As filed with the Securities and Exchange Commission on October 14, 1997
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 23
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
JOHN E. PELLETIER, Secretary
60 State Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to Rule 485(b)
__X__ on October 15, 1997 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on June 30, 1997 pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1997 was filed on August 29, 1997.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheet for Prospectus for Class R shares of Montgomery
U.S. Asset Allocation Fund (formerly, Montgomery Asset
Allocation Fund)
Cross-Reference Sheet for Prospectus for Class P shares of Montgomery
U.S. Asset Allocation Fund (formerly, Montgomery Asset
Allocation Fund)
Cross-Reference Sheet for Prospectus for Class R shares of Montgomery
Institutional Series: Emerging Markets Portfolio
Part A - Prospectus for Class R shares of 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 Small Cap Fund,
Montgomery International Growth Fund, Montgomery Latin America
Fund, Montgomery Emerging Asia Fund, Montgomery Emerging
Markets Fund, Montgomery Select 50 Fund, Montgomery U.S. 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 and Montgomery California
Tax-Free Money Fund
Part A - Prospectus for Class P shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap
Opportunities Fund, Montgomery U.S. Asset Allocation Fund,
Montgomery Select 50 Fund, Montgomery Government Reserve Fund,
Montgomery Short Duration Government Bond Fund, Montgomery
International Growth Fund, Montgomery Emerging Markets Fund
and Montgomery International Small Cap Fund
Part A - Prospectus for Montgomery Institutional Series: Emerging
Markets Portfolio
Part B - Statement of Additional Information for Class R, Class P and
Class L shares of 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
ii
<PAGE>
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Latin America
Fund, Montgomery Emerging Asia Fund, Montgomery Emerging
Markets Fund, Montgomery Select 50 Fund, Montgomery U.S. 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 and Montgomery California
Tax-Free Money Fund
Part B - Statement of Additional Information for Montgomery
Institutional Series: Emerging Markets Portfolio
Part C - Other Information
Signature Page
Exhibits
iii
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
<TABLE>
FORM N-1A
Part A: Information Required in Prospectus
----------------------------------------------
(Prospectuses for Class R and Class P shares)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- ------- ---- ----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Montgomery Funds," "Fees and Expenses of the
Funds"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "Montgomery Funds,""The Funds'
Investment Objective and Policies," "Portfolio
Securities," "Other Investment Practices," "Risk
Considerations" and "General Information"
5. Management of "The Funds' Investment Objective and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable (contained in the Funds' Annual
of Fund Performance Report)
6. Capital Stock and "Montgomery Funds," "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Funds,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
iv
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
--------------------------------------------
(Prospectus for Montgomery Institutional Series: Emerging Markets Portfolio)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Fund"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "The Fund's Investment
Objectives and Policies,"
"Portfolio Securities," "Other
Investment Practices," "Risk
Considerations" and "General
Information" of Registrant
5. Management of "The Fund's Investment Objectives
the Fund and Policies," "Management of the
Fund" and "How to Invest in the
Fund"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "Dividends and Distributions,"
Other Securities "Taxation" and "General
Information"
7. Purchase of Securities "How to Invest in the Fund," "How
Being Offered Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the
Repurchase Fund" and "General Information"
9. Pending Legal Not Applicable
Proceedings
v
<PAGE>
PART B: Information Required in
Statement of Additional Information
--------------------------------------
(Combined Statement of Additional Information)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- ------- ---- ----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trusts" and "General Information"
and History
13. Investment Objectives "Investment Objectives and Policies of the
Funds," "Risk Considerations" and
"Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trusts" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption
and Pricing of Information" and "Determination of Net Asset
Securities Being Value"
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
<PAGE>
PART B: Information Required in
Statement of Additional Information
--------------------------------------------
(Statement of Additional Information for
Montgomery Institutional Series: Emerging Markets Portfolio)
N-1A Registration Statement
Item No. Item by Heading
- ------- ---- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trust" and "General
and History Information"
13. Investment Objectives "Investment Objective and Policies
of the Fund," "Risk Considerations"
and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General
Information" Securities
16. Investment Advisory "Investment Management and Other
and Other Services Services"
17. Brokerage Allocation "Execution of Portfolio
Transactions"
18. Capital Stock and "The Trust" and "General
Other Securities Information"
19. Purchase, Redemption "Additional Purchase and Redemption
and Pricing of Information" and "Determination of
Securities Being Net Asset Value"
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS R SHARES
---------------------------------------------------------------------
<PAGE>
[LOGO]
Prospectus
October 15, 1997
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wiselySM
TABLE OF CONTENTS
The Montgomery Funds 1
Fees and Expenses of the Funds 4
Financial Highlights 7
The Funds' Investment Objectives and Policies 16
Portfolio Securities 25
Other Investment Practices 29
Risk Considerations 31
Management of the Funds 35
How to Contact the Funds 40
How to Invest in the Funds 40
How to Redeem an Investment in the Funds 43
Exchange Privileges and Restrictions 45
Brokers and Other Intermediaries 45
How Net Asset Value Is Determined 46
Dividends and Distributions 46
Taxation 47
General Information 48
Backup Withholding 49
Glossary 50
Each Fund's shares offered in this prospectus (the Class R shares) are sold at
net asset value (NAV) 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, managed by Montgomery
Asset Management LLC (the "Manager"), an affiliate of Commerzbank AG. Each Fund
has its own investment objective and policies designed to meet different
investment goals. Funds Distributor, Inc., which is not affiliated with the
Manager, is the distributor of the funds (the "Distributor"). As with all mutual
funds, attainment of each Fund's investment objective cannot be assured.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated October 15,
1997, as may be revised, has been filed with the Securities and Exchange
Commission, is incorporated by this reference and is available without charge by
calling (800) 572-FUND (3863). If you are viewing the electronic version of this
prospectus through an online computer service, you may request a printed version
free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds and The Montgomery Funds II.
An investment in the funds is neither insured nor guaranteed by the U.S.
government. There can be no assurance that Montgomery Government Reserve Fund,
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 per share. The
California Tax-Free Money Fund may invest a significant percentage of its assets
in a single issuer and, therefore, an investment in it may be riskier than an
investment in other types of money market funds.
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 21 mutual funds (the "Funds") are offered in this prospectus:
- --------------------------------------------------------------------------------
FUND FUND STOCK
NUMBER TICKER
- --------------------------------------------------------------------------------
Montgomery U.S. Equity Funds
-------------------------------------------------------------------------------
Growth Fund 284 MNGFX
-------------------------------------------------------------------------------
Small Cap Opportunities Fund 645 MNSOX
-------------------------------------------------------------------------------
Small Cap Fund 276 MNSCX
-------------------------------------------------------------------------------
Micro Cap Fund 294 MNMCX
-------------------------------------------------------------------------------
Equity Income Fund 293 MNEIX
-------------------------------------------------------------------------------
Montgomery Foreign and Global Equity Funds
-------------------------------------------------------------------------------
International Growth Fund 296 MNIGX
-------------------------------------------------------------------------------
International Small Cap Fund 283 MNISX
-------------------------------------------------------------------------------
Emerging Markets Fund 277 MNEMX
-------------------------------------------------------------------------------
Emerging Asia Fund 648 MNEAX
-------------------------------------------------------------------------------
Latin America Fund 652 MNLAX
-------------------------------------------------------------------------------
Global Opportunities Fund 285 MNGOX
-------------------------------------------------------------------------------
Global Communications Fund 280 MNGCX
-------------------------------------------------------------------------------
Montgomery Multi-Strategy Funds
-------------------------------------------------------------------------------
Select 50 Fund 295 MNSFX
-------------------------------------------------------------------------------
U.S. Asset Allocation Fund 291 MNAAX
-------------------------------------------------------------------------------
Global Asset Allocation Fund 649 N/A
-------------------------------------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
-------------------------------------------------------------------------------
Total Return Bond Fund 650 MNTRX
-------------------------------------------------------------------------------
Short Duration Government Bond Fund 279 MNSGX
-------------------------------------------------------------------------------
Government Reserve Fund 278 MNGXX
-------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund 281 MNCTX
-------------------------------------------------------------------------------
California Tax-Free Money Fund 292 MCFXX
-------------------------------------------------------------------------------
Federal Tax-Free Money Fund 647 MFFXX
-------------------------------------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having total market capitalizations of more than $1
billion.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
Montgomery 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 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 Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies
having total market capitalizations of more than $1 billion.
Foreign and Global Equity Funds
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations more than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable price.
2
<PAGE>
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 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 Emerging Asia Fund
Invests primarily in the equity securities of emerging Asia companies.
Montgomery Latin America Fund
Invests primarily in the equity securities of companies in Latin America.
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 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.
Multi-Strategy Funds
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
Montgomery U.S. Asset Allocation Fund
A fund-of-funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities and cash or cash
equivalents--using Funds from The Montgomery Funds family.
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.
U.S. Fixed-Income and Money Market Funds
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,
with less fluctuation in the value of its shares than long-term bond funds. This
Fund does not maintain a stable net asset value of $1 per share.
Montgomery Short Duration Government Bond Fund
Invests primarily in U.S. government securities and maintains an average
portfolio effective duration comparable to or less than three-year U.S. Treasury
notes. It targets higher yields than money market funds generally, with less
fluctuation in the value of its shares than long-term bond funds. This Fund does
not maintain a stable net asset value of $1 per share.
Montgomery Government Reserve Fund
Invests only in U.S. government securities, repurchase agreements for U.S.
government securities and other money market funds investing exclusively in U.S.
government securities and such repurchase agreements. It seeks to maintain a
stable net asset value of $1 per share.
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.
3
<PAGE>
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.
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.
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 MAXIMUM DEFERRED SALES REDEMPTION FEES+ EXCHANGE FEES
IMPOSED ON PURCHASES IMPOSED ON REINVESTED LOAD
DIVIDENDS (AND OTHER
DISTRIBUTIONS)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
None None None None None
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Shareholders effecting redemptions via wire transfer may be required to
pay fees, including the wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee
that will be directly deducted from redemption proceeds. The Montgomery
Funds reserve the right upon 60 days' advance notice to shareholders to
impose a redemption fee of up to 1% on shares redeemed within 90 days of
purchase.
</FN>
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
MANAGEMENT FEES* OTHER EXPENSES TOTAL FUND OPERATING EXPENSES
(AFTER REIMBURSEMENT (AFTER REIMBURSEMENT UNLESS
UNLESS NOTED)* NOTED)*
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
Growth Fund 0.92% 0.33% 1.25%
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 1.19% 0.31% 1.50%
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Fund 1.00% 0.23% 1.23%
-----------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund 1.34% 0.36% 1.70%
-----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 0.60% 0.25% 0.85%
-----------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
International Growth Fund 1.10% 0.55% 1.65%
-----------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 1.25% 0.65% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.05% 0.55% 1.60%
-----------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund 1.25% 0.65% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Latin America Fund 1.25% 0.65% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund 1.25% 0.65% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Global Communications Fund 1.25% 0.65% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
-----------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 1.25% 0.55% 1.80%
-----------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 0.00% 1.30%#** 1.30%#
-----------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund 0.20% 1.55%#** 1.75%#
-----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund 0.50% 0.20% 0.70%
-----------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0.50% 0.10% 0.60%
-----------------------------------------------------------------------------------------------------------------------------
4
<PAGE>
MANAGEMENT FEES* OTHER EXPENSES TOTAL FUND OPERATING EXPENSES
(AFTER REIMBURSEMENT (AFTER REIMBURSEMENT UNLESS
UNLESS NOTED)* NOTED)*
-----------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0.35% 0.25% 0.60%
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund 0.50% 0.18%+ 0.68%+
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund 0.40% 0.18%+ 0.58%+
-----------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
-----------------------------------------------------------------------------------------------------------------------------
<FN>
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, 1997. Expenses for the
Montgomery Latin America Fund, Montgomery Global Asset Allocation Fund
and Montgomery Total Return Bond 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 amount indicated in the table. A Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the three
years following that reduction and only if such reimbursement can be
achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for
fees and expenses for the current year. Absent reduction, actual total
fund operating expenses for the period ended June 30, 1997 (annualized)
would have been as follows: Montgomery Equity Income Fund, 1.46% (0.86%
other expenses); Montgomery Small Cap Opportunities Fund, 1.75% (0.56%
other expenses); Montgomery Global Opportunities Fund, 2.62% (1.37% other
expenses); Montgomery Global Communications Fund, 2.00% (0.75% other
expenses); Montgomery International Growth Fund, 2.37% (1.27% other
expenses); Montgomery International Small Cap Fund, 2.60% (1.35% other
expenses); Montgomery Emerging Asia Fund, 2.69% (1.44% other expenses);
Montgomery U.S. Asset Allocation Fund, 1.49% (1.49% other expenses);
Montgomery Global Asset Allocation Fund, 4.84% (4.64% other expenses);
Montgomery Select 50 Fund, 1.92% (0.67% other expenses); Montgomery Short
Duration Government Bond Fund, 2.05% (1.55% other expenses); Montgomery
Government Reserve Fund, 0.62% (0.27% other expenses); Montgomery
California Tax-Free Money Fund, 0.69% (0.29% other expenses); Montgomery
California Tax-Free Intermediate Bond Fund, 1.18% (0.68% other expenses);
and Montgomery California Tax-Free Money Fund, 0.73% (0.33% 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); and Montgomery Latin America Fund, 3.25% (2.00%
other expenses). The Manager may terminate these voluntary reductions at
any time. See "Management of the Funds."
** Estimated expenses of Montgomery U.S. Asset Allocation Fund and
Montgomery Global Asset Allocation Fund (excluding expenses related to
the Underlying Funds and after reimbursement) are 0.25% for the
Montgomery U.S. Asset Allocation Fund and 0.50% for the Montgomery Global
Asset Allocation Fund. Estimated expenses related to the Underlying Funds
for Montgomery U.S. Asset Allocation Fund are 1.05%, and the estimated
expenses related to the Underlying Funds for Montgomery Global Asset
Allocation Fund are 1.25%.
+ These figures show actual expenses; no reimbursements or waivers applied.
# Even if the total expenses of the Underlying Funds exceed 1.05% for the
Montgomery U.S. Asset Allocation Fund (1.25% for the Montgomery Global
Asset Allocation Fund), the Manager has agreed to limit the Montgomery
U.S. 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 U.S. Asset Allocation Fund (currently estimated
to be 1.05%) 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.
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
Growth Fund $13 $40 $ 69 $151
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund $15 $47 $ 82 $178
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Fund $13 $39 $ 67 $148
-----------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund $17 $54 $ 92 $200
-----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund $ 9 $27 $ 47 $105
-----------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
International Growth Fund $17 $52 $ 90 $195
-----------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund $19 $60 $102 $221
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund $16 $59 $ 87 $189
-----------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund $19 $60 $102 $221
-----------------------------------------------------------------------------------------------------------------------------
Latin America Fund $19 $60 $102 $221
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Opportunities Fund $19 $60 $102 $221
-----------------------------------------------------------------------------------------------------------------------------
Global Communications Fund $19 $60 $102 $221
-----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
-----------------------------------------------------------------------------------------------------------------------------
Select 50 Fund $18 $57 $ 97 $211
-----------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund $13 $41 $ 71 $156
-----------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund $18 $55 $ 95 $206
-----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund $ 7 $22 $ 39 $ 87
-----------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund $ 6 $19 $ 33 $ 75
-----------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund $ 6 $19 $ 33 $ 75
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund $ 7 $22 $ 38 $ 85
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund $ 6 $19 $ 32 $ 72
-----------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund $ 6 $19 $ 33 $ 75
-----------------------------------------------------------------------------------------------------------------------------
<FN>
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.
</FN>
</TABLE>
6
<PAGE>
Financial Highlights
Selected per-Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992, through
June 30, 1997, was audited by Deloitte & Touche LLP, whose report, dated August
18, 1997, appears in the 1997 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>
Small Cap
Growth Fund Opportunities Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997## 1996 1995 1994(A) 1997 1996(B)##
<S> <C> <C> <C> <C> <C> <C>
$21.94 $19.16 $15.27 $12.00 $15.80 $12.00
Net asset value--beginning of year
Net investment income/(loss) 0.15 0.17 0.12 0.04 (0.13) 0.02
Net realized and unrealized gain/(loss) on 3.90 4.32 3.91 3.31++ 1.86 3.78++
investments
Net increase/(decrease) in net assets resulting from 4.05 4.49 4.03 3.35 1.73 3.80
investment operations
Distributions:
Dividends from net investment income (0.15) (0.17) (0.07) (0.01) (0.00)# --
Distributions from net realized capital gains (2.77) (1.54) (0.07) -- -- --
Distributions in excess of net realized capital -- -- -- (0.07) -- --
gains
Total distributions (2.92) (1.71) (0.14) (0.08) (0.00)# --
Net asset value--end of year $23.07 $21.94 $19.16 $15.27 $17.53 $15.80
Total return** 20.44% 24.85% 26.53% 27.98% 10.97% 31.67%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $1,137,343 $926,382 $878,776 $149,103 $226,318 $136,140
Ratio of net investment income/(loss) to average net 0.69% 0.78% 0.98% 1.09%+ (0.86)% 0.23%+
assets
Net investment income/(loss) before deferral of fees -- -- -- $0.03 $(0.16) $(0.04)
by Manager
Portfolio turnover rate 61.10% 118.14% 128.36% 110.65% 154.50% 81.29%
Average commission rate paid+++ $0.0595 $0.0596 N/A N/A $0.0562 $0.0578
Expense ratio before deferral of fees by Manager -- -- -- 1.79%+ 1.75% 2.16%+
Expense ratio including interest expense 1.27% 1.35% 1.50% 1.49%+ 1.50% 1.50%+
<FN>
(A) The Growth Fund's Class R shares commenced operations on September 30,
1993.
(B) The Small Cap Opportunities Fund's Class R shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Small Cap Fund
FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 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) (0.18) (0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07)
Net realized and unrealized gain/(loss) on 1.43 6.31 3.04 (0.47) 4.04 3.25 3.27 2.71
investments
Net increase/(decrease) in net assets resulting 1.25 6.22 2.94 (0.59) 3.93 3.19 3.21 2.64
from investment operations
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)
Distributions 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 $19.52 $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24
Total return** 6.81% 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 000s) $198,298 $275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181
Ratio of net investment income/(loss) to average (0.78)% (0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+
net assets
Net investment income/(loss) before deferral of -- -- -- -- -- -- -- --
fees by Manager
Portfolio turnover rate 58.71% 80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16%
Average commission rate paid+++ $0.0522 $0.0529 N/A N/A N/A N/A N/A N/A
Expense ratio before deferral of fees by N/A N/A N/A N/A N/A N/A N/A N/A
Manager, including interest expense
Expense ratio excluding interest expense N/A N/A N/A N/A N/A N/A N/A N/A
Expense ratio before deferral of fees by Manager -- -- -- -- -- -- -- --
Expense ratio including interest expense 1.20% 1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+
<FN>
(A) The Small Cap Fund's Class R shares became available for investment by
the public on July 13, 1990.
(B) The Micro Cap Fund's Class R shares commenced operations on December 30,
1994.
(C) The Equity Income Fund's Class R shares commenced operations on September
30, 1994.
(D) The International Growth Fund's Class R shares commenced operations on
July 3, 1995.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Micro Cap Fund Equity Income Fund International Growth Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995(B)## 1997## 1996 1995(C) 1997## 1996(D)
<S> <C> <C> <C> <C> <C> <C> <C>
$17.82 $13.75 $12.00 $16.09 $13.38 $12.00 $15.31 $12.00
(0.13) (0.04) 0.09 0.49 0.43 0.31 0.08 0.02
2.54 4.26 1.66 3.35 2.82 1.38 2.53 3.29
2.41 4.22 1.75 3.84 3.25 1.69 2.61 3.31
-- (0.04) -- (0.46) (0.42) (0.31) -- --
-- -- -- -- -- -- -- --
(1.23) (0.11) -- (1.56) (0.12) -- (1.68) --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
(1.23) (0.15) -- (2.02) (0.54) (0.31) (1.68) --
$19.00 $17.82 $13.75 $17.91 $16.09 $13.38 $16.24 $15.31
14.77% 30.95% 14.58% 26.02% 24.56% 14.26% 19.20% 27.58%
$317,812 $306,217 $162,949 $38,595 $19,312 $6,383 $33,912 $18,303
(0.75)% (0.11)% 1.40%+ 2.93% 3.03% 4.06%+ 0.57% 0.26%+
-- $(0.05) $0.07 $0.39 $0.34 $0.13 $(0.02) $(0.07)
79.00% 88.98% 36.81% 62.31% 89.77% 29.46% 95.02% 238.91%
$0.0569 $0.0573 N/A $0.0598 $0.0423 N/A $0.0217 $0.0176
N/A N/A N/A 1.46% 1.45% 3.16%+ 2.37% 2.91%+
N/A N/A N/A 0.86% 0.85% 0.84%+ 1.66% 1.65%+
-- 1.79% 2.07%+ N/A N/A N/A N/A N/A
1.71% 1.75% 1.75%+ -- -- -- -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
International Small Cap Fund
FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
Net asset value--beginning of year $14.86 $11.75 $12.02 $12.00
Net investment income/(loss) (0.05) 0.03 0.12 0.00#
Net realized and unrealized gain/(loss) on 2.35 3.10 (0.39) 0.02
investments
Net increase/(decrease) in net assets resulting from 2.30 3.13 (0.27) 0.02
investment operations
Distributions:
Dividends from net investment income -- (0.02) (0.00)# --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital -- -- -- --
gains
Total distributions -- (0.02) (0.00)# --
Net asset value--end of year $17.16 $14.86 $11.75 $12.02
Total Return** 15.48% 26.68% (2.23)% 0.17%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $53,602 $41,640 $28,516 $34,555
Ratio of net investment income/(loss) to average net (0.34)% 0.20% 0.95% 0.04%+
assets
Net investment income/(loss) before deferral of fees $(0.14) $(0.08) $0.05 $(0.02)
by Manager
Portfolio turnover rate 84.91% 177.36% 156.13% 123.50%
Average commission rate paid+++ $0.0157 $0.0123 N/A N/A
Expense ratio before deferral of fees by Manager, 2.60% 2.76% 2.50% 2.32%+
including interest expense
Expense ratio excluding interest expense 1.90% 1.90% 1.90% 1.90%+
Expense ratio including interest expense 1.90% 1.96% 1.91% 1.99%+
<FN>
(A) The International Small Cap Fund's Class R shares commenced operations on
September 30, 1993.
(B) The Emerging Markets Fund's Class R shares commenced operations on March
1, 1992.
(C) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
(D) The Global Opportunities Fund's Class R shares commenced operations on
September 30, 1993.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets Fund Emerging Asia Fund Global Opportunities Fund
FISCAL YEAR
FISCAL YEAR ENDED JUNE 30 ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995## 1994 1993 1992(B) 1997(C) 1997 1996 1995 1994(D)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$14.19 $13.17 $13.68 $11.07 $9.96 $10.00 $12.00 $16.96 $13.25 $12.92 $12.00
0.07 0.08 0.03 (0.03) 0.07 0.03 (0.01) (0.11) (0.06) 0.13 0.01
2.66 0.94 0.25++ 2.92 1.05 (0.07) 6.95 3.14 3.84 0.70 0.91
2.73 1.02 0.28 2.89 1.12 (0.04) 6.94 3.03 3.78 0.83 0.92
(0.07) -- -- -- (0.01) -- -- -- (0.07) -- --
-- -- -- -- -- -- (0.03) -- -- -- --
-- -- (0.42) (0.28) (0.00)# -- -- (0.82) -- (0.50) --
-- -- (0.37) -- -- -- -- -- -- -- --
(0.07) -- (0.79) (0.28) (0.01) -- (0.03) (0.82) (0.07) (0.50) --
$16.85 $14.19 $13.17 $13.68 $11.07 $9.96 $18.91 $19.17 $16.96 $13.25 $12.92
19.34% 7.74% 1.40% 26.10% 11.27% (0.40)% 57.80% 18.71% 28.64% 6.43% 7.67%
$1,259,457 $994,378 $998,083 $654,960 $206,617 $54,625 $68,095 $32,371 $28,496 $13,677 $12,504
0.48% 0.58% 0.23% (0.14)% 0.66% 1.70%+ (0.42)%+ (0.62)% (0.56)% 1.03% 0.02%+
-- -- -- -- $0.06 $0.01 $(0.02) $(0.23) $(0.16) $(0.01) $(0.05)
83.08% 109.92% 92.09% 63.79% 21.40% 0.19% 72.18% 117.10% 163.80% 118.75% 67.22%
$0.0011 $0.0007 N/A N/A N/A N/A $0.0077 $0.0240 $0.0235 N/A N/A
-- -- -- -- 1.93% 2.80%+ 2.69%+ 2.62% 3.10% 2.99% 2.75%+
1.67% 1.72% 1.80% 1.85% 1.90% 1.90%+ 2.13%+ 1.90% 1.90% 1.90% 1.90%+
-- -- -- -- -- -- 2.20%+ -- 2.05% 1.91% 1.99%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Global Communications Fund Select 50 Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED
JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 1996 1995 1994 1993(A) 1997## 1996(B)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $18.05 $15.42 $14.20 $12.45 $12.00 $16.46 $12.00
Net investment income/(loss) (0.25) (0.20) (0.03) (0.05) 0.00# 0.01 0.06
Net realized and unrealized gain/(loss) on 2.72 2.83 1.28 1.80++ 0.45 4.16 4.45
investments
Net increase/(decrease) in net assets resulting 2.47 2.63 1.25 1.75 0.45 4.17 4.51
from investment operations
Distributions:
Dividends from net investment income -- -- -- -- -- (0.10) (0.04)
Distributions in excess of net investment -- -- -- -- -- -- --
income
Distributions from net realized capital gains (0.91) -- -- -- -- (0.52) --
Distributions in excess of net realized -- -- (0.03) -- -- -- (0.01)
capital gains
Distributions from capital -- -- -- -- -- -- --
Total distributions (0.91) -- (0.03) -- -- (0.62) (0.05)
Net asset value--end of year $19.61 $18.05 $15.42 $14.20 $12.45 $20.01 $16.46
Total return** 14.43% 17.06% 8.83% 14.06% 3.75% 26.35% 37.75%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $153,955 $206,671 $209,644 $234,886 $4,670 $172,509 $77,955
Ratio of net investment income/(loss) to average (1.05)% (1.01)% (0.10)% (0.46)% (0.05)%+ 0.04% 0.42%+
net sales
Net investment income/(loss) before deferral of $(0.27) $(0.22) $(0.07) $(0.06) $(0.04) $(0.01) $0.02
fees by Manager
Portfolio turnover rate 75.79% 103.73% 50.17% 29.20% 0.00% 157.93% 105.98%
Average commission rate paid+++ $0.0104 $0.0129 N/A N/A N/A $0.0011 $0.0097
Expense ratio before deferral of fees by 2.00% 2.11% 2.09% 2.04% 8.96%+ 1.92% 2.11%+
Manager, including interest expense
Expense ratio excluding interest expense 1.91% 1.90% 1.90% 1.90% 1.90%+ 1.82% 1.80%+
Expense ratio including interest expense -- 2.01% 1.91% 1.94% -- -- --
<FN>
(A) The Global Communications Fund's Class R s hares commenced operations on
June 1, 1993.
(B) The Select 50 Fund's Class R shares commenced operations on October 2,
1995.
(C) The U.S. Asset Allocation Fund's Class R shares commenced operations on
March 31, 1994.
(D) The Global Asset Allocation Fund's Class R shares commenced operations on
January 2, 1997.
(E) The Short Duration Government Bond Fund's Class R shares commenced
operations on December 18, 1992.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
U.S. Asset Allocation Fund Global Asset Short Duration Government Bond Fund
Allocation Fund
FISCAL YEAR
FISCAL YEAR ENDED JUNE 30 ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997## 1996 1995 1994(C) 1997(D)## 1997## 1996 1995 1994 1993(E)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$19.33 $16.33 $12.24 $12.00 $12.00 $9.92 $9.95 $9.80 $10.23 $10.00
0.48 0.26 0.25 0.06 0.09 0.59 0.60 0.62 0.61 0.33
2.13 3.54 4.11 0.18 1.24 0.07 (0.04) 0.16 (0.34) 0.23
2.61 3.80 4.36 0.24 1.33 0.66 0.56 0.78 0.27 0.56
(0.39) (0.25) (0.17) -- -- (0.59) (0.59) (0.62) (0.56) (0.33)
-- -- -- -- -- (0.00)# (0.00)# -- (0.07) --
(1.66) (0.55) (0.10) -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- (0.07) --
-- -- -- -- -- -- -- (0.01) -- (0.00)#
(2.05) (0.80) (0.27) -- -- (0.59) (0.59) (0.63) (0.70) (0.33)
$19.89 $19.33 $16.33 $12.24 $13.33 $9.99 $9.92 $9.95 $9.80 $10.23
14.65% 23.92% 35.99% 2.00% 11.17% 6.79% 5.74% 8.28% 2.49% 5.66%
$127,214 $132,511 $60,234 $1,548 $1,653 $47,265 $22,681 $17,093 $21,937 $22,254
2.55% 1.85% 3.43% 2.54%+ 1.31%+ 5.87% 5.88% 6.41% 5.93% 6.02%+
$0.47 $0.24 $0.19 $(0.11) $(0.21) $0.54 $0.52 $0.54 $0.51 $0.27
168.51% 225.91% 95.75% 190.94% 89.52% 450.98% 349.62% 284.23% 603.07% 213.22%
$0.0448 $0.0595 N/A N/A N/A N/A N/A N/A N/A N/A
1.49% 1.55% 2.07% 9.00%+ 4.84%+ 2.05% 2.31% 2.23% 1.75% 2.07%+
1.31% 1.30% 1.30% 1.30%+ 0.47%+ 0.60% 0.60% 0.47% 0.25% 0.22%+
1.43% 1.42% 1.31% 1.43%+ -- 1.55% 1.55% 1.38% 0.71% --
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
Government Reserve Fund
FISCAL YEAR ENDED JUNE 30
<CAPTION>
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 1996 1995 1994 1993(A)
<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) 0.049 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 0.049 0.052 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.049) (0.052) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- -- --
Total distributions (0.049) (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** 5.03% 5.28% 4.97% 2.96% 2.41%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $473,154 $439,423 $258,956 $211,129 $124,795
Ratio of net investment income/(loss) to average net
assets 4.93% 5.17% 4.92% 2.99% 2.96%+
Net investment income/(loss) before deferral of fees
by Manager $0.049 $0.050 $0.047 $0.028 $0.013
Portfolio turnover rate -- -- -- -- --
Expense ratio before deferral of fees by Manager,
including interest expense 0.62% 0.74% 0.79% 0.71% 0.77%+
Expense ratio excluding interest expense 0.60% 0.60% 0.60% 0.60% 0.38%+
Expense ratio before deferral of fees by Manager N/A N/A N/A N/A N/A
Expense ratio including interest expense -- -- 0.63% -- --
<FN>
(A) The Government Reserve Fund's Class R shares commenced operations on
September 14, 1992.
(B) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(C) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
(D) The Federal Tax-Free Money Fund's Class R shares commenced operations on
July 15, 1996.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
California Tax-Free California Tax-Free Federal Tax-Free
Intermediate Bond Fund Money Fund Money Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995 1994(B) 1997 1996 1995(C) 1997(D)
<S> <C> <C> <C> <C> <C> <C> <C>
$12.23 $12.04 $11.79 $12.00 $1.00 $1.00 $1.00 $1.00
0.53 0.54 0.44 0.41 0.029 0.030 0.027 0.032
0.30 0.19 0.25 (0.21) 0.000### 0.000### 0.000### 0.000###
0.83 0.73 0.69 0.20 0.029 0.030 0.027 0.032
(0.53) (0.54) (0.44) (0.41) (0.029) (0.030) (0.027) (0.032)
-- -- (0.00)# -- -- -- (0.000)### (0.000)###
(0.53) (0.54) (0.44) (0.41) (0.029) (0.030) (0.027) (0.032)
$12.53 $12.23 $12.04 $11.79 $1.00 $1.00 $1.00 $1.00
6.91% 6.11% 6.03% 1.65% 2.95% 3.03% 2.68% 3.26%
$21,681 $13,948 $5,153 $11,556 $118,723 $98,134 $64,780 $114,197
4.27% 4.34% 3.71% 3.44% 2.91% 2.99% 3.55%+ 3.24%+
$0.47 $0.43 $0.34 $0.25 $0.028 $0.028 $0.023 $0.030
25.60% 58.11% 37.93% 77.03% -- -- -- --
N/A N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A N/A
1.18% 1.43% 1.41% 1.63% 0.73% 0.80% 0.86%+ 0.69%+
0.68% 0.61% 0.56% 0.23% 0.58% 0.59% 0.33%+ 0.33%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
### Amount represented less than $0.001 per share.
</FN>
</TABLE>
15
<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." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investments in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used in the
prospectus are defined in the glossary at the end of this prospectus.
Summary Comparison of Funds
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM FOCUS TYPICAL MARKET
EQUITY EXPOSURE DEBT CAPITALIZATION OF
EXPOSURE PORTFOLIO COMPANIES
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
- --------------------------------------------------------------------------------------------------------------------------------
Growth Fund 65-100% 35% Growth More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 65-100% 35% Small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund 80-100% 35% Small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund 65-100% 35% Micro-cap Less than $600 million
- --------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 65-100% 35% Large-cap dividend More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
- --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund 65-100% 35% Foreign growth More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 65-100% 35% Foreign small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 65-100% 35% Foreign emerging growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund 65-100% 35% Asian growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Latin America Fund 65-100% 35% Latin American growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund 65-100% 35% Worldwide growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund 65-100% 35% Worldwide communication Any size
- --------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- --------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 65-100% 35% Capital appreciation Any size
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 20-80% 20-80% U.S. Balanced Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund 10- 95% 100% Worldwide balanced Any size
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- --------------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund 0% 100% Total return N/A
- --------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0% 100% Total return N/A
- --------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0% 100% Income N/A
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Equity Funds
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions, it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock, but also
invests in other types of equity securities and equity-derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in investment-grade debt
securities or in foreign securities. See "Portfolio Securities." The Manager
does not expect the Growth Fund to be consistently fully invested in equity
securities. During periods that the Manager deems appropriate, the Fund may take
a more defensive position and be significantly invested in cash and cash
equivalents.
16
<PAGE>
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental values and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis, focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities Fund
generally invests the remaining 35% of its total assets in a similar manner, but
may invest those assets in companies having total market capitalizations of $1
billion or more and in investment-grade debt securities and foreign companies.
The Fund invests primarily in common stock. It also may invest in other types of
equity securities and equity-derivative securities. See "Portfolio Securities."
Current income from dividends, interest and other sources is only incidental.
The Small Cap Opportunities Fund seeks growth at a reasonable value, identifying
companies with sound fundamental value and potential for substantial growth. The
Fund selects its investments based on a combination of quantitative screening
techniques and fundamental analysis. The Fund initially identifies a universe of
investment candidates by screening companies based on changes in rates of growth
and valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap 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 and in
investment-grade debt securities.
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. See "Portfolio Securities." Current income from
dividends, interest and other sources is only incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macroeconomic 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 in society at
large. Early identification of potential investments is a key to the Fund's
investment style. Heavy emphasis is placed on in-house research, which includes
discussions with company management. The Fund also draws on the expertise of
brokerage firms, including regional firms that closely follow
smaller-capitalization companies within their geographic regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with the Fund may make additional
investments. Once your account is closed, additional investments in the Fund may
not be possible. An account may be considered closed and subject to redemption
by the Fund if the value of the shares remaining after a transfer or redemption
falls below $1,000. The Fund may resume sales of shares to new investors at some
future date, but it has no present intention to do so.
17
<PAGE>
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 assets in other equity
securities and in investment-grade debt instruments, including foreign
securities. See "Portfolio Securities."
The Micro Cap Fund seeks growth at a reasonable value, identifying companies
with sound fundamental value and potential for substantial growth. The Fund
selects its investments based on a combination of quantitative screening
techniques and fundamental analysis. The Fund initially identifies a universe of
investment candidates by screening companies based on changes in rates of growth
and valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
The 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 the 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 Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having total
market capitalizations of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative-yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower-growth areas of the economy and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage, and market leadership. The Fund usually holds companies for a period
of two to four years, resulting in relatively low turnover. The Fund will
usually begin to reduce its position in a company as the price moves up and
yield drops to the lower end of its historical range. In addition, the Fund will
usually reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in investment grade debt
instruments. The Fund attempts to achieve low price volatility through its
investment in mature companies. In addition, the Fund may invest up to 20% of
its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Foreign and Global Equity Funds
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner, but may
invest those assets in equity securities of U.S. companies, in
lower-capitalization companies or in debt securities, including
18
<PAGE>
up to 5% of its total assets in debt securities rated below investment grade.
See "Portfolio Securities" and "Risk Considerations."
The Fund targets companies with potential for above-average, long-term growth in
sales and earnings on a sustained basis with securities reasonably priced at the
time of purchase, in the Manager's opinion, compared with the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research;
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the 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 equity securities of U.S. companies, in companies having
market capitalizations of $1 billion or more, or in debt securities, including
up to 5% of its total assets in debt securities rated below investment grade.
See "Portfolio Securities" and "Risk Considerations."
The Fund targets companies with potential for above-average, long-term growth in
sales and earnings on a sustained basis with securities reasonably priced at the
time of purchase, in the Manager's opinion, compared with the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the 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 Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of emerging markets companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging markets country. The Manager currently regards the
following to be emerging markets countries: Latin America (Argentina, Brazil,
Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay
and Venezuela); Asia (Bangladesh, China/Hong Kong, India, Indonesia, Korea,
Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and
Vietnam); southern and eastern Europe (Czech Republic, Greece, Hungary,
Kazakstan, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Turkey and
Ukraine); the Middle East (Israel and Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe). In the
future, the Fund may invest in other emerging markets countries.
The Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percentage of assets to invest in each country
to maximize expected returns for a given risk level. The Fund's aims are to
invest in those countries that are expected to have the highest risk/reward
trade-off when incorporated into a total portfolio context. This "top-down"
country selection is combined with "bottom-up" fundamental industry analysis and
stock selection based on original research and publicly available information
and company visits.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
19
<PAGE>
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging 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. See "Portfolio
Securities."
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/Hong Kong (the Fund
considers China/Hong Kong to be one single emerging Asian country), India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan, Thailand and Vietnam. The Fund does not expect to invest in securities
in Japan, Australia or New Zealand, 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/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 China/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. 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 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 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 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 June 30, 1997, the market capitalization of the top five Latin America
markets are as follows:
20
<PAGE>
- --------------------------------------------------------------------------------
COUNTRY MARKET CAPITALIZATION (IN US$ MILLIONS)*
- --------------------------------------------------------------------------------
Brazil $195,859
- --------------------------------------------------------------------------------
Mexico $107,565
- --------------------------------------------------------------------------------
Chile $ 54,651
- --------------------------------------------------------------------------------
Argentina $ 49,460
- --------------------------------------------------------------------------------
Venezuela $ 10,042
- --------------------------------------------------------------------------------
*Source: Datastream. Investors should note that given the volatile nature of the
stock markets in most Latin America countries, the market capitalizations 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. Latin American countries are in various stages
of economic development, however, 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 invest up to 35% of its total
assets in 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."
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."
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 providing the greatest potential for long-term capital appreciation.
For information on risks, see "Portfolio Securities" and "Risk Considerations."
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.
21
<PAGE>
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, communications 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 worldwide 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 Communications 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."
Multi-Strategy Funds
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
The Fund invests primarily in 10 equity securities selected by each of the
Manager's five different equity disciplines. These five disciplines, which may
be adjusted from time to time, include U.S. Growth Equity, U.S.
Smaller-Capitalization Companies, U.S. Equity Income and International and
Emerging Markets. See "Management of the Funds." The Manager's Equity teams
select those securities based on the potential for capital appreciation.
The Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation, but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries, which may include the 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."
Montgomery U.S. Asset Allocation Fund (the "U.S. Asset Allocation Fund,"
formerly called the "Montgomery Asset Allocation Fund")
The investment objective of the U.S. Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The
22
<PAGE>
Fund is a "fund-of-funds," which means that the Fund will not invest directly in
securities but will instead invest in a diversified group of three Funds from
The Montgomery Funds family (each, an "Underlying Fund") that the Manager
considers to be appropriate investments for achieving the U.S. Asset Allocation
Fund's investment objective. The U.S. Asset Allocation Fund adjusts the
proportion of its investments in each of these categories as needed to respond
to current market conditions, primarily by changing its allocation percentage
among the different Underlying Funds. The following table illustrates the
anticipated allocation methodology:
- --------------------------------------------------------------------------------
U.S. Asset Allocation Fund Allocation
- --------------------------------------------------------------------------------
INVESTMENT FOCUS ANTICIPATED RANGE OF UNDERLYING
ASSET ALLOCATION FUND
- --------------------------------------------------------------------------------
Domestic stocks 20 to 80%
Growth Fund; After
November 30, 1997, this
may include other
domestic equity funds
advised by the Manager.
- --------------------------------------------------------------------------------
Debt instruments 20 to 80% Total Return Bond Fund
or other general
investment-grade bond
funds advised by the
Manager
- --------------------------------------------------------------------------------
Cash and cash equivalents 0 to 50% Government Reserve Fund
- --------------------------------------------------------------------------------
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 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 that 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") that 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 FOCUS ANTICIPATED RANGE OF UNDERLYING
ASSET ALLOCATION FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic stocks 5 to 60% Growth Fund; After November 30, 1997, this may include
other domestic equity funds advised by the Manager.
- -------------------------------------------------------------------------------------------------------------------------
International developed markets stocks 5 to 60% International Growth Fund; After November 30, 1997,
this may include other international developed market
stock funds advised by the Manager.
- -------------------------------------------------------------------------------------------------------------------------
Emerging markets stocks 0 to 20% Emerging Markets Fund; After November 30, 1997, this
may include other emerging markets stock funds advised
by the Manager.
- -------------------------------------------------------------------------------------------------------------------------
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 80% 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.
U.S. Fixed-Income and Money Market Funds
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 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."
23
<PAGE>
Duration of the Total Return Bond Fund. The Total Return Bond Fund may purchase
individual securities of any maturity. The Fund, however, seeks to maintain an
average portfolio duration of between four- to five-and-a-half years.
Montgomery Short Duration Government Bond Fund (the "Short Bond Fund", formerly
called the "Short Government Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. Because the Manager seeks to
manage interest rate risk by limiting effective duration, the Fund may invest in
securities of any maturity.
The Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which the
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value of $1 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Duration Government Bond Fund may
purchase individual securities of any maturity, and the dollar-weighted average
maturity (or period until the next interest rate reset date) of its portfolio
securities may exceed three years. The Fund, however, seeks to maintain an
average portfolio duration comparable to or less than that of three-year U.S.
Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital which, under normal conditions, it seeks
by investing exclusively in U.S. government securities, repurchase agreements
for U.S. government securities, and other money market funds investing in U.S.
government securities and those repurchase agreements. The Fund seeks to
maintain a stable net asset value of $1 per share in compliance with Rule 2a-7
under the Investment Company Act and, pursuant to procedures adopted under such
Rule, limits its investments to those U.S. government securities that the Board
of Trustees (the "Board") determines present minimal credit risks and have
remaining maturities, as determined under the Rule, of 397 calendar days or
less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
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. 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. 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 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 its 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 the Fund's share value but who are not
willing to accept the
24
<PAGE>
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 values of the securities
in which the Fund invests generally change with interest rates, the value of its
shares will fluctuate, unlike shares of a money market fund, which seeks to
maintain a stable net asset value of $1 per share. Consequently, the Fund seeks
to reduce such fluctuations by managing the effective duration, and thus the
interest risk, of its portfolio. (Effective duration is an indicator of a
security's sensitivity to interest rate change. See duration 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. The Fund may invest in securities of any maturity, however. The 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 of Trustees ("the Board"), but not to exceed
20% of the 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. There is no assurance that any municipal issuers will make full payments
of principal and interest or remain solvent, however. 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 invest in other municipal securities
if, in the Manager's opinion, suitable California municipal securities are not
available. The California Intermediate Bond Fund, the Federal Money and
California Money Funds may invest up to 20%, of their respective net assets in
cash, U.S. government securities, and obligations of U.S. possessions,
commercial paper and other eligible debt securities, including corporate debt
instruments or instruments the interest from which is subject to the federal
alternative minimum tax ("AMT") for individuals. Additionally, the California
Intermediate Bond Fund may invest up to 20%, and the California Money Fund may
invest 35%, of their respective net assets in eligible 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 net 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 of $1 per share 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.
Portfolio Securities
The following describes portfolio securities in which the Funds may invest.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note that the portfolio securities of the U.S. Asset Allocation Fund and
the Global Asset Allocation Fund, respectively, consist of the portfolio
securities of each of their respective Underlying Funds.
Equity Securities
The Foreign and Global Equity Funds, the Select 50 Fund and the U.S. Equity
Funds emphasize investments in common stock. These Funds may also invest in
other types of equity securities (such as preferred stocks or convertible
securities) and equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Foreign and Global Equity Funds, the Select 50 Fund and the U.S. Equity
Funds may invest in ADRs, EDRs, 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.
25
<PAGE>
Privatizations
The Select 50 Fund and the Foreign and Global Equity 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 Foreign and Global Equity 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 Foreign and Global Equity Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The Foreign and Global Equity
Funds also may incur tax liability to the extent that they invest in the stock
of a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds. See the Statement of Additional Information.
The Select 50 Fund, the Foreign and Global Equity Funds, the U.S. Equity Funds
and the U.S. Fixed-Income and Money Market 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
All Funds may purchase debt securities that complement their objective of
capital appreciation through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers. Debt securities may constitute up to 35% of the 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% (except the Latin America Fund which may
invest up to 15%) 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 Foreign and Global Equity Funds and the Equity Income
Fund may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
26
<PAGE>
U.S. Government Securities
All Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and mortgage-related securities of the GNMA, are issued
or guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. 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 U.S. Fixed-Income and Money Market Funds may invest in mortgage-related
securities. A mortgage-related security is an interest in a pool of mortgage
loans and is considered a derivative security. Most mortgage-related securities
are pass-through securities, which means that investors receive payments
consisting of a pro rata share of both principal and interest (less servicing
and other fees), as well as unscheduled prepayments, as mortgages in the
underlying mortgage pool are paid off by the borrowers. Certain mortgage-related
securities are subject to high volatility. These Funds use these derivative
securities in an effort to enhance return and as a means to make certain
investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" under the "Other Investment 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 U.S. government securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The U.S. Fixed-Income and Money Market Funds consider GNMA, FNMA and
FHLMC-issued pass-through certificates, CMOs and other mortgage-related
securities to be U.S. government securities for purposes of their investment
policies. The Money Market Funds do not invest in stripped mortgage securities,
however, and the Short Bond Fund limits its stripped mortgage securities
investments to 10% of total assets. The liquidity of 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
27
<PAGE>
mortgage loans; and bonds and CMOs collateralized by mortgage-related securities
issued by GNMA, FNMA, FHLMC or by pools of conventional mortgages, multifamily
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. Many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal, however. The Short Bond Fund and Total Return 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 U.S. Fixed-Income and Money Market Funds may invest in variable-rate demand
notes ("VRDNs").
Zero Coupon Bonds
The U.S. Fixed-Income and Money Market Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
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 and the
Total Return 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 Tax-Free Intermediate Bond
Fund may invest in custodial receipts. The Tax-Free Funds may invest in
participation interests and tender option bonds.
28
<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 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>
=============================================================================================================================
U.S. Equity Funds Foreign and Multi-Strategy U.S. Fixed-Income and
Global Equity Funds Funds Money Market Funds
-----------------------------------------------------------------------------------------
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G S S M E I I E E L G G S U G T S G C C F
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) x x x x x x x x x x x x x * * x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions(1) * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third x x x x x x x x x x x x x * * x x x x x x
of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements x x x x x x x x x x x x x * * x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * * x x
- -----------------------------------------------------------------------------------------------------------------------------
Leverage x x x x x x x x x x x x x * * x x(2) x
- -----------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed x x x x x x x x x x x x x * * x x x x x x
30% of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment x x x x x x x x x x x x x * * x(3)x(3) x x x x
securities
- -----------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(4) x 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
currencies(5)
- -----------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x x x x x x x x x x x x x * *
indices(5)
- -----------------------------------------------------------------------------------------------------------------------------
Write covered call options(5) x x x x x x x x x x x x x * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Write covered put options(5) x x x x x x x x x x x x x * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(6) 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
futures(6)
- -----------------------------------------------------------------------------------------------------------------------------
Equity swaps(7) x x x x x x x x x x x x x * *
- -----------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to * * x x x
10% of fund's net assets)
- -----------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to x x x x x x x x x x x x x * * x x x
15% of 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
29
<PAGE>
security, a Fund may experience delay or difficulty in exercising its rights to
realize upon the security, may incur a loss if the value of the security
declines and may incur disposition costs in liquidating the security.
(2) The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that of
three-year U.S. Treasury notes..
(3) The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
(4) A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts. The Total Return Bond Fund can
invest 20% of its net assets in foreign securities.
(5) 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.
(6) 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.
(7) A Fund that may invest in equity swaps may invest up to 10% of its total
assets in such investment.
* To the extent allowed in each Underlying Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further a Fund's investment objective or when it appears that a position of the
desired size cannot be accumulated. Portfolio turnover generally involves some
expense to a Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. The annual portfolio turnover rate for the Total Return
Bond Fund is expected to exceed 100%, 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.
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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-current financial positions and goals. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note the risks involved with each Underlying Fund, because the U.S. 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, the Growth and the Foreign and Global Equity
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, the Total Return Bond Fund and the
Foreign and Global Equity Funds have the right to purchase securities in foreign
countries. Accordingly, shareholders should consider carefully the substantial
risks involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks of loss inherent in
domestic investments. The Select 50 and the Foreign and Global Equity Funds,
particularly the Emerging Asia, Emerging Markets and Latin America Funds, 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
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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 among currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the 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
As an operating policy, which may be changed by the Board without shareholder
approval, the Select 50, and the Foreign and Global Equity Funds are permitted
to invest in medium-quality debt securities, but do not invest more than 5%
(with the exception of the Latin America Fund which may invest up to 15%) of
their total assets in high-risk debt securities below investment-grade quality
(sometimes called "junk bonds.")
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less-diversified
mutual funds may be more sensitive to changes in the market value of a single
issuer or industry. The Select 50 Fund may present greater risk than is usually
associated with widely diversified mutual funds, because it may invest in the
securities of as few as 50 issuers. Therefore, the Select 50 Fund is not
appropriate as your sole investment.
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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 the 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"), the 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
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/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.
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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 assets, 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.
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 U.S. Fixed-Income and Money Market Fund, to the
extent that it retains the same percentage of debt securities, may have to
reinvest the proceeds of prepayments at lower interest rates than those of 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 U.S. Fixed-Income and Money Market Funds purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See duration in the Glossary.
Equity Swaps
The U.S. Equity, Foreign and Global Equity and Select 50 Funds may invest in
equity swaps. Equity swaps are derivatives and their value can be very volatile.
To the extent that the Manager does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party, a
Fund may suffer a loss. The value of some components of an equity swap (like the
dividends on a common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, the Fund may suffer a loss
if the counterparty defaults.
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
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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. The investment return on a
non-diversified portfolio, however, 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 LLC is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. The Manager was
formed in February 1997 as an investment adviser registered as such with the SEC
under the Investment Advisers Act of 1940, as amended. It advises private
accounts as well as the Funds. Commerzbank, one of the largest publicly held
commercial banks in Germany, has total assets of approximately $268 billion.
Commerzbank and its affiliates had more than $479 billion in assets under
management as of June 30, 1997. Commerzbank's asset management operations
involve more than 1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager of the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997, for an initial two-year period.
Portfolio Managers
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Montgomery Micro Cap Fund
Roger W. Honour is a senior portfolio manager and principal. Prior to joining
Montgomery Asset Management in June 1993, Mr. Honour spent one year as vice
president and portfolio manager at Twentieth Century Investors in Kansas City,
Missouri. From 1990 to 1992, he served as vice president and portfolio manager
at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets.
Kathryn M. Peters is a portfolio manager and principal. From 1993 to 1995, Ms.
Peters was an associate in the investment banking division of Donaldson, Lufkin
& Jenrette in New York, where she evaluated prospective equity investments for
the merchant banking fund and processed investment banking transactions,
including equity and high-yield offerings. Prior to that, she analyzed mezzanine
investments for Barclays de Zoete Wedd in New York. From 1988 to 1990, Ms.
Peters worked in the leveraged buyout group of Marine Midland Bank.
Andrew G. Pratt, CFA, is a portfolio manager and principal. He joined Montgomery
Asset Management from Hewlett-Packard Company, where he was an equity analyst,
managed a portfolio of small-capitalization technology companies, and researched
private placement and venture capital investments. From 1983 through 1988, he
worked in the Capital Markets Group at Fidelity Investments in Boston.
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Montgomery Small Cap Fund
Stuart O. Roberts is a senior portfolio manager and principal. For the five
years preceding the 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 and principal. 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 and principal. 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. Before then, he covered the
savings and loan industry for Dean Witter Reynolds from 1987 to 1989.
Montgomery Equity Income Fund
John H. Brown, CFA, is a senior portfolio manager and principal. Preceding his
arrival at the Manager in May 1994, Mr. Brown was an analyst and portfolio
manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a senior portfolio manager and principal. 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 senior portfolio manager and principal.
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 and principal. 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, below.
Montgomery Emerging Asia Fund
Frank Chiang is a portfolio manager and principal. 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 Latin America Fund
Jesus Isidoro Duarte is a portfolio manager and principal 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 International Growth Fund
Montgomery International Small Cap Fund
Montgomery Global Opportunities Fund
Montgomery Global Communications Fund
John D. Boich, CFA, is a senior portfolio manager and principal. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The
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Common Goal World Fund, a global equity partnership. From 1987 to 1989, Mr.
Boich worked as a financial advisor with Prudential-Bache Securities and E.F.
Hutton & Company.
Oscar A. Castro, CFA, is a senior portfolio manager and principal. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller-Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers" section
and below.
Kevin T. Hamilton, CFA, Chairman of the Manager's Investment Oversight Committee
and executive vice president, is responsible for coordinating and implementing
the investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
U.S. Asset Allocation Fund and the Global Asset Allocation Fund. From 1985 until
joining the Manager in February 1991, Mr. Hamilton was a senior vice president
responsible for investment oversight at Analytic Investment Management in
Irvine, California. The portfolio management teams responsible for the different
disciplines used in the Select 50 Fund are described throughout this "Portfolio
Managers" section.
Nancy Kukacka is a portfolio manager and principal. Prior to joining the
Manager, Ms. Kukacka worked at CS First Boston Investment from April 1994
through April 1995 where she was an equity research analyst covering consumer
cyclical and non-durable sectors. Previously, Ms. Kukacka was an equity research
analyst at RCM Capital Management from April 1990 through March 1994, providing
fundamental-based analysis for more than US$12 billion in equity investments.
Ms. Kukacka holds a bachelor of arts degree in economics with minors in
chemistry and biology from Bucknell University. She is a Level III CFA
candidate.
Montgomery U.S. Asset Allocation Fund
Montgomery Global Asset Allocation Fund
The U.S. Asset Allocation Fund invests its assets in separate Funds,
representing three different investment disciplines. The Global Asset Allocation
Fund invests its assets in 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 U.S. Asset Allocation Fund and the Global Asset
Allocation Fund. For the background and business experience of Kevin T.
Hamilton, see the discussion under the Montgomery Select 50 Fund, above.
Montgomery Total Return Bond Fund
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
Montgomery Federal Tax-Free Money Fund
William C. Stevens is a senior portfolio manager and principal. At Barclays de
Zoete Wedd Securities from 1991 to 1992, he started its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Corporation from 1990
to 1991; and while with Drexel Burnham Lambert from 1984 to 1990, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager and principal. Mr. Wilson joined the
Manager's Fixed-Income team in April 1994. From 1992 to 1994, he was an
associate in the Fixed Income Client Services Department of BARRA in Berkeley,
California. At BARRA, Mr. Wilson directed research and development teams on
mortgage, CMO and other fixed-income projects. Prior to that he was an associate
in the structured finance department at Security Pacific Merchant Bank as well
as on the mortgage trading desk at Chemical Bank.
37
<PAGE>
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 U.S. Equity, the Select 50 and the Foreign and
Global Equity Funds are higher than for most mutual funds.
<CAPTION>
- -------------------------------------------------------- --------------------------------- -----------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
(ANNUAL RATE)
- -------------------------------------------------------- --------------------------------- -----------------------
<S> <C> <C>
U.S. Equity Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
More than $1 billion 0.80%
- -------------------------------------------------------- --------------------------------- -----------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
More than $500 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Small Cap Fund First $250 million 1.00%
More than $250 million 0.80%
- -------------------------------------------------------- --------------------------------- -----------------------
Micro Cap Fund First $200 million 1.40%
More than $200 million 1.25%
- -------------------------------------------------------- --------------------------------- -----------------------
Equity Income Fund First $500 million 0.60%
More than $500 million 0.50%
- -------------------------------------------------------- --------------------------------- -----------------------
Foreign and Global Equity Funds
- -------------------------------------------------------- --------------------------------- -----------------------
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
- -------------------------------------------------------- --------------------------------- -----------------------
International Small Cap Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Emerging Markets Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Global Communications Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Multi-Strategy Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
More than $500 million 0.90%
- -------------------------------------------------------- --------------------------------- -----------------------
U.S. Asset Allocation Fund All amounts 0.00%*
- -------------------------------------------------------- --------------------------------------------------------
Global Asset Allocation Fund All amounts 0.20%**
- -------------------------------------------------------- --------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Total Return Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
Short Duration Government Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
Government Reserve Fund First $250 million 0.40%
38
<PAGE>
- -------------------------------------------------------- --------------------------------- -----------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
(ANNUAL RATE)
- -------------------------------------------------------- --------------------------------- -----------------------
Next $250 million 0.30%
More than $500 million 0.20%
- -------------------------------------------------------- --------------------------------- -----------------------
California Tax-Free Intermediate Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
California Tax-Free Money Fund First $500 million 0.40%
More than $500 million 0.30%
- -------------------------------------------------------- --------------------------------- -----------------------
Federal Tax-Free Money Fund First $500 million 0.40%
More than $500 million 0.30%
- -------------------------------------------------------- --------------------------------------------------------
<FN>
*This amount represents only the management fee of the U.S. Asset Allocation
Fund and does not include management fees attributable to the Underlying Funds,
which ultimately are to be borne by shareholders of the U.S. Asset Allocation
Fund.
**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 U.S. 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 U.S. 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 U.S. 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.
39
<PAGE>
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions, quality of services, and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
that the Funds receive prompt execution at competitive prices, the Manager also
may consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How to Contact the Funds
For information on the Funds or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
- --------------------------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- --------------------------------------------------------------------------------
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- --------------------------------------------------------------------------------
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Funds
The Funds' shares are offered 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 Funds Distributor, Inc., the Funds'
Distributor, 101 California Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds, by the close of trading (generally, 4:00 p.m. eastern time) on any day
that the New York Stock Exchange ("NYSE") is open, 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, eastern 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 U.S. Fixed-Income and
Money Market Funds will not be priced on national bank holidays.
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
40
<PAGE>
requirements may apply. The Funds do not accept third-party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum initial investment (including IRAs) ..............................$1,000
Minimum initial investment for the Micro Cap Fund (including IRAs)........$5,000
Initial Investments by Check
o Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
o Dividends do not begin to accrue on the U.S. Fixed-Income and Money Market
Funds until your check has cleared.
Initial Investments by Wire
o Call the Transfer Agent to tell it you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar
amount to be invested and Fund(s) in which you want to invest. It will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the new Fund.
o Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from the
shareholder's existing account(s) that result from a telephone purchase not
funded within three business days.
Subsequent Investments
Minimum subsequent investment (including IRAs) .............................$100
Minimum subsequent investment for the Micro Cap Fund (including IRAs).......$500
41
<PAGE>
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agents affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent s affiliated
bank by using the bank wire information under the section titled
"Initial Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
New Account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Funds account.
o Please call the Transfer Agent for instructions on establishing this
service.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued by the
Funds at any time upon 30-days' written notice, or by you at any time by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the
42
<PAGE>
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.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the U.S. Fixed-Income and Money
Market Funds). The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption and such request
is received by the Transfer Agent or other agents of the Funds. Payment of
redemption proceeds is made promptly regardless of when redemption occurs and
normally within three days after receipt of all documents in proper form,
including a written redemption order with appropriate signature guarantee.
Redemption proceeds will be mailed or wired in accordance with the shareholder's
instructions. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission (SEC). In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until 15 days from the purchase date. Shares tendered for redemptions through
brokers or dealers (other than the Distributor) may be subject to a service
charge by such brokers or dealers. Procedures for requesting a redemption are
set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock broker, a savings
association or a national securities exchange. Contact the Transfer Agent
for more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager s discretion.
Redeeming by Check
o Check writing is available on the Government Reserve, Federal Money,
California Money, California Intermediate Tax-Free Bond, Short Government
Bond and Total Return Bond Funds.
o Checkwriting is not available for IRA accounts.
o The minimum amount per check is $250. A check for less may be returned to
you.
o All checks will require only one signature unless otherwise indicated.
43
<PAGE>
o You should not write a check to close your U.S. Fixed-Income and Money
Market Fund account.
o Checks will be returned to you at the end of each month.
o A charge may be imposed for any stop payments requested.
o Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Funds will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Funds (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Funds are
responsible only for mailing the distribution or redemption checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Funds, the Funds will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($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 to at least
the minimum investment required to open an account before the Fund takes any
action.
44
<PAGE>
Exchange Privileges and Restrictions
You may exchange shares from another Fund with the same registration, Taxpayer
Identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of telephone procedures and
limitations of liability under "Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery Funds account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Funds'
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this
prospectus. You may not exchange for shares of a Fund that is not open to
new shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together).
Exchanges out of the U.S. Fixed-Income and Money Market Funds are exempt. A
shareholder's exchanges may be restricted or refused if a Fund receives, or
the Manager anticipates, simultaneous orders affecting significant portions
of that Fund's assets and, in particular, a pattern of exchanges coinciding
with a "market timing" strategy. The Trusts reserve the right to refuse
exchanges by any person or group if, in the Manager's judgment, a Fund
would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trusts attempt to provide prior notice to
affected shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service (ATS)
You may elect systematic exchanges out of the U.S. Fixed-Income and Money Market
Funds into any other Fund. The minimum exchange is $100 ($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 U.S. Fixed-Income and Money Market Funds are exempt from the
four-exchanges limit policy.
Directed Dividend Service
If you own shares of the U.S. Fixed-Income and Money Market Funds, you may elect
to use your monthly dividends to automatically purchase additional shares of
another Fund. Your account with the recipient Fund must meet the applicable
minimum of $1,000, or $5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Some of these agents may appoint
sub-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 before the relevant Fund's daily cutoff
time. Orders received after that time will be purchased at the next-determined
net asset value. To the extent that these agents perform shareholder servicing
activities for the Funds, they may receive fees from the Funds or the Manager
for such services.
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<PAGE>
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the applicable Fund's cutoff time on a day that
the Fund redeems shares. Orders received after that time are entitled to the net
asset value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of the Fund's
cutoff time on each day that the NYSE is open for trading (but not on bank
holidays for the U.S. Fixed-Income and Money Market Funds). Generally, this is
4:00 p.m. eastern time (12:00 noon for the Money Market Funds), or earlier when
trading closes earlier. The Fixed-Income Funds will determine their net asset
values earlier when the fixed-income markets close earlier. Per-share net asset
value is calculated by dividing the value of each Fund's total net assets by the
total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed- income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
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 Declared and paid in the last quarter of Declared and paid in the last quarter
(except Equity Income Fund) each year* of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
Equity Income Fund Declared and paid on or about the last Declared and paid in the last quarter
business day of each quarter of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last quarter
each year* of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
U.S. Fixed-Income and Declared daily and paid monthly on or about Declared and paid in the last quarter
Money Market Funds the last business day of each month of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
<FN>
*Additional distributions, if necessary, may be made following each Fund's fiscal year end (June 30) in order to avoid the
imposition of tax on a Fund.
</FN>
</TABLE>
Unless you request cash distributions in writing at least seven business days
before a distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund
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<PAGE>
and credited to your account at the closing net asset value on the reinvestment
date. Furthermore, if you have elected to receive cash distributions in cash and
the postal or other delivery service is unable to deliver checks to your address
of record, your distribution option will automatically be converted to having
all dividend and other distributions reinvested in additional shares. Also, as
is the case for redemption checks, no interest will accrue on amounts
represented by uncashed distribution checks. See "Uncashed Distribution or
Redemption Checks" above.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by distributing substantially all of its
net investment income and net capital gains to its shareholders and meeting
other requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that their earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code. If a Fund is unable to meet certain
Code requirements, it may be subject to taxation as a corporation. Funds
investing in foreign securities also may incur tax liability to the extent that
they invest in "passive foreign investment companies." See "Portfolio
Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gains over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gains over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The Federal Money, 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
47
<PAGE>
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.
General Information
The Trusts
All of the Funds with the exception of the U.S. Asset Allocation Fund are series
of The Montgomery Funds, a Massachusetts business trust organized on May 10,
1990. The U.S. Asset Allocation Fund is a series of The Montgomery Funds II, a
Delaware business trust organized on September 10, 1993. The Agreement and
Declarations of Trust of both Trusts permit their Boards to issue an unlimited
number of full and fractional shares of beneficial interest, $0.01 par value, in
any number of series. The assets and liabilities of each series within either of
the two Trusts are separate and distinct from each other series.
This prospectus relates only to the Class 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 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 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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<PAGE>
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification number (TIN) section of the New
Account application when you open an account. Federal tax law requires that a
Fund withhold 31% of taxable dividends, capital-gains distributions and
redemption and exchange proceeds from accounts (other than those of certain
exempt payees) without a certified Social Security or Taxpayer Identification
number and certain other certified information or upon notification from the 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 who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Funds' official sales literature.
49
<PAGE>
Glossary
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g., credit
card) agreements.
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools into
different classes or tranches. Stripped mortgage securities are CMOs that
allocate different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only, or IO
class) whereas another may receive all of the principal (principal only, or PO
class). The yield to maturity on any IO or PO class is extremely sensitive not
only to changes in interest rates but also to the rate of principal payments and
prepayments on underlying mortgages. In the most extreme cases, an IO class may
become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
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. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar
instruments. Depositary receipts are receipts typically issued in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
dollar roll transaction. This is similar to a reverse repurchase agreement
except that it requires a fund to repurchase a similar rather than the same
security.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity," however,
measures only the time until a debt security provides its final payment, taking
no account of prematurity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Determining duration may involve the
Manager's estimates of future economic parameters, which may vary from actual
future values. Fixed-income securities with effective durations of three years
are more responsive to
50
<PAGE>
interest rate fluctuations than those with effective durations of one year. For
example, if interest rates rise by 1%, the value of securities having an
effective duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or from
sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or would
be considered by the World Bank or the United Nations to be emerging or
developing.
equity derivative securities. These include, among other things, options on
equity securities, warrants and futures contracts on equity securities.
equity swaps. These allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swap transactions may be volatile and may present a fund with
counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The Funds generally do not enter into forward contracts with terms
greater than one year. A fund generally enters into forward contracts only under
two circumstances. First, if a fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second, if
the Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency approximating the value of some or all of a
fund's portfolio securities denominated in such currency. A fund will not enter
into a forward contract if, as a result, it would have more than one-third of
total assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate segregable assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect a fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell interest
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. Each
fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA. The Government National Mortgage Association.
illiquid securities. The Funds treat any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa), or unrated debt securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board of Trustees.
leverage. Some funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
municipal securities. These 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
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<PAGE>
securities are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenue derived from a particular facility, class of facilities or
the proceeds of a special excise or other specific revenue source but not from
the issuer's general taxing power. Private activity bonds and industrial revenue
bonds, in most cases, are revenue bonds that do not carry the pledge of the
credit of the issuing municipality but generally are guaranteed by the corporate
entity on whose behalf they are issued. 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. These 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). These are instruments with rates of interest
adjusted periodically or that "float" continuously according to specific
formulas and often have a demand feature entitling the purchaser to resell the
securities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a fund will enter into
when-issued and forward
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<PAGE>
commitments only with the intention of actually receiving or delivering the
securities. No income accrues on securities that have been purchased pursuant to
a forward commitment or on a when-issued basis prior to delivery to a fund. At
the time a fund enters into a transaction on a when-issued or forward commitment
basis, it supports its obligation with collateral assets equal to the value of
the when-issued or forward commitment securities and causes the collateral
assets to be marked to market daily. There is a risk that the securities may not
be delivered and that the fund may incur a loss.
zero coupon bonds. These are debt obligations that do not pay current interest
and are consequently issued at a significant discount from face value. The
discount approximates the total interest the bonds will accrue and compound over
the period to maturity or the first interest-payment date at a rate of interest
reflecting the market rate of interest at the time of issuance.
53
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1 (800) 572-3863
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
[LOGO]
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.SM
54
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS P SHARES
---------------------------------------------------------------------
<PAGE>
[LOGO]
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Prospectus
October 15, 1997
TABLE OF CONTENTS
Fees and Expenses of the Funds.............................3
Financial Highlights.......................................5
The Funds' Investment Objectives and Policies.............11
Portfolio Securities......................................15
Other Investment Practices................................19
Risk Considerations.......................................21
Management of the Funds...................................23
How to Contact the Funds..................................28
How to Invest in the Funds................................28
How to Redeem an Investment in the Funds..................31
Exchange Privileges and Restrictions......................33
Brokers and Other Intermediaries..........................34
How Net Asset Value is Determined.........................34
Dividends and Distributions...............................35
Taxation..................................................35
General Information.......................................36
Backup Withholding........................................37
Glossary..................................................39
Each Fund's shares offered in this prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
with no sales load, no commissions, and no redemption or exchange fees. The
Class P shares are subject to a Rule 12b-1 distribution fee as described in this
prospectus. The minimum initial investment in each Fund is $1,000 and subsequent
investments must be at least $100. The Manager or the Distributor may waive
these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies managed by Montgomery
Asset Management LLC (the "Manager"), a subsidiary of Commerzbank AG. Fund
Distributors, Inc., which is not affiliated with the Manager, is the distributor
of the Funds (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated October 15,
1997, as may be revised, has been filed with the Securities and Exchange
Commission, is incorporated by this reference and is available without charge by
calling (800) 572-FUND (3863). If you are viewing the electronic version of this
prospectus through an online computer service, you may request a printed version
free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds and The Montgomery Funds II.
An investment in the funds is neither insured nor guaranteed by the U.S.
government. There can be no assurance that Montgomery Government Reserve Fund
will be able to maintain a stable net asset value of $1 per share.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
1
<PAGE>
The following 10 mutual funds (the "Funds") are offered in this prospectus:
----------------------------------------------------------
-----------------------------------------------------------
Montgomery U.S. Equity Funds
-----------------------------------------------------------
Growth Fund
----------------------------------------------------------
Small Cap Opportunities Fund
----------------------------------------------------------
Equity Income Fund
-----------------------------------------------------------
Montgomery Foreign and Global Equity Funds
-----------------------------------------------------------
International Growth Fund
----------------------------------------------------------
International Small Cap Fund
----------------------------------------------------------
Emerging Markets Fund
-----------------------------------------------------------
Montgomery Multi-Strategy Funds
-----------------------------------------------------------
Select 50 Fund
----------------------------------------------------------
U.S. Asset Allocation Fund
----------------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
----------------------------------------------------------
Short Duration Government Bond Fund
----------------------------------------------------------
Government Reserve Fund
----------------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having total market capitalizations of more than $1
billion.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
Montgomery Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies
having total capitalizations of more than $1 billion.
Foreign and Global Equity Funds
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations 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 Emerging Markets Fund
Invests primarily in equity securities of companies in countries having
economies and markets generally considered by the World Bank or the United
Nations to be emerging or developing.
Multi-Strategy Funds
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
Montgomery U.S. Asset Allocation Fund
A fund-of-funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities and cash or cash
equivalents--using Funds from The Montgomery Funds family.
2
<PAGE>
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund
Invests primarily in U.S. government securities and maintains an average
portfolio effective duration comparable to or less than three-year U.S. Treasury
notes. It targets higher yields than money market funds generally, with less
fluctuation in the value of its shares than long-term bond funds. This Fund does
not maintain a stable net asset value of $1 per share.
Montgomery Government Reserve Fund
Invests only in U.S. government securities, repurchase agreements for U.S.
government securities and other money market funds investing exclusively in U.S.
government securities and such repurchase agreements. It seeks to maintain a
stable net asset value of $1 per share.
Fees and Expenses of the Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD IMPOSED MAXIMUM SALES LOAD IMPOSED MAXIMUM DEFERRED SALES REDEMPTION FEES+ EXCHANGE FEES
ON PURCHASES ON REINVESTED DIVIDENDS LOAD
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
-----------------------------------------------------------------------------------------------------------------------------
<FN>
+ Shareholders effecting redemptions via wire transfer may be required to
pay fees, including the wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee
that will be directly deducted from redemption proceeds. The Montgomery
Funds reserve the right upon 60 days' advance notice to shareholders to
impose a redemption fee of up to 1% on shares redeemed within 90 days of
purchase.
</FN>
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
OTHER EXPENSES EXPENSES
(AFTER REIMBURSEMENT (AFTER REIMBURSEMENT
MANAGEMENT FEE* 12B-1 FEES* UNLESS NOTED)* UNLESS NOTED)*
------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund 0.92% 0.25% 0.33% 1.50%
------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 1.19% 0.25% 0.31% 1.75%
------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 0.60% 0.25% 0.25% 1.10%
------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
------------------------------------------------------------------------------------------------------------------------------
International Growth Fund 1.10% 0.25% 0.55% 1.90%
------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.05% 0.25% 0.55% 1.85%
------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 1.25% 0.25% 0.55% 2.05%
------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 0.00% 0.25% 1.30%#** 1.55%#
------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0.50% 0.25% 0.10% 0.85%
------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0.35% 0.25% 0.25% 0.85%
------------------------------------------------------------------------------------------------------------------------------
<FN>
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.
3
<PAGE>
* Expenses for the Funds are based on actual expenses and expense
limitations for the fiscal year ended June 30, 1997 for the Class P
shares (or, if no Class P shares were outstanding, for another class of
shares, but adjusted to include the Rule 12b-1 fee.) The Manager will
reduce its fees and may absorb or reimburse a Fund for certain expenses
to the extent necessary to limit total annual fund operating expenses to
the amount indicated in the table. A Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the three
years following that reduction and only if such reimbursement can be
achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for
fees and expenses for the current year. Absent reduction and including
the Rule 12b-1 fee for the Class P shares, actual total fund operating
expenses for the period ended June 30, 1997 (annualized) would have been
as follows: Montgomery Equity Income Fund, 1.46% (0.86% other expenses);
Montgomery Small Cap Opportunities Fund, 1.75% (0.56% other expenses);
Montgomery International Growth Fund, 2.37% (1.27% other expenses);
Montgomery International Small Cap Fund, 2.60% (1.35% other expenses);
Montgomery U.S. Asset Allocation Fund, 1.49% (1.49% other expenses);
Montgomery Select 50 Fund, 1.92% (0.67% other expenses); Montgomery Short
Duration Government Bond Fund, 2.05% (1.55% other expenses); Montgomery
Government Reserve Fund, 0.62% (0.27% other expenses); The Manager may
terminate these voluntary reductions at any time. See "Management of the
Funds."
** Estimated expenses of Montgomery U.S. Asset Allocation Fund (excluding
Rule 12b-1 fees and expenses related to the Underlying Funds and after
reimbursement) is 0.25% for the Montgomery U.S. Asset Allocation Fund.
Estimated expenses related to the Underlying Funds for Montgomery U.S.
Asset Allocation Fund are 1.05%.
+ These figures show actual expenses; no reimbursements or waivers applied.
# Even if the total expenses of the Underlying Funds exceed 1.05% for the
Montgomery U.S. Asset Allocation Fund, the Manager has agreed to limit
the Montgomery U.S. Asset Allocation Fund's total fund operating expenses
to 1.30%. The total expenses for the Underlying Funds for the Montgomery
U.S. Asset Allocation Fund (currently estimated to be 1.05%) will depend
on the actual expenses of the Underlying Funds and how the Fund's assets
are allocated among those Underlying Funds.
</FN>
</TABLE>
<TABLE>
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund $15 $47 $82 $178
------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund $18 $55 $95 $205
------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund $11 $35 $61 $134
------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
------------------------------------------------------------------------------------------------------------------------------
International Growth Fund $19 $60 $102 $221
------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund $22 $67 $115 $247
------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund $19 $58 $100 $216
------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund $21 $64 $110 $237
------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund $16 $49 $84 $184
------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund $9 $27 $47 $105
------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund $9 $27 $47 $105
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
4
<PAGE>
Financial Highlights
Selected per-Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992, through
June 30, 1997, was audited by Deloitte & Touche LLP, whose report, dated August
8, 1997, appears in the 1997 Annual Report of the Funds. The financial
information for periods indicated with the note "R" relate to another class of
shares of the Funds not subject to the Class P Rule 12b-1 fee because Class P
shares were not offered during those periods.
<CAPTION>
Growth Fund
SELECTED PER-SHARE DATE FOR THE YEAR OR PERIOD FISCAL YEAR ENDED JUNE 30
ENDED:
1997## 1996 1995R 1994(A)R
<S> <C> <C> <C> <C>
Net asset value--beginning of year $21.94 $19.22 $15.27 $12.00
Net investment income/(loss) 0.09 0.03 0.12 0.04
Net realized and unrealized gain/(loss) on 3.96 2.69 3.91 3.31++
investments
Net increase/(decrease) in net assets resulting 4.05 2.72 4.03 3.35
from investment operations
Distributions:
Dividends from net investment income (0.10) -- (0.07) (0.01)
Distributions from net realized capital gains (2.77) -- (0.07) --
Distributions in excess of net realized -- -- -- (0.07)
capital gains
Total distributions (2.87) -- (0.14) (0.08)
Net asset value--end of year $23.12 $21.94 $19.16 $15.27
Total return** 20.41% 14.15% 26.53% 27.98%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $212 $82 $878,776 $149,103
Ratio of net investment income/(loss) to average 0.44% 0.53%+ 0.98% 1.09%+
net assets
Net investment income/(loss) before deferral of -- -- -- $0.03
fees by Manager
Portfolio turnover rate 61.10% 118.14% 128.36% 110.65%
Average commission rate paid+++ $0.0595 $0.0596 N/A N/A
Expense ratio before deferral of fees by Manager -- -- -- 1.79%+
Expense ratio including interest expense 1.52% 1.60%+ 1.50% 1.49%+
<FN>
(A) The Growth Fund's Class R shares and Class P shares commenced operations
on September 30, 1993, and January 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
## Per-share numbers have been calculated using the average shares method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity Income Fund
Opportunities Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
ENDED:
1997 1996(A)##R 1997## 1996 1995(B)R
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $14.37 $12.00 $16.09 $15.66 $12.00
Net investment income/(loss) (0.11) 0.02 0.44 0.08 0.31
Net realized and unrealized gain/(loss) on 3.27 3.78++ 3.35 0.35 1.38
investments
Net increase/(decrease) in net assets resulting 3.80 3.79 0.43 1.69
from Investment operations 3.16
Distributions:
Dividends from net investment income (0.00)# -- (0.42) -- (0.31)
Distributions in excess of net investment -- -- (1.56) -- --
income
Distributions from net realized capital gains -- -- -- -- --
Distributions in excess of net realized -- -- -- -- --
capital gains
Distributions from capital -- -- -- -- --
Total distributions (0.00)# -- (1.98) -- (0.31)
Net asset value--end of year $17.53 $15.80 $17.90 $16.09 $13.38
Total return** 22.09% 31.67% 25.64% 2.75% 14.26%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $9 $136,140 $868 $2 $6,383
Ratio of net investment income/(loss) to (1.11)%+ 0.23%+ 2.68% 2.78%+ 4.06%+
average net assets
Net investment income/(loss) before deferral of $(0.04) $0.34 $0.06 $0.13
fees by Manager $(0.14)
Portfolio turnover rate 154.50% 81.29% 62.31% 89.77% 29.46%
Average commission rate paid+++ $0.0562 $0.0578 $0.0598 $0.0423 N/A
Expense ratio before deferral of fees by Manager 2.00%+ 2.16%+ N/A N/A N/A
Expense ratio excluding interest expense N/A N/A 1.11% 1.10%+ 0.84%+
Expense ratio before deferral of fees by N/A 1.71% 1.70%+ 3.16%+
Manager, including interest expense N/A
Expense ratio including interest expense 1.75%+ 1.50%+ -- -- --
<FN>
(A) The Small Cap Opportunities Fund's Class R shares and Class P shares
commenced operations on December 29, 1995, and July 29, 1996,
respectively.
(B) The Equity Income Fund's Class R shares and Class P shares commenced
operations on September 30, 1994, and March 12, 1996, respectively.
(C) The International Growth Fund's Class P shares commenced operations on
March 12, 1996.
(D) The International Small Cap Fund's Class R shares and Class P shares
commenced operations on September 30, 1993, and June 9, 1997,
respectively.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
International Growth Fund International Small Cap Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997## 1996(C) 1997 1996R 1995R 1994(D)R
<S> <C> <C> <C> <C> <C>
$15.31 $13.66 $16.96 $11.75 $12.02 $12.00
0.05 0.00# 0.00# 0.03 0.12 0.00#
2.54 1.65 0.20 3.10 (0.39) 0.02
2.59 1.65 0.20 3.13 (0.27) 0.02
-- -- -- (0.02) (0.00)# --
(1.68) -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
(1.68) -- -- (0.02) (0.00)# --
$16.22 $15.31 $17.16 14.86 $11.75 $12.02
19.13% 12.08% 1.18% 26.68% (2.23)% 0.17%
$5 $1 $15 $41,640 $28,516 $34,555
0.32% 0.01%+ (0.59)%+ 0.20% 0.95% 0.04%+
$(0.05) $(0.01) $(0.08) $0.05 $(0.02)
$(0.06)
95.02% 238.91% 84.91% 177.36% 156.13% 123.50%
0.0217 N/A $0.0157 $0.0123 N/A N/A
N/A N/A N/A N/A N/A N/A
1.91% 1.90%+ 2.15%+ 1.90% 1.90% 1.90%+
3.16%+ 2.85%+ 2.76% 2.50% 2.32%+
2.62%
-- -- 2.15%+ 1.96% 1.91% 1.99%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED: FISCAL YEAR ENDED JUNE 30
1997 1996 1995##R 1994R 1993R 1992(A)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $14.19 $12.62 $13.68 $11.07 $9.96 $10.00
Net investment income/(loss) 0.06 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on 2.58 1.56 0.25++ 2.92 1.05 (0.07)
investments
Net increase/(decrease) in net assets resulting 2.64 1.57 0.28 2.89 1.12 (0.04)
from investment operations
Distributions:
Dividends from net investment income (0.06) -- -- -- (0.01) --
Distributions in excess of net investment -- -- -- -- -- --
income
Distributions from net realized capital gains -- -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized -- -- (0.37) -- -- --
capital gains
Total distributions (0.06) -- (0.79) (0.28) (0.01) --
Net asset value--end of year $16.77 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** 18.62% 12.44% 1.40% 26.10% 11.27% (0.40)%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $607 $2 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) to average 0.23% 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
net assets
Net investment income/(loss) before deferral of -- -- -- -- $0.06 $0.01
fees by Manager
Portfolio turnover rate 83.08% 109.92% 92.09% 63.79% 21.40% 0.19%
Average commission rate paid+++ $0.0011 $0.0007 N/A N/A N/A N/A
Expense ratio including interest expense -- -- -- -- -- --
Expense ratio before deferral of fees by -- -- -- -- 1.93% 2.80%+
Manager, including interest expense
Expense ratio excluding interest expense 1.92% 1.97%+ 1.80% 1.85% 1.90% 1.90%+
<FN>
(A) The Emerging Markets Fund's Class R shares and Class P shares commenced
operations on March 1, 1992, and March 12, 1996, respectively.
(B) The Select 50 Fund's Class R shares and Class P shares commenced
operations on October 2, 1995, and December 12, 1996, respectively.
(C) The U.S. Asset Allocation Fund's Class R shares and Class P shares
commenced operations on March 31, 1994, and January 3, 1996,
respectively.
(D) The Short Duration Government Bond Fund's Class R shares and Class P
shares commenced operations on December 18, 1992, and March 12, 1996,
respectively.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Select 50 Fund U.S. Asset Allocation Fund Short Duration Government Bond Fund
FISCAL YEAR ENDED FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
JUNE 30
1997## 1996(B)R 1997## 1996 1995R 1994(C)R 1997## 1996 1995R 1994R 1993(D)R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.89 $12.00 $19.33 $17.86 $12.24 $12.00 $9.92 $9.98 $9.80 $10.23 $10.00
(0.02) 0.06 0.43 0.09 0.25 0.06 0.59 0.16 0.62 0.61 0.33
4.11 4.45 2.13 1.38 4.11 0.18 0.06 (0.05) 0.16 (0.34) 0.23
4.51 2.56 1.47 4.36 0.24 0.65 0.11 0.78 0.27 0.56
4.09
-- (0.04) (0.34) -- (0.17) -- (0.58) (0.17) (0.62) (0.56) (0.33)
-- -- -- -- -- -- (0.00)# -- -- (0.07) --
-- -- (1.66) -- (0.10) -- -- -- -- -- --
-- (0.01) -- -- -- -- -- -- -- (0.07) --
-- -- -- -- -- -- -- -- (0.01) -- (0.00)#
-- (0.05) (2.00) -- (0.27) -- (0.58) (0.17) (0.63) (0.70) (0.33)
$19.98 $16.46 $19.89 $19.33 $16.33 $12.24 $9.99 $9.92 $9.95 $9.80 $10.23
25.74% 37.75% 14.35% 8.23% 35.99% 2.00% 6.69% 1.12% 8.28% 2.49% 5.66%
$9 $77,955 $74 $43 $60,234 $1,548 $0 $1 $17,093 $21,937 $22,254
(0.21)%+ 0.42%+ 2.30% 1.60%+ 3.43% 2.54%+ 5.62% 5.63%+ 6.41% 5.93% 6.02%+
$0.02 $0.42 $0.08 $0.19 $(0.11) $0.54 $0.14 $0.54 $0.51 $0.27
$(0.03)
157.93% 105.98% 168.51% 225.91% 95.75% 190.94% 450.98% 349.62% 284.23% 603.07% 213.22%
$0.0011 $0.0097 $0.0448 $0.0595 N/A N/A N/A N/A N/A N/A N/A
-- -- 1.68% 1.67%+ 1.31% 1.43%+ 1.80% 1.80%+ 1.38% 0.71% --
2.11%+ 1.74% 1.80%+ 2.07% 9.00%+ 2.30% 2.56%+ 2.23% 1.75% 2.07%+
2.17%+
2.07%+ 1.80%+ 1.56% 1.55%+ 1.30% 1.30%+ 0.85% 0.85%+ 0.47% 0.25% 0.22%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average shares method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with the
results of operations.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Government Reserve Fund
SELECTED PER-SHARE DATE FOR THE YEAR OR PERIOD FISCAL YEAR ENDED JUNE 30
ENDED:
1997 1996 1995R 1994R 1993(E)R
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income/(loss) 0.048 0.014 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on 0.000### 0.000### 0.000### 0.000### 0.000###
investments
Net increase/(decrease) in net assets resulting 0.048 0.014 0.049 0.029 0.024
from investment operations
Distributions:
Dividends from net investment income (0.048) (0.014) (0.049) (0.029) (0.024)
Total distributions (0.048) (0.014) (0.049) (0.029) (0.024)
Net asset value--end of year $1.00 $1.00 $1.00 $1.00 $1.00
Total return** 4.88% 1.38% 4.97% 2.96% 2.41%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $0 $1 $258,956 $211,129 $124,795
Ratio of net investment income/(loss) to average 4.68% 4.91%+ 4.92% 2.99% 2.96%+
net sales
Net investment income/(loss) before deferral of $0.048 $0.013 $0.047 $0.028 $0.013
fees by Manager
Portfolio turnover rate -- -- -- -- --
Average commission rate paid+++ N/A N/A N/A N/A N/A
Expense ratio including interest expense -- -- 0.63% -- --
Expense ratio before deferral of fees by 0.87% 0.99%+ 0.79% 0.71% 0.77%+
Manager, including interest expense
Expense ratio excluding interest expense 0.85% 0.85%+ 0.60% 0.60% 0.38%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
## Per-share numbers have been calculated using the average shares method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with the
results of operations.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
The Funds' Investment Objectives and Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investments in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used in the
prospectus are defined in the glossary at the end of this prospectus.
Summary Comparison Of Funds
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM DEBT FOCUS TYPICAL MARKET
EQUITY EXPOSURE EXPOSURE CAPITALIZATION OF
PORTFOLIO COMPANIES
-----------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund 65-100% 35% Growth More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 65-100% 35% Small-cap Less than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 65-100% 35% Large-cap dividend More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
International Growth Fund 65-100% 35% Foreign growth More than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 65-100% 35% Foreign small-cap Less than $1 billion
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 65-100% 35% Foreign emerging growth Any size
-----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
-----------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 65-100% 35% Capital appreciation Any size
-----------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 20- 80% 20- 80% U.S. balanced Any size
-----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond 0% 100% Total return N/A
Fund
-----------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0% 100% Income N/A
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Equity Funds
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions, it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock, but also
invests in other types of equity securities and equity-derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in investment-grade debt
securities or in foreign securities. See "Portfolio Securities." The Manager
does not expect the Growth Fund to be consistently fully invested in equity
securities. During periods that the Manager deems appropriate, the Fund may take
a more defensive position and be significantly invested in cash and cash
equivalents.
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental values and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis, focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund
11
<PAGE>
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Opportunities Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in companies having total market capitalizations of $1 billion or more
and in investment-grade debt securities and foreign companies. The Fund invests
primarily in common stock. It also may invest in other types of equity
securities and equity-derivative securities. See "Portfolio Securities." Current
income from dividends, interest and other sources is only incidental.
The Small Cap Opportunities Fund seeks growth at a reasonable value, identifying
companies with sound fundamental 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 Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having total
market capitalizations of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative-yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower-growth areas of the economy and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage, and market leadership. The Fund usually holds companies for a period
of two to four years, resulting in relatively low turnover. The Fund will
usually begin to reduce its position in a company as the price moves up and
yield drops to the lower end of its historical range. In addition, the Fund will
usually reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in investment grade debt
instruments. The Fund attempts to achieve low price volatility through its
investment in mature companies. In addition, the Fund may invest up to 20% of
its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Foreign and Global Equity Funds
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner, but may
invest those assets in equity securities of U.S. companies, in
lower-capitalization companies or in debt securities, including up to 5% of its
total assets in debt securities rated below investment grade. See "Portfolio
Securities" and "Risk Considerations."
The Fund targets companies with potential for above-average, long-term growth in
sales and earnings on a sustained basis with securities reasonably priced at the
time of purchase, in the Manager's opinion, compared the potential for capital
appreciation. In evaluating investments, the Fund considers a number of factors,
including a company's per-share sales and earnings growth; return on capital;
balance sheet; financial and accounting policies; overall financial strength;
industry sector; competitive advantages and disadvantages; research; product
development and marketing; new technologies or services; pricing flexibility;
quality of management; and general operating characteristics.
12
<PAGE>
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the 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 equity securities of U.S. companies, in companies having
market capitalizations of $1 billion or more, or in debt securities, including
up to 5% of its total assets in debt securities rated below investment grade.
Portfolio Securities" and "Risk Considerations."
The Fund targets companies with potential for above-average, long-term growth in
sales and earnings on a sustained basis with securities reasonably priced at the
time of purchase, in the Manager's opinion, compared with the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the 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 Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of emerging markets companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging markets country. The Manager currently regards the
following to be emerging markets countries: Latin America (Argentina, Brazil,
Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay
and Venezuela); Asia (Bangladesh, China/Hong Kong, India, Indonesia, Korea,
Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and
Vietnam); southern and eastern Europe (Czech Republic, Greece, Hungary,
Kazakstan, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Turkey and
Ukraine); the Middle East (Israel and Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe). In the
future, the Fund may invest in other emerging markets countries.
The Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percentage of assets to invest in each country
to maximize expected returns for a given risk level. The Fund's aims are to
invest in those countries that are expected to have the highest risk/reward
trade-off when incorporated into a total portfolio context. This "top-down"
country selection is combined with "bottom-up" fundamental industry analysis and
stock selection based on original research and publicly available information
and company visits.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging 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. See "Portfolio
Securities."
13
<PAGE>
Multi-Strategy Funds
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
The Fund invests primarily in 10 equity securities selected by each of the
Manager's five different equity disciplines. These five disciplines, which may
be adjusted from time to time, include U.S. Growth Equity, U.S.
Smaller-Capitalization Companies, U.S. Equity Income and International and
Emerging Markets. See "Management of the Funds." The Manager's Equity teams
select those securities based on the potential for capital appreciation.
The Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation, but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries, which may include the 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."
Montgomery U.S. Asset Allocation Fund (the "U.S. Asset Allocation Fund,"
formerly called the "Montgomery Asset Allocation Fund")
<TABLE>
The investment objective of the U.S. Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The Fund is a "fund-of-funds," which means that the Fund will not
invest directly in securities but will instead invest in a diversified group of
Funds from The Montgomery Funds family (each, an "Underlying Fund") that the
Manager considers to be appropriate investments for achieving the U.S. Asset
Allocation Fund's investment objective. The U.S. Asset Allocation Fund adjusts
the proportion of its investments in each of these categories as needed to
respond to current market conditions, primarily by changing its allocation
percentage among the different Underlying Funds. The following table illustrates
the anticipated allocation methodology:
<CAPTION>
---------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund Allocation
---------------------------------------------------------------------------------------------------------------
INVESTMENT FOCUS ANTICIPATED RANGE OF ASSET UNDERLYING FUND
ALLOCATION
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic stocks 20 to 80% Growth Fund; After November 30, 1997,
this may include other domestic equity funds
advised by the Manager.
---------------------------------------------------------------------------------------------------------------
Debt instruments 20 to 80% Total Return Bond Fund or other general
investment-grade bond funds advised by the
Manager
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0 to 50% Government Reserve Fund
---------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager will implement its allocation strategy with the use of a
quantitative risk model and computer optimization program. The Manager may
temporarily increase the Fund's cash allocation from its set strategy in order
to meet anticipated redemptions.
Characteristics of the Underlying Funds
<TABLE>
The Characteristics of the Growth Fund and the Government Reserve Fund are
discussed elsewhere in this prospectus. The following summarizes the
characteristics of the Total Return Bond Fund and its investment objective and
policies.
<CAPTION>
--------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM DEBT FOCUS TYPICAL MARKET
EQUITY EXPOSURE EXPOSURE CAPITALIZATION OF PORTFOLIO
COMPANIES
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund 0% 100% Income N/A
--------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
The investment objective of the Total Return Bond Fund is to seek maximum total
return (which consists of both income and capital appreciation), consistent with
preservation of capital and prudent investment management. Under normal
conditions, the Fund seeks to achieve its objective by investing at least 65%
(and typically more than 90%) of its total assets in a broad range of
investment-grade bonds, including marketable corporate bonds, U.S. government
securities, mortgage-related securities, other asset-backed securities, and cash
or money market instruments. The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. See "Portfolio
Securities."
Duration of the Total Return Bond Fund. The Total Return Bond Fund may purchase
individual securities of any maturity. The Fund, however, seeks to maintain an
average portfolio duration of between four- to five-and-a-half years.
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration 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. Because the Manager seeks to
manage interest rate risk by limiting effective duration, the Fund may invest in
securities of any maturity.
The Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which the
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value of $1 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Duration Government Bond Fund may
purchase individual securities of any maturity, and the dollar-weighted average
maturity (or period until the next interest rate reset date) of its portfolio
securities may exceed three years. The Fund, however, seeks to maintain an
average portfolio duration comparable to or less than that of three-year U.S.
Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Government 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.
The Fund seeks to maintain a stable net asset value of $1 per share in
compliance with Rule 2a-7 under the Investment Company Act and, pursuant to
procedures adopted under such Rule, limits its investments to those U.S.
government securities that the Board of Trustees (the "Board") determines
present minimal credit risks and have remaining maturities, as determined under
the Rule, of 397 calendar days or less. The Fund also maintains a
dollar-weighted average maturity of the securities in its portfolio of 90 days
or less.
Portfolio Securities
The following describes portfolio securities in which the Funds may invest.
Investors in the U.S. Asset Allocation Fund should note that the portfolio
securities of the U.S. Asset Allocation Fund consist of the portfolio securities
of each of its Underlying Funds.
15
<PAGE>
Equity Securities
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund emphasize investments in common stock. These Funds may also invest in other
types of equity securities (such as preferred stocks or convertible securities)
and equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund may invest in ADRs, EDRs, GDRs and convertible securities which the Manager
regards as a form of equity security. These Funds may also invest up to 5% of
its net assets in warrants.
Privatizations
The Foreign and Global Equity Funds and the Select 50 Fund believe that foreign
governmental programs of selling interests in government-owned or -controlled
enterprises ("privatizations") may represent opportunities for significant
capital appreciation, and these Funds may invest in privatizations. The ability
of U.S. entities, such as these Funds, to participate in privatizations may be
limited by local law, or the terms for participation may be less advantageous
than for local investors. There can be no assurance that privatization programs
will be successful.
Special Situations
The Foreign and Global Equity Funds and the Select 50 Fund believe that
carefully selected investments in joint ventures, cooperatives, partnerships,
private placements, unlisted securities and similar vehicles (collectively,
"special situations") could enhance their capital appreciation potential. These
Funds also may invest in certain types of vehicles or derivative securities that
represent indirect investments in foreign markets or securities in which it is
impracticable for the Funds to invest directly. Investments in special
situations may be illiquid, as determined by the Manager based on criteria
reviewed by the Board. These Funds do not invest more than 15% of their net
assets in illiquid investments, including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Foreign and Global Equity Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The Foreign and Global Equity
Funds also may incur tax liability to the extent that they invest in the stock
of a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds. See the Statement of Additional Information.
The funds do not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
Debt Securities
All Funds may purchase debt securities that complement their objective of
capital appreciation through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers. Debt securities may constitute up to 35% of the 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."
16
<PAGE>
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit quality standards of each Fund and will be limited to 5%
of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the Equity Income Fund and the Foreign and Global Equity
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. Government Securities
All Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and mortgage-related securities of the GNMA, are issued
or guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. 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 U.S. Fixed-Income and Money Market Funds may invest in mortgage-related
securities. A mortgage-related security is an interest in a pool of mortgage
loans and is considered a derivative security. Most mortgage-related securities
are pass-through securities, which means that investors receive payments
consisting of a pro rata share of both principal and interest (less servicing
and other fees), as well as unscheduled prepayments, as mortgages in the
underlying mortgage pool are paid off by the borrowers. Certain mortgage-related
securities are subject to high volatility. These Funds use these derivative
securities in an effort to enhance return and as a means to make certain
investments not otherwise available to the Funds. See "Hedging and Risk
Management Practices" under "Other Investment Practices" for a discussion of
other reasons why these Funds invest in derivative securities.
Agency Mortgage-Related Securities
Investors in the Government Reserve Fund and Short Bond Fund should note that
the dominant issuers or guarantors of mortgage-related securities today are
GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from pools of
government-guaranteed or -insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The U.S. Fixed-Income and Money Market Funds consider GNMA, FNMA and
FHLMC-issued pass-through certificates, CMOs and other mortgage-related
securities to be U.S. government securities for purposes of their investment
policies. However, the Reserve Fund does not invest in stripped mortgage
securities and the Short Bond Fund limits its stripped mortgage securities
investments to 10% of total assets. The liquidity of IOs and POs issued by the
U.S. government or its
17
<PAGE>
agencies and instrumentalities and backed by fixed-rate mortgage-related
securities will be determined by the Manager under the direct supervision of the
Trust's Pricing Committee and reviewed by the Board, and all other IOs and POs
will be deemed illiquid for purposes of the U.S. Fixed-Income and Money Market
Funds' limitation on illiquid securities. The Short Bond Fund may invest in
derivative securities known as "floaters" and "inverse floaters," the values of
which vary in response to interest rates. These securities may be illiquid and
their values may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives
The Short Bond Fund may invest in mortgage-related securities offered by private
issuers, including pass-through securities for pools of conventional residential
mortgage loans; mortgage pay-through obligations and mortgage-backed bonds,
which are considered to be obligations of the institution issuing the bonds and
are collateralized by mortgage loans; and bonds and CMOs collateralized by
mortgage-related securities issued by GNMA, FNMA, FHLMC or by pools of
conventional mortgages, multifamily 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. Many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal, however. The Short Bond Fund may purchase some mortgage-related
securities through private placements that are restricted as to further sale.
See illiquid securities in the Glossary. The value of these securities may be
very volatile.
Structured Notes and Indexed Securities
The Funds may invest in structured notes and indexed securities. Structured
notes are debt securities, the interest rate or principal of which is determined
by an unrelated indicator. Indexed securities include structured notes as well
as securities other than debt securities, the interest rate or principal of
which is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent a
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Variable-Rate Demand Notes
The U.S. Fixed-Income and Money Market Funds may invest in variable-rate demand
notes ("VRDNs").
Zero Coupon Bonds
The U.S. Fixed-Income and Money Market Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the Short Bond Fund) of its
total assets in asset-backed securities. Like mortgage-related securities, these
securities are subject to the risk of prepayment. See "Risk Considerations."
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<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 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.
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds Foreign and Global Multi-Strategy U.S. Fixed
Equity Funds Funds Income and
Money Market
Funds
- ---------------------------------------------------------------------------------------------------------------------------------
Short
Small Interna- U.S. Duration
Cap Inter- tional Emerg- Asset Govern- Govern-
Growth Oppor- Equity national Small ing Select Alloca- ment ment
tunities Income Growth Cap Markets 50 tion Bond Reserve
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) x x x x x x x * x x
- ---------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions * x
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total x x x x x x x * x x
fund assets
- ---------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements x x x x x x x * x x
- ---------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * x
- ---------------------------------------------------------------------------------------------------------------------------------
Leverage x x x x x x x * x(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total x x x x x x x * x x
fund assets
- ---------------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities x x x x x x x * x(3) x
- ---------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(4) x x x x x x x *
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies(5) x x x x x x x * x
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices(5) x x x x x x x *
- ---------------------------------------------------------------------------------------------------------------------------------
Write covered call options(5) x x x x x x x * x
- ---------------------------------------------------------------------------------------------------------------------------------
Write covered put options(5) x x x x x x x * x
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(6) x x x x x x x * x
- ---------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures(6) x x x x x x x * x
- ---------------------------------------------------------------------------------------------------------------------------------
Equity swaps(7) x x x x x x x *
- ---------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of fund's * x
net assets)
- ---------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of fund's x x x x x x x * x
net assets)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Under the Investment Company Act, repurchase agreements and reverse
dollar roll transactions are considered to be loans by a fund and must be
fully collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the
security, may incur a loss if the value of the security declines and may
incur disposition costs in liquidating the security.
19
<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 that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
5 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.
6 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.
7 A Fund that may invest in equity swaps may invest up to 10% of its total
assets in such investment.
* To the extent allowed in each Underlying Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further a Fund's investment objective or when it appears that a position of the
desired size cannot be accumulated. Portfolio turnover generally involves some
expense to a Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. Even when portfolio turnover exceeds 100% for a Fund, that
Fund does not regard portfolio turnover as a limiting factor. Portfolio turnover
in excess of 100% is considered high, increases brokerage costs incurred by a
Fund and may cause recognition of gain by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Government Reserve Fund) may employ certain risk management practices using
certain derivative securities and techniques (known as "derivatives"). Markets
in some countries currently do not have instruments available for hedging
transactions. To the extent that such instruments do not exist, the Manager may
not be able to hedge its investment effectively in such countries. Furthermore,
a Fund engages in hedging activities only when the Manager deems it to be
appropriate, and does not necessarily engage in hedging transactions with
respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
20
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and goals. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund should note the risks involved with
each Underlying Fund, because the U.S. Asset Allocation Fund is a
"fund-of-funds."
Small Companies
The Small Cap Opportunities Fund and the International Small Cap Fund emphasize,
and the Growth Fund, the International Growth Fund, the Emerging Markets Fund
and the Select 50 Fund may make investments in, smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the Foreign and Global Equity Funds and the Select 50
Fund have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Foreign and Global Equity Funds, particularly the Emerging
Markets Fund, and the Select 50 Fund may invest in securities of companies
domiciled in, and in markets of, so-called "emerging markets countries." These
investments may be subject to higher risks than investments in more-developed
countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the 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.
21
<PAGE>
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions among currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Foreign and Global Equity Funds and the Select 50 Fund are
permitted to invest in medium-quality debt securities, but do not invest more
than 5% of their total assets in high-risk debt securities below
investment-grade quality (sometimes called "junk bonds.")
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less-diversified
mutual funds may be more sensitive to changes in the market value of a single
issuer or industry. The Select 50 Fund may present greater risk than is usually
associated with widely diversified mutual funds, because it may invest in the
securities of as few as 50 issuers. Therefore, the Select 50 Fund is not
appropriate as your sole investment.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer
22
<PAGE>
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 U.S. Fixed-Income and Money Market Fund, to the
extent that it retains the same percentage of debt securities, may have to
reinvest the proceeds of prepayments at lower interest rates than those of its
previous investments. If this occurs, that Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the U.S. Fixed-Income and Money Market Funds purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See duration in the Glossary.
Equity Swaps
The U.S. Equity Funds may invest in equity swaps. Equity swaps are derivatives
and their values can be very volatile. To the extent that the Manager does not
accurately analyze and predict the potential relative fluctuation of the
components swapped with another party, a Fund may suffer a loss. The value of
some components of an equity swap (like the dividends on a common stock) may
also be sensitive to changes in interest rates. Furthermore, during the period a
swap is outstanding, the Fund may suffer a loss if the counterparty defaults.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees (a "Board") that establishes its Funds' policies and supervises and
reviews their management. Day-to-day operations of the Funds are administered by
the officers of the Trusts and by the Manager pursuant to the terms of an
investment management agreement with each Fund.
Montgomery Asset Management LLC is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. The Manager was
formed in February 1997 as an investment adviser registered as such with the SEC
under the Investment Advisers Act of 1940, as amended. It advises private
accounts as well as the Funds. Commerzbank, one of the largest publicly held
commercial banks in Germany, has total assets of approximately $268 billion.
Commerzbank and its affiliates had more than $479 billion in assets under
management as of June 30, 1997. Commerzbank's asset management operations
involve more than 1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager of the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997, for an initial two-year period.
Portfolio Managers
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Roger W. Honour is a senior portfolio manager and principal. Prior to joining
Montgomery Asset Management in June 1993, Mr. Honour spent one year as vice
president and portfolio manager at Twentieth Century Investors in Kansas City,
Missouri. From 1990 to 1992, he served as vice president and portfolio manager
at Alliance Capital Management. From 1978 to 1990, Mr.
Honour was a vice president with Merrill Lynch Capital Markets.
Kathryn M. Peters is a portfolio manager and principal. From 1993 to 1995, Ms.
Peters was an associate in the investment banking division of Donaldson, Lufkin
& Jenrette in New York, where she evaluated prospective equity investments for
the merchant banking fund and processed investment banking transactions,
including equity and high-yield offerings. Prior to that,
23
<PAGE>
she analyzed mezzanine investments for Barclays de Zoete Wedd in New York. From
1988 to 1990, Ms. Peters worked in the leveraged buyout group of Marine Midland
Bank.
Andrew G. Pratt, CFA, is a portfolio manager and principal. He joined Montgomery
Asset Management from Hewlett-Packard Company, where he was an equity analyst,
managed a portfolio of small-capitalization technology companies, and researched
private placement and venture capital investments. From 1983 through 1988, he
worked in the Capital Markets Group at Fidelity Investments in Boston.
Montgomery Equity Income Fund
John H. Brown, CFA, is a senior portfolio manager and principal. Preceding his
arrival at the Manager in May 1994, Mr. Brown was an analyst and portfolio
manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a senior portfolio manager and principal. 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 senior portfolio manager and principal.
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 and principal. From 1990 until joining the
Manager in July 1994, Ms. Ee was an Investment Manager with AIG Investment Corp.
in Hong Kong. From June 1989 until September 1990, Ms. Ee was a co-manager of a
portfolio of Asian equities and bonds at Chase Manhattan Bank in Singapore.
Frank Chiang is a portfolio manager and principal. 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.
Jesus Isidoro Duarte is a portfolio manager and principal for the Manager,
responsible for the Latin American markets. Mr. Duarte began his investment
career in 1980. He joined the Manager from Latinvest Management Co. in Brazil,
where he was director and vice president responsible for research and portfolio
management for the firm's Latin American funds. Prior to Latinvest, Mr. Duarte
worked at W.I. Carr in Tokyo as a securities analyst of Japanese equities. He is
fluent in Spanish and Japanese, and conversant in French and Portuguese. Mr.
Duarte has a bachelor of arts degree in international relations and a minor in
business administration from the University of Redlands in California and has
successfully completed the Japanese Language Institute's two-year program at the
Sophia University in Tokyo.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
John D. Boich, CFA, is a senior portfolio manager and principal. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial advisor with Prudential-Bache
Securities and E.F. Hutton & Company.
Oscar A. Castro, CFA, is a senior portfolio manager and principal. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller-Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers" section
and below.
24
<PAGE>
Kevin T. Hamilton, CFA, Chairman of the Manager's Investment Oversight Committee
and executive vice president, is responsible for coordinating and implementing
the investment decisions of the Manager's equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
U.S. Asset Allocation Fund. From 1985 until joining the Manager in February
1991, Mr. Hamilton was a senior vice president responsible for investment
oversight at Analytic Investment Management in Irvine, California. The portfolio
management teams responsible for the different disciplines used in the Select 50
Fund are described throughout this "Portfolio Managers" section.
Nancy Kukacka is a portfolio manager and principal. Prior to joining the
Manager, Ms. Kukacka worked at CS First Boston Investment from April 1994
through April 1995 where she was an equity research analyst covering consumer
cyclical and non-durable sectors. Previously, Ms. Kukacka was an equity research
analyst at RCM Capital Management from April 1990 through March 1994, providing
fundamental-based analysis for more than US$12 billion in equity investments.
Ms. Kukacka holds a bachelor of arts degree in economics with minors in
chemistry and biology from Bucknell University. She is a Level III CFA
candidate.
Montgomery U.S. Asset Allocation Fund
The U.S. Asset Allocation Fund invests its assets in three separate Funds,
representing three different investment disciplines.
Kevin T. Hamilton, CFA, is responsible for selecting the Funds to be included in
each fund-of-funds structure and also for coordinating and implementing the
investment decisions of the U.S. Asset Allocation Fund. For the background and
business experience of Kevin T. Hamilton, see the discussion under the
Montgomery Select 50 Fund, above.
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
William C. Stevens is a senior portfolio manager and principal. At Barclays de
Zoete Wedd Securities from 1991 to 1992, he started its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Corporation from 1990
to 1991; and while with Drexel Burnham Lambert from 1984 to 1990, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager and principal. Mr. Wilson joined the
Manager's Fixed-Income team in April 1994. From 1992 to 1994, he was an
associate in the Fixed Income Client Services Department of BARRA in Berkeley,
California. At BARRA, Mr. Wilson directed research and development teams on
mortgage, CMO and other fixed-income projects. Prior to that he was an associate
in the structured finance department at Security Pacific Merchant Bank as well
as on the mortgage trading desk at Chemical Bank.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
The management fees for the Funds are higher than for most mutual funds.
-------------------------------------------------------------------------------
AVERAGE DAILY MANAGEMENT FEE
NET ASSETS (ANNUAL RATE)
-------------------------------------------------------------------------------
U.S. Equity Funds
-------------------------------------------------------------------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
More than $1 billion 0.80%
-------------------------------------------------------------------------------
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-------------------------------------------------------------------------------
AVERAGE DAILY MANAGEMENT FEE
NET ASSETS (ANNUAL RATE)
-------------------------------------------------------------------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
More than $500 million 1.00%
-------------------------------------------------------------------------------
Equity Income Fund First $500 million 0.60%
More than $500 million 0.50%
-------------------------------------------------------------------------------
Foreign and Global Equity Funds
-------------------------------------------------------------------------------
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
-------------------------------------------------------------------------------
International Small Cap Fund First $250 million 1.25%
More than $250 million 1.00%
-------------------------------------------------------------------------------
Emerging Markets Fund First $250 million 1.25%
More than $250 million 1.00%
-------------------------------------------------------------------------------
Multi-Strategy Funds
-------------------------------------------------------------------------------
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
More than $500 million 0.90%
-------------------------------------------------------------------------------
U.S. Asset Allocation Fund All amounts 0.00%*
-------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-------------------------------------------------------------------------------
Short Duration Government Bond Fund First $500 million 0.50%
More than $500 million 0.40%
------------------------------------------------------------------------------
Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
More than $500 million 0.20%
-------------------------------------------------------------------------------
* This amount represents only the management fee of the U.S. Asset Allocation
Fund and does not include management fees attributable to the Underlying
Funds, which ultimately are to be borne by shareholders of the U.S. Asset
Allocation Fund.
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: Each of the Growth and Equity Income
Funds pays seven one-hundredths of one percent (0.07%) of average daily net
assets (0.06% of average daily net assets over $500 million); each of the Small
Cap Opportunities, International Growth, International Small Cap, Emerging
Markets and Select 50 Funds pays seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million); each of
the Short Bond and Reserve Funds pays five one-hundredths of one percent (0.05%)
of average daily net assets (0.04% of average daily net assets over $500 million
for the Short Bond Fund and over $250 million for the Reserve Fund). In the case
of the U.S. Asset Allocation Fund, the Administrator does not charge a fee for
performing administrative services for those Funds, although it charges a fee
for such services performed for the Underlying Funds, which ultimately are borne
by shareholders of the U.S. Asset Allocation Fund.
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and record keeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution
26
<PAGE>
coordinator, for the Class P shares. Under the Plan, each Fund will pay
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, to
reimburse the Distributor for its distribution costs with respect to that Class.
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to, the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily and paid
monthly, and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares. The Class P shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
was terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Distributor.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Distributor to compensate those persons on an ongoing basis in
connection with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses (excluding the Rule 12b-1 fee)
at or below the following percentages of each Fund's average net assets: the
Growth Fund, one and five-tenths of one percent (1.50%); the Small Cap
Opportunities Fund, one and five-tenths of one percent (1.50%); the Equity
Income Fund, eighty-five one-hundredths of one percent (0.85%); the
International Growth Fund, one and sixty-five one-hundredths of one percent
(1.65%); the International Small Cap and Emerging Markets Funds, one and
nine-tenths of one percent (1.90%); the Select 50 Fund, one and eight-tenths of
one percent (1.80%); the U.S. Asset Allocation Fund, one and three-tenths of one
percent (1.30%) through limits in the Underlying Funds; the Short Bond Fund,
seven-tenths of one percent (0.70%); and the Reserve Fund, six-tenths of one
percent (0.60%). The Manager also may voluntarily reduce additional amounts to
increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following three years,
provided that the Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Funds
for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries
27
<PAGE>
that distribute a Fund's shares as well as other service providers of
shareholder and administrative services. The Manager may also sponsor seminars
and educational programs on the Funds for financial intermediaries and
shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions, quality of services, and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
that the Funds receive prompt execution at competitive prices, the Manager also
may consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How to Contact the Funds
For information on the Funds or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
- --------------------------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- --------------------------------------------------------------------------------
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- --------------------------------------------------------------------------------
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Funds Distributor, Inc., the Funds' Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds by the close of trading (generally, 4:00 p.m. eastern time) on any day
that the New York Stock Exchange ("NYSE") is open, Fund shares will be purchased
at the Fund's next-determined net asset value. Orders and payment for the
Reserve Fund must be received by 12:00 noon, eastern time. Orders for Fund
shares received after the Funds' cutoff times will be purchased at the
next-determined net asset value after receipt of the order. Shares of the U.S.
Fixed-Income and Money Market Funds will not be priced on national bank
holidays.
The minimum initial investment in each Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. If you buy shares through a broker or investment
adviser instead of directly from the Distributor, different minimum investment
requirements may apply. The Funds do not accept third-party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in
28
<PAGE>
the U.S. Purchases may also be made in certain circumstances by payment of
securities. See the Statement of Additional Information for further details.
Initial Investments
Minimum initial investment (including IRAs) ..............................$1,000
Initial Investments by Check
o Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
o Dividends do not begin to accrue on the U.S. Fixed-Income and Money Market
Funds until your check has cleared.
Initial Investments by Wire
o Call the Transfer Agent to tell it you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar amount
to be invested and Fund(s) in which you want to invest. It will provide you
with further instructions to complete your purchase. Complete information
regarding your account must be included in all wire instructions to ensure
accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the new Fund.
o Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset value
of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business days
of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from the
shareholder's existing account(s) that result from a telephone purchase not
funded within three business days.
Subsequent Investments
Minimum subsequent investment (including IRAs) .............................$100
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<PAGE>
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check with
written instructions indicating the Fund name and account number to which
your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer Agent
s affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To make
a purchase, call the Transfer Agent at (800) 572-FUND (3863) before the Fund
cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and a
voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent s affiliated bank
by using the bank wire information under the section titled "Initial
Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount is
each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
Acount application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your checking
or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Funds account.
o Please call the Transfer Agent for instructions on establishing this
service.
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<PAGE>
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.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the U.S. Fixed-Income and Money
Market Funds). The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption and such request
is received by the Transfer Agent or other agents of the Funds. Payment of
redemption proceeds is made promptly regardless of when redemption occurs and
normally within three days after receipt of all documents in proper form,
including a written redemption order with appropriate signature guarantee.
Redemption proceeds will be mailed or wired in accordance with the shareholder's
instructions. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission (SEC). In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until 15 days from the purchase date. Shares tendered for redemptions through
brokers or dealers (other than the Distributor) may be subject to a service
charge by such brokers or dealers. Procedures for requesting a redemption are
set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go to
a party other than the account owner(s), your predesignated bank account or
if the dollar amount of the redemption exceeds $50,000. Signature guarantees
may be
31
<PAGE>
provided by an eligible guarantor institution such as a commercial bank, an
NASD member firm such as a stock broker, a savings association or a national
securities exchange. Contact the Transfer Agent for more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager s discretion.
Redeeming by Check
o Check writing is available on the Government Reserve and Short Bond Funds.
o Checkwriting is not available for IRA accounts.
o The minimum amount per check is $250. A check for less may be returned to
you.
o All checks will require only one signature unless otherwise indicated.
o You should not write a check to close your U.S. Fixed-Income and Money
Market Fund account.
o Checks will be returned to you at the end of each month.
o A charge may be imposed for any stop payments requested.
o Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
o Unless you have declined telephone redemption privileges on your New Account
application, you may redeem shares up to $50,000 by calling the Transfer
Agent before the Fund cutoff time. This service is not available for IRA
accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with a
guaranteed signature.
o Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be processed
upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Funds will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
32
<PAGE>
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Funds (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Funds are
responsible only for mailing the distribution or redemption checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Funds, the Funds will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund may
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make such an involuntary redemption, the shareholder will
first be notified that the value of the shareholder's account is less than the
minimum level and will be allowed 30 days to make an additional investment to
bring the value of that account to at least the minimum investment required to
open an account before the Fund takes any action.
Exchange Privileges and Restrictions
You may exchange shares from another Fund with the same registration, Taxpayer
Identification Number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of telephone procedures and
limitations of liability under "Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery Funds account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee) after
your request is received. Your request is subject to the Funds' cutoff
times.
o Exchange purchases must meet the minimum investment requirements of the Fund
you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts with
the same Taxpayer Identification Number will be counted together). Exchanges
out of the U.S. Fixed-Income and Money Market Funds are exempt. A
shareholder's exchanges may be restricted or refused if a Fund receives, or
the Manager anticipates, simultaneous orders affecting significant portions
of that Fund's assets and, in particular, a pattern of exchanges coinciding
with a "market timing" strategy. The Trusts reserve the right to refuse
exchanges by any person or group if, in the Manager's judgment, a Fund would
be unable to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts in
certain institutional retirement plans to conform to plan exchange limits
and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the exchange
privileges of Fund shareholders in the future.
Automatic Transfer Service (ATS)
You may elect systematic exchanges out of the U.S. Fixed-Income and Money Market
Funds into any other Fund. The minimum exchange is $100. Periodically investing
a set dollar amount into a Fund is also referred to as dollar-cost averaging,
because the number of shares purchased will vary depending on the price per
share. Your account with the recipient Fund must
33
<PAGE>
meet the minimum of $1,000. Exchanges out of the U.S. Fixed-Income and Money
Market Funds are exempt from the four-exchanges limit policy.
Directed Dividend Service
If you own shares of the U.S. Fixed-Income and Money Market Funds, you may elect
to use your monthly dividends to automatically purchase additional shares of
another Fund. Your account with the recipient Fund must meet the applicable
minimum of $1,000.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Some of these agents may appoint
sub-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 before the relevant Fund's daily cutoff
time. Orders received after that time will be purchased at the next-determined
net asset value. To the extent that these agents perform shareholder servicing
activities for the Funds, they may receive fees from the Funds or the Manager
for such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the applicable Fund's cutoff time on a day that
the Fund redeems shares. Orders received after that time are entitled to the net
asset value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of the Fund's
cutoff time on each day that the NYSE is open for trading (but not on bank
holidays for the U.S. Fixed-Income and Money Market Funds). Generally, this is
4:00 p.m. eastern time (12:00 noon for the Government Reserve Fund), or earlier
when trading closes earlier. The Short Bond Fund will determine its net asset
values earlier when the fixed-income markets close earlier. Per-share net asset
value is calculated by dividing the value of each Fund's total net assets by the
total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed- income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may
34
<PAGE>
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 Declared and paid in the last quarter of Declared and paid in the last quarter
(except Equity Income Fund) each year* of each year*
----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the last Declared and paid in the last quarter
business day of each quarter of each year*
----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last quarter
each year* of each year*
----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Declared daily and paid monthly on or about Declared and paid in the last quarter
Money Market Funds the last business day of each month of each year*
----------------------------------------------------------------------------------------------------------------------------
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a
Fund.
</FN>
</TABLE>
Unless you request cash distributions in writing at least seven business days
before a distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to your account at the closing net asset value on
the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks. See
"Uncashed Distribution or Redemption Checks" above.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by distributing substantially all of its
net investment income and net capital gains to its shareholders and meeting
other requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that their earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code. If a Fund is unable
35
<PAGE>
to meet certain Code requirements, it may be subject to taxation as a
corporation. Funds investing in foreign securities also may incur tax liability
to the extent that they invest in "passive foreign investment companies." See
"Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gains over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trusts
All of the Funds with the exception of the U.S. Asset Allocation Fund are series
of The Montgomery Funds, a Massachusetts business trust organized on May 10,
1990. The U.S. Asset Allocation Fund is a series of The Montgomery Funds II, a
Delaware business trust organized on September 10, 1993. The Agreement and
Declarations of Trust of both Trusts permit their Boards to issue an unlimited
number of full and fractional shares of beneficial interest, $0.01 par value, in
any number of series. The assets and liabilities of each series within either of
the two Trusts are separate and distinct from each other series.
This prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may, in the future, designate
other classes of shares for specific purposes. The other classes of shares may
have different fees and expenses that may affect performance. For information
concerning the other classes of shares not offered in this prospectus, call The
Montgomery Funds at (800) 572-FUND (3863) or contact sales representatives or
financial intermediaries who offer those classes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of trustees). Voting rights are not cumulative,
so the holders of more than 50% of the shares voting in any election of Trustees
can, if they so choose, elect all of the trustees of that Trust. Although the
Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated
36
<PAGE>
in a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during either a 7-day period or a 30-day period. For
yield computed from a 7-day period, base period return is simply annualized by
multiplying the base period return by 365/7; the effective yield computed from a
7-day period is calculated by adding one to the base period return and raising
the result to the (365/7)th power and then subtracting one. When the yield is
computed from a 30-day period, the yield is computed by determining the net
change, excluding capital changes, in the value of a hypothetical preexisting
account having a balance of one share at the beginning of the period. A
hypothetical charge reflecting deductions from shareholder accounts for
management fees or shareholder services fees, for example, is subtracted from
the value of the account at the end of the period, and the difference is divided
by the value of the account at the beginning of the base period to obtain the
base period return. The result is then annualized. See "Performance Information"
in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered a representation of what an investor's total return or current yield
may be in any future period. The Funds' annual report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND (3863).
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects your
account balance, except for most money market transactions (monthly) and
preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June 30
and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application when you open an account. Federal tax law requires that a
Fund withhold 31% of taxable dividends, capital-gains distributions and
redemption and exchange proceeds from accounts (other than those of certain
exempt payees) without a certified Social Security or Taxpayer Identification
number and certain other certified information or upon notification from the 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
37
<PAGE>
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 who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
-------------------------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Funds' official sales literature.
38
<PAGE>
Glossary
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g., credit
card) agreements.
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools into
different classes or tranches. Stripped mortgage securities are CMOs that
allocate different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only, or IO
class) whereas another may receive all of the principal (principal only, or PO
class). The yield to maturity on any IO or PO class is extremely sensitive not
only to changes in interest rates but also to the rate of principal payments and
prepayments on underlying mortgages. In the most extreme cases, an IO class may
become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar
instruments. Depositary receipts are receipts typically issued in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
dollar roll transaction. This is similar to a reverse repurchase agreement
except that it requires a fund to repurchase a similar rather than the same
security.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity," however,
measures only the time until a debt security provides its final payment, taking
no account of prematurity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Determining duration may involve the
Manager's estimates of future economic parameters, which may vary from actual
future values. Fixed-income securities with effective durations of three years
are more responsive to interest rate fluctuations than those with effective
durations of one year. For example, if interest rates rise by 1%, the value of
securities having an effective duration of three years will generally decrease
by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or from
sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or would
be considered by the
39
<PAGE>
World Bank or the United Nations to be emerging or developing.
equity derivative securities. These include, among other things, options on
equity securities, warrants and futures contracts on equity securities.
equity swaps. These allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swap transactions may be volatile and may present a fund with
counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The Funds generally do not enter into forward contracts with terms
greater than one year. A fund generally enters into forward contracts only under
two circumstances. First, if a fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second, if
the Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency approximating the value of some or all of a
fund's portfolio securities denominated in such currency. A fund will not enter
into a forward contract if, as a result, it would have more than one-third of
total assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate segregable assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect a fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell interest
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. Each
fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA. The Government National Mortgage Association.
illiquid securities. The Funds treat any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa), or unrated debt securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board of Trustees.
leverage. Some funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
options on securities, securities indices and currencies. A fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A fund
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industrywide stock price fluctuations.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same security
at a specified time and price.
reverse dollar roll transactions. When a fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees to
resell a similar security to that institution at a later date at an agreed-upon
price.
40
<PAGE>
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase at an
agreed-upon price and date.
S&P 500. Standard & Poor's 500 Composite Price Index.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
variable-rate demand notes (VRDNs). These are instruments with rates of interest
adjusted periodically or that "float" continuously according to specific
formulas and often have a demand feature entitling the purchaser to resell the
securities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a fund will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities. No income accrues on securities that
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a fund. At the time a fund enters into a transaction on a
when-issued or forward commitment basis, it supports its obligation with
collateral assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily. There
is a risk that the securities may not be delivered and that the fund may incur a
loss.
zero coupon bonds. These are debt obligations that do not pay current interest
and are consequently issued at a significant discount from face value. The
discount approximates the total interest the bonds will accrue and compound over
the period to maturity or the first interest-payment date at a rate of interest
reflecting the market rate of interest at the time of issuance.
41
<PAGE>
Investment Manager
Montgomery Asset Management LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1 (800) 572-3863
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
42
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Montgomery Institutional Series: Emerging Markets Portfolio
101 California Street
San Francisco, California 94111
(415) 248-6330
www.montgomeryfunds.com
Prospectus
October 15, 1997
Montgomery Institutional Series: Emerging Markets Portfolio (the "Fund") seeks
capital appreciation for institutional investors by investing primarily in
equity securities of companies in countries having economies and markets that
are or would be considered by the World Bank or the United Nations to be
emerging or developing.
The Fund's shares are sold at net asset value (NAV) with no sales load, no
commissions, no Rule 12b-1 fees and no dividend reinvestment or exchange fees.
Purchases and redemptions may be made in certain circumstances with the payment
of securities. When purchases or redemptions are made in cash, the Fund charges
a fee to cover the expenses related to the investment of cash received by the
Fund or related to the sale of securities to obtain cash, as appropriate, in
order to prevent the dilution of the investments of existing shareholders.
Shares purchased after November 1, 1995, will not be subject to both fees.
Shares purchased by the Manager on behalf of advisory clients for which it has
investment discretion may not be subject to these fees. The Fund, rather than
the Manager, ultimately receives these fees. In general, the minimum initial
investment in the Fund is $2,000,000, and subsequent investments must be at
least $100,000. The Manager or the Distributor, in its discretion, may waive
these minimums. See "How to Invest in the Fund."
The Fund is managed by Montgomery Asset Management, LLC (the "Manager"), an
affiliate of Commerzbank AG. The Fund is a series of The Montgomery Funds II, an
open-end management investment company, and is intended primarily for
institutional investors. Funds Distributor, Inc., which is not affiliated with
the Manager, is the distributor of the Funds (the "Distributor"). As is the case
for all mutual funds, attainment of the Fund's investment objective cannot be
assured.
Please read this prospectus before investing and retain it for future reference.
A Statement of Additional Information dated October 15, 1997, as may be revised,
has been filed with the Securities and Exchange Commission (SEC), is
incorporated by this reference and is available without charge by calling (415)
248-6659. If you are viewing the electronic version of this prospectus through
an online computer service, you may request a printed version free of charge by
calling (415) 248-6659.
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 II.
The Fund, in the future, may offer other classes of shares to investors eligible
to purchase those shares. The other classes of shares may have different fees
and expenses than the class of shares offered in this prospectus, and those
different fees and expenses may affect performance.
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>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Fees and Expenses of the Fund 3
Financial Highlights 4
The Fund's Investment Objective and Policies 5
Management of the Fund 5
How to Invest in the Fund 8
How to Redeem an Investment in the Fund 9
How Net Asset Value Is Determined 10
Dividends and Distributions 11
Taxation 11
Portfolio Securities 12
Other Investment Practices 14
Risk Considerations 17
General Information 19
Backup Withholding Instructions 20
- --------------------------------------------------------------------------------
2
<PAGE>
<TABLE>
<CAPTION>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Fees and Expenses of the Fund
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of
the Fund in cash:
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------------------
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of None
offering price)
- --------------------------------------------------------------------------------------------
Maximum Deferred Sales Load (as a percentage of original None
purchase price or redemption proceeds, as applicable)
- --------------------------------------------------------------------------------------------
Investment Expense Reimbursement Fee* 0.75%
- --------------------------------------------------------------------------------------------
Redemption Fees*+ (as a percentage of amount redeemed) 0.75%
- --------------------------------------------------------------------------------------------
Exchange Fees None
- --------------------------------------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees** .95
- --------------------------------------------------------------------------------
Rule 12b-1 Fees None
- --------------------------------------------------------------------------------
Other Expenses** .30
- --------------------------------------------------------------------------------
Total Fund Operating Expenses** 1.25%
- --------------------------------------------------------------------------------
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
* Investment expense reimbursement fees and redemption expense
reimbursement fees are paid to the Fund to offset certain costs, such as
brokers' commissions, incurred by the Fund in either investing the cash
received from shareholders or selling securities to obtain cash to pay
redemptions. Charging these fees enhances the return of the Fund for all
existing shareholders. This fee will not be charged on investments made
in the form of securities acceptable to the Manager and will not be
charged on redemptions when the proceeds are paid in securities (although
reregistration fees may be incurred). Shares purchased after November 1,
1995, will not be subject to both fees. For those shares, shareholders
may elect which fee to pay. Shares purchased by the Manager on behalf of
advisory clients for which it has investment discretion may not be
subject to these fees. See "Management of the Fund--Investment Expense
and Redemption Expense Reimbursement Fees."
+ Redemptions effected via wire transfer may be required to pay a
third-party service provider charge that will be directly deducted from
redemption proceeds. This would be in addition to any redemption expense
reimbursement fee. See "How to Redeem an Investment in the
Fund--General."
** Expenses are based on actual expenses for the fiscal year ended June 30,
1997. The Manager will reduce its fees and may absorb or reimburse the
Fund for certain expenses to the extent necessary to limit total annual
fund operating expenses to the amount indicated in the table for the
Fund, subject to possible reimbursement by the Fund within the following
three years if such reimbursement can be achieved within the foregoing
expense limit. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses
for the current year. Absent the reduction, actual total Fund operating
expenses for the period ended June 30, 1997 (annualized) would have been
1.61% (0.36% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Fund."
Example of Fund Expenses
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares (assuming application of the redemption expense reimbursement fee):
----------------------------------
1 Year $21
----------------------------------
3 Years $48
----------------------------------
5 Years $78
----------------------------------
10 Years $161
----------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
- --------------------------------------------------------------------------------
3
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Selected per-Share Data and Ratios
<TABLE>
The following financial information was audited by Deloitte & Touche LLP, whose
report, dated August 8, 1997, appears in the Annual Report of the Fund.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995++ JUNE 30, 1994(A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $49.09 $44.61 $43.71 $ 50.00
Net investment income ......................................... 0.43 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on investments ........ 9.46 3.93 0.67 (6.67)
Net increase/(decrease) in net assets resulting from
investment operations ...................................... 9.89 4.43 0.80 (6.58)
Effect of redemption expense reimbursement fee ................ 0.02 0.09 0.11 0.29
Distributions from net investment income ...................... (0.48) (0.04) (0.01) --
Net asset value, end of period .................................. $58.52 $49.09 $44.61 $ 43.71
Total Return** .................................................. 20.45% 10.14% 2.09% (12.58)%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) ............................. $334,181 $270,878 $186,666 $127,085
Ratio of net investment income to average net assets .......... 0.86% 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets ................... 1.26% 1.29% 1.40% 1.40%+
Portfolio turnover rate ....................................... 85% 88% 101% 33%
Average commission rate paid+++ ............................... $0.0009 $0.0007 N/A N/A
Net investment income/(loss) before deferral of fees by
Manager $ 0.26 $0.33 $(0.05) $0.01
Ratio of expenses before deferral of fees by Manager .......... 1.61% 1.70% 1.79% 1.81%+
- --------------------
<FN>
(A) The Montgomery Institutional Series: Emerging Markets Portfolio commenced
operations on December 17, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per-share numbers have been calculated using the monthly average shares
method, which more appropriately represents the per-share data for the
year since the use of the undistributed method did not accord with
results of operations.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
The Fund's Investment Objective and Policies
The Fund's investment objective and general investment policies are described
below. Specific portfolio securities that the Fund may purchase are described in
"Portfolio Securities." Specific investment practices that the Fund may employ
are described in "Other Investment Practices." Certain risks associated with
investments in the Fund are described in those sections as well as in "Risk
Considerations.".
The Fund's investment objective is capital appreciation, which under normal
conditions it seeks by investing at least 85% of its total assets in equity
securities of emerging markets companies. For these purposes, the Fund defines
an emerging markets country as any country whose economy and market the World
Bank or the United Nations considers to be emerging or developing.
The Fund currently limits its investments to the following emerging markets
countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela); Asia
(Bangladesh, China/Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam); southern and
eastern Europe (Czech Republic, Greece, Hungary, Kazakstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine); Middle East (Israel
and Jordan); and Africa (Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria,
South Africa, Tunisia and Zimbabwe). In the future, the Fund may invest in other
emerging markets countries. Under normal conditions, the Fund maintains
investments in at least six emerging markets countries at all times and does not
invest more than 25% of its total assets in any one emerging markets country.
The Fund considers emerging markets companies to be companies whose securities
are principally traded in the capital market of an emerging markets country;
that derive at least 50% of their total revenue from either goods produced or
services rendered in emerging markets countries or from sales made in such
emerging markets countries, regardless of where the securities of such companies
are principally traded; or organized under the laws of, and with a principal
office in, an emerging markets country.
The Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percentage of assets to invest in each country
to maximize expected returns for a given risk level. The Fund's aims are to
invest in those countries that are expected to have the highest risk/reward
trade-off when incorporated into a total portfolio context and to construct a
portfolio of emerging markets investments that approximates the risk level of an
internationally diversified portfolio of securities in developed markets. This
"top-down" country selection is combined with "bottom-up" fundamental industry
analysis and stock selection based on original research, publicly available
information and company visits.
The Fund invests primarily in common stocks, but it also may invest in other
types of equity and equity-derivative securities. The Fund may invest up to 15%
of its total assets in debt securities, including up to 5% of its total assets
in debt securities rated below investment grade. See "Portfolio Securities,"
"Risk Considerations" and the Appendix in the Statement of Additional
Information.
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are or may be eligible for conversion into
investments in emerging markets companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity-derivative securities. See
"Portfolio Securities."
Management of the Fund
The Montgomery Funds II (the "Trust") has a Board of Trustees that establishes
the Fund's policies and supervises and reviews the management of the Fund. The
day-to-day operations of the Fund are administered by the officers of the Trust
and by the Manager pursuant to the terms of an Investment Management Agreement
with the Fund.
Montgomery Asset Management, LLC is the Fund's Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. The Manager was
formed in February 1997 as an investment advisor registered as such with the SEC
under the Investment Advisers Act of 1940, as amended. It advises private
accounts as well as the Fund. Commerzbank, the third-largest publicly held
commercial bank in Germany, has total assets of approximately $268 billion.
- --------------------------------------------------------------------------------
5
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Commerzbank and its affiliates had more than $479 billion in assets under
management as of June 30, 1997. Commerzbank's asset management operations
involve more than 1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager to the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997, for an initial two-year period.
Portfolio Managers
Josephine S. Jimenez, CFA, a founding partner of the emerging markets
discipline, is a senior portfolio manager and principal responsible for
strategic research and qualitative analysis of countries and industries. From
1988 through 1991. Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C., as senior analyst
and portfolio manager in charge of investments in Latin America, the Philippines
and Portugal. From 1984 through 1987, she was an Investment Officer at Shawmut
Corporation where she designed a stock valuation model for hyper-inflationary
economies, which has served as the foundation for most of her work since that
time.
Bryan L. Sudweeks, Ph.D., CFA, a founding partner of the emerging markets
discipline, is a senior portfolio manager and principal responsible for all
quantitative modeling as it relates to the investment process. From 1988 until
joining the Manager in 1991, he was a senior analyst and portfolio manager at
Emerging Markets Investors/Emerging Markets Management in Washington, D.C.
specializing in Asia, Greece, Jordan and Turkey. He was instrumental in the
design and implementation of the firm's asset allocation model. Previously, Dr.
Sudweeks was a professor of international finance and investments at George
Washington University and served as adjunct professor of international
investments from 1988 until May 1991. Dr. Sudweeks is fluent in Mandarin
Chinese.
Angeline Ee is a portfolio manager and principal focusing on Southeast Asian
investments. From 1990 until joining the Manager in July 1994, Ms. Ee was an
investment manager with AIG Investment Corp. in Hong Kong responsible for US$
110 million invested in Singapore, Malaysia and Thailand. From June 1989 until
September 1990, Ms. Ee was co-manager of a portfolio of Asian equities and bonds
at Chase Manhattan Bank in Singapore.
Frank Chiang is a portfolio manager and principal responsible for North Asian
markets. From 1993 until joining the Manager in 1996, Mr. Chiang was managing
director and portfolio manager with TCW Asia Ltd., Hong Kong, responsible for
TCW's Asian Equity strategy. While at TCW, Mr. Chiang co-managed US$ 1.3 billion
invested throughout the Asian Pacific Region. Prior to TCW Asia, he was
associate director and portfolio manager for Wardly Investment Services, Hong
Kong, where he created and managed three dedicated China Funds. Mr. Chiang is
fluent in three Chinese dialects: Mandarin, Shanghaineses and Cantonese.
Jesus Isidoro Duarte is a portfolio manager and principal for the Manager
responsible for the Latin American markets. From 1993 until joining the Manager
he was director and vice president of Latinvest Management Co. in Brazil, where
he was responsible for research and portfolio management for the firm's Latin
American funds. From 1989 to 1992, Mr. Duarte worked at W.I. Carr in Tokyo as a
securities analyst of Japanese equities. He is fluent in Spanish and Japanese
and conversant in French and Portuguese.
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, including the placement of orders for
portfolio transactions, furnishes the Fund with office space and certain
administrative services, and provides the personnel needed by the Fund with
respect to the Manager's responsibilities under the Manager's Investment
Management Agreement with the Fund. The Manager also compensates the members of
the Trust's Board of Trustees who are interested persons of the Manager, and
assumes the cost of printing prospectuses and shareholder reports for
dissemination to prospective investors. As compensation, the Fund pays the
Manager a monthly management fee (accrued daily but paid when requested by the
Manager) based upon the value of the average daily net assets of the Fund, at
the annual rate of one and twenty-five one-hundredths percent (1.25%) of the
first $50 million in average daily net assets, one percent (1.00%) of the next
$50 million of daily net assets, and nine-tenths of one percent (.90%) of
amounts over $100 million in average daily net assets. The management fee for
the Fund is higher than for most mutual funds.
Montgomery Asset Management, LLC also serves as the Fund's Administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative operations. As compensation, the Fund pays
the Administrator a monthly fee at an annual rate of five one-hundredths of one
percent (0.05%) of average daily equity assets.
The Fund is responsible for its own operating expenses including but not limited
to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage and
commission expenses, if any; interest charges on any borrowings; transfer agent,
custodian, legal and auditing fees; shareholder servicing fees including fees to
third-party servicing agents; fees and expenses of Trustees who are not
interested persons of the Manager; salaries of certain personnel; costs and
expenses of calculating its daily net asset value; costs and expenses of
accounting, bookkeeping and recordkeeping required under the Investment Company
Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
registrations of its shares for sale under federal and applicable state
securities laws; all costs associated with shareholders meetings and the
preparation and dissemination of proxy materials, except for meetings called
solely for the benefit of the Manager or its affiliates; printing and mailing
prospectuses, statements of additional information and reports to shareholders;
and other expenses relating to the Fund's operations, plus any extraordinary and
nonrecurring expenses that are not expressly assumed by the Manager.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below one and twenty-five one-hundredths percent
(1.25%) of the Fund's average net assets. The Manager also may voluntarily
reduce additional amounts to increase the return to the Fund's investors. The
Manager may terminate those voluntary reductions at any time. Any reductions
made by the Manager in its fees are subject to reimbursement by the Fund within
the following three years provided the Fund is able to effect such reimbursement
and remain in compliance with applicable expense limitations. The Manager
generally seeks reimbursement for the oldest reductions and waivers before
payment by the Fund for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers and other
financial intermediaries that distribute the Fund's shares as well as other
providers of shareholder and administrative services.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These are discussed more
fully in the Statement of Additional Information; the factors include, but are
not limited to, the reasonableness of commissions, the quality of services and
execution, and the availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider the sale of the Fund's shares as a factor in selecting broker-dealers
for the Fund's portfolio transactions. See "Execution of Portfolio Transactions"
in the Statement of Additional Information for further information regarding the
Fund's policies concerning the execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
Investment Expense and Redemption Expense Reimbursement Fees
The Board of Trustees of the Trust and the Manager have determined that payment
of an investment expense reimbursement fee by certain investors is appropriate
to defray the significant costs, listed below, associated with investing the
proceeds received by the Fund and to offset the dilutive effect such costs would
otherwise have on the net asset value of shares held by existing shareholders.
Likewise, the redemption expense reimbursement fee is used to defray the
significant costs, listed below, associated with the sale of portfolio
securities needed to pay cash redemption requests. Therefore, the shares of the
Fund are sold at a public offering price which is equal to the net asset value
of such shares plus the investment expense reimbursement fee. In addition,
redemption requests are paid at net asset value less the redemption expense
reimbursement fee.
The amount of the reimbursement fees represents the Manager's estimate of the
costs reasonably anticipated to be associated with the purchase of securities
with cash received from investors and the sale of securities to obtain cash. The
fees are paid to the Fund and used by it to defray those costs. Those costs
include brokerage commissions on listed securities, imputed commissions on
over-the-counter securities, and, in the case of foreign countries, commissions,
duties and taxes (other than taxes based on net income) imposed on the purchase
or sale of securities. These costs do not include distribution-related expenses.
It is possible that the amount of the reimbursement fees will be more or less
than the actual costs they are intended to defray. The Fund will incur any extra
costs or receive any excess fees, as applicable.
The Fund charges an investment expense reimbursement fee of seventy-five
one-hundredths of one percent (0.75%) of the amount invested and a redemption
expense reimbursement fee of seventy-five one-hundredths of one percent (0.75%)
of the
- --------------------------------------------------------------------------------
7
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
amount redeemed. Shares purchased after November 1, 1995, will not be subject to
both fees. For those shares, shareholders may elect which fee to pay. Shares
purchased by the Manager on behalf of advisory clients for which it has
investment discretion may not be subject to these fees. Reinvestments of
dividends, capital-gains distributions paid by the Fund and investments in kind
are not subject to the expense reimbursement fees. Purchases and redemptions in
kind are not subject to the expense reimbursement fees. See "How to Invest in
the Fund--In-Kind Purchases."
How to Invest in the Fund
The Fund's shares are offered directly to the public at their current net asset
value plus any applicable investment expense reimbursement fee, with no sales
load. The Fund's shares are offered for sale by Funds Distributor, Inc., the
Funds' Distributor, 101 California Street, San Francisco, California 94111,
(800) 572-3863, and through selected securities brokers and dealers.
The minimum initial investment in the Fund is $2,000,000. Subsequent investments
for the Fund must be at least $100,000. The Manager or the Distributor, in its
discretion, may waive these minimums. Purchases may also be made in certain
circumstances by payment of securities. See "In Kind Purchases" below and the
Statement of Additional Information for further details.
Initial Investments by Check
o Complete the New Account application.
o Make your check(s) payable to Montgomery Institutional Series:
Emerging Markets Portfolio.
o Mail or deliver the completed New Account application and your
check(s) to the Transfer Agent: Montgomery Institutional Series:
Emerging Markets Portfolio, P.O. Box 419073, Kansas City, MO
64141-6073.
Initial Investments by Wire
o Before wiring funds, call the Transfer Agent at (800) 572-3863 to
advise the Transfer Agent that you intend to make an initial
investment by wire and to receive an account number.
o Provide the Transfer Agent with the name of the investor and the
dollar amount to be invested.
o Complete the New Account application. Be sure to include the date
and the account number. Mail or deliver the completed New Account
application to the appropriate address shown at the end of the New
Account application.
o Request the investor's bank to immediately transmit available funds
by wire for purchase of shares in the investor's name to the
Transfer Agent's affiliated bank, as follows:
Investors Fiduciary Trust Company
ABA # 101003621
For: DST Systems, Inc.
Account # 7526601
Attention: Montgomery Institutional Series:
Emerging Markets Portfolio
For credit to:
Shareholder:
Account Number:
Subsequent Investments by Check
o Detach and complete the stub attached to your account statement. If
you do not have an investment stub, mail your check with written
instructions indicating the Fund name and your account number.
o Make your check(s) payable to Montgomery Institutional Series:
Emerging Markets Portfolio.
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
o Write your shareholder account number on the check.
o Mail the check(s) and investment stub to the Transfer Agent:
Montgomery Institutional Series: Emerging Markets Portfolio, P.O.
Box 419073, Kansas City, MO 64141-6073.
Subsequent Investments by Wire
o Instruct the bank to wire funds as indicated above. It is not
necessary to contact the Transfer Agent prior to making subsequent
investments by wire.
It is essential that complete information regarding your account be included in
all wire instructions in order to facilitate prompt and accurate handling of
investments. Investors may obtain further information about remitting funds in
this manner and any fees that may be imposed from their own banks.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the United States. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor each reserve the right to reject any purchase order in whole or in
part.
If an order, together with payment in proper form, is received by the Transfer
Agent by the close of trading (generally, 4:00 P.M. eastern time) on any day
that the New York Stock Exchange ("NYSE") is open, Fund shares will be purchased
at the Fund's next-determined net asset value. Orders for Fund shares received
after the Fund's cutoff times will be purchased at the next-determined net asset
value after receipt of the order.
In-Kind Purchases
An investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. For purposes of in-kind purchases, a security will be considered
"readily marketable" if it is in the process of undergoing customary settlement
and/or registration in its primary market. For the purposes of sales of shares
of the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares.
Purchases of the Fund's shares with acceptable securities will not be charged an
investment expense reimbursement fee. See "Fees and Expenses of the Fund" and
"Management of the Fund--Investment Expense and Redemption Expense Reimbursement
Fees."
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form, registered on the books of the Fund and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share, less any redemption
expense reimbursement fee, next determined after the shares are validly tendered
for redemption and such request is received by the Transfer Agent or, in the
case of repurchase orders, securities dealers. The procedures for requesting a
redemption are set forth below.
- --------------------------------------------------------------------------------
9
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Direct Redemption by Check or Wire
Redemptions can be requested by writing to the Fund's Transfer Agent. If you
want to have redemption proceeds wired directly to your bank account, include a
voided check with your letter. Send your letter to Montgomery Institutional
Series: Emerging Markets Portfolio, P.O. Box 419073, Kansas City, MO 64141-6073.
The minimum amount that may be wired is $100,000 (wire charges, if any, will be
deducted from redemption proceeds). The Fund reserves the right to permit lesser
wire amounts or fees at the Manager's discretion. The Transfer Agent requires
that the signature(s) on any written request be guaranteed by an eligible
guarantor institution, such as a commercial bank, a member firm of a domestic
stock exchange or the National Association of Securities Dealers, Inc., an
authorized credit union, a national securities exchange, a registered securities
association, a clearing agency or a savings association. Please contact the
Transfer Agent for more information.
In-Kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Fund, an investor may redeem shares of the Fund and receive securities from
the Fund's portfolio selected by the Manager at its sole discretion, provided
that such redemption is not expected to affect the Fund's ability to attain its
investment objective or otherwise materially affect its operations. For the
purposes of redemptions in kind, the redeemed securities shall be valued at the
identical time and in the identical manner that the other portfolio securities
are valued for purposes of calculating the net asset value of the Fund's shares.
Redemptions of the Fund's shares for securities will not be charged any
redemption expense reimbursement fee. See "Fees and Expenses of the Fund" and
"Management of the Fund--Investment Expense and Redemption Expense Reimbursement
Fees."
General
Payment of redemption proceeds is made promptly regardless of when redemption
occurs, but not later than three days after the receipt of all documents in
proper form, including a written redemption order with appropriate signature
guarantee. Redemption proceeds will be mailed or wired in accordance with the
shareholder's instructions on the New Account application to a predesignated
account. The minimum amount that may be wired is $100,000 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion. The Fund may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account is
less than $100,000. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than $100,000 and will be allowed 30 days to make
an additional investment to bring the value of that account to at least $100,000
before the Fund takes any action.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally, this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board of Trustees of the Trust, respectively, in accordance
with methods specifically authorized by the Board of Trustees. Short-term
obligations with maturities of 60 days or less are valued at amortized cost as
reflecting fair value.
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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 of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of net asset value unless the Manager, under supervision of the
Board of Trustees, determines that the particular event would materially affect
the Fund's net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made on or about the last
quarter of each year with respect to any undistributed capital gains earned
during the one-year period ended October 31 of such calendar year. Another
distribution of any undistributed capital gains will be made following the
Fund's fiscal year end (June 30). The amount and frequency of distributions by
the Fund are not guaranteed and are at the discretion of the Trust's Board of
Trustees.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the New Account application, all dividends
and other distributions will be reinvested automatically in additional shares of
the Fund and credited to the shareholder's account at the closing net asset
value on the reinvestment date, without the imposition of an investment expense
reimbursement fee.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of its assets. Accordingly, the Fund generally will not be
liable for federal income tax or excise tax based on the net income except to
the extent that its earnings are not distributed or are distributed in a manner
that does not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent that it invests in "passive foreign investment
companies." See the Statement of Additional Information for further information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. A portion of the distributions paid by the Fund may not be eligible for
the dividends-received deduction allowed to corporate shareholders under the
Code. Distributions of the excess of net long-term capital gains over net
short-term capital loss from transactions of the Fund are treated by
shareholders as long-term capital gains regardless of the length of time the
Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt investors and non-U.S. investors) are
advised to consult their own tax advisors regarding the particular tax
consequences to them of an investment in shares of the Fund. Additional
information on tax matters relating to the Fund and its shareholders is included
in the Statement of Additional Information.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Portfolio Securities
The following describes portfolio securities in which the Fund may invest.
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stock. The Fund also may invest in other types of equity securities and
equity-derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund also may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other depositary receipts. Depositary receipts are
receipts typically issued in connection with a U.S. or foreign bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Unsponsored depositary receipts programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored depositary receipts, and the prices of unsponsored
depositary receipts may be more volatile than if such depositary receipts were
sponsored by the issuer.
Convertible Securities
The Fund also may invest in convertible securities as a form of equity
securities. A convertible security is a fixed-income security (a bond or
preferred stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock; it tends to increase as the market value
of the underlying stock rises, and to decrease as the market value of the
underlying stock declines. For purposes of allocating the Fund's investments,
the Manager regards convertible securities as a form of equity securities.
Securities Warrants
The Fund may invest up to 5% of its net assets in warrants, including warrants
that are not listed on a securities exchange. A warrant typically is a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified number of shares of the underlying common stock of the issuer at a
specified exercise price at any time on or before an expiration date. Stock
index warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
Privatizations
The Fund believes that foreign governments' programs of selling all or part of
the interests in government-owned or -controlled enterprises ("privatizations")
may represent opportunities for significant capital appreciation and may invest
in privatizations as it deems appropriate. The ability of U.S. entities such as
the Fund to participate in privatizations in certain foreign countries may be
limited by local law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that foreign governments will continue to sell their interests
in companies currently owned or controlled by them or that privatization
programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar vehicles (collectively, "special situations") could enhance the Fund's
capital appreciation potential. This Fund also may invest in certain types of
vehicles or derivative securities that represent indirect investments in foreign
markets or securities in which it is impracticable for the Funds to invest
directly. Investments in special situations
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Montgomery Institutional Series: Emerging Markets Portfolio
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may be illiquid, as determined by the Manager based on criteria established by
the Board of Trustees. The Fund will not invest more than 15% of its total
assets in all types of illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies. Because of restrictions on direct investment by U.S. entities in
certain countries, investment in other investment companies may be the most
practical or only manner in which the Fund can invest in the securities markets
of those countries. Such investments may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities and are
subject to limitations under the Investment Company Act. The Fund also may incur
tax liability to the extent it invests in stock of a foreign issuer that
constitutes a "passive foreign investment company." See Statement of Additional
Information.
The Fund does not intend to invest in other investment companies unless, in the
judgment of the Manager, the potential benefits of such investment exceed the
associated costs relative to the benefits and costs associated with direct
investments in the underlying securities. As a shareholder in an investment
company, the Fund would bear its ratable share of that investment company's
expenses, including its advisory and administration fees. In accordance with
applicable state regulatory provisions, the Manager has agreed to waive its
management fee with respect to the portion of the Fund's assets invested in
shares of other open-end investment companies. The Fund continues to pay its own
management fees and other expenses with respect to its investments in shares of
closed-end investment companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation, either through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers. In selecting debt securities, the Manager will seek out good credits.
The Manager also analyzes interest rate trends and specific developments that
may affect individual issuers. As an operating policy which may be changed by
the Board of Trustees, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investor Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. Subject to this limitation, the Fund may invest in any debt security,
including securities in default. See "Risk Considerations."
In addition to traditional corporate, governmental and supranational debt
securities, the Fund may invest in external debt obligations issued by the
governments, governmental entities and companies of emerging markets countries.
External debt obligations are those issued by an emerging markets country or
company to foreign lenders.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rates of
economic growth and corporate profits growth; changes in governmental policies,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of governmental
finances; and the conditions of the balance of payments and changes in the terms
of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the Government National Mortgage Association
("GNMA"), are issued or guaranteed by the U.S. government. Other securities
issued by U.S. government agencies or instrumentalities are supported only by
the credit of the agency or instrumentality, for example those issued by the
Federal Home Loan Bank; whereas others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce these risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a bank, a broker-dealer or other financial
institution that simultaneously agrees to repurchase the same security from the
Fund at a specified time and price. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return, which
is not determined by the coupon rate on the underlying security. Under the
Investment Company Act, repurchase agreements are considered to be loans by the
Fund and must be fully collateralized by cash, letters of credit, U.S.
government securities or other liquid equity or debt securities ("Collateral
Assets") separately identified and rendered unavailable for investment. If the
seller defaults on its obligation to repurchase the underlying security, the
Fund may experience delay or difficulty in exercising its rights to realize upon
the security and might incur a loss if the value of the security declines, as
well as disposition costs in liquidating the security. See the Statement of
Additional Information for further information.
Borrowing
The Fund may borrow money from banks in an aggregate amount not to exceed 10% of
the Fund's total assets to meet temporary or emergency purposes, and the Fund
may pledge its assets in connection with such borrowings. The Fund will not
purchase any securities while any such borrowings exceed 5% of the Fund's total
assets.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 30% of the Fund's
total assets. Each securities loan is collateralized with Collateral Assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. If the seller should default on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security and might incur a loss if
the value of the security declines, as well as disposition costs in liquidating
the security. See the Statement of Additional Information for further
information.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. government or other securities on a "when-issued,"
and may purchase or sell securities on a "forward commitment" or "delayed
delivery," basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
seven to 15 days later. When-issued securities and forward commitments may be
sold prior to the settlement date, but the Fund will enter into when-issued and
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. No income accrues on securities that have
been purchased pursuant to a forward commitment or on a when-issued basis prior
to delivery to the Fund. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition, or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its Custodian to collateralize the Fund's obligation
with Collateral Assets equal to the value of the when-issued or forward
commitment securities, marked-to-market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in the financial
markets in which the Fund invests, or against currency exchange rate or interest
rate changes that are adverse to the present or prospective positions of the
Fund, the Fund may employ certain risk management practices using the following
derivative securities and techniques (known as "derivatives"): forward currency
exchange contracts, stock options, currency options, and stock and stock index
options;
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Montgomery Institutional Series: Emerging Markets Portfolio
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futures contracts; and swaps and options on futures contracts on U.S. government
and foreign government securities and currencies. The Board has adopted
derivatives guidelines that require the Board to review each new type of
derivative that may be used by the Fund. Some markets currently do not have
instruments available for hedging transactions relating to currencies or to
securities denominated in such currencies or to securities of issuers domiciled
or principally engaged in business in such markets. To the extent that such
markets do not exist, the Manager may not be able effectively to hedge its
investment in such countries. Furthermore, the Fund will engage in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment. The
Statement of Additional Information contains further information on the Fund's
hedging and risk management practices, including related risks and other special
considerations.
Forward Currency Contracts
A forward currency contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Fund normally
conducts its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
at the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into a forward contract with a term greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy or sell the amount of foreign currency needed to settle the
transaction. Second, if the Manager believes that the currency of a particular
foreign country may suffer or substantially benefit against the U.S. dollar, it
may enter into a forward contract to buy or sell the currency of such country
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The Fund will not enter into forward
contracts if, as a result, the Fund will have more than one-third of its total
assets committed to the consummation of such contracts or unless the Fund owns
the currency that it is obligated to deliver or has caused its Custodian to
collateralize the Fund's obligation with Collateral Assets having a value
sufficient to cover its obligations to purchase the currency. Although forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be predicted accurately.
Options on Securities, Securities Indices and Currencies
The Fund also may purchase put and call options on securities and currencies
traded on U.S. exchanges and, to the extent permitted by law, foreign exchanges,
as well as in the over-the-counter market. The Fund may purchase call options on
securities 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 relative to the U.S. dollar). The Fund also may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value 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). The ability to purchase put options allows the Fund to protect the
unrealized gain in an appreciated security in its portfolio without actually
selling the security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from such a sale will depend upon
whether the amount received is more or less than the premium paid for the option
plus the related transaction cost.
The Fund also may purchase put and call options on stock indices in order to
hedge against the risk of stock market or industry-wide stock price
fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
The Fund may purchase and write options in the over-the-counter market ("OTC
options") to the same extent that they may engage in transactions in
exchange-traded options. OTC options differ from exchange-traded options in that
they are negotiated individually and terms of the contract are not standardized
as is the case with exchange-traded options. Moreover, because there is no
clearing corporation involved in an OTC option, there is a risk of
non-performance by the counterparty to the option. However, OTC options
generally are much more available for securities in a wider range of expiration
dates and exercise prices than exchange-traded options. It is the current
position of the staff of the SEC that OTC options (and securities underlying the
OTC options) are illiquid securities except to the extent that OTC options are
entered
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Montgomery Institutional Series: Emerging Markets Portfolio
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into with U.S. government securities dealers designated by the Federal Reserve
Bank of New York under guidelines specified by the SEC staff. Accordingly, the
Fund will treat OTC options as subject to the Fund's limitations on illiquid
securities until such time as there is a change in the SEC's position.
Futures and Options on Futures
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement by the Fund to purchase or sell debt securities,
usually U.S. government securities, at a specified date and price. The Fund may
sell interest rate futures contracts (i.e., enter into a futures contract to
sell the underlying debt security) in an attempt to hedge its portfolio against
an anticipated increase in interest rates and a corresponding decline in the
Fund's portfolio debt securities. The Fund may purchase an interest rate futures
contract (i.e., enter into a futures contract to purchase an underlying
security) to hedge against an interest rate decrease and corresponding increase
in the value of debt securities it anticipates purchasing. The Fund also may
purchase and sell put and call options on interest rate futures contracts in
lieu of, and for the same purposes as, entering into the underlying interest
rate futures contracts. The Fund collateralizes its obligation with Collateral
Assets equal to the purchase price of the portfolio securities represented by
the underlying interest rate futures contracts for which it has an obligation to
purchase.
The Fund will not enter into any futures contracts or related options if the sum
of the initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options purchased by the Fund would exceed 5% of the value of
the Fund's total assets. The Fund will not purchase futures contracts or related
options if, as a result, more than one-third of the value of the Fund's total
assets would be so invested.
Hedging Considerations
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. The Fund also could be exposed to risks if it could not close out
its futures or options positions because of an illiquid secondary market. The
Statement of Additional Information contains further information on the Fund's
hedging and risk management practices, including related risks and other special
considerations.
Futures, options and options on futures have effective durations which, in
general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (supported by
Collateral Assets) may lengthen the effective duration of the Fund's portfolio.
Although utilization of options, futures contracts and related options and
similar instruments may be advantageous to the Fund, if the Manager is not
successful in employing such instruments in managing the Fund's investments or
in predicting changes in the market, the Fund's performance will be worse than
if the Fund did not make such investments. In addition, the Fund pays
commissions and other costs in connection with such investments, which may
increase the Fund's expenses and reduce its return. See the Statement of
Additional Information for a further discussion of the possible risks involved
in transactions in options and futures contracts and related options.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund will treat any securities that are subject to restrictions on
repatriation for more than seven days, as well as any securities issued in
connection with foreign debt conversion programs that are restricted as to
remittance of invested capital or profit, as illiquid securities. The Fund also
treats repurchase agreements with maturities in excess of seven days as illiquid
securities. Illiquid securities do not include securities that are restricted
from trading on formal markets for some period of time but for which an active
informal market exists, or securities that meet the requirements of Rule 144A
under the Securities Act of 1933, as amended, and that, subject to review by the
Board and guidelines adopted by the Board, the Manager has determined to be
liquid. State securities laws may impose further limitations on the amount of
illiquid or restricted securities that the Fund may purchase.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
the erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies) such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it is appropriate,
regardless of how long the securities have been held by the Fund. The Manager
therefore changes the Fund's investments whenever it believes doing so will
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to the Fund, including brokerage commissions or dealer markups and
other transaction costs on the sale of securities and reinvestment in other
securities. Portfolio turnover also may result in the recognition of capital
gains that may be distributed to shareholders. Portfolio turnover in excess of
100% is considered high and increases such costs. See "Financial Highlights" for
the Fund's past portfolio turnover information. The annual portfolio turnover
for the Fund is anticipated to be less than 100%. The Manager does not regard
portfolio turnover as a limiting factor, however.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval; but unless otherwise stated, the Fund's other
investment policies may be changed by the Trust's Board of Trustees. If there is
a change in the investment objective or policies of the Fund, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then current financial positions and needs. The Fund is subject to
additional investment policies and restrictions described in the Statement of
Additional Information, some of which are fundamental.
Risk Considerations
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may invest in smaller companies that can benefit
from the development of new products and services. These smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than larger, mature issuers. Such smaller companies may have
limited product lines, markets or financial resources, and their securities may
trade less frequently and in more limited volume than the securities of larger,
more mature companies. As a result, the prices of the securities of such smaller
companies may fluctuate to a greater degree than those of the securities of
other issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should carefully consider the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Investments in securities of companies domiciled in, and markets of, emerging
markets countries may be subject to higher risks than investments in
more-developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investment in securities of issuers in foreign nations. In addition,
there is often less publicly available information about foreign issuers than
those in the United States. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards, and auditing
- --------------------------------------------------------------------------------
17
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
practices and requirements may not be comparable to those applicable to U.S.
companies. Further, the Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. Further risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services, and other costs relating to
investments by the Fund in other countries generally are greater than in the
United States. Such markets have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
settle certain transactions. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result either in loss to the Fund if the value of the
portfolio security subsequently declined or, if the Fund entered into a contract
to sell the security, could result in possible claims against the Fund. In
certain countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. The securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States
Because the securities of the Fund may be denominated in foreign currencies, the
value of such securities to the Fund will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions among currencies. A change in the value of a
foreign currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of the Fund's securities denominated in that currency.
Such changes also will affect the Fund's income and distributions to
shareholders. The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange among the currencies of different
nations, and the Fund therefore may engage in certain foreign currency hedging
strategies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Manager's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements among,
exchange rates and currency hedges.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not free-floating against the U.S. dollar. Further, certain
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated may
have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. Moreover,
the economies of some countries may differ favorably or unfavorably from the
U.S. economy in such respects as the rate of growth of gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Certain countries also limit the amount of foreign
capital that can be invested in their markets and local companies, creating a
"foreign premium" on capital investments available to foreign investors such as
the Fund. The Fund may pay a "foreign premium" to establish an investment
position which it cannot later recoup because of changes in that country's
foreign investment laws.
Lower-Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) or (in limited amounts) high-risk,
lower-quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. Medium-quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher-grade debt securities.
As an operating policy, which may be changed by the Board of Trustees without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's or, if unrated,
deemed to be of comparable quality as determined by the Manager using guidelines
approved by the Board of Trustees. The Board may consider a change in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high-risk, lower-quality debt securities would be
consistent with the interests of the Fund and its shareholders. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed by
the Manager to determine, to the extent reasonably possible, that the planned
investment is sound
- --------------------------------------------------------------------------------
18
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
in the Manager's opinion. The Fund, from time to time, may purchase defaulted
debt securities if, in the opinion of the Manager, the issuer may resume
interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates; i.e., a decline in
interest rates produces an increase in market value, whereas an increase in
interest rates produces a decrease in market debt value, of these securities.
Moreover, the longer the remaining maturity of a security, the greater the
effect of interest rate changes on the market value of the security. In
addition, changes in the ability of an issuer to make payments of interest and
principal and in the market's perception of an issuer's creditworthiness also
affect the market value of the debt securities of that issuer.
Equity Swaps
The Fund may invest in equity swaps. Equity swaps are derivatives and their
value can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, a Fund may suffer a loss. The value of some components of an
equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
General Information
The Trust
The Fund is a separate series of The Montgomery Funds II, a Delaware business
trust which was organized on September 8, 1993. The Agreement and Declaration of
Trust permits the Board of Trustees to issue an unlimited number of full and
fractional shares of beneficial interest, $.01 par value, in any number of
series. The Fund is one of several series of the Trust, the assets and
liabilities of which are separate and distinct from each other.
This prospectus relates only to the Class R shares of the Fund. The Fund may in
the future designate other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share shall be entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share shall be entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust will vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so the holders of more
than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. Although the Trust is not required to and
does not intend to hold annual meetings of shareholders, such meetings may be
called by the Trustees at their discretion, or upon demand by the holders of 10%
or more of the outstanding shares of the Trust for the purpose of electing or
removing Trustees. Shareholders may receive assistance in communicating with
other shareholders in connection with the election or removal of Trustees
pursuant to the provisions contained in Section 16(c) of the Investment Company
Act.
Performance Information
From time to time, the Fund may publish its total return in advertisements and
communications to investors. Total return information generally will include the
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations.
The Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 cash investment that
includes capital appreciation and depreciation for the stated period according
to a specific formula, but is subject to the expense reimbursement fees
discussed elsewhere in this prospectus. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
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19
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
figures will reflect all recurring charges against the Fund's income. See
"Performance Information" in the Statement of Additional Information.
The investment results of the Fund will fluctuate over time, and any
presentation of the Fund's total return for any prior period should not be
considered a representation of what an investor's total return may be in any
future period.
Legal Opinion
The validity of shares of beneficial interest offered by this prospectus will be
passed on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San
Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material will be sent to each address regardless of the number of shareholders
or accounts at that address. Shareholder inquiries generally should be directed
to (415) 248-6330.
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN, to check the appropriate boxes on the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (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 the shareholder is subject to
backup withholding because the shareholder failed to report all interest and
dividend income on his, her or its tax return and the shareholder has not been
notified by the IRS that such withholding should cease, the shareholder should
cross out the backup withholding certification in the signature portion of the
New Account application.
If a shareholder is a nonresident alien or foreign entity, a completed Form W-8
should be provided to the Fund in order to avoid backup withholding on
redemptions and other payments. Dividends paid to a shareholder account by the
Fund may be subject to up to 30% withholding instead of backup withholding.
If a shareholder is an exempt recipient, the shareholder should furnish a TIN.
Exempt recipients include: certain corporations, certain tax-exempt entities,
tax-exempt pension plans and IRAs, governmental agencies, financial
institutions, registered securities and commodities dealers and others.
For further information regarding backup withholding, 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 Fund's official sales literature.
- --------------------------------------------------------------------------------
20
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(415) 248-6330
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
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
(800) 572-3863
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------------
MONTGOMERY GROWTH FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
October 15, 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 U.S. 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, LLC (the "Manager") and their shares are distributed by Funds
Distributor, Inc.(the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the combined prospectuses
for all Funds dated October 15, 1997 (with respect to the Class R shares) and
dated October 15, 1997 (with respect to the Class P 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
<PAGE>
TABLE OF CONTENTS
Page
----
THE TRUSTS..................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS.............................B-3
RISK FACTORS...............................................................B-20
INVESTMENT RESTRICTIONS....................................................B-26
DISTRIBUTIONS AND TAX INFORMATION..........................................B-28
TRUSTEES AND OFFICERS......................................................B-33
INVESTMENT MANAGEMENT AND OTHER SERVICES...................................B-37
EXECUTION OF PORTFOLIO TRANSACTIONS........................................B-42
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................B-45
DETERMINATION OF NET ASSET VALUE...........................................B-47
PRINCIPAL UNDERWRITER......................................................B-49
PERFORMANCE INFORMATION....................................................B-49
GENERAL INFORMATION........................................................B-56
FINANCIAL STATEMENTS.......................................................B-65
Appendix A.................................................................B-66
B-2
<PAGE>
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 Small Cap Opportunities Fund (the "Small Cap Opportunities Fund");
Montgomery Small Cap Fund (the "Small Cap Fund"); Montgomery Micro Cap Fund (the
"Micro Cap Fund"); Montgomery Equity Income Fund (the "Equity Income Fund");
Montgomery International Growth Fund (the "International Growth Fund");
Montgomery International Small Cap Fund (the "International Small Cap Fund");
Montgomery Emerging Markets Fund (the "Emerging Markets Fund"); Montgomery
Emerging Asia Fund (the "Emerging Asia Fund"); Montgomery Latin America Fund
(the "Latin America Fund"); Montgomery Global Opportunities Fund (the
"Opportunities Fund"); Montgomery Global Communications Fund (the
"Communications Fund"); Montgomery Select 50 Fund (the "Select 50 Fund");
Montgomery Global Asset Allocation Fund (the "Global Asset Allocation Fund");
Montgomery Total Return Bond Fund (the "Total Return Bond Fund"); Montgomery
Short Duration Government Bond Fund (formerly called the "Montgomery Short
Government Bond Fund," the "Short Bond Fund"); Montgomery Government Reserve
Fund (the "Reserve Fund"); Montgomery California Tax-Free Intermediate Bond Fund
(the "California Intermediate Bond Fund") and Montgomery California Tax-Free
Money Fund (the "California Money Fund"); Montgomery Federal Tax-Free Money Fund
(the "Federal Money Fund"); as well as one series of The Montgomery Funds II,
Montgomery U.S. Asset Allocation Fund, which was formerly called the Montgomery
Asset Allocation Fund (the "U.S. Asset Allocation Fund").
Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Growth, Small
Cap Opportunities, Small Cap, Micro Cap and Equity Income Funds as the "U.S.
Equity Funds"; the International Growth, International Small Cap, Emerging
Markets, Emerging Asia, Latin America, Opportunities and Communications Funds as
the "Foreign and Global Equity Funds"; the Select 50, U.S. Asset Allocation and
Global Asset Allocation Funds as the "Multi-Strategy Funds"; the Total Return
Bond, Short Bond and California Intermediate Bond Funds as the "Fixed Income
Funds"; the California Intermediate Bond, California Money and Federal Money
Funds as the "Tax-Free Funds"; the Reserve, California Money and Federal Money
Funds as the "Money Market Funds"; and all of the Funds other than the Tax-Free
Funds as the "Taxable Funds."
Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The
B-3
<PAGE>
achievement of each Fund's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
The U.S. Asset Allocation Fund and the Global Asset Allocation
Fund are funds-of-funds. Other than U.S. government securities, neither the U.S.
Asset Allocation Fund nor the Global Asset Allocation Fund owns securities of
their own. Instead, each of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund invests its assets in a number of funds in The Montgomery Funds
family (each, an "Underlying Fund")Investors of the U.S. 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 U.S. Asset Allocation Fund and the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. To the extent allowed in the Prospectus,
a Fund 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 a
Fund's investment policies, a Fund's 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 Fund, to the extent permitted
by the prospectus, may invest in securities issued by other investment
companies. Those investment companies must invest in securities in which the
Fund can invest in a manner consistent with the Fund's investment objective and
policies. 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.
U.S. Government Securities. Some funds may, to the extent
allowed by the prospectus invest a substantial portion, if not all, of their net
assets in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Generally, the value of U.S. Government securities held by
these Funds will fluctuate inversely with interest rates. U.S. Government
securities in which these Funds may
B-4
<PAGE>
invest include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
Government, including the Federal Housing Administration ("FHA"), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Bank, Farm Credit System Financial Assistance Corporation, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate
Credit Banks, Federal Land Banks, Financing Corporation, Federal Financing Bank,
Federal National Mortgage Association ("FNMA"), Maritime Administration,
Tennessee Valley Authority, Resolution Funding Corporation, Student Loan
Marketing Association and Washington Metropolitan Area Transit Authority. Direct
obligations of the U.S. Treasury include a variety of securities that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, a Fund will not invest in obligations issued by an
instrumentality of the U.S. Government unless the Manager determines that the
instrumentality's credit risk makes its securities suitable for investment by
the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
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
B-5
<PAGE>
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 10 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. To the extent
allowed in the Prospectus, a 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 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.
To the extent allowed in the Prospectus, a Fund 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,
B-6
<PAGE>
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 a Fund 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, a Fund 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 a Fund. Further, because of this
feature, the value of ARMS is unlikely to rise during periods of declining
interest rates to the same extent as fixed rate instruments. For further
discussion of the risks associated with mortgage-related securities generally,
see "Risk Considerations" in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution")Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not 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
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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 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. 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.
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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 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.
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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 Bond Fund will not invest more than 15% of its total
assets and the California Money 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. To the extent allowed in the Prospectus, a
Fund 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
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interest rates, liquidity of the security and perceived credit quality of the
issuer. Zero coupon securities also may take the form of debt securities that
have been stripped of their unmatured interest coupons, the coupons themselves
and receipts or certificates representing interests in such stripped debt
obligations and coupons. The market prices of zero coupon securities are
generally more volatile than the market prices of interest-bearing securities
and respond more to changes in interest rates than interest-bearing securities
with similar maturities and credit qualities.
Risk Factors/Special Considerations Relating to Debt Securities
To the extent allowed in the Prospectus, a Fund 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, a Fund will invest no
more than 5% (15% for the Latin America Fund) of its 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 a Fund 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 a Fund 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 the Fund.
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 a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if the Fund 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
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company to make principal and interest payments on its debt securities. If the
issuer of low-rated debt securities defaults, the Fund 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
a Fund, to the extent allowed in the Prospectus, 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. The Fund also may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
To the extent allowed in the Prospectus, a Fund 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. To the extent allowed in the Prospectus, a
Fund may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that currency for a fixed dollar
amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or 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 a Fund 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. A Fund 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 a Fund, to the extent allowed in the Prospectus, 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
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securities (such as U.S. Government securities), securities indices, foreign
currencies and other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
these Funds or which they expect to purchase. These Funds' futures transactions
generally will be entered into only for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect a Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated)All futures contracts entered into by these Funds are
traded on U.S. exchanges or boards of trade licensed and regulated by the CFTC
or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek, 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
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contracts. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Manager will attempt to estimate the extent of this difference in volatility
based on historical patterns and to compensate for it by having that Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting that Fund's securities
portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities can be substantially offset by appreciation in the
value of the futures position. However, any unanticipated appreciation in the
value of a Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. To
the extent allowed in the Prospectus, a Fund may purchase put and call options
on securities in which it has invested, on foreign currencies represented in its
portfolios and on any securities index based in whole or in part on securities
in which the Fund may invest. The Fund also may enter into closing sales
transactions in order to realize gains or minimize losses on options they have
purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
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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 the 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.
The 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.
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.
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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
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. To the extent allowed in the
Prospectus, a Fund may enter into reverse repurchase agreements, as set forth in
the Prospectus. A Fund typically will invest the proceeds of a reverse
repurchase agreement in money market
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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. A Fund 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.
The 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. To the extent allowed in the
Prospectus, a Fund may enter into dollar roll transactions. 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 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.
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When-Issued and Forward Commitment Securities. To the extent
allowed in the Prospectus, a Fund 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.
To the extent allowed in the Prospectus, a 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, the Fund must obtain the security
which it has made a commitment to deliver. If the 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, the Fund may incur a loss as a
result of this type of forward commitment if the price of the security increases
between the date the Fund enters into the forward commitment and the date on
which it must purchase the security it is committed to deliver. The 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 the 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. To the extent allowed in the Prospectus,
a Fund may invest 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
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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 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
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note the risks involved with each Underlying Fund, because the U.S. Asset
Allocation Fund and the Global Asset Allocation Fund are "funds-of-funds."
Foreign Securities
Investors in Funds that may, as allowed by the Prospectus,
invest in foreign securities 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
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available information about foreign companies comparable to the reports and
ratings published regarding companies in the United States. Foreign companies
are often not subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements often may not be comparable
to those applicable to U.S. companies. Many foreign markets have substantially
less volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Emerging Market Countries
To the extent allowed in the Prospectus, a Fund 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
Funds, to the extent allowed in the Prospectus, that buy and
sell foreign currencies endeavor to do so 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.
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
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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, 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
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financial services, among other industries, have been severely affected. Since
the start of 1994, however, California's economy has been on a steady recovery.
The rate of economic growth in California in 1996, in terms of job gains,
exceeded that of the rest of the United States. The State added nearly 350,000
jobs during 1996, surpassing its pre-recession employment peak of 12.7 million
jobs. Another 380,000 jobs are expected to be created in 1997. The unemployment
rate, while still higher than the national average, fell to the low 6 percent
range in mid-1997, compared to over 10 percent during the recession. Many of the
new jobs were created in such industries as computer services, software design,
motion pictures and high technology manufacturing. Business services, export
trade and other manufacturing also experienced growth. All major economic
regions of the State grew, with particularly large gains in the Silicon Valley
region of Northern California.
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. A consequence of the large
budget deficits has been that the State depleted its available cash resources
and had to use a series of external borrowings to meet its cash needs. With the
end of the recession, the State's financial condition has improved in the
1995-96 and 1996-97 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint. As of June 30, 1997, the State's budget reserve had a positive cash
balance of $281 million. No deficit borrowing has occurred at the end of the
last two fiscal years and the State's cash flow borrowing was limited to $3
billion in 1996-97.
In each of these two fiscal years, the State budget contained the
following major features:
1. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98.
2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for greater
support from the federal government. The State also attempted to shift
to the federal government a larger share of the cost of incarceration
and social services for illegal immigrants. Federal support never
reached the levels anticipated when the budgets were enacted. These
funding shortfalls were filled, however, by revenue collections which
exceeded expectations.
3. General Fund support for the University of California and California
State Universities grew by an average of 5.2 percent and 3.3 percent
per year, respectively, and there were no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were
approved for construction, however.
5. There were no tax increases and, starting January 1, 1997, there was
a 5 percent cut in corporate taxes. The suspension of the Renter's Tax
Credit was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was not
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any dramatic increase in budget reserves, although the accumulated budget
deficit from the recession years was finally eliminated in the past fiscal
years.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The
Budget Act anticipates General Fund revenues and transfers of $52.5 billion (a
6.8 percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels)On a budgetary basis,
the budget reserve (SFEU) is projected to decrease from $408 million at June 30,
1997 to $112 million at June 30, 1998. The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education, reflecting strong revenues which have
exceeded initial budgeted amounts. Part of the nearly $1.75 billion in increased
spending is allocated to prior fiscal years.
2. The Budget Act reflects a $1.235 billion pension case
judgment payment, and returns funding of the State's pension contribution to the
quarterly basis existing prior to the deferral actions invalidated by the
courts.
3. Continuing the third year of a four-year "compact" which
the State Administration has made with higher education units, funding from the
General Fund for the University of California and California State University
has increased by about 6 percent ($121 million and $107 million, respectively),
and there was no increase in student fees.
4. Because of the effect of the pension payment, most other
State programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing
generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program.
6. Unlike prior years, this Budget Act does not depend on
uncertain federal budget actions. About $300 million in federal funds, already
included in the federal FY 1997 and 1998 budgets, are included in the Budget
Act, to offset incarceration costs for illegal immigrants.
7. The Budget Act contains no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
After enactment of the Budget Act, and prior to the end of the
Legislative Session on September 12, 1997, the Legislature and the Governor
reached certain agreements related to State expenditures and taxes. The
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Legislature
also passed a bill to restore $48 million of welfare cost savings which had been
part of earlier legislation vetoed by the Governor. The Legislature also passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the legislation already
signed by the Governor are a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the
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year, and reform of funding for county trial courts, with the State to assume
greater financial responsibility.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service,
Inc. It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash 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
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other taxes that have been 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.
In November 1996, California voters approved Proposition 218.
The initiative applied the provisions of Proposition 62 to all entities,
including charter cities. It requires that all taxes for general purposes obtain
a simple majority popular vote and that taxes for special purposes obtain a
two-thirds majority vote. Prior to the effectiveness of Proposition 218, charter
cities could levy certain taxes such as transient occupancy taxes and utility
user's taxes without a popular vote. Proposition 218 will also limit the
authority of local governments to impose property-related assessments, fees and
charges, requiring that such assessments be limited to the special benefit
conferred and prohibiting their use for general governmental services.
Proposition 218 also allows voters to use their initiative power to reduce or
repeal previously-authorized taxes, assessments, fees and charges.
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.
Certain tax-exempt securities in which a Fund may invest may
be obligations payable solely from the revenues of specific institutions, or may
be secured by specific properties, which are subject to provisions of California
law that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.
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:
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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 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 U.S. Asset Allocation and Global
Asset Allocation Funds 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.
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
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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 Total Return
Bond, Short Bond and California Intermediate Bond Funds):
(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.)
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.
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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 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 the eight previous taxable years), although a
distribution from capital gains, will be distributed to shareholders with and as
a part of dividends giving rise to ordinary income. 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 the
eight previous taxable 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 by the shareholders.
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 elections with respect to
the reinvestment of dividends and distributions by
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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 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) for taxable years beginning or before August 5,
1997, 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 the eight prior taxable 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 furnished
their correct taxpayer identification numbers and made certain required
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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.
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, including certain holding period
requirements. In this case, shareholders will be informed in writing 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 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
A Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. A Fund may invest up to 10% of its total assets in the stock of
foreign investment companies. Such companies are likely to be treated as
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, a Fund may be able to avoid this tax by electing
to be taxed currently on its share of the PFIC's income, whether or not such
income is actually distributed by the PFIC. A Fund will endeavor to limit its
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, a Fund 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 year, at least 50% of the value of
the total assets of each of the California
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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 laws of California, 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 year, 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 exempt-interest dividends paid by
these Funds will qualify for the corporate dividends-received deduction for
federal income tax purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their own 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
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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.
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's
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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 LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same
members on their Boards, are responsible for the overall management of the
Funds, including general supervision and review of their investment activities.
The officers (the two Trusts, as well as an affiliated Trust, The Montgomery
Funds III, have the same officers), who administer the Funds' daily operations,
are appointed by the Boards of Trustees. The current Trustees and officers of
the Trusts performing a policy-making function and their affiliations and
principal occupations for the past five years are set forth below:
Richard W. Ingram, President and Treasurer (Age 42)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management LLC ("RCM") and Harris Trust and Savings Bank ("Harris") or
their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From 1989 to 1994, Mr.
Ingram was Vice President, Assistant Treasurer and Tax Director Mutual Funds of
The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered
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by Morgan, Waterhouse, RCM and Harris or their respective affiliates. From June
1994 to January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration, Scudder,
Stevens & Clark, Inc. From 1988 to May 1994, Ms. Jacoppo-Wood was a Senior
Paralegal at The Boston Company Advisers, Inc. ("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 28)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 0209. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
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60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off 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.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 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.
B-35
<PAGE>
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.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Managment in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E.F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
<TABLE>
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers or partners of the Manager or the
Distributor may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Funds Distributor, Inc. will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for each regular Board meeting attended. The
aggregate compensation paid by each Trust to each of the Trustees during the
fiscal year ended June 30, 1997, and the aggregate compensation paid to each of
the Trustees during the fiscal year ended June 30, 1997 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
John A. Farnsworth $25,000 $5,000 -- $35,000
Andrew Cox $25,000 $5,000 -- $35,000
Cecilia H. Herbert $25,000 $5,000 -- $35,000
<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 U.S. Asset
Allocation Fund) by Montgomery Asset Management LLC, the Manager, pursuant to an
Investment Management Agreement between the Manager and The Montgomery Funds
dated July 31, 1997; and to the U.S. Asset
- -----------------
* Trustee deemed an "interested person" of the Funds as defined in
the Investment Company Act.
B-36
<PAGE>
Allocation Fund by the Manager pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds II dated July 31, 1997(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:
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 Small Cap Opportunities First $200 million 1.20%
Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery International Growth First $500 million 1.10%
Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery International Small Cap First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
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%
B-37
<PAGE>
Montgomery Global Opportunities First $500 million 1.25%
Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Communications 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 U.S. Asset Allocation All Amounts None
Fund
Montgomery Global Asset Allocation All Amounts 0.20%*
Fund
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Short Duration First $500 million 0.50%
Government Bond Fund Over $500 million 0.40%
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Montgomery California Tax-Free First $500 million 0.50%
Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery Federal Tax-Free Money First $500 million 0.40%
Fund Over $500 million 0.30%
* This amount represents only the management fee of the U.S. Asset
Allocation Fund and does not include management fees attributable to the
Underlying Funds which ultimately are to be borne by shareholders of the
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): International Small Cap,
Emerging Markets, Emerging Asia, Latin America, 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%); U.S. Asset 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
B-38
<PAGE>
(1.75%) (including total expenses of the Underlying Funds), the Short Bond,
Total Return Bond, 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.
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.
<TABLE>
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
Fund Year or Period Ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Montgomery Growth Fund $9,429,758 $8,336,529 $5,566,892
Montgomery Small Cap $2,352,549 $ 217,603 NA
Opportunities Fund
Montgomery Small Cap Fund $2,290,187 $2,364,834 $2,095,945
Montgomery Micro Cap Fund $4,042,815 $3,732,720 $ 703,124
</TABLE>
B-39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Montgomery Equity Income Fund $ 244,249 $ 101,709 $ 12,589
Montgomery International Growth Fund $ 378,515 $ 97,137 NA
Montgomery International Small Cap $ 823,594 $ 611,587 $ 473,200
Fund
Montgomery Emerging Markets Fund $10,621,310 $10,262,601 $ 9,290,178
Montgomery Emerging Asia Fund $ 257,092 NA NA
Montgomery Latin America Fund NA NA NA
Montgomery Global Opportunities Fund $ 562,210 $ 381,316 $ 226,283
Montgomery Global Communications $ 2,298,528 $ 3,186,649 $ 2,952,058
Fund
Montgomery Select 50 Fund $ 1,366,989 $ 359,453 NA
Montgomery U.S. Asset Allocation $ 1,211,759 $ 998,198 $ 150,882
Fund
Montgomery Global Asset Allocation $ 1,231 NA NA
Fund
Montgomery Total Return Bond Fund NA NA NA
Montgomery Short Duration $ 231,870 $ 93,531 $ 99,249
Government Bond Fund
Montgomery Government Reserve Fund $ 2,175,561 $ 1,703,723 $ 1,440,964
Montgomery California Tax-Free $ 103,992 $ 48,596 $ 43,889
Intermediate Bond Fund
Montgomery California Tax-Free $ 640,819 $ 538,030 $ 149,574
Money Fund
Montgomery Federal Tax-Free $ 319,348 NA NA
Money Fund
</TABLE>
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Distributor 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.
B-40
<PAGE>
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the Trusts, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor 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 Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor 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
Distributor.
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 Rule 2830 of the NASD Rules of Conduct, as such
Rule may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the
B-41
<PAGE>
Services Plan for the newly designated Class P and Class L shares of each Fund.
The initial shareholder of the Class P and Class L shares, if any, of each Fund
approved the Services Plan covering each Class. Class R shares are not covered
by the Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund, including
responding to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Funds, including issuers of securities in which the
Funds may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
The Foreign and Global Equity 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
B-42
<PAGE>
usually act as principals for their own account. Purchases from underwriters
will include a concession paid by the issuer to the underwriter and purchases
from dealers will include the spread between the bid and the asked price. If the
execution and price offered by more than one dealer or underwriter are
comparable, the order may be allocated to a dealer or underwriter that has
provided research or other services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than 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 reasonable flexibility to
use
B-43
<PAGE>
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.
Other than for the U.S. Fixed Income and Money Market Funds,
the Manager's sell discipline for investments 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 each Fund, sell decisions at the country level are
dependent on the results of the Manager's asset allocation model. Some countries
impose restrictions on repatriation of capital and/or dividends which would
lengthen the Manager's assumed time horizon in those countries. In addition, the
rapid pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
For the year ended June 30, 1997, the Funds' total securities
transactions generated commissions of $12,725,341, of which $27,015 was paid to
Montgomery Securities.
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. Throughout those fiscal years, Montgomery
Securities was affiliated with the Funds through its ownership of Montgomery
Asset Management L.P., the former Manager of the Funds.
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, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Funds for their customers.
B-44
<PAGE>
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 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.
B-45
<PAGE>
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 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), eastern time, (or earlier when trading
closes earlier) 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, Martin Luther King 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,
B-46
<PAGE>
Thanksgiving Day and Christmas, include January 2, Good Friday, Columbus Day,
Veteran's Day and December 26. The Funds may, but do not expect to, determine
the net asset values of their shares on any day when the NYSE is not open for
trading if there is sufficient trading in their portfolio securities on such
days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs, 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 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
B-47
<PAGE>
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.
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
B-48
<PAGE>
anticipated to increase, above $1.00 (computed using amortized cost), the Board
might supplement dividends in an effort to maintain the net asset value at $1.00
per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with respect to each Fund may be terminated
without penalty by the parties thereto upon 60 days' written notice and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield is computed
by determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
Effective Yield = [(Base Period Return + 1) 365/7 ] -1
The Short Bond 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).
B-49
<PAGE>
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula 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 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. 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,
1997, were as follows:
<CAPTION>
Tax-Equiv.
Effective Effective Current Tax-Equiv.
Yield Yield Yield* Yield Yield*
Fund (7-day) (7-day) (7-Day) (30-day) (30-day)
<S> <C> <C> <C> <C> <C>
Montgomery Total N/A N/A N/A N/A N/A
Return Bond Fund
Montgomery Short N/A N/A N/A 6.03% N/A
Duration Government
Bond Fund
Montgomery Government 5.10% 5.23% N/A 5.09% N/A
Reserve Fund
Montgomery Federal 3.61% 3.67% 6.08% 3.29% 5.45%
Tax-Free Money Fund
B-50
<PAGE>
Montgomery N/A N/A N/A 4.19% 7.65%
California Tax-Free
Intermediate Bond
Fund
Montgomery 3.43% 3.49% 6.37% 3.21% 5.86%
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
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
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<PAGE>
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in that Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing that Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
<TABLE>
The average annual total return for each Fund for the periods
indicated was as follows:
<CAPTION>
Year 5-Years Inception*
Ended Ended Through
Fund June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
Montgomery Growth Fund 20.44% N/A 26.78%
Montgomery Small Cap 10.97% N/A 28.65%
Opportunities Fund
Montgomery Small Cap Fund 6.81% 18.07% 20.47%
Montgomery Micro Cap Fund 14.77% N/A 24.26%
Montgomery Equity Income 26.02% N/A 23.67%
Fund
Montgomery International 19.20% N/A 23.43%
Growth Fund
Montgomery International
Small Cap Fund 15.48% N/A 10.06%
Montgomery Emerging Markets
Fund 19.34% 12.84% 11.91%
Montgomery Emerging Asia 57.80% N/A 57.80%
Fund
Montgomery Latin America N/A N/A N/A
Fund
Montgomery Global
Opportunities Fund 18.71% N/A 16.09%
Montgomery Global
Communications Fund 14.43% N/A 14.30%
Montgomery Select 50 Fund 26.35% N/A 37.38%
Montgomery U.S. Asset
Allocation Fund 14.65% N/A 23.21%
Montgomery Global Asset
Allocation Fund 19.20% N/A 23.43%
Montgomery Total Return Bond
Fund N/A N/A N/A
Montgomery Short Duration
Government Bond Fund 6.79% N/A 6.38%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Year 5-Years Inception*
Ended Ended Through
Fund June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C>
Montgomery Government
Reserve Fund 5.03% N/A 4.30%
Montgomery California Tax-
Free Intermediate Bond Fund 6.91% N/A 5.17%
Montgomery California Tax-
Free Money Fund 2.95% N/A 3.15%
Montgomery Federal Tax-Free N/A N/A 3.26%
Money Fund
<FN>
- ----------------
* Total return for periods of less than one year are
aggregate, not annualized, return figures. The dates of inception for the Funds
were:
Growth Fund, September 30, 1993; Small Cap Opportunities Fund, December 29,
1995; Small Cap Fund, July 13, 1990; Micro Cap Fund, December 30, 1994; Equity
Income Fund, September 30, 1994; International Growth Fund, June 30, 1995;
International Small Cap Fund, September 30, 1993; Emerging Markets Fund, March
1, 1992; Emerging Asia Fund, September 30, 1996; Latin America Fund, June 30,
1997; Global Opportunities Fund, September 30, 1993; Global Communications Fund,
June 1, 1993; Select 50 Fund, October 27, 1995; U.S. Asset Allocation Fund,
March 31, 1994; Global Asset Allocation Fund, January 2, 1997; Total Return Bond
Fund, June 30, 1997; Short Duration Government Bond Fund, December 18, 1992;
Government Reserve Fund, September 14, 1992; California Intermediate Bond Fund,
July 1, 1993; California Tax-Free Money Fund, September 30, 1994; and Federal
Tax-Free Money Fund, June 30, 1996.
</FN>
</TABLE>
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 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%
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<PAGE>
*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 Manager managed that Fund until July 31, 1997.
The performance information of the Navigator Asia Pacific Fund (net of fees) was
as follows:
Period Aggregate Total Return
(Net of fees)
Year to date ended July 31, 1997 42.09%
Since inception 78.70%
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:
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
B-54
<PAGE>
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.
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. The Manager has developed its own tradition of
intensive research and the Manager has made intensive research one of the
important characteristics of the Montgomery Funds style.
The portfolio managers for Montgomery's Foreign and Global
Equity 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 smaller
capitalization businesses
B-55
<PAGE>
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market. The growth equity team, for example, has developed its own strategy 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 $9 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 307,000).
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. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073, 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
B-56
<PAGE>
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 September 30, 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:
B-57
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Growth Fund
Charles Schwab & Co., Inc. 18,675,502 36.66
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 4,265,685 8.37
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. 4,875,495 36.73
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,027,699 9.10
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 735,263 7.57
Knoxville
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,544,261 15.89
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,178,834 36.62
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 980,263 5.81
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Equity Income Fund
</TABLE>
B-58
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Charles Schwab & Co., Inc. 1,085,789 51.12
101 Montgomery Street
San Francisco, CA 94104-4122
International Growth Fund
Charles Schwab & Co., Inc. 460,926 18.58
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 209,595 8.45
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
Resources Trust Co. Custody 241,362 9.73
For the Exclusive Benefit of Ian
P.O. Box 3865
Englewood, CO 80155-3865
International Small Cap Fund
Charles Schwab & Co., Inc. 1,202,775 40.90
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp for the 206,203 7.01
Exclusive Use of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Markets Fund
Charles Schwab & Co., Inc. 35,178,272 45.39
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 6,415,317 8.28
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Asia Fund
Charles Schwab & Co., Inc. 1,043,187 34.78
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
National Financial Services Corp. 490,193 16.34
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global Opportunities Fund
Charles Schwab & Co., Inc. 697,590 38.29
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 134,397 7.38
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 7.32
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 3,029,720 39.65
101 Montgomery Street
San Francisco, CA 94104-4122
Select 50 Fund
Charles Schwab & Co., Inc. 3,459,076 31.11
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,175,797 10.57
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Latin America Fund
Charles Schwab & Co., Inc. 105,664 12.71
101 Montgomery Street
San Francisco, CA 94104-9122
Donaldson, Lufkin & Jenrette 45,872 5.52
Securities Corporation
Mutual Funds Department, 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Montgomery Securities 61,118 7.35
401K Deferred Compensation Plan
For the Exclusive Benefit of Clients
Attn: Jeanette Harrison
600 Montgomery Street
San Francisco, CA 94111-2777
Nations Banc Montgomery Seecurities 83,333 10.03
001-00200-14
Attn: Mutual Funds, 5th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
U.S. Asset Allocation Fund
Charles Schwab & Co., Inc. 2,126,188 33.16
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 882,783 13.77
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Total Return Bond Fund
Asset Allocation Fund 6,281,199 93.76
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
Short Duration Government Bond Fund
Charles Schwab & Co., Inc. 1,376,828 31.47
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 451,734 10.32
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 480,341 10.98
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
</TABLE>
B-61
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Prudential Securities Inc. 553,649 12.65
Special Custody Account for The Exclusive
Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
Wertheim Schroeder & Co. Inc. 255,929 5.85
Mutual Fund Control A/C
c/o LEWCO Securities
Attn: Tony Muoia
34 Exchange Place, Floor 4
Jersey City, NJ 07302-3901
Government Reserve Fund
Mary Miner, Trustee for Robert 59,393,306 10.72
Miner and Mary Miner Trust
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
California Tax-Free Intermediate Bond Fund
Charles Schwab & Co., Inc. 913,915 45.83
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 113,202 5.68
110-02832-15
Attn: Mutual Funds -- 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
California Tax-Free Money Market Fund
First Broadcasting Company 8,020,823 5.14
Attn: Ron Unkefer
300 Broadway
San Francisco, CA 94133
</TABLE>
B-62
<PAGE>
<TABLE>
As of September 30, 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:
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Growth Fund
Dreyfus Investment Services Corp. 1,014 26.56
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 238 6.24
FBO 659026941
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 357 9.34
FBO 210-08164-18
14 Wall Street
New York, NY 10005-2101
ABN AMRO Chicago Corp. 239 6.26
FBO 086-79443-16
Attn: Mutual Fund Operations
P.O. Box 6108
Chicago, IL 60680-6108
Gruntal & Co., L.L.C. 243 6.38
FBO 825-28374-12
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 281 7.36
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 281 7.36
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 237 6.22
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
Small Cap Opportunities Fund
E*Trade Securities Inc. 348 56.06
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
</TABLE>
B-63
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
U.S. Clearing Corp. 138 22.26
FBO 720-90531-10
26 Broadway
New York, NY 1004-1798
Gruntal & Co., L.L.C. 135 21.69
FBO 886-10149-11
14 Wall Street
New York, NY 10005-2101
Small Cap Fund
State Street Bank & Trust Co. 176,596 41.94
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 80, 184 19.04
U/A January 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 44,030 10.46
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 0226-8705
State Street Bank & Trust Co. Tr. 81,450 19.34
U/A December 1, 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. 38,819 9.22
The Bordon Group, Inc.
401K Retirement & P.S.P.
P.O. Box 1992
Boston, MA 02105-1992
Equity-Income Fund
State Street Bank & Trust Co. Tr. 63,370 99.98
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Emerging Markets Fund
</TABLE>
B-64
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
State Street Bank & Trust Co. 27,464 64.80
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 5.19
FB0 720-90531-10
26 Broadway
New York, NY 1004-1798
US Clearing Corp. 5,851 13.81
FBO 780-16649-18
26 Broadway
New York, NY 10004-1798
Select 50 Fund
Gruntal & Co., LLC 122 5.13
FBO 884-04563-16
14 Wall Street
New York, NY 10005-2101
BA(1) Investment Services 925 38.77
FBO 423416511
185 Berry Street, 3rd Fl.
San Francisco, CA 94107-1729
No. Quincy, MA 02171-2126
BA(1) Investment Services 556 23.26
FBO 210426271
185 Berry Street, 3rd Fl.
San Francisco, CA 94107-1729
No. Quincy, MA 02171-2126
US Clearing Corp. 252 10.56
FBO 780-95252-10
26 Broadway
Investment Plan
New York, NY 10004-1798
Anthony J. Mattio 226 9.49
Bank of America NT&SA
As IRA Rollover Custodian
2555 Sundew Ave.
Henderson, NV 89012-2911
U.S. Asset Allocation Fund
Gruntal & Co., LLC 316 26.59
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
</TABLE>
B-65
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Gruntal & Co., LLC 316 26.59
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 290 24.36
FBO 880-12981-11
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 267 22.46
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
</TABLE>
As of October 7, 1997, officers and directors of the
Montgomery Funds owned, in aggregate, of record more than 1% of the outstanding
shares in the California Tax-Free Intermediate Bond Fund, holding a combined
2.5% of the shares outstanding.
The Trusts are registered with the Securities and Exchange
Commission as non-diversified management investment companies, although each
Fund, except for the Tax-Free Funds, is a diversified series of the Trust. Such
a registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending
June 30, 1997, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities,
Equity Income, Opportunities, Communications, International Growth,
International Small Cap, Emerging Markets, Select 50, U.S. Asset Allocation,
Global Asset Allocation, Short Bond, Reserve, Federal Tax-Free Money, 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, 1997 (the
"Report"), are incorporated herein by reference to the Report.
B-66
<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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:
1An application for rating was not received or accepted.
2The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
B-67
<PAGE>
3There is a lack of essential data pertaining to the issuer.
4The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such 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
B-68
<PAGE>
AAA -- Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A -- Bonds and notes rated A are regarded as being of good quality. The
obligor's ability to pay interest and repay principal is strong but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB -- Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-69
<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-70
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
STATEMENT OF ADDITIONAL INFORMATION
October 15, 1997
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust with different series
of shares of beneficial interest. Montgomery Institutional Series: Emerging
Markets Portfolio (the "Fund") is a series of the Trust. The Fund is managed by
Montgomery Asset Management LLC (the "Manager") and its shares are distributed
by Funds Distributor, Inc. (the "Distributor"). This Statement of Additional
Information contains information in addition to that set forth in the Prospectus
for the Fund (the "Prospectus"), dated October 15, 1997, as may be revised from
time to time. The Prospectus provides the basic information a prospective
investor should know before purchasing shares of the 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 Prospectus.
TABLE OF CONTENTS
Page
----
The Trust............................................................. B- 2
Investment Objective and Policies of the Fund......................... B- 2
Risk Factors.......................................................... B-14
Investment Restrictions............................................... B-16
Distributions and Tax Information..................................... B-19
Trustees and Officers................................................. B-25
Investment Management and Other Services.............................. B-31
Execution of Portfolio Transactions................................... B-36
Additional Purchase and Redemption Information........................ B-40
Determination of Net Asset Value...................................... B-42
Principal Underwriter................................................. B-44
Performance Information............................................... B-44
General Information................................................... B-48
Financial Statements.................................................. B-50
Appendix A............................................................ B-51
THE TRUST
The Trust is an open-end management investment company
organized as a Delaware business trust on September 10, 1993, and registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Trust currently offers 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
Montgomery Institutional Series: Emerging Markets Portfolio.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
B-1
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The investment objective and policies of the Fund are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
The Fund is a diversified series of the Trust, an open-end
management investment company offering redeemable shares of beneficial interest.
The achievement of the Fund's investment objective will depend on market
conditions generally and on the Manager's analytical and portfolio management
skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar 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 the
Fund's investment policies, the Fund's 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. The Fund may invest up to 10% of
its total assets in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either the Fund and affiliated persons
of the 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 the Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or the 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, the 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 the 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 Fund that are invested in other
investment companies.
U.S. Government Securities. Generally, the value of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities") held by the Fund will fluctuate
inversely with interest rates.
U.S. Government securities in which the Fund 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
B-2
<PAGE>
Banks, Federal Land Banks, Financing Corporation, Federal 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, the 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.
Risk Factors/Special Considerations Relating to Debt Securities
The Fund may invest in debt securities which are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") or 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 (the "Board") without
shareholder approval, the Fund will invest no more than 5% of its assets in debt
securities rated below Baa by Moody's or BBB by S&P or Fitch, 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. These changes in market value will be reflected in the Fund's net
asset value.
Bonds which are 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 or Fitch
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, 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 Fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect, and cause fluctuations in, the daily net
asset value of the Fund's shares.
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 the Fund to
achieve its investment objective may, to the extent it invests in low rated debt
securities, be more dependent upon such credit analysis than would be the case
if the Fund were investing in higher rated debt securities.
B-3
<PAGE>
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, the Fund
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 Fund 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. The Fund
also may conduct its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
at the time of the transaction.
The Fund 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 Fund may enter into forward contracts
to attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed-upon
price at a future date which is individually negotiated and privately traded by
currency traders and their customers.
The 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 the security or dividend or interest payment.
In addition, when the 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 foreign
currency, or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
contract to buy that foreign currency for a fixed dollar amount.
In connection with the Fund's forward contract transactions,
an amount of the Fund's assets equal to the amount of the Fund's commitments
will be held aside or segregated to be used to pay for the commitments.
Accordingly, the 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 forward
contracts. In such event, the Fund's ability to utilize forward contracts in the
manner set forth above 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 the Fund than if it had not engaged in such
contracts. The Fund generally will not enter into a forward foreign currency
exchange contract with a term greater than one year.
B-4
<PAGE>
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Fund may purchase and sell various kinds of futures contracts and
options on futures contracts. The Fund 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.
The Fund has 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 the Fund will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the 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
the 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%.
The Fund will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. The Fund's 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 the 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 the Fund are
traded on U.S. exchanges or boards of trade that are 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 the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may instead make or take delivery of the underlying securities
or currencies whenever it appears economically advantageous for it to do so. 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 its positions, the Fund
seeks 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 the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the 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, the
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, the 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. The 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 the Fund has acquired or
expects to acquire.
B-5
<PAGE>
As part of its hedging strategy, the Fund also may enter into
other types of financial futures contracts if, in the opinion of the Fund's
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 the 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 the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of the
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of
the Fund's portfolio securities could substantially be offset by a decline in
the value of the futures position.
The acquisition of put and call options on futures contracts
gives the Fund the right (but not the obligation), for a specified price, to
sell or purchase, respectively, the underlying futures contract at any time
during the option period. Purchasing an option on a futures contract gives the
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.
The 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. The Fund's ability to establish and close
out positions on such options will be subject to the development and maintenance
of a liquid market.
Loss from investing in futures transactions by the Fund is
potentially unlimited.
The Fund 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
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The
Fund may purchase put and call options on securities in which it has invested,
on foreign currencies represented in its portfolio and on any securities index
based in whole or in part on securities in which the Fund may invest. The Fund
also may enter into closing sales transactions in order to realize gains or
minimize losses on options it has purchased.
The 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 foreign currency in which such securities are
denominated. The purchase of a call option would entitle the 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.
The Fund may purchase and sell options that are traded on U.S.
and foreign exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Trading in OTC options is also subject to the risk that the
other party will be unable or unwilling to close out options purchased by the
Fund.
B-6
<PAGE>
Although the Fund will generally purchase only those options
for which there appears to be an active secondary market, there can be no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the 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 the Fund does not currently intend to do so, the Fund
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which the Fund may invest. A
covered call option is an option where the Fund, in return for a premium, gives
another party 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 of the underlying security
declining. However, by writing a covered call option, the Fund gives up the
opportunity, while the option is in effect, to realize gain from any price
increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction.
The Fund also may write covered put options which give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. The Fund will receive a premium for writing a put
option but will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise for
as long as the option is outstanding. In order to "cover" the put options that
it has written, the Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other liquid equity or debt
securities with a value equal to or greater than the exercise price of the put
options. The Fund will not write put options if the aggregate value of the
obligations underlying the put options shall exceed 10% of the Fund's total
assets.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and thereby result in
the institution by an exchange of special procedures which may interfere with
the timely execution of the Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Fund
may enter into repurchase agreements. The Fund's repurchase agreements generally
will involve a short- term investment in a U.S. Government security or other
high grade liquid debt security,
B-7
<PAGE>
with the seller of the underlying security agreeing to repurchase it from the
Fund at a mutually agreed-upon time and price. The repurchase price generally is
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 the Fund together with the repurchase price on
the date of repurchase. In either case, the income to the Fund is unrelated to
the interest rate on the underlying security itself.
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 Board of Trustees, reviews on a periodic basis the suitability and
creditworthiness, and the value of the collateral, of those sellers with whom
the Fund enters into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Trust's Board of Trustees.
The Fund generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Fund regards repurchase agreements
with maturities in excess of seven days as illiquid. The Fund may not invest
more than 15% 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 the 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 the Fund subject to a repurchase
agreement as being owned by the 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 under a repurchase
agreement, the 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 the Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the 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 the 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,
the Fund also runs the risk that the seller may fail to repurchase the security.
However, the Fund always requires collateral for any repurchase agreement to
which it is a party in the form of securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the Fund plus
accrued interest, and the Fund makes 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), the 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 at all times equals or exceeds the repurchase price.
The Fund may participate in one or more joint accounts with
other funds of the Trust that may invest in repurchase agreements collateralized
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,
B-8
<PAGE>
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 will have a duration of more than
seven days.
Lending of Portfolio Securities. Although the Fund does not
currently intend to do so, the Fund may lend its portfolio securities having a
value of up to 10% 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. The 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 the Fund or the borrower at any time. Upon such
termination, the Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned, will receive proceeds from the investment of the collateral
and will continue to retain any voting rights with respect to the 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 Fund 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 the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the 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 Fund does not believe that its net asset value
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund causes its 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 the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
Illiquid Securities. The Fund may invest up to 15% 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
B-9
<PAGE>
other things, purchased OTC options, 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 the Fund in excess of 1% of that company's total outstanding
shares. 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 Fund 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, the
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, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Board. 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 Fund's portfolio and
reports periodically on such decisions to the Board of Trustees.
RISK FACTORS
Foreign Securities
B-10
<PAGE>
Investors in the Fund 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 not generally
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. Many foreign markets have substantially less volume than either
the established domestic securities exchanges or the OTC markets. Securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commission rates in foreign countries, which may be
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. and capital requirements for brokerage firms are generally lower.
Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
Emerging markets Countries
The Fund invests in securities of companies domiciled in, and
in markets of, so-called "emerging markets 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 the Fund's 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 markets
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in certain emerging
markets countries may be slowed or reversed by unanticipated political or social
events in such countries.
Exchange Rates and Polices
The Fund endeavors to buy and sell foreign currencies on
favorable terms. Some price spreads on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes 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 the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's 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.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the
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degree of risk from political acts of foreign governments to which such assets
may be exposed. The Trustees 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 the
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 the 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 the Fund may be exposed to risk of financial loss.
Perfect correlation between the 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.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by the Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of the Fund's outstanding
voting securities as defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government and its agencies
and instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such issuer.
There are no limitations with respect to the remaining 25% of its total assets,
except to the extent other investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 10% of its portfolio securities as described above
and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency
purposes from a bank, and then not in excess of 10% of the value of its total
assets (at the lower of cost or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset coverage of at least 300%
of all borrowings, and no additional investments may be made while any such
borrowings are in excess of 5% 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.
4. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude the
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Fund from obtaining such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities.)
5. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however,
the 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
Statement of Additional Information.
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
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.
8. Invest, in the aggregate, more than 15% 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 OTC 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. 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.) For purposes of this restriction, the Fund generally
relies 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 the
Fund from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
12. Acquire or dispose of put, call, straddle or spread
options except as described herein and in the Prospectus and subject to the
following conditions:
(A) such options are written by other persons (except as
described herein or in the Prospectus), and
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(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 and unless 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.)
14. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value. (This
is an operating policy which may be changed without shareholder approval,
consistent with the regulations of the State of Texas.)
15. Purchase more than 10% of the outstanding voting
securities of any one issuer. (This is an operating policy which may be changed
without shareholder approval.)
16. Invest in commodities, except for futures contracts or
options on futures contracts, if, as a result thereof, more than 5% of the
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.
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 Board of Trustees 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.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Fund will receive income in the form of
dividends and interest earned on its investments in securities. This income,
less the expenses incurred in its operations, is the Fund's net investment
income, substantially all of which will be declared as dividends to the Fund's
shareholders.
The Fund also may derive capital gains or losses in connection
with sales or other dispositions of its portfolio securities. Any net gain the
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 the eight previous taxable years), although a
distribution from capital gains, will be distributed to shareholders with and as
a part of dividends giving rise to ordinary income. If during
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any year the Fund realizes a net gain on transactions involving investments held
more than 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 the eight previous taxable years) will be distributed and
treated as long-term capital gains in the hands of the shareholders regardless
of the length of time the Fund's shares may have been held by the shareholders.
Any dividend or distribution paid by the Fund reduces the
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.
As stated in the Prospectus, dividends and other distributions
will generally be made in the form of additional shares of the Fund. Investors
have the right to change their elections 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. The Fund intends to continue 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. The
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 the
Fund will not be subject to any federal income or excise taxes based on net
income. However, the Board of Trustees may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of
the Fund.
In order to qualify as a regulated investment company, the
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 stock or 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) for taxable years beginning on or before August 5, 1997, 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 the 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, the 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
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the 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 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 the eight prior taxable 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 the 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 Fund or the securities dealer effecting a redemption of
the Fund's shares by a shareholder will be required to file information reports
with the Internal Revenue Service ("IRS") with respect to distributions and
payments made to the shareholder. In addition, the Fund will be required to
withhold federal income tax at the rate of 31% on taxable dividends, redemptions
and other payments made to accounts of individual or other non-exempt
shareholders who have not furnished their correct taxpayer identification
numbers and certain required certifications on the Account Application Form or
with respect to which the 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 Fund intends 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, the 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.
The Fund may receive dividend distributions from U.S.
corporations. To the extent that the 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.
If more than 50% in value of the total assets of the Fund at
the end of its fiscal year is invested in stock or securities of foreign
corporations, the Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of the Fund's foreign source income (including any foreign income
taxes paid by the 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, including certain holding period requirements. If not more than 50% in
value of the Fund's total assets at the end of its fiscal year is invested in
stock or securities of foreign corporations, the Fund will not be entitled under
the Code to pass through to its shareholders their pro rata share of the foreign
taxes paid by the Fund. In this case, these taxes will be taken as a deduction
by the Fund. In either case, shareholders will be informed in writing by the
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 the Fund) to be included in their income tax returns.
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The Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. The Fund may invest up to 10% of its total assets in the stock of
foreign investment companies that may 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 the Fund derives from PFIC stock may be
subject to a non-deductible federal income tax at the Fund level. In some cases,
the Fund may be able to avoid this tax by electing to be taxed currently on its
share of the PFIC's income, whether or not such income is actually distributed
by the PFIC. The Fund will endeavor to limit its 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, the Fund may incur the PFIC tax in some
instances.
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 the 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 the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the 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
the Fund upon the expiration or sale of such options held by the Fund generally
will be capital gain or loss.
Any security, option, or other position entered into or held
by the Fund that substantially diminishes the Fund's risk of loss from any other
position held by the 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 the 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 the 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 the
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 the 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 the 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
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<PAGE>
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 the 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.
A shareholder who purchases shares of the Fund by tendering
payment for the shares in the form of other securities may be required to
recognize gain or loss for income tax purposes on the difference, if any,
between the adjusted basis of the securities tendered to the fund and the
purchase price of the Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities
must generally "mark to market" at the end of its taxable year all securities
which it owns. The resulting gain or loss is treated as ordinary (and not
capital) gain or loss, except to the extent allocable to periods during which
the dealer held the security for investment. The "mark to market" rules do not
apply, however, to a security held for investment which is clearly identified in
the dealer's records as being held for investment before the end of the day in
which the security was acquired. The IRS has issued guidance under Section 475
that provides that, for example, a bank that regularly originates and sells
loans is a dealer in securities, and subject to the "mark to market" rules.
Shares of the Fund held by a dealer in securities will be subject to the "mark
to market" rules unless they are held by the dealer for investment and the
dealer property identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's adjusted tax basis for the shares. Any loss
realized upon the redemption or exchange of 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 during such six-month period.
All or a portion of a loss realized upon the redemption of shares may be
disallowed to the extent shares 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 Fund. The law firm of Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
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
Fund.
TRUSTEES AND OFFICERS
The Trustees are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers, who administer the Fund's daily operations, are appointed by the Board
of Trustees. The current Trustees and officers of the Trust performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
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Richard W. Ingram, President and Treasurer (Age 41)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management LLC ("RCM") and Harris Trust and Savings Bank ("Harris") or
their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From 1989 to 1994, Mr.
Ingram was Vice President, Assistant Treasurer and Tax Director - Mutual Funds
of The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 27)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 0209. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus,
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Waterhouse, RCM and Harris or their respective affiliates. From February 1992 to
April 1994, Mr. Pelletier served as Counsel for TBCA. From August 1990 to
February 1992, Mr. Pelletier was employed as an Associate at Ropes & Gray (a
Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off 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.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
B-20
<PAGE>
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.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
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 former distributor, and has been employed by Montgomery Securities
since October 1983.
<TABLE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust 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 Fund and Montgomery Securities will receive commissions for
executing portfolio transactions for the Fund. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by the Trust to each of the Trustees during the fiscal year
ended June 30, 1997, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1997 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
John A. Farnsworth $25,000 $5,000 -- $35,000
Andrew Cox $25,000 $5,000 -- $35,000
Cecilia H. Herbert $25,000 $5,000 -- $35,000
<FN>
- -------------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-21
<PAGE>
* 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 Fund by Montgomery Asset
Management LLC, the Manager, pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds II dated July 31, 1997 (the
"Agreement").
The Agreement is in effect with respect to the Fund for two
years after the Fund's inclusion in its Trust's Agreement (on or around its
beginning of public operations) and then continues for periods not exceeding one
year so long as such continuation is approved at least annually by (1) the Board
or the vote of a majority of the outstanding shares of the Fund, and (2) a
majority of the Trustees who are not interested persons of any party to the
Agreement, in each case by a vote cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any time,
without penalty, by the Fund or the Manager upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act.
For services performed under the Agreement, the Fund pays the
Manager a monthly management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund, at the annual rate
of one and twenty-five one-hundredths of one percent (1.25%) of the first $50
million in average daily net assets, one percent (1.00%) of the next $50 million
in average daily net assets and nine-tenths of one percent (.90%) of amounts
over $100 million in average daily net assets.
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 one and twenty-five one hundredths
of one percent (1.25%) of the Fund's average net assets. The Manager also may
voluntarily reduce additional amounts to increase the return to the Fund's
investors. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following three years provided the Fund is
able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses for the
current year.
Operating expenses for purposes of the Agreement include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, if any, expenses incurred in connection with any merger or
reorganization, any extraordinary expenses such as litigation, and such other
expenses as may be deemed excludable with the prior written approval of any
state securities commission imposing an expense limitation. The Manager may also
at its discretion from time to time pay for other Fund expenses from its own
funds or reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the
Board of Trustees of the Trust at a duly called meeting. In considering the
Agreement, 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 following such reduction subject to
the Fund's ability to effect such reimbursement and remain in compliance with
applicable expense limitations. The Trustees also considered that any such
management fee reimbursement will be accounted for on the financial statements
of the Fund as a contingent liability of the Fund and will appear as a
B-22
<PAGE>
footnote to the Fund's financial statements until such time as it appears that
the Fund will be able to effect such reimbursement. At such time as it appears
probable that the Fund is able to effect such reimbursement, the amount of
reimbursement that the Fund is able to effect will be accrued as an expense of
the Fund for that current period.
As compensation for its investment management services the
Fund paid the Manager investment advisory fees in the amounts specified below.
Additional investment advisory fees payable under the Agreement may have instead
been waived by the Manager, but may be subject to reimbursement by the Fund as
discussed previously.
Year or Period Ended June 30,
-------------------------------------
1997 1996 1995
---- ---- ----
Emerging Markets Portfolio $3,614,992 $2,827,007 $1,789,283
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 Trust and who are also affiliated
persons of the Manager.
The use of the name "Montgomery" by the Trust and by the Fund
is pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing
Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant
to Rule 12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Fund pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Fund offered only one class of
shares. On that date, the Board of Trustees of the Trust, 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 the 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, the Fund pays distribution fees to the
Distributor at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares 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 Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor 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
Distributor.
B-23
<PAGE>
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 Fund under the 12b-1 Plan
will be paid in accordance with Article III, Rule 2830 of the NASD Rules of
Conduct as such Rule may change from time to time. Pursuant to the 12b-1 Plan,
the Board 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 the Fund. In addition, as long as the 12b-1 Plan remains in effect,
the selection and nomination of Trustees who are not interested persons (as
defined in the Investment Company Act) of the Trust shall be made by the
Trustees then in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder
Services Plan (the "Services Plan") with respect to the Fund. The Manager (or
its affiliate) serves as the service provider under the Services Plan and, as
such, receives any fees paid by the Fund pursuant to the Services Plan. The
Trust has not yet implemented the Services Plan for the Fund and has 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 Trust,
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 the Fund. The initial
shareholder of the Class P and Class L shares, if any, of the 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 the 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 the Fund. Such amounts are compensation for providing certain services
to clients owning shares of Class P or Class L of the Fund, 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 the Fund, including responding
to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Fund on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Fund, including issuers of securities in which the
Fund may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Fund, and may restrict the
ability of the Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Fund's assets, which are maintained at the
Custodian's principal office and at
B-24
<PAGE>
the offices of its branches and agencies throughout the world. The Custodian has
entered into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the Investment Company Act. The Custodian, its
branches and sub-custodians generally hold certificates for the securities in
their custody, but may, in certain cases, have book records with domestic and
foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Manager determines which securities
are to be purchased and sold by the Fund and which broker-dealers are eligible
to execute the Fund's portfolio transactions, subject to the instructions of,
and review by, the Fund and the Trust's Board of Trustees. 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 the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities
directly in the securities markets located in emerging or developing countries
or in the over-the-counter markets. The Fund may purchase ADRs and EDRs 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 the Fund may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund 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 Fund 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 the Fund, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Fund is
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Fund's shares as a factor in the selection of
broker-dealers to execute its portfolio transactions. The placement of portfolio
transactions with broker-dealers who sell shares of the Fund is subject to rules
adopted by the National Association of Securities Dealers, Inc. ("NASD").
B-25
<PAGE>
While the Fund's 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
Fund or to the Manager, even if the specific services were not imputed just to
the Fund 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, the 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 the 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 the Fund or
assist the Manager in carrying out its responsibilities to the Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Fund.
Investment decisions for the Fund 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 the Fund 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 Fund 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 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 the
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,
the 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 the
Fund is purchasing or selling, each day's transactions in such security
generally will be allocated between the 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 Fund's 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 the 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 Fund's account by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Board of Trustees that the Fund will not be materially
disadvantaged by any such trading preclusion and that the desirability of
continuing its advisory arrangements with the Manager and the
B-26
<PAGE>
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 Fund's 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. The Fund will limit investments in illiquid securities to
15% of net assets.
Sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
B-27
<PAGE>
For the year ended June 30, 1997, the Fund's total securities
transactions generated commissions of $2,250,280, none of which was paid to
Montgomery Securities. For the year ended June 30, 1996, the Fund's total
securities transactions generated commissions of $2,251,340, none of which was
paid to Montgomery Securities. For the year ended June 30, 1995, the Fund's
total securities transactions generated commissions of $1,578,108, none of which
was paid to Montgomery Securities. For the year ended June 30, 1994, the Fund's
total securities transactions generated commissions of $614,484, none of which
was paid to Montgomery Securities. Montgomery Securities was an affiliate of the
Manager's predecessor during those periods.
The Fund does not effect securities transactions through
brokers in accordance with any formula, nor does it effect securities
transactions through such brokers solely for selling shares of the Fund. Brokers
who execute brokerage transactions as described above may from time to time
effect purchases of shares of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund
may or may not purchase securities with the expectation of holding them to
maturity, although its general policy is to hold securities to maturity. The
Fund 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
The Trust reserves the right in its sole discretion to (i)
suspend the continued offering of the Fund's 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 the Fund.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may purchase shares of the Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable, their acquisition is consistent with the
Fund's investment objective and policies, and the tendered securities are
otherwise acceptable to the Fund's Manager. For the purposes of sales of shares
of the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed
directly from the 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 the Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange
("NYSE") is restricted as determined by the SEC or the NYSE is
B-28
<PAGE>
closed for other than weekends and holidays; (b) an emergency exists as
determined by the SEC (upon application by the Fund pursuant to Section 22(e) of
the Investment Company Act) making disposal of portfolio securities or valuation
of net assets of the Fund not reasonably practicable; or (c) for such other
period as the SEC may permit for the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares
redeemed, but, as described below or under abnormal conditions that make payment
in cash unwise, the Fund may make payment partly in its portfolio securities
with a current amortized cost or market value, as appropriate, equal to the
redemption price. Although the Fund does not anticipate that it will normally
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
Trust has elected to be governed by the provisions of Rule 18f-1 under the
Investment Company Act, which require that the Fund 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.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may redeem shares of the Fund and receive
securities from the Fund's portfolio selected by the Manager in its sole
discretion, provided that such redemption is not expected to affect the Fund's
ability to attain its investment objective or otherwise materially affect its
operations. For the purposes of redemptions in kind, the redeemed securities
shall be valued at the identical time and in the identical manner that the other
portfolio securities are valued for purposes of calculating the net asset value
of the Fund's shares.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the 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 the 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 the Fund is
dtermined once daily as of the Fund's cutoff time on each day that the NYSE is
open for trading. Generally, this is 4:00 p.m. eastern time or earlier when
trading closes earlier. It is expected that the Exchange will be closed on
Saturdays and Sundays and on New Year's Day, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas. The Fund may, but does not expect to, determine the net asset
value of its shares on any day when the NYSE is not open for trading if there is
sufficient trading in its portfolio securities on such days to materially affect
the net asset value per share.
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 Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE which
B-29
<PAGE>
will not be reflected in the computation of the Fund's net asset value unless
the Trustees or their delegates deem that such events would materially affect
the net asset value, in which case an adjustment would be made.
Generally, the Fund's 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 of Trustees.
The Fund's 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 Board of Trustees.
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 the
Fund if acquired within 60 days of maturity or, if already held by the 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 Fund are valued on the basis of valuations
provided by dealers in those instruments or by an independent pricing service,
approved by the Board of Trustees. Any such pricing service, in determining
value, will 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 the 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 the 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 Trust's Board of Trustees.
If any securities held by the Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board of Trustees. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally determined
as the amount which the Fund could reasonably
B-30
<PAGE>
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 the 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
Board of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Fund are valued in such manner as the
Board of Trustees in good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor acts as the Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, and is a member
of most of the principal securities exchanges in the U.S. and is a member of the
NASD. The Underwriting Agreement between the Fund and the Distributor is in
effect until May 23, 1996, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the Board of
Trustees of the Trust or the vote of a majority of the outstanding securities of
the 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 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 Fund's shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate its past performance. Performance figures will be calculated
separately for Class R, Class P and Class L shares.
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 the Fund will be accompanied by information on
the Fund's average annual
B-31
<PAGE>
compounded rate of return over the most recent four calendar quarters and the
period from the Fund's inception of operations. The Fund may also advertise
aggregate and average total return information over different periods of time.
The Fund's "average annual 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. The Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in the
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of a
l-, 5- or 10-year period at the end of a l-, 5-
or 10-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
The Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. The total return information also assumes cash investments and
redemptions and, therefore, includes the applicable expense reimbursement fees
discussed in the Prospectus. Consequently, any given performance quotation
should not be considered representative of the 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 the Fund with certain
bank deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other investment
companies should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
B-32
<PAGE>
The average annual total return for the Fund for the periods
indicated was as follows:
Inception*
Year Ended through
June 30, 1997 June 30, 1997
-------------- ---------------
Emerging Markets Portfolio 20.45% 4.90%
* December 17, 1993
Comparisons. To help investors better evaluate how an
investment in the Fund might satisfy their investment objectives, advertisements
and other materials regarding the Fund may discuss various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. The
following publications, indices and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) 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.
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 Fund.
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 Fund's 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
Fund to calculate its figures.
Investors should note that the investment results of the Fund
will fluctuate over time, and any presentation of the Fund's total return for
any period should not be
B-33
<PAGE>
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 Fund. From time to time, the Fund may
publish or distribute information and reasons supporting the Manager's belief
that the 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, I/B/E/S Consensus Forecast,
Worldscope and Reuters as well as both local and international brokerage firms.
For example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth.
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 the Fund 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 may be used for
the Fund.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's 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 Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; expenses incurred in
connection with the establishment and registration of shares of any other funds
constituting a separate series of the Trust will be assumed by each respective
series. The expenses incurred in connection with the establishment and
registration of shares of the Fund as a separate series of the Trust have been
assumed by the Fund and are being amortized over a period of five years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses after commencement of the Fund's
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the
"Custodian") acts as custodian of the securities and other assets of the Fund.
The Custodian does not participate in decisions relating to the purchase and
sale of securities by the Fund.
B-34
<PAGE>
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Fund's Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and
Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Fund.
The validity of shares offered hereby will be passed on by
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Among the Trustees' powers enumerated in the Declaration of
Trust is the authority to terminate the Trust or any series of the Trust, or to
merge or consolidate the Trust or one or more of its series with another trust
or company without the need to seek shareholder approval of any such action.
B-35
<PAGE>
As of September 30, 1997, to the knowledge of the Fund, the
following shareholders owned of record 5% or more of the outstanding shares of
the Fund:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
----------------------- ------------ ---------
Pacific Gas & Electric Company 1,052,378 19.04
Retirement Plan
Attn: Peter Corippo
77 Beale Street, 24th Floor
Room 2461
San Francisco, CA 94105-1828
Leland Stanford Junior University 1,170,837 21.18
2770 Sand Hill Road
Menlo Park, CA 94025-7020
General Electric Pension Trust 526,240 9.52
3003 Summer Street
Stamford, CT 06905-4317
Chase Manhattan Bank Tr. 522,023 9.44
Reynolds Metals Retirement Trust
P.O. Box 27003
Richmond, VA 23261-7003
ASEA Brown Boveri Master Trust 612,904 11.09
c/o Eric W. Wood
P.O. Box 120071
Stanford, CT 06912-0071
Bankers Trust of CA NA TR 293,483 5.31
U/A Jan 2, 1997
Pacificorp Retirement Trust
300 S. Grand Ave., 40th Floor
Los Angeles, CA 90071-3110
As of September 30, 1997, the Trustees and Officers of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
The Trust is registered with the Securities and Exchange
Commission as a non-diversified management investment company, although the Fund
is a diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant period ended
June 30, 1997 for the Fund as contained in the Annual Report to Shareholders of
the Fund for the fiscal
B-36
<PAGE>
period ended June 30, 1997 (the "Report"), are incorporated herein by reference
to the Report.
B-37
<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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.
B-38
<PAGE>
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such 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.
B-39
<PAGE>
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds and notes
with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-40
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) For Montgomery Institutional Series: Emerging Markets
Portfolio:
(1) Portfolio Investments as of June 30, 1997; Statement of
Assets and Liabilities as of June 30, 1997; Statement of
Operations for the Year Ended June 30, 1997; Statement of
Changes in Net Assets for the year ended June 30, 1997;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1997; Notes to
Financial Statements; Independent Auditor's Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Institutional Series: Emerging
Markets Portfolio for the year ended June 30, 1997.
(b) For Montgomery U.S. Asset Allocation Fund:
(1) Portfolio Investments as of June 30, 1997; Statement of
Assets and Liabilities as of June 30, 1997; Statement of
Operations for the Year Ended June 30, 1997; Statement of
Changes in Net Assets for the year ended June 30, 1997;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1997; Notes to
Financial Statements; Independent Auditors' Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Asset Allocation Fund for the
year ended June 30, 1997.
(c) Exhibits:
(1) Amended and Restated Agreement and Declaration of
Trust.D
(2) Amended and Restated By-Laws.D
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.G
(6) Form of Underwriting Agreement.G
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.E
- ------------------
A Previously filed as part of Pre-Effective Amendment No. 2 to the
Registration Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the
Registration Statement, filed on November 15, 1993.
D Previously filed as part of Post-Effective Amendment No. 9 to the
Registration Statement, filed on November 1, 1994.
E Previously filed as part of Post-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
G Previously filed as part of Post-Effective Amendment No. 22 to the
Registration Statement, filed on July 31, 1997.
C-1
<PAGE>
(9)(A) Administrative Services Agreement.G
(9)(B) Form of Multiple Class Plan.F
(9)(C) Form of Shareholder Services Plan.F
(10) Consent and Opinion of Counsel as to legality of
shares.C
(11) Consent of Independent Auditors
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Form of Subscription Agreement for initial shares.C
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing Plan (Rule 12b-1 Plan)G
(16)(A) Performance Computation for Montgomery Institutional
Series: Emerging Markets Portfolio.E
(16)(B) Performance Computation for Montgomery Asset
Allocation Fund.E
(27) Financial Data Schedule is incorporated by reference
to Form N-SAR filed for the period ended December 31,
1996.
- ------------------
A Previously filed as part of Pre-Effective Amendment No. 2 to the
Registration Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the
Registration Statement, filed on November 15, 1993.
D Previously filed as part of Post-Effective Amendment No. 9 to the
Registration Statement, filed on November 1, 1994.
E Previously filed as part of Post-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
G Previously filed as part of Post-Effective Amendment No. 22 to the
Registration Statement, filed on July 31, 1997.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, LLC, a Delaware limited company,
is the manager of each series of the Registrant, of The Montgomery Funds II, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management, LLC is a subsidiary of Commerzbank AG based
in Frankfurt. The Registrant, The Montgomery Funds II and The Montgomery Funds
III are deemed to be under the common control of each of those two entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of September 30, 1997
-------------- ------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio 32
Montgomery U.S. Asset Allocation Fund 8,607
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
Effective July 31, 1997, MAM, L.P. completed the sale of
substantially all of its assets to the current investment manager -- Montgomery
Asset Management, LLC ("MAM, LLC"), a subsidiary of Commerzbank AG. Mr. R.
Stephen Doyle is the Chief Executive Officer, Mr. Mark B. Geist is the
President, Mr. Kevin T. Hamilton is a Managing Director, Mr. John T. Story is an
Executive Vice President and Mr. David E. Demarest is a Managing Director and
Chief Administrative Officer of MAM, LLC. In addition to their positions as
officers, each of them is also a Director of MAM, LLC. Mr. Heinz Josef Hockmann,
Mr. Dietrich-Kurt Frowein and Mr. Andreas Kleffel (each of whom is an officer of
Commerzbank) also are Directors of MAM, LLC.
C-3
<PAGE>
Prior to July 31, 1997, Montgomery Securities, which is a
broker-dealer and the prior principal underwriter of The M ontgomery Funds, was
the sole limited partner of the prior investment manager, Montgomery Asset
Management, L.P. ("MAM, L.P."). The general partner of MAM, L.P. was a
corporation, Montgomery Asset Management, Inc. ("MAM, Inc."), certain of the
officers and directors of which serve in similar capacities for MAM, L.P. R.
Stephen Doyle was the Chairman and Chief Executive Officer of MAM, L.P.; Mark B.
Geist was the President, John T. Story was the Managing Director of Mutual Funds
and Executive Vice President; and David E. Demarest was Chief Administrative
Officer. Information about the individuals who functioned as officers of MAM,
L.P. was set forth in Part B of Post-Effective Amendment No. 51 to the
Registration Statement was filed with the Commission on July 16, 1997 and are
herein incorporated by reference.
Item 29. Principal Underwriter
(a) Funds Distributor, inc. currently acts as distributor for:
BJB Investment Funds
Burridge funds
The Brinson Funds
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
The JPM Advisor Funds
The JPM Institutional Funds
The JPM Poerpoint Funds
The JPM Series Trust
The JPM Series Trust II
LKCM Fund
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc
Orbitex Group of Funds
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Cash Management Fund, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker- dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is an indirect wholly-owned
subsidiary of Boston Institutional Group, Inc., a holding company all of whose
outstanding shares are owned by key employees.
(b) The following is a list of the executive officers,
directors and partners of Funds Distributor, Inc.:
Director, President and Chief Marie E. Connolly
Executive Officer
Executive Vice President Richard W. Ingram
Executive Vice President Donald R. Robertson
Senior Vice President, General John E. Pelletier
Counsel, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President Joseph F. Tower, III
Treasurer and Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Bernard A. Whalen
Director William J. Nutt
C-4
<PAGE>
(c) Not Applicable.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., P.O. Box 1004 Baltimore,
Kansas City, Missouri 64105, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which will be kept by the Registrant at 600 Montgomery Street, San
Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's last annual
report to Shareholders, upon request and without charge.
(c) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and that registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Francisco and
State of California on this 8th day of October, 1997.
THE MONTGOMERY FUNDS II
By: Richard W. Ingram*
------------------------
Richard W. Ingram
President and Treasurer
(Principal Executive Officer
and Principal Accounting and
Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
R. Stephen Doyle * Trustee October 8, 1997
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee October 8, 1997
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee October 8, 1997
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee October 8, 1997
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
----------------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
<PAGE>
THE MONTGOMERY FUNDS II
EXHIBIT INDEX
No. Exhibit
--- -------
11 Consent of Independent Auditors'
<PAGE>
THE MONTGOMERY FUNDS II
EXHIBIT INDEX
No. Exhibit
11 Consent of Independent Auditors'
Deloitte &
Touche LLP
- ------------ ----------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds II:
We consent to (a) the incorporation by reference in this Post-Effective
Amendment No. 23 to Registration Statement No. 33-69686 of The Montgomery Funds
on Form N-1A of our reports dated August 8, 1997 incorporated by reference in
the Statement of Additional Information for Montgomery Institutional Series:
Emerging Markets Portfolio and (b) the references to us under the caption
"Financial Highlights" appearing in the Combined Prospectuses which also are a
part of such Registration Statement.
/s/ Deloitte & Touche LLP
October 13, 1997
- ----------------
Deloitte Touche
Tohmatsu
International
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