
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<PAGE>
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 one of the fundamental tools used by the Manager in managing
interest rate risks including prepayment risks. See Duration in the Glossary.
Tax-Free Funds
Investing in Municipal Securities. Because the California Intermediate Bond and
the California Money Funds invest primarily in California municipal securities,
their performance may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California municipal securities to meet their obligations. As a
result, the value of the Funds' shares may fluctuate more widely than the value
of shares of a portfolio investing in securities relating to a number of
different states. The Federal Money Fund also may invest a portion of its
portfolio in California municipal securities. Investors in the Federal Money
Fund should note that the types of risks of investing in California municipal
securities exist in varying degrees for municipal securities of other states.
Non-Diversified Portfolio. The California Intermediate Bond Fund is a
"non-diversified" investment company under the Investment Company Act. This
means that, with respect to 50% of its total assets, it may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
government). The balance of its assets may be invested in as few as two issuers.
Thus, up to 25% of the Fund's total assets may be invested in the securities of
any one issuer. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) the assets and revenues of which
back the security, or, with respect to an industrial development bond, that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. However, the investment return on
a non-diversified portfolio typically is dependent upon the performance of a
smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment advisor
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is an affiliate of Montgomery Securities, the Funds' Distributor. Under
the Investment Company Act, both Montgomery Asset Management, Inc., and
Montgomery Securities may be deemed control persons of the Manager. Although the
operations and management of the Manager are independent of those of Montgomery
Securities, the Manager may draw upon the research and administrative resources
of Montgomery Securities in its discretion and consistent with applicable
regulations.
Portfolio Managers
Montgomery Emerging Asia Fund
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<PAGE>
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. Mr. Chiang is supported by the Emerging Markets team, whose other
members include Josephine S. Jimenez, Bryan L. Sudweeks, Angeline Ee and Jesus
Isidoro Duarte.
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.
For the backgrounds and business experience of Frank Chiang and Jesus Isidoro
Duarte, who are the other members of the Emerging Markets team, see the
discussion under the Montgomery Emerging Asia Fund and Montgomery Latin America
Fund, respectively.
Montgomery Global Communications Fund
Montgomery Global Opportunities Fund
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.
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 Latin America Fund
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. Mr. Duarte is supported by the Emerging Markets
team, whose other members include Josephine S. Jimenez, Bryan L. Sudweeks,
Angeline Ee and Frank Chiang.
Montgomery Asset Allocation Fund
Montgomery Global Asset Allocation Fund
The Asset Allocation Fund invests its assets in three separate Funds,
representing three different investment disciplines. The Global Asset Allocation
Fund invests its assets in five separate Funds, representing five different
investment disciplines. Kevin T. Hamilton, CFA, is responsible for selecting the
Funds to be included in each Fund-of-Funds structure, and also for coordinating
and implementing the investment decisions of the Asset Allocation Fund and the
Global Asset Allocation Fund. For the background and business experience of
Kevin T. Hamilton, see the discussion under the Montgomery Select 50 Fund,
below.
36
<PAGE>
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller-Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers"
section.
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 and the Global Asset Allocation Fund. From 1985 until
joining the Manager in February 1991, Mr. Hamilton was a senior vice president
responsible for investment oversight at Analytic Investment Management in
Irvine, California. The portfolio management teams responsible for the different
disciplines used in the Select 50 Fund are described throughout this "Portfolio
Managers" section.
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 Micro Cap 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 Small Cap Fund
Stuart O. Roberts is a managing director and senior portfolio manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, where he managed
three public mutual Funds.
Jerome C. (Cam) Philpott, CFA, is a portfolio manager. Before joining the
Manager, Mr. Philpott was a securities analyst with Boettcher & Company in
Denver from 1988 to 1991.
Bradford D. Kidwell is a portfolio manager. He joined the Manager in 1991 from
the position he held since 1989 as the sole general partner and portfolio
manager of Oasis Financial Partners, an affiliate of the Distributor that
invested in savings and loans. Before then, he covered the savings and loan
industry for Dean Witter Reynolds from 1987 to 1989.
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
Montgomery Federal Tax-Free Money Fund
Montgomery Government Reserve Fund
Montgomery Short Duration Government Bond Fund
Montgomery Total Return Bond 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.
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<PAGE>
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 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, Emerging
Markets and Global Funds are higher than for most mutual Funds.
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
<S> <C> <C>
Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 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%
Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 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%
Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Small Cap Fund First $250 million 1.00%
Over $250 million 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%*
Global Asset Allocation Fund All amounts 0.20%**
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
38
<PAGE>
Average Daily Net Assets Management Fee
(Annual Rate)
Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
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%
Total Return 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.
** This amount represents only the management fee of the Global Asset
Allocation Fund and does not include management fees attributable to the
Underlying Funds which ultimately are to be borne by shareholders of the
Global 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, Equity Income,
Opportunities, Emerging Asia and Latin America Funds pays seven one-hundredths
of one percent (0.07%) of average daily net assets (0.06% of average daily net
assets over $500 million); each of the Small Cap, Small Cap Opportunities,
Select 50, Micro Cap, Emerging Markets, International Small Cap, International
Growth and Communications Funds pays seven one-hundredths of one percent (0.07%)
of average daily net assets (0.06% of daily net assets over $250 million); each
of the Short, Reserve, Total Return Bond and Tax-Free Funds pays five
one-hundredths of one percent (0.05%) of average daily net assets (0.04% of
average daily net assets over $500 million and the Reserve Fund over $250
million). In the case of the Asset Allocation Fund and the Global Asset
Allocation Fund, the Administrator does not charge a fee for performing
administrative services for those Funds, although it charges a fee for such
services performed for the Underlying Funds, which ultimately are borne
indirectly by shareholders of the Asset Allocation Fund and the Global Asset
Allocation Fund.
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and 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.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses 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 Fund, one and four-tenths
of one percent (1.40%); the Small Cap Opportunities Fund, one and five-tenths of
one percent (1.50%); the Micro Cap Fund, one and seventy-five one-hundredths of
one percent (1.75%); the International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); the Select 50 Fund, one and eight-tenths
of one percent (1.80%); the Emerging Asia, Emerging Markets, Latin America,
International Small Cap, Communications and Opportunities 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
Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the Global
Asset Allocation Fund's average net assets (excluding expenses related to the
Underlying Funds) or one and seventy-five one-hundredths of one percent (1.75%)
including the total expenses of the Underlying Funds; the Bond Funds,
seven-tenths of one percent (0.70%); and the Money Market Funds, six-tenths of
one percent (0.60%). The Manager also may voluntarily reduce additional amounts
to increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following 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
39
<PAGE>
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. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as their broker only when, in
the judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To 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 directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Funds
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 ($5,000 for the Micro Cap
Fund) (including IRAs) and $100 ($500 for the Micro Cap Fund) 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
40
<PAGE>
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
Minimum Initial Investment for the Micro Cap Fund (including IRAs):......$5,000
Initial Investments by Check
Complete the Account Application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
A charge may be imposed on checks that do not clear.
Dividends do not begin to accrue on the Fixed Income Funds until your check
has cleared.
Initial Investments by Wire
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.
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.
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)
Your bank may charge a fee for any wire transfers.
The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
You must be a shareholder in another Montgomery Fund.
You must have been a shareholder for at least 30 days.
Your existing account registration will be duplicated in the new Fund.
Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
The Fund must receive your check or wire transfer within 3 business days of
the telephone purchase.
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<PAGE>
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 3 business days.
Subsequent Investments
Minimum Subsequent Investment(including IRAs):..............................$100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs):......$500
Subsequent Investments by Check
Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572- FUND (3863) before
the Fund cutoff time.
Shares for IRAs may not be purchased by phone.
The maximum telephone purchase is an amount up to five times your account
value on the previous day.
Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
You should do one of the following to ensure payment is received in time:
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.
Send a check by overnight or 2nd day courier service.
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")
AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
Your bank must be a member of the Automated Clearing House.
42
<PAGE>
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.
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.
You should allow 20 business days for this service to become effective.
You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
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
Except for theTax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
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.
43
<PAGE>
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed-Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the 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
Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
The letter must be signed the same way your account is registered. If you
have a joint account, all holders of the account must sign.
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.
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
Checkwriting is available on the Government Reserve, Federal Money,
California Money, California Intermediate Tax-Free Bond, Short Government
Bond and Total Return Bond Funds.
Checkwriting is not available for IRA accounts.
The minimum amount per check is $250. A check for less may be returned to
you.
All checks will require only one signature unless otherwise indicated.
You should not write a check to close your Fixed Income Fund account.
Checks will be returned to you at the end of each month.
Checkwriting privileges may not be available for Montgomery Securities
brokerage accounts.
A charge may be imposed for any stop payments requested.
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<PAGE>
Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for IRA accounts.
If you included bank wire information on your application or made
subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
Telephone redemption privileges may be cancelled 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 market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
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
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action.
Exchange Privileges And Restrictions
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<PAGE>
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
You are automatically eligible to make telephone exchanges with your
Montgomery account.
Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Funds'
cutoff times.
Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this
Prospectus.
You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together).
Exchanges out of the 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 ($500 for the Micro Cap Fund). 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, or $5,000 for the Micro Cap Fund. 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, or
$5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing Through Montgomery Securities Brokerage Account (Money Funds Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Fund when the free credit
balance in the investor's brokerage account (including deposits, proceeds of
sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Montgomery Securities as collateral for margin obligations
46
<PAGE>
to Montgomery Securities) exceeds $100 on each day the NYSE is open for trading
other than national bank holidays. Upon request, a free credit balance in a
Montgomery Securities brokerage account also may be invested in shares of the
money Funds following receipt by the Transfer Agent of investor instructions. If
such instructions are received after 12 noon, New York time, Fund shares will be
purchased at the next-determined asset value. Checkwriting privileges may not be
available for Montgomery Securities brokerage accounts. For the Money Market
Funds, the minimum initial investment through an investor's brokerage account
with Montgomery Securities is $100.
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4 p.m. (1 p.m. for the Money Funds), New York time, on days that the
Fund issues shares. Orders received after that time will be purchased at the
next-determined net asset value. To the extent that these agents perform
shareholder servicing activities for the Fund, they may receive fees from the
Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account (Money Funds
Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the selected
Money Fund automatically to satisfy debit balances in a shareholder's Montgomery
Securities brokerage account or to provide necessary cash collateral for a
shareholder's margin obligation to Montgomery Securities. Redemptions also may
be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected money Fund, not to exceed the number
of shares in the shareholder's account, will be redeemed on the next day the
NYSE is open for trading to satisfy any remaining debits or amounts needed for
pending securities settlements.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a 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
Money Funds), on a day that the Fund redeems shares. Orders received after that
time are entitled to the net asset value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4 p.m. (12 noon
for the Money Funds), New York time, on each day that the NYSE is open for
trading (except for bank holidays for the Fixed Income Funds). Per-share 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
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<PAGE>
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 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 declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by distributing substantially all of its
net investment income and net capital gains to its shareholders and meeting
other requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
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 (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time 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.
The Federal Money Fund intends, and the California Money and California
Intermediate Bond Funds intend to continue, to qualify to pay "exempt-interest
dividends" to their shareholders by maintaining, as of the close of each quarter
of its taxable year, at least 50% of the value of its total assets in municipal
securities. If these Funds satisfy this requirement, distributions from net
investment income to shareholders will be exempt from federal income taxation to
the extent net investment income is represented by interest on municipal
securities. Distributions from other net investment income, such as market
discount on municipal securities, and from certain other investment practices,
such as certain transactions in options, will be ordinary income. Shareholders
generally will not incur any federal income tax on the amount of exempt-interest
dividends received by them from these Funds, whether taken in cash or reinvested
in additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security or railroad
retirement benefits are subject to federal income tax.
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<PAGE>
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.
This Prospectus relates only to the Class R 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. 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. In the case of the
California Money and California Intermediate Bond Funds, tax equivalent yield is
the yield that a taxable investment must generate in order to equal (after
applicable taxes are deducted) either Fund's yield for an investor in stated
federal income and California personal income tax brackets. For the Federal
Money Fund, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) the Fund's
yield for an investor in stated federal income tax brackets. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND (3863).
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Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
1099 tax form(s) are mailed by January 31.
Annual updated Prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification number (TIN) section of the New
Account application when you open an account. Federal tax law requires 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 securites 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.
Custodial receipts. Custodial receipts represent rights to receive certain
future principal and interest payments on municipal securities deposited with a
custodian. Typically, two classes of receipts are issued in a private placement.
The interest rate of the first class is similar to that of the underlying
municipal security. The value of the second class may be quite volatile.
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.
Derivativesinclude 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 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
52
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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.
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.
Municipal securities. Municipal securities are obligations issued by, or on
behalf of, states, territories and possessions of the U.S. and the District of
Columbia, and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. government.
Municipal securities
53
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are classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from revenue derived from a particular facility, class of facilities or
the proceeds of a special excise or other specific revenue source but not from
the issuer's general taxing power. Private activity bonds and industrial revenue
bonds, in most cases, are revenue bonds that do not carry the pledge of the
credit of the issuing municipality but generally are guaranteed by the corporate
entity on whose behalf they are issued. Notes are short-term instruments that
are obligations of the issuing municipalities or agencies sold in anticipation
of a bond sale, collection of taxes or other receipt of revenues.
Options on securities, securities indices and currencies. A Fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industrywide stock price fluctuations.
Participation interests. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of interest.
Some participation interests are subject to a "nonappropriation" or "abatement"
feature by which, under certain conditions, the issuer of the underlying
municipal security, without penalty, may terminate its payment obligation. In
such event, the Funds must look to the underlying collateral.
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.
Tender option bonds. Tender option bonds are municipal securities that have a
relatively long maturity and bear interest at a fixed rate substantially higher
than the prevailing short-term tax-exempt rates, coupled with an option to
tender the securities at periodic intervals and in order to receive the
securities' face value. In return for the option, the holder of the securities
pays a fee in an amount that causes the municipal securities to trade at face
value when the option is issued. Effectively, the security bears the short-term
tax-exempt rate at the time the option was issued.
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.
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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 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.
55
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Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
<PAGE>
THE MONTGOMERY FUNDS ------------------
Rule 497(e)
-------------------- 33-69686; 811-8064
------------------
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND
--------------------
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1997
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). The Funds are managed by Montgomery Asset
Management, L.P. (the "Manager") and their shares are distributed by Montgomery
Securities (the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the combined prospectuses
for all Funds dated June 30, 1997 (with respect to the Class R shares), dated
November 12, 1996 (with respect to the Class P shares for various series) and
dated November 12, 1996 (with respect to the Class L shares for various series),
and as each prospectus may be revised from time to time (in reference to the
appropriate Fund or Funds, the "Prospectuses"). The Prospectuses provide the
basic information a prospective investor should know before purchasing shares of
any Fund and may be obtained without charge at the address or telephone number
provided above. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the appropriate Prospectuses.
B-1
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TABLE OF CONTENTS
Page
THE TRUSTS................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS...........................B-4
RISK FACTORS.............................................................B-24
INVESTMENT RESTRICTIONS..................................................B-31
DISTRIBUTIONS AND TAX INFORMATION........................................B-35
TRUSTEES AND OFFICERS....................................................B-42
INVESTMENT MANAGEMENT AND OTHER SERVICES.................................B-46
EXECUTION OF PORTFOLIO TRANSACTIONS......................................B-52
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...........................B-57
DETERMINATION OF NET ASSET VALUE.........................................B-60
PRINCIPAL UNDERWRITER....................................................B-62
PERFORMANCE INFORMATION..................................................B-64
GENERAL INFORMATION......................................................B-70
FINANCIAL STATEMENTS.....................................................B-78
Appendix A...............................................................B-80
B-2
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THE TRUSTS
The Montgomery Funds is an open-end management investment
company organized as a Massachusetts business trust on May 10, 1990, and The
Montgomery Funds II is an open-end management investment company organized as a
Delaware business trust on September 10, 1993. Both are registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trusts currently offer shares of beneficial interest, $.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L).
This Statement of Additional Information pertains to twenty
series of The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"),
Montgomery Equity Income Fund (the "Equity Income Fund"), Montgomery Small Cap
Fund (the "Small Cap Fund"), Montgomery Small Cap Opportunities Fund (the "Small
Cap Opportunities Fund"), Montgomery Micro Cap Fund (the "Micro Cap Fund"),
Montgomery Global Opportunities Fund (the "Opportunities Fund"), Montgomery
Global Communications Fund (the "Communications Fund"), Montgomery International
Growth Fund (the "International Growth Fund"), Montgomery International Small
Cap Fund (the "International Small Cap Fund"), Montgomery Emerging Asia Fund
(the "Emerging Asia Fund"), Montgomery Emerging Markets Fund (the "Emerging
Markets Fund"), Montgomery Latin America Fund (the "Latin America Fund"),
Montgomery Select 50 Fund (the "Select 50 Fund"), Montgomery Global Asset
Allocation Fund (the "Global Asset Allocation Fund"), Montgomery Short Duration
Government Bond Fund (formerly called the "Montgomery Short Government Bond
Fund") (the "Short Fund"), Montgomery Government Reserve Fund (the "Reserve
Fund"), Montgomery Total Return Bond Fund (the "Total Return Bond Fund")
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund"), Montgomery
California Tax-Free Intermediate Bond Fund (the "California Intermediate Bond
Fund") and Montgomery California Tax-Free Money Fund (the "California Money
Fund"); as well as one series of The Montgomery Funds II, Montgomery Asset
Allocation Fund (the "Allocation Fund").
Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Small Cap,
Small Cap Opportunities, Micro Cap, Equity Income and Growth Funds as the
"Domestic Equity Funds"; the Emerging Asia, Emerging Markets, Latin America
International Small Cap and International Growth Funds as the "International
Funds"; the Opportunities and Communications Funds as the "Global Funds"; the
Select 50, Allocation and Global Asset Allocation Funds as the "Multi-Strategy
Funds";the Short, Reserve Total Return Bond, Federal Money, California
Intermediate Bond and California Money Funds as the "Fixed Income Funds"; the
Federal Money, California Intermediate Bond and California Money Funds as the
"Tax-Free Funds"; the Reserve, Federal Money and California Money Funds as the
"Money Market Funds"; and all of the Funds other than the Tax-Free Funds as the
"Taxable Funds."
B-3
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Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The achievement of each Fund's investment objective will
depend upon market conditions generally and on the Manager's analytical and
portfolio management skills.
The Asset Allocation Fund and the Global Asset Allocation Fund
are fund-of-funds. Other than U.S. government securities, neither the Asset
Allocation Fund nor the Global Asset Allocation Fund owns securities of their
own. Instead, each of Asset Allocation Fund and the Global Asset Allocation Fund
invests its assets in a number of funds of The Montgomery Funds family (each, an
"Underlying Fund"). Investors of the Asset Allocation Fund and the Global Asset
Allocation Fund should therefore review the discussion in this Statement of
Additional Information that relates to each Underlying Fund of the Asset
Allocation Fund and the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. The Domestic Equity, Select 50,
International and Global Funds may hold securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and other similar global instruments available in emerging markets, or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. Generally, ADRs in registered form
are designed for use in U.S. securities markets, and EDRs and other similar
global instruments in bearer form are designed for use in European securities
markets. For purposes of these Funds' investment policies, these Funds'
investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. Each of the Equity Income, Select
50, International, Global, and Fixed Income Funds may invest up to 10% of its
total assets in securities issued by other investment companies investing in
securities in which the Fund can
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invest provided that such investment companies invest in portfolio securities in
a manner consistent with the Fund's investment objective and policies, except
for the Money Market Funds, which may so invest up to 35% of their total assets
(and, except for the Money Market Funds, not in money market funds). Applicable
provisions of the Investment Company Act require that a Fund limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% (or 35% for the Money Market Funds) of the value of
a Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either (i) a Fund and affiliated
persons of that Fund not own together more than 3% of the total outstanding
shares of any one investment company at the time of purchase (and that all
shares of the investment company held by that Fund in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that Fund bears directly in connection with its own operations.
In accordance with applicable regulatory provisions of the
State of California, the Manager has agreed to waive its management fee with
respect to assets of the Funds that are invested in other open-end investment
companies.
U.S. Government Securities. Because the Short and Reserve
Funds invest a substantial portion, if not all, of their net assets, and the
Equity Income Fund may invest a substantial portion of its net assets, in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S.
Government securities.
Generally, the value of U.S. Government securities held by the
Funds will fluctuate inversely with interest rates. U.S. Government securities
in which the Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal
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Financing Bank, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, Resolution Funding Corporation,
Student Loan Marketing Association and Washington Metropolitan Area Transit
Authority. Direct obligations of the U.S. Treasury include a variety of
securities that differ primarily in their interest rates, maturities and dates
of issuance. Because the U.S. Government is not obligated by law to provide
support to an instrumentality that it sponsors, a Fund will not invest in
obligations issued by an instrumentality of the U.S. Government unless the
Manager determines that the instrumentality's credit risk makes its securities
suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local
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lenders, thereby providing them with funds for additional lending. FNMA acquires
funds to purchase loans from investors that may not ordinarily invest in
mortgage loans directly, thereby expanding the total amount of funds available
for housing.
Each FNMA pass-through security represents a proportionate
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (that is, mortgage loans that are not insured or guaranteed by any U.S.
Government agency). The loans contained in those pools consist of one or more of
the following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate
growing equity mortgage loans; (3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage
Corporation. FHLMC is a corporate instrumentality of the United States
established by the Emergency Home Finance Act of 1970, as amended. FHLMC was
organized primarily for the purpose of increasing the availability of mortgage
credit to finance needed housing. The operations of FHLMC currently consist
primarily of the purchase of first lien, conventional, residential mortgage
loans and participation interests in mortgage loans and the resale of the
mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between ten and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each mortgage loan must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in
the Prospectus, the Short Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the collateral pool may cause the various classes of a CMO to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the collateral pool may be allocated
among the several classes of a CMO in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more
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predictable cash flow to some of the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
These Funds may invest in, among other things, "parallel pay"
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class which, like the
other CMO structures, must be retired by its stated maturity date or final
distribution date, but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the
interest rates on the mortgages underlying adjustable-rate mortgage-related
securities ("ARMS") reset periodically, yields of such portfolio securities will
gradually align themselves to reflect changes in market rates. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, ARMS allow the Allocation and Short Funds to participate in increases in
interest rates through periodic adjustments in the coupons of the underlying
mortgages, resulting in both higher current yields and low price fluctuations.
Furthermore, if prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, these Funds may be able to reinvest
such amounts in securities with a higher current rate of return. During periods
of declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to these Funds. Further, because of this feature, the
value of ARMS is unlikely to rise during periods of declining interest rates to
the same extent as fixed rate instruments. For further discussion of the risks
associated with mortgage-related securities generally, see "Risk Considerations"
in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon
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the prime rate of a bank or some other appropriate interest rate adjustment
index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Funds may invest in such VRDNs, the issuers or underlying
institutions of which the Manager believes are creditworthy and satisfy the
quality requirements of the Funds. The Manager periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic
slowdown, together with the fiscal measures adopted by governmental authorities
to attempt to deal with them, interest rates have varied widely. While the value
of the underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Funds invest at
least 80% of their total assets in obligations either issued by
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or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), or exempt from federal and
California personal income tax ("California Municipal Securities"), and the
California Money Fund invests at least 65% of its total assets in California
Municipal Securities, and may invest in Municipal Securities, these Funds
generally will have a lower yield than if they primarily purchased higher
yielding taxable securities, commercial paper or other securities with
correspondingly greater risk. Generally, the value of the Municipal Securities
and California Municipal Securities held by these Funds will fluctuate inversely
with interest rates.
General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the principal security for
a revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control.
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These bonds also are used to finance public facilities, such as airports, mass
transit systems, ports and parking. The payment of the principal and interest on
such bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of the real and personal property
so financed as security for such payment. As a result of 1986 federal tax
legislation, industrial revenue bonds may no longer be issued on a tax-exempt
basis for certain previously permissible purposes, including sports and
pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Security. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board of Trustees has approved as meeting the Board's standards,
or, alternatively, the payment obligation will be collateralized by U.S.
Government securities.
For certain participation interests, these Funds will have the
right to demand payment, on not more than seven days' notice, for all or any
part of their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, these Funds intend to exercise their right to
demand payment only upon a default under the terms of the Municipal Securities,
as needed to provide liquidity to meet redemptions, or to maintain or improve
the quality of their investment portfolios. The California Intermediate Bond
Fund will not invest more than 15% of its total assets and the California Money
Fund will not invest more than 10% of its total assets in participation
interests that do not have this demand feature, and in other illiquid
securities.
Some participation interests are subject to a
"nonappropriation" or "abatement" feature by which, under certain conditions,
the issuer of the underlying Municipal Security may, without penalty, terminate
its obligation to make payment. In such event, the holder of such security must
look to the underlying collateral, which is often a municipal facility used by
the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are
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based on payments received on the underlying Municipal Securities. One class has
the characteristics of a typical auction-rate security, having its interest rate
adjusted at specified intervals, and its ownership changes based on an auction
mechanism. The interest rate of this class generally is expected to be below the
coupon rate of the underlying Municipal Securities and generally is at a level
comparable to that of a Municipal Security of similar quality and having a
maturity equal to the period between interest rate adjustments. The second class
bears interest at a rate that exceeds the interest rate typically borne by a
security of comparable quality and maturity; this rate also is adjusted,
although inversely to changes in the rate of interest of the first class. If the
interest rate on the first class exceeds the coupon rate of the underlying
Municipal Securities, its interest rate will exceed the rate paid on the second
class. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Municipal Securities. The
value of the second class and similar securities should be expected to fluctuate
more than the value of a Municipal Security of comparable quality and maturity
and their purchase by one of these Funds should increase the volatility of its
net asset value and, thus, its price per share. These custodial receipts are
sold in private placements and are subject to these Funds' limitation with
respect to illiquid investments. The Tax-Free Funds also may purchase directly
from issuers, and not in a private placement, Municipal Securities having the
same characteristics as the custodial receipts.
Tender Option Bonds. The Tax-Free Funds may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, coupled with an agreement of
a third party, such as a bank, broker-dealer or other financial institution,
granting the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. The Manager, on behalf of a Tax-Free
Fund, considers on a periodic basis the creditworthiness of the issuer of the
underlying Municipal Security, of any custodian and of the third party provider
of the tender option. In certain instances and for certain tender option bonds,
the option may be terminable in the event of a default in payment of principal
or interest on the underlying Municipal Obligations and for other reasons. The
California Intermediate
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Bond Fund will not invest more than 15% of its total assets and the California
Money Market Fund more than 10% of its total assets in securities that are
illiquid (including tender option bonds with a tender feature that cannot be
exercised on not more than seven days' notice if there is no secondary market
available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may
purchase Municipal Securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the securities' maturity date. Although an obligation with a put attached is
not a put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue
ruling to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. The Fixed Income Funds may invest in zero
coupon securities, which are debt securities issued or sold at a discount from
their face value and do not entitle the holder to any periodic payment of
interest prior to maturity, a specified redemption date or a cash payment date.
The amount of the discount varies depending on the time remaining until maturity
or cash payment date, prevailing interest rates, liquidity of the security and
perceived credit quality of the issuer. Zero coupon securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves and receipts or certificates representing
interests in such stripped
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debt obligations and coupons. The market prices of zero coupon securities are
generally more volatile than the market prices of interest-bearing securities
and respond more to changes in interest rates than interest-bearing securities
with similar maturities and credit qualities.
Risk Factors/Special Considerations Relating to Debt Securities
The Select 50, International and the Global Funds may invest
in debt securities that are rated below BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or, if unrated, are deemed to be of equivalent
investment quality by the Manager. As an operating policy, which may be changed
by the Board of Trustees without shareholder approval, these Funds will invest
no more than 5% of their assets in debt securities rated below Baa by Moody's or
BBB by S&P, or, if unrated, of equivalent investment quality as determined by
the Manager. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. The net asset value of these Funds will
reflect these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of these Funds to sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or financial markets and could adversely affect, and cause fluctuations
in, the per-share net asset value of these Funds.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of
low-rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of these Funds to
achieve their investment objectives may, to the extent they invest in low-rated
debt securities, be more dependent upon such credit analysis
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than would be the case if these Funds invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
investment-grade securities. The prices of low-rated debt securities have been
found to be less sensitive to interest rate changes than higher-rated debt
securities but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low-rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low-rated debt securities defaults, these
Funds may incur additional expenses to seek financial recovery. The low-rated
bond market is relatively new, and many of the outstanding low-rated bonds have
not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate
risks, the Select 50, International, Global and Equity Income Funds may enter
into forward foreign currency exchange contracts ("forward contracts") and
foreign currency futures contracts, as well as purchase put or call options on
foreign currencies, as described below. These Funds also may conduct their
foreign currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market.
The Funds (except the Money Market Funds) also may purchase
other types of options and futures and may, in the future, write covered
options, as described below and in the Prospectus.
Forward Contracts. The Select 50, International and Global
Funds may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer
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a substantial decline against a foreign currency, it may enter into a forward
contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Funds (except the Money Market Funds) may purchase and sell various
kinds of futures contracts and options on futures contracts. These Funds also
may enter into closing purchase and sale transactions with respect to any such
contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used
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for hedging purposes are substantially related to price fluctuations in
securities held by these Funds or which they expect to purchase. These Funds'
futures transactions generally will be entered into only for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities or currencies and will be purchased to protect a Fund
against an increase in the price of securities it intends to purchase (or the
currencies in which they are denominated). All futures contracts entered into by
these Funds are traded on U.S. exchanges or boards of trade licensed and
regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, a Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market with respect
to anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having that Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that
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Fund's securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities can be substantially offset by
appreciation in the value of the futures position. However, any unanticipated
appreciation in the value of a Fund's portfolio securities could be offset
substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies.
These Funds may purchase put and call options on securities in which they have
invested, on foreign currencies represented in their portfolios and on any
securities index based in whole or in part on securities in which these Funds
may invest. These Funds also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an
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exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although these Funds do not currently intend to do so, they
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which they may invest. A
covered call option involves a Fund's giving another party, in return for a
premium, the right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. A covered call option
serves as a partial hedge against the price decline of the underlying security.
However, by writing a covered call option, a Fund gives up the opportunity,
while the option is in effect, to realize gain from any price increase (above
the option exercise price) in the underlying security. In addition, a Fund's
ability to sell the underlying security is limited while the option is in effect
unless the Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, a Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other liquid equity or debt
securities with at least the value of the exercise price of the put options. A
Fund will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the Fund's total assets.
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There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds
may enter into repurchase agreements. A Fund's repurchase agreements will
generally involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Manager, acting under the supervision of
the Boards, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Funds enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest more
than 15% (10% in the case of the Money Market Funds) of the value of its net
assets in illiquid securities, including repurchase agreements with maturities
greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a Fund to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
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<PAGE>
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, the Funds always require collateral for any repurchase agreement to
which they are a party in the form of securities acceptable to them, the market
value of which is equal to at least 100% of the amount invested by the Funds
plus accrued interest, and the Funds make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), a Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price (including
interest) at all times.
The Funds may participate in one or more joint accounts with
each other and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. The Domestic Equity, Select 50,
International, Opportunities, Short, Reserve and Tax-Free Funds may enter into
reverse repurchase agreements, as set forth in the Prospectus. These Funds
typically will invest the proceeds of a reverse repurchase agreement in money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. This use of proceeds involves
leverage, and a Fund will enter into a reverse repurchase agreement for leverage
purposes only when the Manager believes that the interest income to be earned
from the investment of the proceeds would be greater than the interest expense
of the transaction. These Funds also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when sale of the
Fund's securities is disadvantageous.
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<PAGE>
These Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other liquid equity or debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Dollar Roll Transactions. The Short and California
Intermediate Bond Funds may enter into dollar roll transactions, as discussed in
the Prospectus. A dollar roll transaction involves a sale by a Fund of a
security to a financial institution concurrently with an agreement by that Fund
to purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it
causes its custodian to segregate liquid assets such as cash, U.S. Government
securities or other liquid equity or debt securities having a value equal to the
purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
Lending of Portfolio Securities. Although the Funds currently
do not intend to do so, a Fund may lend its portfolio securities having a value
of up to 30% of its total assets in order to generate additional income. Such
loans may be made to broker-dealers or other financial institutions whose
creditworthiness is acceptable to the Manager. These loans would be required to
be secured continuously by collateral, including cash, cash equivalents,
irrevocable letters of credit, U.S. Government securities, or other high-grade
liquid debt securities, maintained on a current basis (i.e., marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued interest. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of a Fund or the borrower at any time. Upon such
termination, a Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the
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<PAGE>
issuer on the securities loaned, will receive proceeds from the investment of
the collateral and will continue to retain any voting rights with respect to
those securities. As with other extensions of credit, there are risks of delay
in recovery or even losses of rights in the securities loaned should the
borrower of the securities fail financially. However, the loans will be made
only to borrowers deemed by the Manager to be creditworthy, and when, in the
judgment of the Manager, the income which can be earned currently from such
loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Short Fund may seek to hedge investments or to realize
additional gains through forward commitments to sell high-grade liquid debt
securities it does not own at the time it enters into the commitments. Such
forward commitments effectively constitute a form of short sale. To complete
such a transaction, this Fund must obtain the security which it has made a
commitment to deliver. If this Fund does not have cash available to purchase the
security it is obligated to deliver, it may be required to liquidate securities
in its portfolio at either a gain or a loss, or borrow cash under a reverse
repurchase or other short-term arrangement, thus incurring an additional
expense. In addition, this Fund may incur a loss as a result of this type of
forward commitment if the price of the security increases between the date this
Fund enters into the forward commitment and the date on which it must purchase
the security it is committed to deliver. This
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<PAGE>
Fund will realize a gain from this type of forward commitment if the security
declines in price between those dates. The amount of any gain will be reduced,
and the amount of any loss increased, by the amount of the interest or other
transaction expenses this Fund may be required to pay in connection with this
type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. A Fund may invest up to 15% (10% for the
Money Market Funds) of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities and includes, among others, repurchase
agreements maturing in more than seven days, certain restricted securities and
securities that are otherwise not freely transferable. Illiquid securities also
include shares of an investment company held by a Fund in excess of 1% of the
total outstanding shares of that investment company. Restricted securities may
be sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the Securities Act
of 1933, as amended ("1933 Act"). Illiquid securities acquired by the Funds may
include those that are subject to restrictions on transferability contained in
the securities laws of other countries. Securities that are freely marketable in
the country where they are principally traded, but that would not be freely
marketable in the United States, will not be considered illiquid. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of
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certain securities to qualified institutional buyers. Institutional markets for
restricted securities sold pursuant to Rule 144A in many cases provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. Such markets might
include automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities, however, could adversely affect the
marketability of such portfolio securities and result in a Fund's inability to
dispose of such securities promptly or at favorable prices.
The Boards of Trustees have delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Boards. The Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
Foreign Securities
Investors in the Select 50, International and Global and Funds
should consider carefully the substantial risks involved in securities of
companies located or doing business in, and governments of, foreign nations,
which are in addition to the usual risks inherent in domestic investments. There
may be less publicly available information about foreign companies comparable to
the reports and ratings published regarding companies in the U.S. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements often may not be
comparable to those applicable to U.S. companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S., and capital requirements for
brokerage firms are generally lower. Settlement of transactions in
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<PAGE>
foreign securities may, in some instances, be subject to delays and related
administrative uncertainties.
Emerging Market Countries
The Select 50, International and Global Funds, particularly
the Latin America, Emerging Asia and Emerging Markets Funds, may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to potentially higher risks
than investments in developed countries. These risks include (i) volatile
social, political and economic conditions; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) the existence of national policies which may restrict these Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging market countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging market countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Polices
The Select 50, International and Global Funds endeavor to buy
and sell foreign currencies on favorable terms. Some price spreads on currency
exchange (to cover service charges) may be incurred, particularly when these
Funds change investments from one country to another or when proceeds from the
sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
these Funds from repatriating invested capital and dividends, withhold portions
of interest and dividends at the source, or impose other taxes, with respect to
these Funds' investments in securities of issuers of that country. There also is
the possibility of expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
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The Boards of both Trusts consider at least annually the
likelihood of the imposition by any foreign government of exchange control
restrictions that would affect the liquidity of the Funds' assets maintained
with custodians in foreign countries, as well as the degree of risk from
political acts of foreign governments to which such assets may be exposed. The
Boards also consider the degree of risk attendant to holding portfolio
securities in domestic and foreign securities depositories (see "Investment
Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for that Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
California Municipal Securities
The information set forth below is a general summary intended
to give a recent historical description. It is not a discussion of any specific
factors that may affect any particular issuer of California Municipal
Securities. The information is not intended to indicate continuing or future
trends in the condition, financial or otherwise, of California. Such information
is derived from official statements utilized in connection with securities
offerings of the State of California that have come to the attention of the
Trusts and were available prior to the date of this Statement of Additional
Information. Such information has not been independently verified by the
California Intermediate Bond and California Money Funds.
Because the California Intermediate Bond and California Money
Funds expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political,
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economic, social, environmental and regulatory policies and conditions. These
Funds cannot predict whether or to what extent such factors or other factors may
affect the issuers of California Municipal Securities, the market value or
marketability of such securities or the ability of the respective issuers of
such securities acquired by these Funds to pay interest on, or principal of,
such securities. The creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible these Funds
will invest in obligations of particular issuers as to which such specific
factors are applicable.
From mid-1990 to late 1993, California suffered the most
severe recession in the State since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among other industries,
have been severely affected. Since the start of 1994, however, California's
economy has been on a steady recovery. Employment grew significantly during 1994
and 1995, especially in export-related industries, business services,
electronics, entertainment and tourism.
The recession severely affected State revenues while the
State's health and welfare costs were increasing. Consequently, the State had a
lengthy period of budget imbalance; the State's accumulated budget deficit
approached $2.8 billion at its peak at June 30, 1993. The 1993-94 Budget Act
proposed to repay the $2.8 billion deficit over two fiscal years, but as a
result of the recession the projected excess of revenues over expenditures did
not materialize. The accumulated budget deficit at June 30, 1994 was about $1.8
billion, and a second two-year plan was implemented in 1994-95 to eliminate the
budget deficit. An additional consequence of the large budget deficits has been
that the State depleted its available cash resources and has had to use a series
of external borrowings to meet its cash needs, including borrowings extending
into the next fiscal year. The State anticipates that it will not have to resort
to such "cross-year" borrowing during the 1995-96 fiscal year.
The 1994-95 Budget Act recognized that the accumulated $2
billion budget deficit could not be repaid in one year, and proposed a two-year
solution to eliminate the deficit with operating surpluses for 1994-95 and
1995-96. The 1994-95 Budget Act projected revenues and transfers of $41.9
billion (up $2.1 billion from 1993-94, and reflecting the Governor's forecast of
an improving economy), and expenditures of $40.9 billion (up $1.6 billion from
1993-94). Principal features of the 1994-95 Budget Act included:
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1. Receipt of about $760 million of federal aid for certain
costs related to refugees and undocumented immigrants. Only about $33
million of this amount was received, with another approximately $98
million scheduled to be received during 1995-96.
2. Reductions of about $1.1 billion in health and welfare
costs. A 2.3 percent reduction in Aid to Families with Dependent
Children has been enjoined pending further litigation, however.
3. An increase in Proposition 98 funding for K-14 schools of
$526 million.
4. Additional miscellaneous cuts and fund transfers of $755
million.
5. A further one-year suspension (for 1995) of the renter's
personal income tax credit.
The 1994-95 Budget Act contained no tax increases other than
the suspension of the renter's credit. As a result of the improving economy, the
California Department of Finance's final estimates for 1994-95 showed revenues
and transfers of $42.7 billion and expenditures of $42 billion.
The 1995-96 Budget Act was enacted on August 3, 1995, 34 days
after the start of the fiscal year.
The 1995-96 Budget Act projects General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from 1994-95, and General
Fund expenditures of $43.4 billion, a 4 percent increase from 1994-95. Special
Fund revenues are estimated at $12.7 billion, and Special Fund expenditures of
$13 billion have been appropriated. The 1995-96 Budget Act projects that the
General Fund will end the 1995-96 fiscal year with a slight surplus at June 30,
1996, and that all of the accumulated budget deficits will have been repaid.
Principal features of the 1995-96 Budget Act include:
1. An increase in Proposition 98 funding for K-14 schools of
about $1.2 billion.
2. Reductions in health and welfare costs of about $900
million (about $500 million of which depends upon federal legislative
approval).
3. A 3.5 percent increase for the University of California and
the California State University system.
4. Receipt of an additional $278 million in federal aid for
costs of illegal immigrants, above commitments already made by the
federal government.
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5. An increase of about 8 percent in General Fund support for
the Department of Corrections, reflecting estimates of an increased
prison population.
The Governor's proposed budget for 1996-97, released on
January 10, 1996, updated the projections for 1995-96; revenues and transfers
are estimated to be $45 billion and expenditures to be $44.2 billion. As a
result, the budget reserve was projected to have a positive balance of about $50
million on June 30, 1996, with available cash (after payment of all obligations
due) of about $2.2 billion.
The Governor's proposed budget for 1996-97 projected General
Fund revenues and transfers of about $45.6 billion and requested total General
Fund appropriations of about $45.2 billion, which would leave a budget reserve
of about $400 million on June 30, 1997. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15 percent
cut in personal and corporate tax rates, phased in over a three-year period. On
the assumption that the proposed tax rate cut would be enacted, the Governor's
proposed budget shows a reduction in revenues of about $600 million for 1996-97.
The Governor's proposed budget also projects external cash flow borrowing of up
to $3.2 billion, to mature by June 30, 1997.
The foregoing discussion of the 1994-95, 1995-96 and 1996-97
fiscal year budgets is based on the Budget Acts for those years, which include
estimates and projections of revenues and expenditures, and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation. There can be no assurance that the estimates will be
achieved.
Certain issuers of California Municipal Securities receive
subventions from the State which are eligible to be used to make payments on
such Securities. No prediction can be made as to what effect any decrease in
subventions may have on the ability of some issuers to make such payments.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service,
Inc. It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
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Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by substantial damage, destruction or other factors, or when there is a
"change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax
revenue caused by the passage of Proposition 13, the State enacted legislation
to provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits
the amount of appropriations of the State and of local governments to the amount
of appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute
known as Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional. The California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been
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imposed by local governments in California and make it more difficult for local
governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives changed
the State's appropriations limit under Article XIII B to (i) require that the
State set aside a prudent reserve fund for public education, and (ii) guarantee
a minimum level of State funding for public elementary and secondary schools and
community colleges.
The effect of constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy.
In addition, it is impossible to predict the time, magnitude,
or location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund)
concentration in California Municipal Securities provides a greater level of
risk than a fund that is diversified across numerous states and municipal
entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by each Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Fund's outstanding
voting securities as defined in the Investment Company Act. A Fund may not:
1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may invest in securities
of other investment companies as described above and consistent with restriction
number 9 below.
2. With respect to 75% (100% for the Federal Money Fund) of
its total assets, invest in the securities of any one issuer (other than the
U.S. Government and its agencies and instrumentalities) if immediately after and
as a result of such investment more than 5% of the total assets of a Fund would
be invested in such issuer. There are no limitations with respect to
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the remaining 25% of its total assets, except to the extent other investment
restrictions may be applicable (not applicable to the Federal Money Fund). This
investment restriction does not apply to the Asset Allocation, the Global Asset
Allocation Fund nor the California Intermediate Bond Fund.
3. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 30% of its portfolio securities as described above
and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement or a reverse dollar roll transaction is deemed to be a loan.
4. (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase agreements or dollar
roll transactions for a Fund that uses such investment techniques and then not
in excess of one-third of the value of its total assets (at the lower of cost or
fair market value). Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all borrowings
(excluding any fully collateralized reverse repurchase agreements and dollar
roll transactions the Fund may enter into), and no additional investments may be
made while any such borrowings are in excess of 10% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude a Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
6. Buy or sell real estate or commodities or commodity
contracts; however, a Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in securities
secured by real estate or interests therein or issued by companies which invest
in real estate or interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward currency exchange
contracts), futures contracts and related options generally as described in the
Prospectus and this Statement of Additional Information.
7. Invest in securities of other investment companies, except
to the extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such securities
may be acquired as part of a merger, consolidation or acquisition of assets.
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8. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities, including (under current
SEC interpretations) restricted securities (excluding liquid Rule 144A-eligible
restricted securities), securities which are not otherwise readily marketable,
repurchase agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by a Fund. (This is
an operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations).
9. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
10. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest more than 25% of the
market value of its total assets in the securities of companies engaged in any
one industry. (This does not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California Municipal
Obligations or Municipal Obligations for the Tax-Free Funds.) For purposes of
this restriction, the Funds generally rely on the U.S. Office of Management and
Budget's Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit a Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b) entering
into permissible repurchase and dollar roll transactions.
12. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options subject to the following conditions (for other than the Short Fund and
California Intermediate Bond Fund):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options
which are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder approval.)
13. Except as described in the Prospectus and this Statement
of Additional Information, engage in short sales of securities. (This is an
operating policy which may be changed without shareholder approval, consistent
with applicable regulations.)
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14. Purchase more than 10% of the outstanding voting
securities of any one issuer. This investment restriction does not relate to the
Fixed Income Funds. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than 5% of a Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open futures contracts
and options on such contracts. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of the amount of the
initial deposit or premium.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to
value the assets of the Money Market Funds in accordance with Rule 2a-7 under
the Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not
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<PAGE>
pay "interest" or guarantee any fixed rate of return on an investment in their
shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio securities. Any
net gain a Fund may realize from transactions involving investments held less
than the period required for long-term capital gain or loss recognition or
otherwise producing short-term capital gains and losses (taking into account any
carryover of capital losses from previous years), while a distribution from
capital gains, will be distributed to shareholders with and as a part of income
dividends. If during any year a Fund realizes a net gain on transactions
involving investments held for the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time that Fund's shares may have been held.
Any dividend or distribution per share paid by a Fund reduces
that Fund's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes (except for
distributions from the Tax-Free Funds to the extent not subject to income
taxes).
Dividends and other distributions will be reinvested in
additional shares of the applicable Fund unless the shareholder has otherwise
indicated. Investors have the right to change their election with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its assets, and the timing of its distributions. Each
Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that Fund will not be subject to any federal income tax or excise taxes
based on net
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<PAGE>
income. However, the Board of Trustees may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of a
Fund.
In order to qualify as a regulated investment company, each
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) derive less than 30% of its gross income each year
from the sale or other disposition of stock or securities (or options thereon)
held less than three months (excluding some amounts otherwise included in income
as a result of certain hedging transactions), and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
its assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
for purposes of this calculation, in the case of other securities of any one
issuer to an amount not greater than 5% of that Fund's assets or 10% of the
voting securities of the issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies). As
such, and by complying with the applicable provisions of the Code, a Fund will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Code. If a Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by a Fund will be taxable to shareholders whether made in cash or
reinvested in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of
the Funds' shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the shareholder.
In addition, the Funds will be required to withhold federal income tax at the
rate of 31% on taxable dividends, redemptions and other payments made to
accounts of individual or other non-exempt shareholders who have not
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furnished their correct taxpayer identification numbers and made certain
required certifications on the Account Application Form or with respect to which
a Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, each Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
A Fund may receive dividend distributions from U.S.
corporations. To the extent that a Fund receives such dividends and distributes
them to its shareholders, and meets certain other requirements of the Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
In the case of the Select 50, International and Global Funds,
if more than 50% in value of the total assets of a Fund at the end of its fiscal
year is invested in stock or other securities of foreign corporations, that Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by that Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of any
foreign income taxes paid by that Fund, and (ii) entitled either to deduct their
share of such foreign taxes in computing their taxable income or to claim a
credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code. In this case, shareholders will be informed by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities, securities of foreign corporations,
that Fund will not be entitled under the Code to pass through to its
shareholders their pro rata share of the foreign income taxes paid by that Fund.
In this case, these taxes will be taken as a deduction by that Fund.
The Select 50, International and Global Funds may be subject
to foreign withholding taxes on dividends and interest earned with respect to
securities of foreign corporations. These Funds may invest up to 10% of their
total assets in the stock of
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foreign investment companies. Such companies are likely to be treated as
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, these Funds may be able to avoid this tax by
electing to be taxed currently on their share of the PFIC's income, whether or
not such income is actually distributed by the PFIC. These Funds will endeavor
to limit their exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Because it is not always possible
to identify a foreign issuer as a PFIC in advance of making the investment,
these Funds may incur the PFIC tax in some instances.
The Tax-Free Funds. Provided that, as anticipated, each
Tax-Free Fund qualifies as a regulated investment company under the Code, and,
at the close of each quarter of its taxable years, at least 50% of the value of
the total assets of each of the California Intermediate Bond and California
Money Funds consist of obligations (including California Municipal Securities)
the interest on which is exempt from California personal income taxation under
the Constitution or laws of California or of the United States, such Fund will
be qualified to pay exempt-interest dividends to its shareholders that, to the
extent attributable to interest received by the Fund on such obligations, are
exempt from California personal income tax. If at the close of each quarter of
its taxable years, at least 50% of the value of the total assets of the Federal
Money Fund consists of obligations (including Municipal Securities) the interest
on which is exempt from federal personal income taxation under the Constitution
or laws of the United States, the Federal Money Fund will be qualified to pay
exempt-interest dividends to its shareholders that, to the extent attributable
to interest received by the Fund on such obligations, are exempt from federal
personal income tax. The total amount of exempt-interest dividends paid by these
Funds to their shareholders with respect to any taxable year cannot exceed the
amount of interest received by these Funds during such year on tax-exempt
obligations less any expenses attributable to such interest. Income from other
transactions engaged in by these Funds, such as income from options, repurchase
agreements and market discount on tax-exempt securities purchased by these
Funds, will be taxable distributions to its shareholders.
The Code may also subject interest received on certain
otherwise tax-exempt securities to an alternative minimum tax. In addition,
certain corporations which are subject to the alternative minimum tax may have
to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
Exempt-interest dividends paid to shareholders that are
corporations subject to California franchise tax will be taxed as ordinary
income to such shareholders. Moreover, no dividends paid
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by these Funds will qualify for the corporate dividends-received deduction for
federal income tax purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their tax advisers
before investing in these Funds.
Up to 85% of social security or railroad retirement benefits
may be included in federal (but not California) taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt sources
such as tax-exempt bonds and these Funds) plus 50% of their benefits exceeding
certain base amounts. Income from these Funds, and other funds like them, is
included in the calculation of whether a recipient's income exceeds these base
amounts, but is not taxable directly.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. It can be expected that similar
proposals may be introduced in the future. Proposals by members of state
legislatures may also be introduced which could affect the state tax treatment
of these Funds' distributions. If such proposals were enacted, the availability
of Municipal Securities for investment by these Funds and the value of these
Funds' portfolios would be affected. In such event, these Funds would reevaluate
their investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
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For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference
B-41
<PAGE>
between the proceeds and the shareholder's adjusted tax basis for the shares.
Any loss realized upon the redemption or exchange of shares within six months
from their date of purchase will be treated as a long-term capital loss to the
extent of distributions of long-term capital gain dividends with respect to such
shares during such six-month period. Any loss realized upon the redemption or
exchange of shares of a Tax-Free Fund within six months from their date of
purchase will be disallowed to the extent of distributions of exempt-interest
dividends with respect to such shares during such six-month period. All or a
portion of a loss realized upon the redemption of shares of a Fund may be
disallowed to the extent shares of the same Fund are purchased (including shares
acquired by means of reinvested dividends) within 30 days before or after such
redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same
members on their Boards, except for Jerome S. Markowitz who is a Trustee of the
Montgomery Funds II) are responsible for the overall management of the Funds,
including general supervision and review of their investment activities. The
officers (the two Trusts, as well as an affiliated Trust, The Montgomery Funds
III, have the same officers), who administer the Funds' daily operations, are
appointed by the Boards of Trustees. The current Trustees and officers of the
Trusts performing a policy-making function and their affiliations and principal
occupations for the past five years are set forth below:
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Principal Financial and Accounting Officer and
Trustee (Age 56).*
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-42
<PAGE>
101 California Street, San Francisco, California 94111. Mr.
Doyle has been the Chairman and a Director of Montgomery Asset
Management, Inc., the general partner of the Manager, and
Chairman of the Manager since April 1990. Mr. Doyle is a
managing director of the investment banking firm of Montgomery
Securities, the Fund's Distributor, and has been employed by
Montgomery Securities since October 1983.
Mark B. Geist, President (Age 44)
101 California Street, San Francisco, California 94111. Mr.
Geist has been the President and a Director of Montgomery
Asset Management, Inc. and President of the Manager since
April 1990. From October 1988 until March 1990, Mr. Geist was
a Senior Vice President of Analytic Investment Management.
From January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 49)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John T. Story, Executive Vice President (Age 56)
101 California Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978 to January 1994, he was
Managing Director - Senior Vice President of Alliance Capital
Management.
David E. Demarest, Chief Administrative Officer (Age 43)
101 California Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 45)
101 California Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her
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<PAGE>
arrival at the Manager in 1993, Ms. Fross was Financial
Analyst/Senior Accountant with Charles Schwab, San Francisco,
California. From 1989 to November 1990, Ms. Fross was
Assistant Controller of Bay Bank of Commerce, San Leandro,
California.
Roger W. Honour, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Roberts is a Managing Director and Portfolio Manager for the
Manager. For the five years prior to his start with the
Manager in 1990, Mr. Roberts was a portfolio manager and
analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the Manager. Before joining the Manager, he was vice
president/portfolio manager at G.T. Capital Management, Inc.
from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1989, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 36)
101 California Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was vice president and
portfolio manager at The Boston Company Institutional
Investors Inc. from 1990 to 1993. From 1989 to 1990, Mr. Boich
was the founder and co-manager of The Common Goal World Fund,
a global equity partnership. From 1987 to 1989, Mr. Boich
worked as a financial adviser with Prudential-Bache Securities
and E.F. Hutton & Company.
B-44
<PAGE>
Josephine S. Jimenez, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio Manager for
the Manager. From 1988 through 1991, Ms. Jimenez worked at
Emerging Markets Investors Corporation/Emerging Markets
Management in Washington, D.C. as senior analyst and portfolio
manager.
Bryan L. Sudweeks, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Stevens is a Portfolio Manager and Managing Director for the
Manager. At Barclays de Zoete Wedd Securities from 1991 to
1992, he was responsible for starting its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage
securities and mortgage-related interest rate swaps for the
First Boston Corporation from 1990 to 1991 and while with
Drexel Burnham Lambert from 1984 to 1990. He was responsible
for the origination and trading of all derivative
mortgage-related securities with more than $10 billion in
total issuance.
John H. Brown, Vice President (Age 36)
101 California Street, San Francisco, California 94111. Mr.
Brown, CFA, is a Senior Portfolio Manager and Managing
Director for the Manager. Preceding his arrival at the Manager
in May 1994, Mr. Brown was an analyst and portfolio manager at
Merus Capital Management in San Francisco, California from
June 1986.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California
94111. Mr. Farnsworth is a partner of Pearson, Caldwell &
Farnsworth, Inc., an executive search consulting firm. From
May 1988 to September 1991, Mr. Farnsworth was the Managing
Partner of the San Francisco office of Ward Howell
International, Inc., an executive
B-45
<PAGE>
recruiting firm. From May 1987 until May 1988, Mr. Farnsworth
was Managing Director of Jeffrey Casdin & Company, an
investment management firm specializing in biotechnology
companies. From May 1984 until May 1987, Mr. Farnsworth served
as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr.
Cox has been engaged as an independent investment consultant.
From September 1976 until June 1988, Mr. Cox was a Vice
President of the Founders Group of Mutual Funds, Denver,
Colorado, and Portfolio Manager or Co-Portfolio Manager of
several of the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms.
Herbert was Managing Director of Morgan Guaranty Trust
Company. From 1983 to 1991 she was General Manager of the
bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a
member of the Board of Schools of the Sacred Heart, and is a
member of the Archdiocese of San Francisco Finance Council,
where she chairs the Investment Committee.
Jerome S. Markowitz, Trustee and Trustee-designate* (Age 57)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds II
and as a trustee-designate of The Montgomery Funds, effective
November 16, 1995. As a trustee- designate, Mr. Markowitz
attends meetings of the Board of Trustees of the Montgomery
Funds but is not eligible to vote. Mr. Markowitz has been the
Senior Managing Director of Montgomery Securities (the
Distributor) since January 1991. Mr. Markowitz joined
Montgomery Securities in December 1987.
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers or partners of the Manager or the
Distributor may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Montgomery Securities will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for
B-46
<PAGE>
<TABLE>
each regular Board meeting attended. The aggregate compensation paid by each
Trust to each of the Trustees during the fiscal year ended June 30, 1996, and
the aggregate compensation paid to each of the Trustees during the fiscal year
ended June 30, 1996 by all of the registered investment companies to which the
Manager provides investment advisory services, are set forth below.
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II Expenses* Trust)
- --------------- ---------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
Jerome S. Markowitz None None -- None
John A. Farnsworth $25,000 $5,000 -- $32,500
Andrew Cox $25,000 $5,000 -- $32,500
Cecilia H. Herbert $25,000 $5,000 -- $32,500
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Funds (except the Allocation
Fund) by Montgomery Asset Management, L.P., the Manager, pursuant to an
Investment Management Agreement initially dated July 13, 1990; and to the
Allocation Fund pursuant to an Investment Management Agreement initially dated
November 18, 1993 (together, the "Agreements"). The Agreements are in effect
with respect to each Fund for two years after the Fund's inclusion in its
Trust's Agreement (on or around its beginning of public operations) and then
continue for each Fund for periods not exceeding one year so long as such
continuation is approved at least annually by (1) the Board of the appropriate
Trust or the vote of a majority of the outstanding shares of that Fund, and (2)
a majority of the Trustees who are not interested persons of any party to the
relevant Agreement, in each case by a vote cast in person at a meeting called
for the purpose of voting on such approval. The Agreements may be terminated at
any time, without penalty, by a Fund or the Manager upon 60 days' written
notice, and are automatically terminated in the event of its assignment as
defined in the Investment Company Act.
For services performed under the Agreements, each Fund pays
the Manager a management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund at the following
annual rates:
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<PAGE>
Fund Average Daily Net Annual
- ---- Assets Rate
------ ----
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Small Cap First $200 million 1.20%
Opportunities Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Global First $500 million 1.25%
Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global First $250 million 1.25%
Communications Fund Over $250 million 1.00%
Montgomery International First $250 million 1.25%
Small Cap Fund Over $250 million 1.00%
Montgomery International First $500 million 1.10%
Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Emerging Markets First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Asset Allocation All Amounts None
Fund
Montgomery Global Asset All Amounts 0.20%*
Allocation Fund
Montgomery Short Duration First $500 million 0.50%
Government Bond Fund Over $500 million 0.40%
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<PAGE>
Montgomery Government Reserve First $250 million 0.40%
Fund Next $250 million 0.30%
Over $500 million 0.20%
Montgomery Federal Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery California Tax- First $500 million 0.50%
Free Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax- First $500 million 0.40%
Free Money Fund Over $500 million 0.30%
* 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 Global
Asset Allocation Fund.
** This amount represents only the management fee of the
Global Asset Allocation Fund and does not include management fees attributable
to the Underlying Funds which ultimately are to be borne by shareholders of the
Global Asset Allocation Fund.
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the following percentages of each
Fund's average net assets (excluding Rule 12b-1 fees): Emerging Asia, Emerging
Markets, Latin America, International Small Cap, Opportunities and
Communications Funds, one and nine-tenths of one percent (1.90%) each; Select 50
Fund, one and eight-tenths of one percent (1.80%); Micro Cap Fund, one and
three-fourths percent (1.75%); International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); Growth and Small Cap Opportunities Fund,
one and five-tenths of one percent (1.50%); Small Cap Fund, one and four-tenths
of one percent (1.40%); Allocation Fund, one and three-tenths percent (1.30%);
Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the Global
Asset Allocation Fund's average net assets (excluding expenses related to the
Underlying Funds) or one and seventy-five one-hundredths of one percent (1.75%)
(including total expenses of the Underlying Funds), the Short and California
Intermediate Bond Funds, seven-tenths of one percent (0.70%) each; the Equity
Income Fund, eighty-five-one-hundredths of one percent (0.85%); and the Money
Market Funds, six-tenths of one percent (0.60%), each. The Manager also may
voluntarily reduce additional amounts to increase the return to a Fund's
investors. Any reductions made by the Manager in its fees are subject to
reimbursement by that Fund within the following three years provided the Fund is
able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Funds for fees and expenses for the
current year.
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<PAGE>
Operating expenses for purposes of the Agreements include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, expenses incurred in connection with any merger or reorganization
or extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the
Board of the Trust at duly called meetings. In considering the Agreements, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reduction made to its management fee within
the three-year period. The Manager's ability to request reimbursement is subject
to various conditions. First, any reimbursement is subject to a Fund's ability
to effect such reimbursement and remain in compliance with applicable expense
limitations in place at that time. Second, the Manager must specifically request
the reimbursement from the Board of Trustees. Third, the Board of Trustees must
approve such reimbursement as appropriate and not inconsistent with the best
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of a Fund until collection is probable; but the
full amount of the potential liability will appear footnote to each Fund's
financial statements. At such time as it appears probable that a Fund is able to
effect such reimbursement, that the Manager intends to seek such reimbursement
and that the Board of Trustees has or is likely to approve the payment of such
reimbursement, the amount of the reimbursement will be accrued as an expense of
that Fund for that current period.
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
Fund Year or Period Ended June 30,
- ----
1996 1995 1994
---- ---- ----
Montgomery Growth Fund $ 8,336,529 $ 5,566,892 $ 290,908
Montgomery Equity Income $ 101,709 $ 12,589 NA
Fund
Montgomery Small Cap Fund $ 2,364,834 $ 2,095,945 $ 2,368,563
Montgomery Small Cap $ 217,603 NA NA
Opportunities Fund
Montgomery Micro Cap Fund $ 3,732,720 $ 703,124 NA
Montgomery Global $ 381,316 $ 226,283 $ 99,102
Opportunities Fund
B-50
<PAGE>
Montgomery Global $ 3,186,649 $ 2,952,058 $ 2,261,713
Communications Fund
Montgomery International $ 611,587 $ 473,200 $ 300,614
Small Cap Fund
Montgomery International $ 97,137 NA NA
Growth Fund
Montgomery Latin America NA NA NA
Fund
Montgomery Emerging Asia NA NA NA
Fund
Montgomery Emerging $10,262,601 $ 9,290,178 $ 5,678,053
Markets Fund
Montgomery Select 50 Fund $ 359,453 NA NA
Montgomery Asset $ 998,198 $ 150,882 $ 2,232
Allocation Fund
Montgomery Short Duration $ 93,531 $ 99,249 $ 117,470
Government Bond Fund
Montgomery Government $ 1,703,723 $ 1,440,964 $ 633,266
Reserve Fund
Montgomery Federal Tax- NA NA NA
Free Money Fund
Montgomery California Tax- $ 48,596 $ 43,889 $ 49,676
Free Intermediate Bond
Fund
Montgomery California Tax- $ 538,030 $ 149,574 NA
Free Money Fund
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Manager serves as
the distribution coordinator under the 12b-1 Plan and, as such, receives any
fees paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the
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<PAGE>
Trusts, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the
"Independent Trustees"), at their regular quarterly meeting, adopted the 12b-1
Plan for the newly designated Class P and Class L shares of each Fund. The
initial shareholder of the Class P and Class L shares, if any, of each Fund
approved the 12b-1 Plan covering each Class. The single class of shares existing
before that date was redesignated the Class R shares. Class R shares are not
covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Manager at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Manager for its expenses in connection with the
promotion and distribution of those Classes.
The 12b-1 Plan provides that the Manager may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Class to the
Manager.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days' notice
by the Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan
will be paid in accordance with Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as such
Section may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of
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<PAGE>
the Trust shall be made by the Trustees then in office who are not interested
persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of each Fund. The initial
shareholder of the Class P and Class L shares, if any, of each Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund, including
responding to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Funds, including issuers of securities in which the
Funds may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the
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<PAGE>
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
The International and Global Funds contemplate purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Funds will be holding, unless
better executions are available elsewhere. Dealers and underwriters usually act
as principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
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<PAGE>
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for the Funds are made independently from
those of other client accounts of the Manager or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at times
the same securities will be acceptable for one or more Funds and for one or more
of such client accounts. The Manager and its personnel may have interests in one
or more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with
B-55
<PAGE>
reasonable flexibility to use allocation methodologies that are appropriate to
their investment discipline on client accounts.
To the extent any of the Manager's client accounts and a Fund
seek to acquire the same security at the same general time (especially if the
security is thinly traded or is a small cap stock), that Fund may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Funds' accounts by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Boards that the Funds will not be materially disadvantaged by
any such trading preclusion and that the desirability of continuing its advisory
arrangements with the Manager and the Manager's affiliation with Montgomery
Securities and other affiliates of Montgomery Securities outweigh any
disadvantages that may result from the foregoing.
The Manager's sell discipline for the Domestic Equity, Select
50, International and Global Funds' investment in issuers is based on the
premise of a long-term investment horizon; however, sudden changes in valuation
levels arising from, for example, new macroeconomic policies, political
developments, and industry conditions could change the assumed time horizon.
Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon.
These Funds will limit investments in illiquid securities to 15% of net assets.
For the Select 50, International and Global Funds, sell
decisions at the country level are dependent on the results of the Manager's
asset allocation model. Some countries impose restrictions on repatriation of
capital and/or dividends which would lengthen the Manager's assumed time horizon
in those countries. In addition, the rapid pace of privatization and initial
public offerings creates a flood of new opportunities which must continually be
assessed against current holdings.
B-56
<PAGE>
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Because Montgomery Securities is a member of the National
Association of Securities Dealers, Inc., it is sometimes entitled to obtain
certain fees when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage commissions for the benefit of
the Funds, any portfolio securities tendered by a Fund will be tendered through
Montgomery Securities if it is legally permissible to do so. In turn, the next
management fee payable to a Fund's Manager (an affiliate of Montgomery
Securities) under the Agreement will be reduced by the amount of any such fees
received by Montgomery Securities in cash, less any costs and expenses incurred
in connection therewith.
Subject to the foregoing policies, the Funds may use
Montgomery Securities as a broker to execute portfolio transactions. In
accordance with the provisions of Section 17(e) of the Investment Company Act
and Rule 17e-1 promulgated thereunder, the Trust has adopted certain procedures
designed to provide that commissions payable to Montgomery Securities are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on securities or options exchanges during a comparable period
of time. In determining the commissions to be paid to Montgomery Securities, it
is the policy of the Funds that such commissions will be, in the judgment of the
Manager, (i) at least as favorable as those which would be charged the Funds by
other qualified unaffiliated brokers having comparable execution capability, and
(ii) at least as favorable as commissions contemporaneously charged by
Montgomery Securities on comparable transactions for its most favored
unaffiliated customers, except for (a) accounts for which Montgomery Securities
acts as a clearing broker for another brokerage firm, and (b) any customers of
Montgomery Securities considered by a majority of the Trustees who are not
interested persons to be not comparable to the Fund. The Funds do not deem it
practicable and in their best interests to solicit competitive bids for
commission rates on each transaction. However, consideration is regularly given
to information concerning the prevailing level of commissions charged on
comparable transactions by other qualified brokers. The Boards review the
procedures adopted by the Trusts with respect to the payment of brokerage
commissions at least annually to ensure their continuing appropriateness, and
determine, on at least a quarterly basis, that all such transactions during the
preceding quarter were effected in compliance with such procedures.
The Trusts have also adopted certain procedures, pursuant to
Rule 10f-3 under the Investment Company Act, which must be followed any time a
Fund purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the
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<PAGE>
underwriting syndicate. The Boards determine, on at least a quarterly basis,
that any such purchases made during the preceding quarter were effected in
compliance with such procedures.
For the year ended June 30, 1996, the Funds' total securities
transactions generated commissions of $14,874,777, of which $164,056 was paid to
Montgomery Securities. For the year ended June 30, 1995, the Funds' total
securities transactions generated commissions of $11,840,329, of which $74,850
was paid to Montgomery Securities. For the year ended June 30, 1994, the Funds'
total securities transactions generated commissions of $586,092, of which $168
was paid to Montgomery Securities.
The Funds do not effect securities transactions through
brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, as stated above, Montgomery Securities may act as one of the Funds'
brokers in the purchase and sale of portfolio securities, and other brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, the
Funds may or may not purchase securities with the expectation of holding them to
maturity, although their general policy is to hold securities to maturity. The
Funds may, however, sell securities prior to maturity to meet redemptions or as
a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i)
suspend the continued offering of its Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best
interests of a Fund, an investor may purchase shares of that Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable (e.g., the Funds will not acquire restricted
securities), their acquisition is consistent with that Fund's investment
objective and policies, and the tendered securities are otherwise acceptable to
that Fund's Manager. Such securities are acquired by that Fund only for the
purpose of investment and not for resale. For the purposes of sales of shares of
that Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of that
Fund are valued for the purpose of calculating the net asset value of that
Fund's shares. A shareholder who purchases shares of a Fund by tendering payment
for the shares in the form of other securities may be required to recognize gain
or loss for income tax purposes on the difference, if any, between the adjusted
basis of the
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<PAGE>
securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed
directly from that Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that a Fund may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by a Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Funds may make payment partly in their portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available
for purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable
Funds through an IRA, there is available through these Funds a prototype
individual retirement account and custody agreement. The custody agreement
provides that DST Systems, Inc. will act as custodian under the plan, and will
furnish custodial services for an annual maintenance fee per participating
account of $10. (These fees are in addition to the normal custodian charges paid
by these Funds and will be deducted automatically from each Participant's
account.) For further details, including the right to appoint a successor
custodian, see the plan and custody agreements and the IRA Disclosure Statement
as provided by these Funds. An IRA that invests in shares of these Funds may
also be used by employers who have adopted a Simplified Employee Pension
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<PAGE>
Plan. Individuals or employers who wish to invest in shares of a Fund under a
custodianship with another bank or trust company must make individual
arrangements with such institution.
The IRA Disclosure Statement available from the Taxable Funds
contains more information on the amount investors may contribute and the
deductibility of IRA contributions. In summary, an individual may make
deductible contributions to the IRA of up to 100% of earned compensation, not to
exceed $2,000 annually (or $2,250 to two IRAs if there is a non-working spouse).
For tax years beginning after 1996, however, the $2,250 limitation is expended
to $4,000. An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
(A) the individual and the individual's spouse are each not an
active participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less for married
couples filing jointly, or (ii) $25,000 or less for single individuals. The
maximum deduction is reduced for a married couple filing jointly with a combined
adjusted gross income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m.
(12:00 noon for the Money Market Funds), New York City time, on each day the
NYSE is open for trading (except national bank holidays for the Fixed Income
Funds). It is expected that the NYSE will be closed on Saturdays and Sundays and
on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas. The national bank holidays, in
addition to New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas, include January 2,
Martin Luther King Day, Good Friday,
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<PAGE>
Columbus Day, Veteran's Day and December 26. The Funds may, but do not expect
to, determine the net asset values of their shares on any day when the NYSE is
not open for trading if there is sufficient trading in their portfolio
securities on such days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which
are traded on securities exchanges are valued at the last sale price on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Securities that are traded on
more than one exchange are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Boards.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to a
Fund if acquired within 60 days of maturity or, if already held by a Fund on the
60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Funds are valued on the basis of valuations
provided by dealers in those instruments, by an independent pricing service,
approved by the appropriate Board, or at fair value as determined in good faith
by procedures approved by the Boards. Any such pricing service, in determining
value, will
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<PAGE>
use information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities and yield to
maturity information.
An option that is written by a Fund is generally valued at the
last sale price or, in the absence of the last sale price, the last offer price.
An option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trusts'
Pricing Committees determine their fair value, following procedures approved by
the Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the
Boards in good faith deem appropriate to reflect their fair value.
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<PAGE>
The Money Market Funds value their portfolio instruments at
amortized cost, which means that securities are valued at their acquisition
cost, as adjusted for amortization of premium or discount, rather than at
current market value. Calculations are made at least weekly to compare the value
of these Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were anticipated to increase, above $1.00 (computed using
amortized cost), the Board might supplement dividends in an effort to maintain
the net asset value at $1.00 per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with
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respect to each Fund may be terminated without penalty by the parties thereto
upon 60 days' written notice and is automatically terminated in the event of its
assignment as defined in the Investment Company Act. There are no underwriting
commissions paid with respect to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield is computed
by determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
365/7
Effective Yield = [(Base Period Return + 1) ] -1
The Short Fund and California Intermediate Bond Fund. These
Funds' 30-day yield figure described in the Prospectus is calculated according
to a formula prescribed by the SEC, expressed as follows:
6
YIELD=2[(a-b +1) -1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period.
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<PAGE>
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund that invests in tax-exempt obligations. The tax equivalent yield for one of
the Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 46.24% (45.22% beginning 1996). The Federal
Money Fund assumes a federal tax rate of 39.6% The effective rate used in
determining such yield does not reflect the tax costs resulting from the loss of
the benefit of personal exemptions and itemized deductions that may result from
the receipt of additional taxable income by taxpayers with adjusted gross
incomes exceeding certain levels. The tax equivalent yield may be higher than
the rate stated for taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30,
1996, were as follows:
<CAPTION>
Tax-
Equiv. Tax-
Yield Effective Effective Current Equiv.
(7- Yield Yield* Yield Yield*
Fund day) (7-day) (7-Day) (30-day) (30-day)
- ---- ---- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Montgomery Short NA NA NA 6.03% NA
Duration
Government Bond
Fund
Montgomery 4.97% 5.11% NA NA NA
Government
Reserve Fund
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<PAGE>
Montgomery NA NA NA NA NA
Federal Tax-Free
Money Fund
Montgomery NA NA NA 4.40% 8.18%
California Tax-
Free
Intermediate
Bond Fund
Montgomery 2.89% 2.94% 5.47% NA NA
California Tax-
Free Money Fund
<FN>
*Calculated using a combined federal and California income tax rate of 46.24%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
n
P(1 + T) =ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning
of a 1-, 5- or 10-year period at the end
of each respective period (or fractional
portion thereof), assuming reinvestment
of all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. A Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in that
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
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<PAGE>
Where: P = a hypothetical initial payment of
$10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of a l-, 5- or 10-year period at the end
of a l-, 5- or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions and complete redemption of
the hypothetical investment at the end of
the measuring period.
Each Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods
indicated was as follows:
Year Inception*
Ended Through
Fund June 30, 1996 June 30, 1996
---- ------------- -------------
Montgomery Growth Fund 24.85% 29.17%
Montgomery Equity Income 24.56% 22.34%
Fund
Montgomery Small Cap Fund 39.28% 22.92%
Montgomery Small Cap NA 31.67%
Opportunities Fund
Montgomery Micro Cap Fund 30.95% 31.00%
Montgomery Select 50 Fund NA 37.75%
Montgomery Global
Opportunities Fund 28.64% 15.15%
Montgomery Global
Communications Fund 17.06% 14.25%
Montgomery International
Small Cap Fund 26.68% 8.16%
Montgomery Latin America NA NA
Fund
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<PAGE>
Montgomery International 27.58% 27.58%
Growth Fund
Montgomery Emerging Asia NA NA
Fund
Montgomery Emerging
Markets Fund 7.74% 10.26%
Montgomery Asset
Allocation Fund 23.92% 27.22%
Montgomery Short Duration
Government Bond Fund 5.74% 6.27%
Montgomery Government
Reserve Fund 5.28% 4.12%
Montgomery Federal Tax-
Free Money Fund NA NA
Montgomery California Tax-
Free Intermediate Bond
Fund 6.11% 4.60%
Montgomery California Tax- 3.03% 3.27%
Free Money Fund
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were: Growth
Fund, September 30, 1993; Small Cap Fund, July 13, 1990; Opportunities Fund,
September 30, 1993; Global Communications Fund, June 1, 1993; International
Small Cap Fund, September 30, 1993; Latin America Fund, June 30, 1997; Emerging
Asia Fund, September 30, 1996; Emerging Markets Fund, March 1, 1992; Allocation
Fund, March 31, 1994; Short Duration Government Bond Fund, December 18, 1992;
Government Reserve Fund, September 14, 1992; California Intermediate Bond Fund,
July 1, 1993; Equity Income and California Money Funds, September 30, 1994;
Micro Cap Fund, December 30, 1994; International Growth Fund, June 30, 1995;
Select 50 Fund, October 27, 1995; Small Cap Opportunities Fund, December 29,
1995 and Federal Tax-Free Money Fund, June 30, 1996.
Presentation of Other Performance Information Regarding the Opportunities Fund
John Boich and Oscar Castro jointly managed a limited partnership
called the Common Goal World Fund Limited Partnership (the "Partnership") before
joining the Manager. John Boich has served as the Partnership's General Partner
since its inception on January 7, 1990 until April 1993, when Mr. Castro and Mr.
Boich joined the Manager as Managing Directors and Portfolio Managers. On
September 30, 1993, the Montgomery Global Opportunities Fund, which has a
similar investment strategy as the partnership, was
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<PAGE>
launched. On October 1, 1993, the Partnership was dissolved and the assets were
transferred in-kind into the Opportunities Fund. Consistent with applicable law,
the Managers may advertise the performance of the Partnership as part of
materials concerning the Opportunity Fund.
The annual total return for the Partnership for the periods indicated
was as follows:
Period Partnership Annual Total Return
------ -------------------------------
(Net of fees)
-------------
Year ended Dec. 31, 1990* 2.04%
Year ended Dec. 31, 1991 25.32%
Year ended Dec. 31, 1992 4.53%
9-month Period ended Sept. 30, 1993 17.29%
*The Partnership commenced operations on January 7, 1990.
Presentation of Other Performance Information Regarding the Emerging Asia Fund
From time to time, the Manager may advertise the performance of a
related mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the "Navigator Asia Pacific Fund" commenced
operations on May 19, 1995. The performance information of the Navigator Asia
Pacific Fund (net of fees) was as follows:
Period Aggregate Total Return
------ ----------------------
(Net of fees)
-------------
3-months ended Sept. 30, 1996 -4.55%
Year to date ended Sept. 30, 1996 10.85%
One year ended Sept. 30, 1996 7.76%
Since inception 2.70%
Comparisons. To help investors better evaluate how an
investment in the Funds might satisfy their investment objectives,
advertisements and other materials regarding the Funds may discuss various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Publications, indices and averages, including but not limited to, the following
may be used in discussion of a Fund's performance or the investment
opportunities it may offer:
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<PAGE>
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report -- Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices -- Lehman Brothers fixed-income indices may
be used for appropriate comparisons.
g) other indices - including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley Capital
International, Europe, Australasia, Far East Index - a capitalization-weighted
index that includes all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC Emerging Markets
Database.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Funds' portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Funds to calculate their figures.
B-70
<PAGE>
The Funds may also publish their relative rankings as
determined by independent mutual fund ranking services like Lipper Analytical
Services, Inc. and Morningstar, Inc.
Investors should note that the investment results of the Funds
will fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time, the Funds
may publish or distribute information and reasons supporting the Manager's
belief that a particular Fund may be appropriate for investors at a particular
time. The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, WEFA, Consensus Estimates, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic product (GDP)
for selected economies. In using this information, the Montgomery Emerging Asia
Fund also may claim that certain Asian countries are regarded as having high
rates of growth for their economies (GDP), international trade and corporate
earnings; thus producing what the Manager believes to be a favorable investment
climate.
Research. Largely inspired by its affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the Manager has developed its own tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for Montgomery's global and
international Funds work extensively on developing an in-depth understanding of
particular foreign markets and particular companies. And they very often
discover that they are the first analysts from the United States to meet with
representatives of foreign companies, especially those in emerging markets
nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that crosses a number
of the Funds and is reflected in the number of Funds oriented towards lower
capitalization businesses.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts
B-71
<PAGE>
have also developed new ways of gaining information about well-known parts of
the domestic market. The growth equity team, for example, has developed its own
strategy and proprietary database for analyzing the growth potential of U.S.
companies, often large, well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (currently $7 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 225,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian")
acts as custodian of the securities and other assets of the Funds. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Funds' Master Transfer Agent.
B-72
<PAGE>
The Master Transfer Agent has delegated certain transfer agent functions to DST
Systems, Inc., P.O. Box 419958, Kansas City, Missouri 64141, the Funds' Transfer
and Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The
Montgomery Funds II) as shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Agreement and Declaration of Trust
("Declaration of Trust") contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses out of the Funds' assets for any
shareholder held personally liable for obligations of the Funds or Trust. The
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Declaration of Trust further provides that the
Trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Trust as an investment
company as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
Among the Boards' powers enumerated in the Agreements and
Declaration of Trust is the authority to terminate the Trusts or any of their
series, or to merge or consolidate the Trusts or one or more of their series
with another trust or company without the need to seek shareholder approval of
any such action.
As of June 23, 1997 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class R Shares of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
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<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Charles Schwab & Co., Inc. 17,933,826 36.33
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 3,832,250 7.76
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
The Trust Company of 776,240 7.63
Knoxville
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,598,112 15.71
101 Montgomery Street
San Francisco, CA 94104-4122
Global Opportunities Fund
Charles Schwab & Co., Inc. 585,495 34.93
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 111,629 6.66
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 133,436 7.96
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 3,215,039 41.23
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 17,874 14.67
401K Deferred Compensation Plan
For the Exclusive Benefit of our Customers
Attn: Jeannette Harnson
600 Montgomery St.
San Francisco, CA 94111-2777
National Financial Services Corp 10,918 8.93
For the Exclusive Benefit of our
Customers
200 Liberty St. 1 World Fncl Ctr
Attn: Mutual Funds FBFL
New York, NY 10281
Charles Schwab & Co. Inc. 6,365 5.21
101 Montgomery Street
San Francisco, CA 94104-4122
International Small Cap Fund
B-74
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Charles Schwab & Co., Inc. 1,267,095 40.64
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 245,513 7.87
for the Exclusive Use of Our
Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
International Growth Fund
Charles Schwab & Co., Inc. 346,825 16.66
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 191,630 9.20
U/A December 20, 1988 Stanley S.
Schwartz Rev Living Trust/Arista
Foundation
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Emerging Markets Fund
Charles Schwab & Co., Inc. 32,643,785 44.19
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 6,239,431 8.45
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Allocation Fund
Charles Schwab & Co., Inc. 2,111,887 32.92
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 860,520 13.42
For the Exclusive Benefit of Our
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Short Duration Government Bond Fund
B-75
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Charles Schwab & Co., Inc. 1,242,298 26.74
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 370.477 7.98
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 431,615 9.29
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
Prudential Securities Inc. 443,785 9.55
Special Custody Account for The
Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
California Tax-Free Intermediate Bond
Fund
Charles Schwab & Co., Inc. 540,612 31.56
101 Montgomery Street
San Francisco, CA 94104-4122
Collier Kimball 115,005 6.71
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Montgomery Securities 141,387 8.25
110-02832-15
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
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<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Government Reserve Fund
Mary Miner, Trustee for Robert 27,975,864 5.98
Miner and Mary Miner Trust
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
Equity Income Fund
Charles Schwab & Co., Inc. 1,030,268 46.53
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,056,099 36.13
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 965,634 5.76
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Select 50 Fund
Charles Schwab & Co., Inc. 2,388,330 28.01
101 Montgomery Street
San Francisco, CA 94104-4122
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<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 957,964 11.23
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,760,171 36.54
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,027,714 7.89
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Montgomery Federal Tax-Free Money Fund
Jeff Adler & 5,502,230 5.19
Rita Adler JTWROS
3125 Hassi Point
Longweed, FL 32779-3125
Montgomery Emerging Asia Fund
Charles Schwab & Co., Inc. 1,060,653 31.44
101 Montgomery Street
San Francisco, CA 94104-4122
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<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 566,774 16.80
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Donaldson, Lufkin & Jenrette 215,246 6.38
Securities Corporation
Mutual Funds Department, 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
As of March 31, 1997 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class P Shares of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Dreyfus Investment Services Corp. 1,014 15.92
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 2,774 43.52
FBO 659049551
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 356,905 5.60
FBO 210-08164-18
14 Wall Street
New York, NY 10005-2101
Equity-Income Fund
State Street Bank & Trust Co. Tr. 44,866 99.97
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Asset Allocation Fund
Gruntal & Co., LLC 316 26.59
FBO 860-09482-18
14 Wall St
New York, NY 10005-2101
Gruntal & Co., LLC 316 26.59
FBO 860-09481-19
14 Wall St
New York, NY 10005-2101
Gruntal & Co., LLC 316 26.59
FBO 880-12481-19
14 Wall St
New York, NY 10005-2101
Gruntal & Co., LLC 316 26.59
FBO 886-09483-17
14 Wall St
New York, NY 10005-2101
Small Cap Fund
State Street Bank & Trust Co. 161,253 47.44
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
Select 50 Fund
Gruntal & Co., LLC 59 82.51
FBO 884-04563-16
14 Wall Street
New York, NY 10005-2101
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<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
State Street Bank & Trust Co. Tr. 63,846 18.78
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
State Street Bank & Trust Co. 75,936 22.34
U/A Jan. 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02171
State Street Bank TR 38,875 11.44
GE 401K Trac Plans
C/O Defined Contributions Rfds
P.O. Box 8705
Boston, MA 02266-8705
Small Cap Opportunities Fund
E*Trade Securities Inc. 348,025 71.58
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
US Clearing Corp 138 28.42
FBO 7201-90531-10
26 Broadway
New York, NY 10004-1798
Emerging Markets Fund
State Street Bank & Trust Co. 27,834 78.88
V/A Jan. 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
US Clearing Corp 2,199 6.23
FBO 7201-90531-10
26 Broadway
New York, NY 10004-1798
As of June 25, 1997, the Trustees and officers of the Trusts,
as a group, owned less than 1% of the outstanding shares of each Fund except the
Opportunities, California Intermediate Bond and Emerging Asia Funds. As of June
25, 1997, the Trustees and officers of the Trusts, as a group, owned
approximately 1.71 percent of the Emerging Asia Fund, 6.02 percent of the Global
Opportunities Fund and 1.10 of the California Intermediate Bond Fund.
The Trusts are registered with the Securities and Exchange
Commission as non-diversified management investment companies, although each
Fund, except for the Tax-Free Funds, is a diversified series of the Trust. Such
a registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
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<PAGE>
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending
June 30, 1996, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities,
Equity Income, Opportunities, Communications, International Growth,
International Small Cap, Emerging Markets, Select 50, Asset Allocation, Short,
Reserve, California Intermediate Bond and California Money Funds, as contained
in the Annual Report to Shareholders of such Funds for the fiscal year ended
June 30, 1996 (the "Report"), are incorporated herein by reference to the
Report.
Unaudited financial statements for the period ending December
31, 1996, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities, Equity
Income, Opportunities, Communications, International Growth, International Small
Cap, Emerging Asia, Emerging Markets, Select 50, Asset Allocation, Short,
Reserve, California Intermediate Bond, California Money and Federal Money Funds,
as contained in the Semi-Annual Report to Shareholders of such Funds for the
six-month period ended December 31, 1996 (the "Semi-Annual Report"), are
incorporated herein by reference to the Semi-Annual Report.
Unaudited financial statements for the period ended April 30,
1997 for the Global Asset Allocation Fund are set forth below.
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<PAGE>
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Portfolio Investments
April 30, 1997 (unaudited)
Value
Shares (Note 1)
------ --------
MUTUAL FUNDS - 98.1%
International - 33.3%
33,457 Montgomery International Growth Fund ............ $ 491,148
Fixed-Income - 25.6%
37,907 Montgomery Shor Duration Government Bond Fund ... 376,796
Large-Cap Growth - 14.9%
10,583 Montgomery Growth Fund .......................... 219,801
Money Market - 12.7%
187,646 Montgomery Government Reserve Fund .............. 187,645
Emerging Markets - 11.6%
11,381 Montgomery Emerging Markets Fund ................ 171,622
----------
TOTAL MUTUAL FUNDS
(Costs $1,437,323) ............................. 1,447,012
----------
TOTAL INVESTMENTS (Cost $1,437,323*) ............ 98.1% 1,447,012
OTHER ASSETS AND LIABILITIES (Net) .............. 1.9 28,365
----- ----------
NET ASSETS ...................................... 100.0% $1,475,377
===== ==========
- ----------------
* Aggregate cost for Federal tax purposes.
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Montgomery Global Asset Allocation Fund
Financial Highlights
For a share of beneficial interest outstanding throughout the period.
Period
Ended
April 30, 1997*
(Unaudited)
-----------
Net asset value - beginning of period $ 12.00
---------
Net investment income 0.04
Net realized and unrealized gain on investments 0.35
---------
Net increase in net assets resulting from
investment operations 0.39
---------
Net asset value - end of period $ 12.39
---------
Total return+ 3.25%
---------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $ 1,475
---------
Ratio of net investment income to average net assets 1.35%**
---------
Ratio of expenses to average net assets 0.46%**
---------
Portfolio turnover rate 62%
---------
Net investment loss before deferral of fees by Manager ($ 0.10)
---------
Expense ratio before deferral of fees by Manager 5.04%**
---------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
**Annualized.
+ Total return represents aggregate total return for the period indicated.
The accompanying notes are an integral part of these financial statements.
B-83
<PAGE>
- ---------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Assets and Liabilities
April 30, 1997 (Unaudited)
- ---------------------------------------
Assets:
Investments in securities, at value (Cost $1,437,323)(Note 1)..... $1,447,012
Cash.............................................................. 9
Receivables:
Shares of beneficial interest sold........................... 2,378
Dividends.................................................... 2,334
Other Assets:
Organization costs (Note 1).................................. 24,078
Expenses absorbed by Manager................................. 7,701
----------
Total Assets...................................................... 1,483,512
----------
Liabilities:
Payables:
Investment securities purchased.................. $2,378
Trustees' fees and expenses...................... 1,569
Accrued liabilities and expenses................. 4,188
------
Total Liabilities..................................... 8,135
------
Net Assets............................................ $1,475,377
==========
Net Assets Consist of:
Undistributed net investment income............................... $ 4,767
Accumulated net realized gain on securities sold.................. 5,099
Net unrealized appreciation of investments........................ 9,689
Shares of beneficial interest..................................... 1,191
Additional paid-in capital........................................ 1,454,631
----------
Net Assets........................................................ $1,475,377
==========
NET ASSET VALUE, offering and redemption price per share
($1,475,377 - 119,087 shares of beneficial interest outstanding $ 12.39
==========
The accompanying notes are an integral part of these financial statements.
B-84
<PAGE>
- ----------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Operations
Period Ended April 30, 1997 (Unaudited)*
- ----------------------------------------
Net Investment Income:
Investment Income:
Dividends........................................................... $ 6,372
--------
Expenses:
Legal and audit fees................................... $ 6,466
Amortization of organization expenses (Note 1)......... 5,923
Trustees' fees......................................... 1,616
Mangement fee (Note 2)................................. 705
Other.................................................. 3,068
--------
Total Expenses......................................... 17,778
Fees deferred and expenses absorbed by Manager (Note 2) (16,173)
--------
Net Expenses .......................................... 1,605
--------
Net Investment Income.................................. 4,767
--------
Net Realized and Unrealized Gain on Investments:
Net realized gain from investments during the period 5,099
Net change in unrealized appreciation of investments
during the period ................................... 9,689
--------
Gain on Investments.................................... 14,788
--------
Net Increase in Net Assets Resulting from Operations... $ 19,555
========
- ------------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
The accompanying notes are an integral part of these financial statements.
B-85
<PAGE>
PLEASE ADVISE FOR THIS PAGE
- ---------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Changes in Net Assets
- ---------------------------------------
Period Ended
April 30, 1997*
(Unaudited)
---------------
Increase in Net Assets from Operations:
Net investment income.......................................... $ 4,767
Net realized gain on securities during the period.............. 5,099
Net unrealized appreciation of securities during the period.... 9,689
-----------
Net Increase in Net Assets Resulting from Operations........... 19,555
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 3).... 1,455,822
-----------
Net Increase in Net Assets..................................... 1,475,377
Net Assets:
Beginning of Period............................................ -
-----------
End of Period (including undistributed net investment income
of $4,767)................................................. $ 1,475,377
===========
- ------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
The accompanying notes are an integral part of these financial statements.
B-86
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Global Asset Allocation Fund (the "Fund", a series of The
Montgomery Funds, the "Trust") is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company. The Trust was organized as a Massachusetts business trust on
May 10, 1990. The Fund will allocate its assets among a diversified group of
five funds from The Montgomery Funds family: Montgomery Growth Fund, Montgomery
International Growth Fund, Montgomery Short Duration Government Bond Fund,
Montgomery Government Reserve Fund and Montgomery Emerging Markets Fund,
(collectively, the "Underlying Funds").
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure in the financial statements. Actual
results could differ from those estimates.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION - The Underlying Funds are valued according to their
stated net asset value. 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 in the case of fixed income
securities, the mean of the closing bid and asked prices.
Portfolio securities which are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sales price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market are valued at the mean between the last available bid and ask price prior
to the time of valuation.
Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by or under the supervision of the
Trusts' officers in accordance with methods which are authorized by the Trusts'
Board of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. DIVIDENDS AND DISTRIBUTIONS - Dividends, if any, from net investment income
of the Fund will be declared and paid at least annually.
Distributions of any short-term capital gains earned by the Fund are distributed
no less frequently than annually. Additional distributions of net investment
income and capital gains for the Fund may be made in order to avoid the
application of a 4% non-deductible excise tax on certain undistributed amounts
of ordinary income and capital gains. Income distributions and capital gain
distributions are determined in accordance with income tax regulations, which
may differ from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund.
B-87
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements (Continued)(Unaudited)
c. SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend income
is recognized on the ex-dividend date.
d. FEDERAL INCOME TAXES - The Fund has qualified and it is the intention of the
Fund to continue to qualify and elect treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve the Fund
from all or substantially all federal income taxes.
e. EXPENSES - General expenses of the Trust are allocated to the Fund based upon
net assets. Operating expenses directly attributable to the Fund are charged to
the Fund's operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH
AFFILIATES AND OTHER CONTRACTUAL COMMITMENTS:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager"). The
Manager, a California limited partnership, is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940, as amended (the "Advisers Act"). The general partner of the Manager is
Montgomery Asset Management, Inc. Montgomery Securities, the Funds' principal
underwriter and distributor, and certain of its principals are affiliates of the
Manager. Under the Advisers Act, both Montgomery Asset Management, Inc. and
Montgomery Securities may be deemed controlling persons of the Manager. Although
the operations and management of the Manager are independent from those of
Montgomery Securities, it is expected that the Manager may draw upon the
research and administrative resources of Montgomery Securities at its discretion
in a manner consistent with applicable regulations.
Pursuant to an investment management agreement ("Investment Management
Agreement"), the Manager provides the Fund with advice on buying and selling
securities, manages the investments of the Fund including the placement of
orders for portfolio transactions, furnishes the Fund with office space and
certain administrative services, and provides the personnel needed by the Trust
with respect to the Manager's responsibilities under such agreement. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily)
based upon the average daily net assets of the Fund, at an annual rate of 0.20%
of the average daily net assets of the Fund. The Manager has agreed to reduce
some or all of its management fee or absorb fund expenses if necessary to keep
the Fund's annual operating expenses, exclusive of interest and taxes, at or
below 0.50% of the Fund's average net assets. Any reductions or absorptions made
to the Fund by the Manager are subject to recovery within the following two
years, provided the Fund is able to affect such reimbursement and remain in
compliance with applicable expense limitations. The Manager may terminate these
reductions or absorptions at any time. For the period ended April 30, 1997, the
Manager has deferred fees of $705 and reimbursed expenses of $15,468.
Montgomery Asset Management, L.P. serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative
B-88
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements (Continued)(Unaudited)
operations. The Administrator does not charge a fee for performing
administrative services to the Fund.
b. Certain officers and Trustees of the Trust are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all three Trusts advised
by the Manager ($25,000 of which will be allocated to the Montgomery Funds).
c. For the period ended April 30, 1997, the Fund's securities transactions
generated no commissions.
d. The Shares of the Fund have no sales load.
3. TRANSACTIONS IN SHARES OF A BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01.
Transactions in shares of beneficial interest for the period indicated below:
Period Ended
April 30, 1997*
---------------
Shares Amount
------ ------
Shares sold.............................. 159,863 $1,957,094
Shares redeemed.......................... (40,776) (501,272)
-------- ----------
Net Increase............................. 119,087 $1,455,822
-------- ----------
- -----------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
4. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. Government securities, during the period ended April
30, 1997 was $2,031,104 and $598,880, respectively.
b. At April 30, 1997, aggregate gross unrealized appreciation and aggregate
gross unrealized depreciation for all Underlying Funds in which there is an
excess of value over tax cost was $11,062 and $1,373, respectively.
5. RISK FACTORS OF THE FUND:
Investing in the Underlying Funds through the Fund involves certain
additional expenses and tax results that would not be present in a direct
investment in the Underlying Funds. Certain of the Underlying Funds may invest
in debt obligations of foreign issuers and stocks of foreign corporations,
securities in foreign investment funds or trusts, derivative securities
B-89
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements (Continued)(Unaudited)
including futures contracts. These Underlying Funds may also engage in reverse
repurchase agreements and dollar roll transactions.
B-90
<PAGE>
Appendix A
----------
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
B-91
<PAGE>
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Nonrated - where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the
B-92
<PAGE>
adverse effects of changes in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay
B-93
<PAGE>
principal is strong but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds and notes with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-94
<PAGE>
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's ability
to repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-95
