<PAGE>
Performance data quoted represents past performance and is not necessarily
indicative of future results. Performance is for a limited time only. The
investment return and principal value of an investment will fluctuate, so an
investor's shares, when redeemed, may be worth more or less than their original
cost. The inception date for each Fund was December 31, 1997.
Performance figures reflect a partial waiver of fees without which the total
returns would have been lower. Fund results in this report are total returns and
do not reflect a maximum sales charge of 5.50%, a maximum contingent deferred
sales charge of 5%, or any applicable redemption fees unless otherwise
indicated. Total return reflecting these charges and fees would have been as
Total returns from inception (12/31/97) through 9/30/98:
Class A Class B Class C
------------------------------
Montgomery Global
Long-Short Fund 27.22% 28.30% 23.80%
Montgomery Emerging
Markets Focus Fund (27.41)% (24.95)% (21.79)%
There are risks associated with investing in funds that invest in securities of
foreign countries, such as erratic market conditions, economic and political
instability, and fluctuations in currency exchange rates. The Montgomery Global
Long-Short Fund also uses sophisticated investment approaches that may present
substantially higher risks than most mutual funds. It may invest a larger
percentage of its assets in transactions using margin, leverage, short sales and
other forms of volatile financial derivatives such as options and futures. As a
result, the value of an investment in this Fund may be more volatile than
investments in other mutual funds. This Fund may not be appropriate for
conservative investors.
This information must be preceded or accompanied by a prospectus. Please read
the prospectus carefully before you invest.
The Funds are distributed by Funds Distributor, Inc. 10/98
<PAGE>
The Montgomery Partners Series/SM/
Semiannual Report
September 30, 1998
Global Long-Short Fund
Emerging Markets Focus Fund
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman's Letter.......................... 1
Investment Review & Portfolio Investments
Global Long-Short Fund................. 2
Emerging Markets Focus Fund............ 20
Statements of Assets & Liabilities......... 26
Statements of Operations................... 28
[MONTGOMERY PARTNERS LOGO Statements of Changes in Net Assets........ 30
APPEARS HERE]
================================== Financial Highlights....................... 32
The Montgomery Partners Series
101 California Street Statement of Cash Flows.................... 34
San Francisco, California 94111
800-OWL-8758 (695-8758) Notes to Financial Statements.............. 35
</TABLE>
INVEST WISELY./(R)/
<PAGE>
CHAIRMAN'S LETTER
================================================================================
[PHOTO OF R. STEPHEN DOYLE] October 1998
Dear Investor:
Recent market conditions have reemphasized the need for alternative solutions
and investment strategies that can respond to changeable market environments now
and into the future. We're pleased that we have been able to leverage the
expertise of our existing team of experienced investment professionals and
provide Funds that have outperformed their respective benchmark indices since
inception on 12/31/97.
The Montgomery Global Long-Short Fund has proved to be particularly appropriate
in today's volatile markets. Taking advantage of the benefits of diversity
through global investing and the ability to short securities, the portfolio
managers have been able to achieve very encouraging returns. Over the nine
months ended September 30, 1998, the Fund was up 34.60%/*/ compared with a
return of 0.69% for the benchmark Morgan Stanley Capital International All-
Country World Free Index for the same time period.
The Montgomery Emerging Markets Focus Fund has helped shield emerging markets
investors to some extent from the negative sentiment affecting this asset class
over recent months. The Fund takes a concentrated approach by investing its
holdings in just three to 10 emerging countries. This enables the portfolio
manager to act on research and insight quickly, moving in and out of positions
opportunistically.
From December 31, 1997 through September 30, 1998, the Fund returned (23.20)%/*/
while the Fund's benchmark, the Morgan Stanley Capital International Emerging
Markets Free Index, returned (36.72)%.
We are encouraged by the results of these Funds and we hope that this report
provides you with answers to any questions you may have had concerning the
performance of your investments.
Sincerely,
/s/ R. Stephen Doyle
R. Stephen Doyle
Chairman
* Performance as stated is for Class A shares and does not reflect a maximum
sales charge of 5.5% or any applicable redemption fees. The Funds also offer
Class B and C shares, which have different sales charges and expense levels
that may affect performance. Please see the preceding page for discussion of
Fund performance.
1
<PAGE>
Investment Review--Global Long-Short Fund
================================================================================
Montgomery Global
Long-Short Fund
- ---------------------------------------------------
Portfolio Management
[PHOT OF NANCY KUKACKA] [PHOTO OF ANGELINE EE]
Nancy Kukacka Angeline Ee
Portfolio Manager Portfolio Manager
- ---------------------------------------------------
Fund Performance
Total Return Since Inception (12/31/97)
for the period ended 9/30/98
Montgomery Global Long-Short Fund
Class A shares 34.60%
Class B shares 33.30%
Class C shares 24.80%
MSCI All-Country World Free Index/1/
Since 12/31/97 0.69%
MSCI EAFE Index/2/
Since 12/31/97 (0.55)%
S&P 500(R) Index/3/
Since 12/31/97 6.00%
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
/1/ The Morgan Stanley Capital International All-Country World Free Index is an
unmanaged, capitalization-weighted monthly total return index composed of
securities listed on the stock exchanges of more than 45 developed and
emerging countries, including the United States.
/2/ The Morgan Stanley Capital International Europe, Australia, and Far East
Index is composed of 21 developed market countries in Europe, Australasia
and the Far East. The returns are presented net of dividend witholding
taxes.
/3/ The Standard & Poor's 500(R) Index is composed of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange
and the over-the-counter markets.
- --------------------------------------------------------------------------------
Q: What is the investment strategy of the Montgomery Global Long-Short Fund,
and how is it different from that of more-typical mutual funds?
A: Unlike typical mutual funds, the Montgomery Global Long-Short Fund has the
capability to exploit both positive and negative swings across markets
world-wide. This gives the Fund broad latitude to diversify as well as a
greater ability to invest defensively in volatile markets. The Fund's
unique approach means that its performance does not correlate very closely
with any market index, even its benchmark, the Morgan Stanley Capital
International All-Country World Free Index. This makes it an attractive
diversification vehicle for long-term investors who want to lower the
overall risk of their portfolios with the goal of higher relative returns.
Q: Has the Fund taken advantage of its shorting capabilities?
A: Yes. We have shorted a number of selected stocks over the past six months.
For example, we are net short in almost every athletic footwear company. We
believe that these companies are plagued by overcapacity and suffer from
their exposure to weak economies such as Japan.
In the markets in general, as of the end of September we were around 75%
short. All of our investments--short as well as long--are based on bottom-
up assessments of corporate fundamentals, not top-down calls. We have the
ability to use short positions defensively (to hedge current portfolio
holdings) and opportunistically (to take advantage of overvalued stocks
rather than simply avoid them).
2
<PAGE>
Investment Review--Global Long-Short Fund
================================================================================
Q: The Montgomery Global Long-Short Fund has outperformed most benchmarks from
its inception (December 31, 1997) through the end of the third quarter.
What factors contributed to that performance?
A: The Fund's recent performance was driven primarily by strength in stock
picking rather than by big bets in any one country or one stock in
particular. From inception through the first six months of the year,
however, the Fund was net long in developed markets and overweighted in
Europe, and net neutral in emerging markets. Given the extremely positive
investment environment in developed markets in the first half of the year
and the poor performance of many emerging markets, this positioning provided
us with strong returns. Since July, however, our approach has been more
cautious. We do not try to time the market, but because of increasing
uncertainty we felt it prudent to take out more short positions in the
developed markets as a defensive strategy to reduce the risk on our long
holdings. This has proved to be a sensible strategy, and the Fund has
managed to preserve gains generated previously in the year.
Q: As one of the pioneer retail funds offering a long-short strategy, how can
you put investors' minds at ease concerning the higher risk they might
associate with hedge funds?
A: Although the Montgomery Long-Short Fund can use some strategies similar to
those available to hedge funds or other private partnerships, it must still
adhere to the Securities and Exchange Commission ("SEC") guidelines and
restrictions that apply to other mutual funds. Additionally, there are
collateral requirements for this Fund that are much more stringent than
those of a hedge fund. We view these constraints not as obstacles but as
safety features that the typical hedge fund does not offer.
- -----------------------------------------------------------------------------
Growth of $10,000/*/
Global
Long-Short MSCI All-
Fund-Class A Country World MSCI EAFE
Date shares Free Index Index S&P 500/(R)/ Index
- -----------------------------------------------------------------------------
12/31/97 $ 9,451.80 $10,000.00 $10,000.00
01/31/98 9,981.10 $10,220.15 10,457.34 10,110.50
02/28/98 11,200.38 10,919.31 11,128.34 10,839.29
03/31/98 12,022.68 11,385.22 11,471.00 11,393.91
04/30/98 12,835.54 11,491.93 11,561.80 11,510.58
05/31/98 12,873.35 11,273.89 11,505.68 11,313.00
06/30/98 13,251.42 11,477.00 11,592.78 11,772.19
07/31/98 13,516.07 11,480.75 11,710.31 11,647.78
08/31/98 12,769.38 9,872.27 10,259.53 9,964.95
09/30/98 12,722.12 10,068.66 9,944.99 10,603.86
/*/ The chart above shows the performance of the Montgomery Global Long-Short
Fund's Class A shares since the Fund's inception versus the various indices.
This represents a cumulative return of 27.22%. The chart assumes a
hypothetical $10,000 initial investment in the Fund's Class A shares and
reflects all Fund expenses and the maximum 5.50% sales charge. A $10,000
investment in the Fund's Class B shares at inception on December 31, 1997,
would have been valued at $12,830 on September 30, 1998. This figure
reflects all Fund expenses and the applicable contingent deferred sales
charge (5% in the first year, decreasing to 0% after six years), assuming a
complete redemption at the end of the period. A $10,000 investment in Class
C shares at inception, December 31, 1997, would have been worth $12,380 on
September 30, 1998.
3
<PAGE>
Investment Review--Global Long-Short Fund
================================================================================
Q: How is the Fund currently positioned to take advantage of volatility in
different market sectors?
A: We primarily follow a fundamental, bottom-up investment strategy, but we do
pay attention to what is happening on a sector basis. We currently favor
technology, telecommunications, health care and consumer products, and our
long positions have not changed much recently. We have used hedging
techniques to protect our returns in these industries during market
corrections, however, by shorting weaker companies in a similar industry in
proportion to our long holdings. We have also taken short positions in
industry sectors that we perceive to be disadvantaged, such as the
financial sector and commodities. To date, this strategy has proved very
effective.
Q: What is your outlook for the global markets and how have you positioned the
Fund accordingly?
A: Given the uncertainty over the severity of the slowdown in the global
economy, we anticipate continued market volatility, at least in the short
term. We have positioned ourselves opportunistically in order to take
advantage of either positive or negative shifts in the market.
U.S. Equities Markets
We expect the U.S. market to remain volatile in the short term, although we
are more confident in this market than in some others. In view of this, as
of September 30, 1998, U.S. common stocks represented 50% of our long
positions. We have used short positions to offset our long positions,
however, thereby reducing our risk exposure. We have also taken a limited
number of short positions in companies that we believe to be overvalued on a
fundamental basis in an effort to enhance returns.
Europe
We believe that the European markets may still fall further. The recession
in Asia has affected European corporate earnings to a greater extent than
those of U.S. companies. In addition, the equities culture is a much more
recent phenomenon in continental Europe. Traditionally, investors have
preferred bonds over equities. Those who have suffered losses as a result of
recent market corrections may be tempted to revert back to less risky
instruments such as government bonds. In view of this, we have reduced our
long holdings in Europe to slightly more than 30% of the long portion of the
overall portfolio. We will continue to monitor the situation, however,
because the changes taking place as a result of the Economic and Monetary
Union (EMU) may eventually reinvigorate market sentiment.
Emerging Markets
Although we believe that the emerging markets are unlikely to experience
further extreme corrections, we remain cautious. Only 10 to 15% of the
portfolio is currently held long in emerging markets. We still believe that
we can benefit more by holding short positions or cash. On the long side, we
prefer companies that pay sizable dividends in very defensible businesses
such as utilities. We make an effort to limit our risk by investing in
highly liquid and extremely well capitalized companies for both our long and
short positions.
This Fund uses sophisticated investment approaches that may present
substantially higher risks than most mutual funds. It may invest a larger
percentage of its assets in transactions using margin, leverage, short sales and
other forms of volatile derivatives such as options and futures. As a result,
the value of an investment in the Fund may be more volatile than investments in
other mutual funds. This Fund may not be appropriate for conservative investors.
4
<PAGE>
Investment Review--Global Long-Short Fund
================================================================================
Long Positions
- ---------------------------------------
Top Ten Holdings
(as a percentage of total net assets)
1. Barry Callebaut
2. Jones Apparel Group
3. Administaff, Inc.
4. Compaq Computer Corporation
5. Gucci Group NV
6. Broadcom Corporation, Class A
7. Mannesmann AG
8. AirTouch Communications, Inc.
9. Bayerische Hypo-Und Vereinsbank
10. Nokia Corporation ADR
- ---------------------------------------
Top Five Countries
(as a percentage of total net assets)
1. United States
2. France
3. Germany
4. Netherlands
5. Switzerland
Portfolio holdings are subject to change and should not be considered a
recommendation to purchase individual securities.
5
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited)
Common Stocks--84.8%
Value
Shares (Note 1)
- ------ ---------
Argentina--0.7%
5,000 Banco Frances Rio PLA, Sponsored ADR (Banks) $ 96,563
12,100 Y.P.F. S.A., Sponsored ADR (Oil) 314,600
---------
411,163
---------
Brazil--0.9%
2,800,000 Cia Energetica de Minas Gerais (Electric Utilities) 60,939
14,800 Elevadores Atlas, S.A. (Machinery & Tools) 153,562
1,670,000 Telec de Sao Paulo S.A. (Telecommunications/Services) 194,221
3,651,000 Telerj Celular S.A. (Telecommunications/Services) 88,800
---------
497,522
---------
Canada--0.7%
22,600 Metronet Communications, Series B
(Telecommunications/Services) 410,331
---------
Chile--0.8%
10,000 Cia de Telecomunicaciones de Chile, Sponsored ADR
(Telephone/Integrated) 191,250
9,000 Quimica y Mineria Chile ADR (Metals & Mining) 262,125
---------
453,375
---------
China/Hong Kong--1.9%
45,000 Beijing Datang Power Generation Company
(Electric Utilities) 107,436
56,000 Cheung Kong Holdings Ltd. (Real Estate) 259,447
500,000 Cosco Pacific Ltd. (Business Services) 208,097
471,000 Henderson Investments Ltd. (Real Estate) 215,782
1,000,000 IDT International Ltd. (Electric Utilities) 104,532
46,000 Sun Hung Kai Properties Ltd. (Real Estate) 162,954
34,800 Wing Lung Bank (Banks) 70,958
---------
1,129,206
---------
Finland--1.4%
10,000 Nokia Corporation ADR
(Telecommunications Equipment) 784,375
---------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
Value
Shares (Note 1)
- ------ ----------
France--7.9%
3,060 Altran Technologies S.A. (Consumer Services) $ 556,831
4,512 Belvedere S.A./+/ (Food & Beverage) 392,397
14,400 Brice (Apparel & Textiles) 604,307
6,540 But S.A. (Furniture) 350,370
4,150 Cap Gemini S.A. (Business Services) 635,862
11,270 Eiffage (Holding) 775,846
6,400 Marc Orian S.A. (Retail Trade) 754,313
14,040 Montupet (Auto/Auto Parts) 521,254
----------
4,591,180
----------
Germany--4.1%
10,800 Bayerische Hypo-Und Vereinsbank (Banks) 795,473
434 Porsche AG (Auto/Auto Parts) 753,675
8,900 Mannesmann AG (Machinery & Tools) 815,414
----------
2,364,562
----------
Great Britain--2.5%
13,000 Arm Holding PLC (Software Systems) 194,491
2,200 Arm Holding, ADR (Software Systems) 98,725
4,000 Colt Telecommunications Group, Sponsored ADR
(Telephone/RegionalLocal) 135,000
32,000 COLT Telecommunications Group PLC/+/
(Telephone/RegionalLocal) 271,744
268,500 Freepages Group PLC (Broadcasting/Advertising) 122,107
66,000 Orange PLC (Telephone/Wireless) 638,455
----------
1,460,522
----------
Greece--1.1%
10,500 Hellenic Telecommunication Organization S.A.
(Telephone/Networks) 251,807
12,000 Stet Hellas Telecommunications S.A., ADR
(Telecommunications/Other) 369,750
----------
621,557
----------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
Value
Shares (Note 1)
- ------ ----------
Hungary--0.5%
23,400 Matav RT/**/ (Telecommunications/Other) $ 103,048
8,300 Mol Magyar Olaj-es Gazipari/**/ (Oil) 161,099
----------
264,147
----------
Indonesia--0.2%
31,500 PT Tambang Timah, GDR (Metals & Mining) 135,450
----------
Ireland--0.8%
14,100 Esat Telecommunications, ADR
(Telecommunications/Services) 471,469
----------
Italy--2.0%
200,000 Poligrafici Editoriale SpA(Newspapers/Publishing) 499,197
135,000 Bulgari SpA (Retail Trade) 637,931
----------
1,137,128
----------
Japan--0.4%
3,400 Sony Corporation (Electronics) 236,338
----------
Malaysia--0.7%
270,000 John Hancock Life Insurance/**/ (Insurance) 83,057
102,000 Malaysia International Shipping Berhad/**/(Shipping) 96,187
177,000 New Straits Times/**/ (Newspapers/Publishing) 59,310
306,000 PPB Oil Palms Berhad** (Agricultural Commodities) 122,147
178,000 Selangor Properties Berhad/**/ (Real Estate) 43,674
----------
404,375
----------
Mexico--0.4%
66,000 Grupo Mexico S.A., Series B (Metals & Mining) 168,235
6,100 Grupo Industrial Maseca S.A. de C.V., Series A
(Agricultural Commodities) 62,525
----------
230,760
----------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
Value
Shares (Note 1)
- ------ ----------
Netherlands--3.9%
10,900 Equant N.V. Registered (Software Systems) $ 501,400
25,000 Gucci Group N.V. (Retail Trade) 903,125
21,000 Ispat International N.V./+/ (Metals & Mining) 157,500
26,400 Ordina Beheer (Business Services) 728,914
----------
2,290,939
----------
Poland--0.5%
12,500 Bank Handlowy W. Warszawie, GDR/***/ (Banks) 128,743
45,000 Polska Miedz S.A. (Metals & Mining) 148,615
----------
277,358
----------
Philippines--0.1%
650,000 Cosmos Bottling Company (Food & Beverage) 49,029
----------
Singapore--2.3%
218,000 DBS Land/**/ (Real Estate) 151,102
257,000 Marco Polo Developments, Ltd. (Real Estate) 133,981
122,000 Oversea-Chinese Banking Corporation (Banks) 306,446
231,000 Overseas Union Bank (F) (Banks) 329,805
41,000 Singapore Airlines Ltd. (F) (Airlines) 224,674
180,000 Singapore Tech Engineering (Conglomerates) 172,749
----------
1,318,757
----------
South Africa--1.6%
3,700 Anglogold/**/ (Metals & Mining) 193,884
14,630 JCI Gold Ltd. (Holding) 11,201
13,300 Liberty Life Association of Africa, Ltd./**/
(Insurance) 202,518
17,400 South African Breweries, Ltd./**/ (Food & Beverage) 262,284
120,000 Standard Bank Investment (Banks) 247,033
----------
916,920
----------
Spain--0.9%
15,900 Baron de Ley, S.A./+/ (Food & Beverage) 537,711
----------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
Value
Shares (Note 1)
- ------ ----------
Switzerland--3.4%
6,200 Barry Callebaut (Food & Beverage) $1,414,807
1,147 Zurich Allied AGNew (Financial Services) 570,841
----------
1,985,648
----------
Sweden--1.3%
24,200 Autoliv, Inc./**/ (Auto/Auto Parts) 744,045
----------
Taiwan--0.3%
15,900 Taiwan Fund, Inc. (Mutual Funds) 194,775
----------
Thailand--0.3%
16,600 GSS Array Technology Public Company, Ltd./+/
(Electronics) 19,097
17,000 GSS Array Technology Public Company, Ltd. (F)/+/
(Electronics) 32,238
322,937 International Broadcasting Corporation Public
Company, Ltd./+/ (Broadcasting/Advertising) 140,851
----------
192,186
----------
Turkey--0.6%
4,870,000 Akbank T.A.S. (Banks) 68,436
5,700,000 Dogan Sirketler Grubu Holding A.S. (Holding) 205,383
9,250 Yapi ve Kredi Bankasi A.S. (Banks) 102,906
----------
376,725
----------
United States--42.6%
29,750 Administaff, Inc./***/+/ (Business Services) 950,141
30,000 Advanced Semiconductor Engineering GDR/**/
(Semiconductors) 273,000
14,000 AirTouch Communications, Inc. (Telephone/Wireless) 798,000
7,000 Alza Corporation (Pharmacy/Drugs) 303,625
13,000 American Home Products Corporation (Pharmacy/Drugs) 680,875
35,000 AnnTaylor Stores Corporation/**/ (Retail Trade) 710,938
14,000 Ascend Communications, Inc.
(Telecommunications Equipment) 637,438
18,000 AXENT Technologies, Inc./***/+/ (Software Systems) 334,688
27,500 Bebe Stores, Inc. (Apparel & Textiles) 434,844
12,300 Broadcom Corporation, Class A (Electrical Equipment) 871,763
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ------ ----------
<S> <C> <C>
United States (continued)
27,700 Burlington Coat Factory (Retail Trade) $ 408,575
6,400 CKE Restaurants, Inc./***/ (Restaurants) 190,400
10,250 Cellular Communications International, Inc. (Telephone/Wireless) 561,828
30,000 Compaq Computer Corporation (Computers & Office Equipment) 948,750
8,000 Cooper Cameron Corporation (Oilfield Equipment & Services) 225,000
10,000 Cost Plus, Inc./+/ (Retail Trade) 263,125
29,000 Cymer, Inc. (Semiconductors) 261,906
10,000 Delia's, Inc. (Retail Trade) 64,375
13,000 Estee Lauder Company, Inc. (Cosmetics & Personal Care) 666,250
14,000 Firstar Corporation (Banks) 708,750
14,500 Forest Laboratories, Inc./+/ (Pharmacy/Drugs) 498,438
11,000 Gateway 2000 (Computers & Office Equipment) 573,375
11,000 General Nutrition Companies, Inc. (Retail Trade) 119,281
36,700 Genesco, Inc. (Footwear) 199,566
24,600 Global Crossing, Ltd. (Telephone/Networks) 515,047
19,000 Global TeleSystems Group, Inc./+/ (Telephone/Networks) 640,063
8,000 Intel Corporation (Semiconductors) 686,250
19,000 JLK Direct Distribution, Class A (Machinery & Tools) 204,250
46,000 Jones Apparel Group (Apparel & Textiles) 1,055,125
12,000 MCI WorldCom (Telephone/Integrated) 586,875
18,000 Medicis Pharmaceutical, Class A (Pharmacy/Drugs) 712,125
8,000 Nationsbank Corporation (Banks) 428,000
10,000 Natural Alternatives International (Pharmacy/Drugs) 121,875
10,500 New Era of Networks, Inc./***/+/ (Telephone/Networks) 428,531
13,000 Office Depot, Inc. (Retail Trade & Services) 291,688
14,000 Pride International, Inc./***/+/ (Oilfield Equipment & Services) 112,000
36,000 RCN Corporation (Telecommunications) 470,250
22,000 Ralston Purina Company (Food & Beverage) 643,500
20,000 Ranbaxy Laboratories (Pharmacy/Drugs) 353,500
3,500 Rexall Sundown, Inc. (Pharmacy/Drugs) 54,250
7,000 Sangstat Medical Corporation/***/+/ (Medical Products) 148,094
22,000 Sapient Corporation (Software Systems) 751,438
20,000 Snyder Communications, Inc. (Broadcasting/Advertising) 670,000
14,700 Tele-Com Liberty Media GR (Broadcasting/Advertising) 538,847
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Common Stocks (continued)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ------ ----------
<S> <C> <C>
38,700 Trans World Entertainment CP (Retail Trade) $ 703,856
16,000 Uniphase Corporation/**/ (Semiconductors) 655,000
12,500 Veritas Software Corporation/***/+/ (Software Systems) 690,234
19,000 Vertex Pharmaceutical, Inc. (Pharmacy/Drugs) 435,813
11,700 Weatherford International (Oilfield Equipment & Services) 253,013
28,500 Wet Seal, Inc., Class A (Specialty Apparel Retail) 492,516
18,000 Williams Sonoma (Household Products) 383,625
-----------
24,710,696
-----------
TOTAL COMMON STOCKS
(Cost $55,462,949) 49,198,249
===========
<CAPTION>
Principal Amount
- ----------------
Foreign Government Obligations--0.3%
(Cost $231,017)
Turkey--0.3%
TKL 60,000,000,000 Treasury Bill, due 11/04/98. $ 196,761
-----------
Convertible Bonds--0.1%
(Cost $97,764)
United States--0.1%
$100,000 Traffic Stream, 14.250% due 05/01/06 45,000
-----------
Shares
- -------
Warrants--0.0%
(Cost $0 )
Thailand--0.0%
350,000 Security One Public Company Ltd. Warrants,
Expire 05/31/2001/**/+/ (Investment Management) 7,965
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Portfolio Investments--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
<TABLE>
<CAPTION>
Expiration Strike Value
Number of Contracts Date Price (Note 1)
---------- ---------- ------------
<S> <C> <C> <C>
Put Options Purchased--0.0%
(Cost $28,162)
20 Dell Computer Corporation
(Computers & Office Equipment) 11/21/98 $ 50 $ 2,875
20 Citicorp (Banks) 11/21/98 $ 95 18,042
------------
20,917
------------
TOTAL INVESTMENTS (Cost $55,819,892/*/) 85.2% 49,468,892
TOTAL SHORT SALES (Proceeds $48,818,843) (75.9)% (44,039,517)
OTHER ASSETS AND LIABILITIES (Net) 90.7% 52,596,220
------------
TOTAL NET ASSETS 100.0% $ 58,025,595
============
</TABLE>
/*/ Aggregate cost for federal tax purposes.
/**/ Illiquid security (see note 1 to Financial Statements).
/***/ Designated as short sale collateral.
/+/ Non-income-producing security.
Abbreviations:
ADR American Depositary Receipt
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
TKL Turkish Lira
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited)
Short Sells--75.9%
<TABLE>
<CAPTION>
Value
Shares Proceeds (Note 1)
- ------- --------- ---------
<S> <C> <C>
Argentina--0.8%
8,300 Banco Frances Rio PLA,
Sponsored ADR (F) (Banks) $156,091 $160,294
12,100 Disco S.A., Sponsored ADR
(Food & Beverage) 271,353 175,450
4,800 Telefonica de Argentina, ADR
(Telephone/Networks) 97,809 142,500
---------- ---------
525,253 478,244
---------- ---------
Belgium--0.7%
5,900 Solvay S.A. (Chemicals) 429,530 393,790
---------- ---------
Brazil--1.3%
6,300 Cia Anonima Telefonica de Venezuela,
ADR (Telephone/Networks) 101,994 107,100
28,000 Cia Cervejaria Brahma, Sponsored,
ADR (Food & Beverage) 271,911 218,750
14,800 Cia Cerveceria Unidas S.A. (Food & Beverage) 272,616 273,338
2,800,000 Cia Energetica de Minas Gerais
(Electric Utilities) 61,584 60,939
1,400 Telebras, Sponsored ADR (Telephone/Networks) 101,679 96,600
---------- ---------
809,784 756,727
---------- ---------
China/Hong Kong--0.7%
250,000 Hong Kong & China Gas Company (Gas Utilities) 266,633 306,499
28,000 V-Tech Holdings Ltd. (Electronics) 98,073 111,656
---------- ---------
364,706 418,155
---------- ---------
France--4.4%
6,500 Dassault Systemes S.A,. ADR
(Computers & Office Equipment) 258,366 230,344
1,400 Essilor International
(Cosmetics & Personal Care) 542,711 515,018
1,900 L'Oreal (Cosmetics & Personal Care) 918,210 883,871
980 Sagem S.A. (Telecommunications Equipment) 698,443 619,522
26,000 Usinor Sacilor S.A. (Building Materials) 389,415 289,260
---------- ---------
2,807,145 2,538,015
---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
<TABLE>
<CAPTION>
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited) (continued)
Short Sells (continued)
Value
Shares Proceeds (Note 1)
- ------- ----------- ---------
<S> <C> <C> <C>
Germany--5.9%
6,810 Adidas AG (Consumer Goods) $ 876,489 $780,931
14,200 Beaf AG (Chemicals) 581,708 538,256
9,700 Degussa AG (Chemicals) 568,136 415,312
11,775 Metro AG (Retail Trade) 667,150 820,044
13,100 SGL Carbon (Chemicals) 1,264,297 898,200
---------- --------
3,957,780 3,452,743
---------- --------
Great Britain--6.5%
360,000 Aegis Group PLC
(Broadcasting/Advertising) 499,983 517,170
82,000 F.I. Group PLC (Software Systems) 343,038 373,826
43,000 Hays PLC (Business Services) 620,539 648,513
97,500 Misys PLC (Business Services) 774,321 873,553
52,000 Sema Group PLC
(Computers & Office Equipment) 508,381 509,399
134,000 Rentokil Initial PLC
(Consumer Services) 837,452 828,814
---------- --------
3,583,714 3,751,275
---------- --------
Indonesia--0.4%
77,600 Telekomunik Indonesia, Sponsored ADR
(Telephone/RegionalLocal) 444,704 227,950
---------- --------
Italy--0.3%
80,000 Ittierre Holding SpA
(Consumer Goods) 287,292 183,928
---------- --------
Japan--2.0%
546,000 Kawasaki Steel Corporation
(Metals & Mining) 746,638 639,883
147,000 NSK Ltd. (Manufacturing) 536,629 506,061
---------- --------
1,283,267 1,145,944
---------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
<TABLE>
<CAPTION>
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited) (continued)
Short Sells (continued)
Value
Shares Proceeds (Note 1)
- ------ ---------- ---------
<S> <C> <C> <C>
Mexico--0.7%
15,000 Bufete Industrial, ADR (F)
(Heavy Construction) $ 68,435 $ 71,247
45,900 Cemex S.A., Sponsored ADR,
Series B (F) (Cement) 303,498 229,500
1,800 Telefonos de Mexico, Sponsored
ADR (Telephone/Networks) 82,352 79,650
--------- ---------
454,285 380,397
--------- ---------
Netherlands--2.5%
13,000 Baan Company (Software Systems) 507,155 334,344
7,200 Ranstad Holdings (Business Services) 454,945 372,740
3,980 Wolters Kluwer N.V.
(Consumer Services) 724,841 764,365
--------- ---------
1,686,941 1,471,449
--------- ---------
Philippines--0.2%
5,000 Philippine Long Distance, ADR
(Telephone/Long Distance) 99,697 101,250
--------- ---------
South Africa--0.4%
7,100 De Beers Consolidation Mines,
ADR (Metals & Mining) 99,397 89,416
11,000 De Beers Centenary Linked UT
(Metals & Mining) 153,455 144,851
--------- ---------
252,852 234,267
--------- ---------
Spain--3.1%
15,150 Acerinox S.A. (Steel) 403,522 291,397
35,550 Banco Bilbao Vizcaya (Banks) 553,204 390,728
14,000 Sol Melia S.A. (Lodging) 558,365 443,865
98,900 Tele Pizza S.A. (Food & Beverage) 762,206 661,958
--------- ---------
2,277,297 1,787,948
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited) (continued)
Short Sells (continued)
<TABLE>
<CAPTION>
Value
Shares Proceeds (Note 1)
- ------- ---------- ----------
<S> <C> <C>
Sweden--2.9%
21,000 Atlas Copco AB, Series B
(Machinery & Tools) $ 484,949 $ 442,049
20,200 Lindex AB (Apparel & Textiles) 743,721 569,522
31,000 Sandvik AB, Series A, SHS (Heavy Construction) 787,459 646,616
--------- ---------
2,016,129 1,658,187
--------- ---------
Switzerland--1.3%
290 Ares Serono Group B (Biotechnology) 384,323 378,151
4,500 CIBA Specialty Chemicals (Chemicals) 562,490 374,891
--------- ---------
946,813 753,042
--------- ---------
Taiwan--0.3%
35,000 Acer, Inc., GDR (F) (Software Systems) 180,250 165,375
--------- ---------
Turkey--0.4%
18,500 Yapi ve Kredi Bankasi, GDR (Banks) 353,750 205,813
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited) (continued)
Short Sells (continued)
<TABLE>
<CAPTION>
Value
Shares Proceeds (Note 1)
- ------- --------- --------
<S> <C> <C> <C>
United States--41.1%
10,000 Agouron Pharmaceuticals, Inc. (Pharmacy/Drugs) $305,615 $344,688
10,000 American Eagle Outfitters (Retail Trade) 422,902 345,625
20,000 Apple Computer, Inc. (Computers & Office Equipment) 723,726 763,125
18,000 Applied Materials, Inc. (Semiconductors) 571,106 455,063
20,500 Barnes & Noble, Inc. (Retail Trade) 714,366 553,500
22,500 Bed Bath & Beyond, Inc. (Retail Trade) 437,556 524,531
26,000 Beringer Wine Estates, Series B (Food & Beverage) 918,928 996,125
9,000 Best Buy Company, Inc. (Retail Trade) 410,490 373,500
10,000 Black & Decker Corporation (Machinery & Tools) 559,382 416,250
7,400 Black Box Corporation (Software Systems) 269,954 179,681
18,000 Cadence Design Systems, Inc. (Software Systems) 492,779 460,125
15,000 Central Parking Corporation (Business Services) 602,876 755,625
22,000 Century Business Services (Business Services) 436,069 445,500
12,000 Cintas Corporation (Apparel & Textiles) 541,898 600,750
28,000 Darden Restaurants, Inc. (Restaurants) 439,879 448,000
10,000 Delia's, Inc. (Retail Trade) 204,056 64,375
21,250 Dollar General Corporation (Retail Trade) 624,912 565,781
26,500 Dollar Tree Stores (Retail Trade) 830,410 829,781
7,000 General Electric Co. (Conglomerates) 538,836 556,938
16,000 Guitar Center, Inc. (Retail Trade) 329,751 299,000
21,000 HBO & Company (Health Care Information Systems) 590,169 607,031
19,000 Intimate Brands, Inc. (Apparel & Textiles) 409,142 359,813
11,300 Just For Feet, Inc. (Footwear) 172,117 142,309
19,100 Korea Electric Power Corporation (Electric Utilities) 142,099 171,900
20,500 Lamar Advertising (Broadcasting/Advertising) 624,167 567,594
3,500 Leap Wireless International, Inc. (Telephone/Wireless) 16,297 16,297
23,000 Linens'N Things, Inc. (Retail Trade) 633,853 632,500
9,000 Micron Technology, Inc. (Semiconductors) 293,852 273,938
18,000 Miller (Herman), Inc. (Furniture) 419,152 358,875
3,500 Nacco Industries, Inc., Class A (Machinery & Tools) 406,870 350,000
21,000 Nike, Inc., Class B (Footwear) 850,727 773,063
16,600 PeopleSoft, Inc. (Software Systems) 495,391 542,094
14,000 Qualcomm, Inc. (Telecommunications Equipment) 707,000 671,563
6,000 Reebok International Ltd. (Retail Trade) 175,447 81,375
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Schedule of Short Sales--Global Long-Short Fund
================================================================================
Montgomery Global Long-Short Fund
Schedule of Short Sales--9/30/98 (unaudited) (continued)
Short Sells (continued)
<TABLE>
<CAPTION>
Value
Shares Proceeds (Note 1)
- ------- ----------- ------------
<S> <C> <C> <C>
United States (continued)
22,000 Rent Way, Inc. (Retail Trade) $ 523,317 $ 539,688
18,500 Restoration Hardware, Inc.
(Furniture) 550,614 380,984
3,500 Rexall Sundown, Inc.
(Pharmacy/Drugs) 105,329 54,250
12,000 Sara Lee Corporation
(Food & Beverage) 645,008 648,000
17,000 Sears, Roebuck and Company
(Retail Trade) 930,511 751,188
16,000 Staples, Inc. (Retail Trade) 472,984 470,500
22,000 Starbucks Corporation
(Food & Beverage) 958,191 799,563
9,000 ST Microelectronics (Electronics) 405,445 405,998
8,000 Talbots (Retail Trade) 196,013 143,000
29,000 The Servicemaster Company
(Consumer Services) 640,825 634,375
23,000 3DFX Interactive, Inc.
(Software Systems) 417,362 260,188
8,000 Tiffany & Company (Retail Trade) 381,007 251,000
9,000 Timberland Company, Class A
(Footwear) 554,314 328,500
12,000 Tommy Hilfiger Corporation
(Retail Trade) 544,043 492,000
28,000 Ultratech Stepper, Inc.
(Semiconductors) 510,139 424,375
10,000 United Auto Group, Inc.+
(Auto/Auto Parts) 145,958 141,875
10,000 Verisign, Inc. (Electrical Equipment) 304,704 271,250
9,000 Wal-Mart Stores, Inc. (Retail Trade) 525,942 491,625
23,500 Walt Disney Company
(Leisure Time) 593,017 594,844
12,000 Wild Oats Market, Inc.
(Food & Beverage) 341,157 325,500
----------- -----------
26,057,654 23,935,018
----------- -----------
TOTAL SHORT SALES $48,818,843 $44,039,517
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Investment Review--Emerging Markets Focus Fund
================================================================================
Montgomery Emerging
Markets Focus Fund
- ------------------------------------
Portfolio Management
[PHOTO OF JOSEPHINE S. JIMENEZ]
Josephine S. Jimenez, CFA
Senior Portfolio Manager
- ------------------------------------
Fund Performance
Total Return Since Inception (12/31/97)
for the period ended 9/30/98
Montgomery Emerging Markets Focus Fund
Class A shares (23.20)%
Class B shares (21.00)%
Class C shares (21.00)%
MSCI Emerging Markets Free Index/1/
Since 12/31/97 (36.72)%
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
/1/ The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.
- --------------------------------------------------------------------------------
Q: What is the Fund's strategy?
A: The Montgomery Emerging Markets Focus Fund employs a disciplined, research-
driven investment strategy combining macroeconomic analysis and original
company research based on qualitative insights and frequent visits to
emerging markets countries. The Fund differs from other general emerging
markets funds in that it concentrates its investments in three to 10
emerging markets. It may also invest up to 50% of its assets in a single
emerging market.
Q: Why should investors consider a focused emerging markets investment
strategy?
A: Although the fact that some emerging markets economies have suffered
economic difficulties over the past year is inescapable, what dedicated
emerging markets investors realize is that not all emerging markets are
alike. For example, Russia's economic fundamentals are a lot weaker than
those of Brazil. Although both markets experienced strong capital flight
during August, we believe that when fundamentals rather than sentiment
start to drive emerging markets performance once again, markets such as
Brazil may provide strong returns whereas those with poor economic
fundamentals such as Russia may continue to languish.
The Montgomery Emerging Markets Focus Fund is designed to seek differences
between markets and concentrate on those likely to provide the best
returns. Investors who have strong convictions about the potential
opportunities in developing countries may find the typical diversified
emerging markets fund overly dilutive. Such funds typically invest in 30 or
more countries and upward of 200 individual securities. By concentrating
the portfolio in a smaller number of attractive, relatively liquid markets
while maintaining diversification across individual securities and
20
<PAGE>
Investment Review--Emerging Markets Focus Fund
================================================================================
sectors, we believe that the Montgomery Emerging Markets Focus Fund can be
more effective in acting on convictions about the direction of developing
countries' stock markets.
Q: The Montgomery Emerging Markets Focus Fund outperformed its benchmark,
the Morgan Stanley Capital International Emerging Markets Free Index.
What factors contributed to the Fund's outperformance?
A: The advantage of such a focused fund is that we can re-direct investments
to reflect changing conditions in the emerging markets. For instance, at
the beginning of the year our investment in South Africa (26.4% of assets
as of 9/30/98) was very profitable. The market rallied on the back of
declining interest rates, lower inflation and corporate restructuring. By
the third quarter, however, South Africa had become a casualty of the
emerging markets contagion in spite of attractive fundamentals. In
contrast, our China/Hong Kong investment (18.4% of assets as of 9/30/98),
albeit hard-hit in mid-August, staged a very strong rally toward the end
of the quarter, helping lift the Fund's relative performance. Greater
China was rewarded for avoiding currency devaluation and for an improving
economic outlook.
Q: Were there any holdings that disappointed you in terms of performance?
A: Our holdings in Brazil (31.1% of assets as of 9/30/98) were perhaps the
biggest recent disappointment. During the third quarter of the year, the
Brazilian market lost more than 35% of its value due to a sentiment-
driven sell-off. Due to Brazil's market size and liquidity, capital
flight from the real was much stronger than the flight suffered by many
other emerging markets currencies. We believe that the underlying
fundamentals of this market are still attractive, however, especially at
today's valuations.
- --------------------------------------------------------------------------------
Growth of $10,000/*/
Emerging Markets Focus MSCI Emerging Markets
Date Fund-A Free Index
- --------------------------------------------------------------------------------
12/31/97 9,451.80
01/31/89 8,950.85 9,215.70
02/28/98 10,000.00 10,177.60
03/31/98 10,803.40 10,619.27
04/30/98 11,332.70 10,503.59
05/31/98 9,792.06 9,064.17
06/30/98 8,827.98 8,113.37
07/31/98 9,083.18 8,370.62
08/31/98 6,559.55 5,950.34
09/30/98 7,258.98 6,327.80
/*/ The chart above shows the performance of the Montgomery Emerging Markets
Focus Fund's Class A shares since the Fund's inception versus the index.
This represents a cumulative return of (27.41)%. The chart assumes a
hypothetical $10,000 initial investment in the Fund's Class A shares and
reflects all Fund expenses and the maximum 5.50% sales charge. A $10,000
investment in the Fund's Class B shares at inception on December 31,
1997, would have been valued at $7,505 on September 30, 1998. This figure
reflects all Fund expenses and the applicable contingent deferred sales
charge (5% in the first year, decreasing to 0% after six years), assuming
a complete redemption at the end of the period. A $10,000 investment in
Class C shares at inception, December 31, 1997, would have been worth
$7,821 on September 30, 1998.
21
<PAGE>
Investment Review--Emerging Markets Focus Fund
================================================================================
Q: How do you view the outlook for emerging markets moving forward?
A: In general, investors remain very risk averse when it comes to emerging
markets. There are, however, indications that countries that have been firm
in their resolve to stick to sensible economic programs or go through
difficult restructuring are now seeing some benefit. We believe that the
Montgomery Emerging Markets Focus Fund has the flexibility to take
advantage of this trend.
Asia
In Asia, after a year long recession in many countries, Japan's decision to
recapitalize its troubled banking industry could help the neighboring
economies recover if the yen strengthens and the Japanese economy absorbs
the excess capacities in Asia. Also, the second round of interest rate
declines in the United Sates have been beneficial to market sentiment,
especially Hong Kong, since the Hong Kong dollar is pegged to the U.S.
dollar. Although economic growth in China has slowed somewhat, growth
remains firm at more than 6%. The rebuilding needed to correct the
infrastructure damages resulting from this year's flooding should stimulate
economic growth next year. In addition, the government is continuing to
take a firm line with financial institutions, allowing them to go bankrupt
no matter the size and, in so doing, cleaning up its banking sector. In
Thailand strict adherence to an International Monetary Fund (IMF) reform
package has won the respect of international bankers. While excesses
especially in the property sector still have to be drawn down, Thailand is
moving forward in correcting its banking crisis and restoring investor
confidence. The stock market has risen and the baht appears to have
stabilized.
The Montgomery Emerging Markets Focus Fund has concentrated its Asian
investments in China/Hong Kong and in India, the latter isolated from the
global turmoil since exports do not represent a major component of gross
domerstic product (GDP) and where we have found extremely attractive
companies with low leverage and strong growth potential.
Latin America
In Latin America our main holdings are in Brazil, where we expect an
improvement in outlook in the near future. While not yet finalized, it is
widely anticipated that the IMF will put an emergency funding package
together to help support the real. It is also widely recognized that
following the elections for state governors on October 25, President
Fernando Henrique Cardoso and the Brazilian Congress are likely to pass
stiff measures to reduce the size of the country's troubling fiscal
deficit. Although this may slow economic growth, it should keep Brazil's
reform program on track and boost investor confidence.
Europe/Africa
We still like South Africa on a fundamental basis and believe that the
market has been oversold. There are a number of companies now trading at
very low multiples with good earnings prospects. Once investors recognize
this, we believe that the market will rebound. While real interest rates
remain high, corporate South Africa benefits, because of highly liquid
balance sheets. Also, efforts by Japan to finally stimulate its economy by
assisting the banking sector could set the stage for eventual recovery in
global demand for commodities abundant in South Africa.
In summary, as of this writing the Montgomery Emerging Markets Focus Fund
has focused its investments in fewer than 20 companies in China/Hong Kong,
India, Brazil and South Africa.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
22
<PAGE>
Investment Review--Emerging Markets Focus Fund
================================================================================
- ---------------------------------------
Top Ten Holdings
(as a percentage of total net assets)
1. Videsh Sanchar Nigam Ltd., ADR
2. Yanzhou Coal Mining Company, Ltd.
3. Banco de Estado de Sao Paolo S.A.
4. JD Group Ltd.
5. Telebras, ADR
6. Vale de Rio Doce
7. China Telecom, ADR
8. ABSA Group Ltd.
9. Banco de Brasil S.A.
10. Wooltru Ltd., "N" Shares
- ---------------------------------------
Top Four Countries
(as a percentage of total net assets)
1. Brazil
2. South Africa
3. China/Hong Kong
4. India
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
23
<PAGE>
Portfolio Investments--Emerging Markets Focus Fund
================================================================================
Montgomery Emerging Markets Focus Fund
Portfolio Investments--9/30/98 (unaudited)
Common Stocks--62.9%
Value
Shares (Note 1)
Brazil--4.6%
7,000,000 Telesp Celular S.A./+/ $174,314
(Telephone/RegionalLocal)
China/Hong Kong--18.4%
6,200 China Telecom, ADR+ (Telephone/Wireless) 186,000
80,000 Shanghai Industrial Holdings Ltd.
(Conglomerates) 160,025
41,600 Yanzhou Coal Mining Company Ltd. (Coal) 358,800
704,825
India--13.5%
6,500 Mahanagar Telephone Nigam Ltd.,
GDR (Telephone/RegionalLocal) 77,025
34,400 Videsh Sanchar Nigam Ltd.,
ADR (Telephone/Long Distance) 378,400
5,500 Videsh Sanchar Nigam Ltd.,
GDR (Telephone/Long Distance) 60,500
515,925
South Africa--26.4%
49,600 ABSA Group Ltd. (Banks) 180,583
4,600 Anglo American Corporation of South Africa Ltd.
(Metals & Mining) 131,479
79,700 C.G. Smith Ltd. (Conglomerates) 158,647
60,700 JD Group Ltd. (Furniture) 278,831
6,255 Liberty Life Association of Africa, 95,244
Ltd. (Insurance)
175,500 Wooltru Ltd., "N" Shares (Retail Trade) 163,923
1,008,707
TOTAL COMMON STOCKS
(Cost $3,446,065) 2,403,771
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Portfolio Investments--Emerging Markets Focus Fund
================================================================================
Montgomery Emerging Markets Focus Fund
Portfolio Investments--9/30/98 (unaudited) (continued)
Preferred Stocks--26.5%
Value
Shares (Note 1)
Brazil--26.5%
24,600,000 Banco de Brasil S.A. (Banks) $ 176,389
9,145,000 Banco de Estado de Sao Paulo S.A. (Banks) 308,575
3,800 Telebras, ADR (Telephone/Networks) 267,663
17,200 Vale de Rio Doce (Metals & Mining) 261,168
TOTAL PREFERRED STOCKS
(Cost $1,242,596) 1,013,795
TOTAL SECURITIES
(Cost $4,688,661) 3,417,566
Principal Amount
Repurchase Agreement--17.3%
(Cost $662,000)
$662,000 Agreement with Bear Stearns, Tri-Party, 5.730% dated 09/30/98,
to be repurchased at $662,105 on 10/01/98, collateralized by
$675,240 market value of U.S. government securities, having
various maturities and various interest rates
662,000
TOTAL INVESTMENTS (Cost $5,350,661/*/) 106.7% 4,079,566
OTHER ASSETS AND LIABILITIES (Net) (6.7)% (256,254)
NET ASSETS 100.0% $3,823,312
- ------------------
/*/ Aggregate cost for federal tax purposes.
/+/ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statements of Assets & Liabilities
================================================================================
The Montgomery Partners Series
Statements of Assets and Liabilities
September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Global Long-Short Emerging Markets
Fund Focus Fund
<S>
ASSETS: <C> <C>
Investments in securities, at value (note 1)
Securities
(Cost $55,819,892 and $4,688,661, respectively) $ 49,468,892 $3,417,566
Repurchase agreements, at cost -- 662,000
Total Investments 49,468,892 4,079,566
Cash 44,633,470 --
Deposit with custodian bank for short sales 4,877,984 --
Foreign currency, at value
(Cost $1,156,966 and $1,269,603, respectively) 1,021,706 1,301,294
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward
foreign-currency exchange contracts (note 5) -- 2,237
Receivables:
Dividends and interest 307,678 23,478
Expenses absorbed by Manager (note 2) 55,235 61,614
Shares of beneficial interest sold 247,175 --
Investment securities sold 7,959,659 243,026
Other assets:
Prepaid expenses 16,500 15,455
Organization costs (note 1) 23,802 17,575
Total Assets 108,612,101 5,744,245
LIABILITIES:
Short sales (Proceeds $48,818,843) (note 1) 44,039,517 --
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward
foreign-currency exchange contracts (note 5) 10,268 --
Payables:
Dividends 93,939 --
Investment securities purchased 5,898,857 1,743,244
Shares of beneficial interest redeemed 12,461 --
Management fees 220,782 16,373
Organization costs 13,704 9,399
Registration and filing fees 33,622 34,122
Trustees' fees and expenses (note 2) 2,723 2,723
Distribution fees
(Class B and Class C shares only) (note 4) 20,371 --
Shareholder servicing fees (note 4) 43,695 5,931
Other accrued liabilities and expenses 196,567 109,141
Total Liabilities 50,586,506 1,920,933
Net Assets $58,025,595 $3,823,312
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statements of Assets & Liabilities
================================================================================
The Montgomery Partners Series
Statements of Assets and Liabilities (continued)
September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Global Long-Short Emerging Markets
Fund Focus Fund
<S> <C> <C>
Net Assets Consist of:
Undistributed net investment income/(loss) $ (52,982) $ 69,116
Accumulated net realized gain/(loss) on securities sold,
forward foreign-currency exchange contracts,
foreign-currency transactions
and securities sold short 3,008,043 (967,799)
Net unrealized depreciation of investments, forward
foreign-currency exchange contracts, foreign-currency
transactions, securities sold short and other assets
(1,698,940) (1,220,192)
Paid-in capital 56,769,474 5,942,187
Net Assets $58,025,595 $ 3,823,312
Class A Shares:
Net assets $42,734,807 $ 3,700,639
Fund shares outstanding 3,179,036 482,783
Net asset value and redemption price per share outstanding $13.44 $7.67
Maximum offering price per share (net asset value plus
sales charge of 5.50% of offering price)
$14.22 $8.12
Class B Shares:
Net assets $10,994,216 $ 13,019
Fund shares outstanding 825,388 1,651
Net asset value and offering price per share outstanding/*/ $ 13.32 $ 7.89
Class C Shares:
Net assets $ 4,296,572 $ 109,654
Fund shares outstanding 344,573 13,903
Net asset value and offering price per share outstanding/*/ $ 12.47 $7.89
</TABLE>
/*/ Redemption price is equal to net asset value less any applicable contingent
deferred sales charge (CDSC).
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Statements of Operations
================================================================================
The Montgomery Partners Series
Statements of Operations
Six Months Ended September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Global Long-Short Emerging Markets
Fund Focus Fund
<S> <C> <C>
Net Investment Income:
Investment Income:
Interest $ 458,858 $ 20,376
Dividends (net of withholding tax of $12,776
and $915, respectively) 149,044 54,903
Total Income 607,902 75,279
Expenses:
Management fee (note 2) 282,543 25,410
Custodian fee 61,595 8,046
Transfer agency fees 42,987 32,759
Administration fee (note 2) 13,185 1,423
Legal and audit fees 29,079 29,079
Trustees' fees 2,758 2,758
Printing fees 7,754 7,754
Registration and filing fees 16,479 18,006
Dividend and interest expenses (note 1 and note 3) 176,575 --
Amortization of organization costs (note 1) 2,807 2,072
Shareholder servicing fees 47,090 5,082
Other 23,447 10,621
Distribution fees (note 4):
Class B shares 20,432 24
Class C shares 7,346 462
Total Expenses 734,077 143,496
Fees deferred and/or expenses
absorbed by Manager (note 2) (87,078) (100,321)
Net Expenses 646,999 43,175
Net Investment Income/(Loss) (39,097) 32,104
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
The Montgomery Partners Series
Statements of Operations (continued)
Six Months Ended September 30, 1998 (unaudited)
Global Long-Short Emerging Markets
Fund Focus Fund
<S> <C> <C>
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Securities transactions $ (238,566) $ (874,715)
Securities sold short 3,119,874 --
Forward foreign-currency exchange contracts (106,038) (80)
Futures contracts (2,933) --
Written options (48,235) --
Foreign-currency transactions and net other assets (251,195) (69,200)
Net Realized Gain/(Loss) on
Investments During the Period 2,472,907 (943,995)
Net change in unrealized appreciation/(depreciation) of:
Securities (8,092,902) (1,480,417)
Securities sold short 5,168,034 --
Forward foreign-currency exchange contracts (9,569) 2,237
Written options (6,498) --
Foreign-currency transactions and net other assets (110,956) 48,820
Net Unrealized Depreciation of Investments
During the Period (3,051,891) (1,429,360)
Net Realized and Unrealized Loss on Investments (578,984) (2,373,355)
Net Decrease in Net Assets Resulting from Operations $ (618,081) (2,341,251)
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Statements of Changes in Net Assets
================================================================================
The Montgomery Partners Series
Statements of Changes in Net Assets
Six Months Ended September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Global Long-Short Emerging Markets
Fund Focus Fund
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations:
Net investment income/(loss) $ (39,097) $ 32,104
Net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts, securities sold
short, written options and foreign-currency
transactions during the period 2,472,907 (943,995)
Net unrealized depreciation of securities, forward
foreign-currency exchange contracts, securities sold
short, written options, foreign-currency
transactions and other net assets during the period (3,051,891) (1,429,360)
Net Decrease in Net Assets Resulting from Operations (618,081) (2,341,251)
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (note 8):
Class A shares 26,085,594 4,184,293
Class B shares 11,424,614 16,972
Class C shares 4,291,225 19,988
Net Increase in Net Assets 41,183,352 1,880,002
Net Assets:
Beginning of Period 16,842,243 1,943,310
End of Period $58,025,595 $ 3,823,312
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Statements of Changes in Net Assets
================================================================================
The Montgomery Partners Series
Statements of Changes in Net Assets (continued)
Period/*/ Ended March 31, 1998
<TABLE>
<CAPTION>
Global Long-Short Emerging Markets
Fund Focus Fund
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations:
Net investment income $ 13,539 $ 35,459
Net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts, securities sold
short, written options and foreign-currency
transactions during the period 506,608 (23,089)
Net unrealized depreciation of securities, forward
foreign-currency exchange contracts, securities sold
short, written options, foreign-currency transactions
and other net assets during the period 1,352,951 209,168
Net Decrease in Net Assets Resulting from Operations 1,873,098 221,538
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (note 8):
Class A shares 14,714,995 1,576,045
Class B shares 59,080 220
Class C shares 195,070 145,507
Net Increase in Net Assets 16,842,243 1,943,310
Net Assets:
Beginning of Period -- --
End of Period $16,842,243 $1,943,310
</TABLE>
/*/ The Funds commenced operations on December 31, 1997.
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Financial Highlights
================================================================================
The Montgomery Partners Series
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Selected Per-Share Data for the Period Ended:
Net Asset Value--Beginning of Period
Net investment income/#/
Net realized and unrealized gain on investments
Net increase in net assets resulting from investment operations
Net Asset Value--End of Period
Total Return/**/
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s)
Ratio of net investment income/(loss) to average net assets/+/
Ratio of operating expenses to average net assets, excluding dividend and
interest expenses/+/
Ratio of operating expenses to average net assets, including dividend and
interest expenses/+/
Portfolio turnover rate
Ratio of net investment income/(loss), before deferral of fees by Manager, to
average net assets/+/
Ratio of operating expenses, before deferral of fees by Manager, to average net
assets/+/
Selected Per-Share Data for the Period Ended:
Net Asset Value--Beginning of Period
Net investment income/#/
Net realized and unrealized gain on investments
Net increase in net assets resulting from investment operations
Net Asset Value--End of Period
Total Return/**/
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s)
Ratio of net investment income/(loss) to average net assets/+/
Ratio of operating expenses to average net assets, excluding dividend/+/
Portfolio turnover rate
Ratio of net investment income/(loss), before deferral of fees by Manager, to
average net assets/+/
Ratio of operating expenses, before deferral of fees by Manager, to average net
assets/+/
Global Long-Short Fund/*/
Class A Shares Class B Shares Class C Shares
9/30/98 9/30/98 9/30/98
(Unaudited) 3/31/98 (Unaudited) 3/31/98 (Unaudited) 3/31/98
$12.70 $ 10.00 $ 12.64 $ 10.00
$ 11.83 $ 10.00
(0.01) 0.02 (0.06) 0.00
(0.05) --
0.75 2.68 0.74 2.64
0.69 1.83
0.75 2.70 0.68 2.64
0.64 1.83
$13.44 $ 12.70 $ 13.32 $ 12.64
$ 12.47 $ 11.83
5.82% 27.20% 5.38% 26.50%
5.32% 18.50%
$42,735 $ 16,579 $ 10,994 $ 61
$ 4,297 $ 202
(0.06)% 0.65% (0.81)% (0.10)%
(0.81)% (0.10)%
2.35% 2.35% 3.10% 3.10%
3.10% 3.10%
3.29% 2.78% 4.04% 3.53%
4.04% 3.53%
112.01% 84.25% 112.01% 84.25%
112.01% 84.25%
(0.52)% (1.77)% (1.27)% (2.52)%
(1.27)% (2.52)%
3.75%/++/ 5.19%/++/ 4.50%/++/
5.94%/++/ 4.50%/++/ 5.94%/++/
Emerging Markets Focus Fund/*/
Class A Shares Class B Shares Class C Shares
9/30/98 9/30/98 9/30/98
(Unaudited) 3/31/98 (Unaudited) 3/31/98 (Unaudited) 3/31/98
$11.43 $ 10.00 $ 11.84 $ 10.00 $
11.83 $ 10.00
0.05 0.27 0.01 0.25
0.02 0.26
(3.81) 1.16 (3.96) 1.59
(3.96) 1.57
(3.76) 1.43 (3.95) 1.84
(3.94) 1.83
$7.67 $ 11.43 $ 7.89 $ 11.84 $
7.89 $ 11.83
(32.81)% 14.40% (33.28)% 18.40%
(33.22)% 18.30%
$3,701 $ 1,789 $ 13 $ 0 $
110 $ 154
1.60% 10.46% 0.85% 9.71%
0.85% 9.71%
2.10% 2.10% 2.85% 2.85%
2.85% 2.85%
147.02% 70.62% 147.02% 70.62%
147.02% 70.62%
(3.33)% 2.77% (4.08)% 3.52%
(4.08)% 3.52%
7.03% 15.34% 7.78% 16.09%
7.78% 16.09%
</TABLE>
The accompanying notes are an integral part of these financial statements.
32 33
<PAGE>
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Statement of Cash Flows
The Montgomery Partners Series
Statement of Cash Flows
Six Months Ended September 30, 1998 (unaudited)
Global Long-Short Fund
Cash Flows from Operating Activities:
Interest income received
$ 184,262
Dividend income received
90,256
Operating expenses paid
(956,760)
Proceeds from sales of securities and purchased options
35,970,374
Net proceeds from short sales and futures transactions
39,374,573
Net proceeds from forward foreign-currency exchange contracts
(106,038)
Net proceeds from written options transactions
(71,092)
Purchase of securities and purchased options
(75,097,448)
Cash Used by Operating Activities
$ (611,873)
Cash Flows from Financing Activities:
Proceeds from subscriptions
$ 49,317,545
Payments on shares redeemed
(7,471,452)
Repayment of custodian borrowings
(3,473,635)
Cash Provided/(Used) by Financing Activities
$38,372,458
Increase in cash
37,760,585
Cash at beginning of period 6,872,885
Cash at end of period $ 44,633,470
Reconciliation of Net Increase in Net Assets from
Operations to Cash Provided by Operating Activities:
Net decrease in net assets resulting from operations $ (618,081)
Amortization of organization costs $ 2,807
Increase in investments (30,013,002)
Increase in interest and dividends receivable
(264,036)
Increase in other assets
(728,111)
Increase in receivables for investments sold
(4,952,156)
Increase in payable for investments purchased
4,527,178
Increase in short sales
31,073,010
Increase in forward foreign-currency exchange contracts
9,569
Decrease in written options
(64,594)
Increase in accrued expenses
415,543
Total adjustments
6,208
Cash Used by Operating Activities
$ (611,873)
Supplemental Information:
Interest Paid
$ 84,662
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Notes to Financial Statements
================================================================================
The Montgomery Global Long-Short Fund and the Montgomery Emerging Markets Focus
Fund (the "Funds") are part of the Montgomery Partners Series (the "Series").
Each Fund and the Series are part of the Montgomery Funds II (the "Trust"). The
Trust is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as a diversified, open-end management investment company and was
organized as a Delaware business trust on September 10, 1993. The Funds
commenced operations on December 31, 1997. Each Fund's investment objective is
to seek capital appreciation.
1. Significant Accounting Policies:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosure in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies.
a. Portfolio Valuation
Portfolio securities are valued using current market valuations: either the
last reported sales price or, in the case of securities for which there is no
reported last sale and in the case of fixed-income securities, the mean of the
closing bid and ask prices.
Portfolio securities that are traded primarily on foreign securities
exchanges or for which market quotations are readily available are generally
valued at the last reported sales price on the respective exchanges or markets;
except that when an occurrence subsequent to the time that a value was so
established is likely to have changed said value, the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees or its delegates. Securities traded on the
over-the-counter market or on the NASDAQ Stock Market are valued at the mean
between the last available bid and ask price prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair market value as determined in good faith by or under the
supervision of the Trust's officers in accordance with methods authorized by the
Trust's Board of Trustees. Short-term securities with maturities of 60 days or
less are carried at amortized cost, which approximates market value.
b. Forward Foreign-Currency Exchange Contracts
The Funds may engage in forward foreign-currency exchange contracts
(forward contracts) as a hedge in connection with portfolio purchases and sales
of securities denominated in foreign currencies. A forward contract is a
commitment to purchase or sell a foreign currency at the settlement date at a
negotiated rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset, and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
the settlement date. Realized and unrealized gains and losses that represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign-currency-related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, a Fund gives up the
opportunity to profit from favorable
35
<PAGE>
Notes to Financial Statements
================================================================================
exchange rate movements during the term of the contract.
c. Foreign Currency
The accounting records of the Funds are maintained in U.S. dollars.
Investment securities and all other assets and liabilities of the Funds
denominated in a foreign currency are translated into U.S. dollars at the
exchange rate each day. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the exchange rate in effect
on the dates of the respective transactions.
The Funds do not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain/(loss) and unrealized appreciation or depreciation from
investments and securities sold short.
d. Repurchase Agreements
The Funds may engage in repurchase agreement transactions individually or
jointly through a joint repurchase account with other series of the Trust and
affiliated registered investment companies pursuant to a joint repurchase
agreement. Under the terms of a typical repurchase agreement, a Fund takes
possession of a government debt obligation as collateral. A Fund also agrees
with the counterparty to allow the counterparty to repurchase, and a Fund to
resell, the obligation at a specified date and price, thereby determining the
yield during a Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at least equal at all times to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, a Fund has the right to use the collateral to offset
losses incurred. There could be potential loss to a Fund in the event a Fund is
delayed or prevented from exercising its rights to dispose of collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period the Fund seeks to assert its rights. A
Fund's investment manager, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which a Fund enters into repurchase agreements, to
evaluate potential risks. A Fund may also participate on an individual or joint
basis in tri-party repurchase agreements that involve a counterparty and a
custodian bank.
e. Short Sales/Forward Commitments
Short sales are transactions in which a Fund sells a security it does not
own, in anticipation of a decline in the market value of that security. To
complete such a transaction, a Fund must borrow the security to deliver to the
buyer upon the short sale; the Fund is then obligated to replace the security
borrowed by purchasing it on the open market at some later date. A Fund will
incur a loss if the market price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security. A
Fund will typically realize a gain if the security declines in value between
those dates. Dividends declared on securities sold short are recorded on the ex-
dividend date. For the period ended September 30, 1998, the Global Long-Short
Fund incurred $91,913 in dividend expenses.
A Fund maintains collateral assets consisting of cash or liquid debt and
equity securities sufficient to fully collateralize its obligation on the short
position.
f. Options
An option contract is a contract in which the writer of the option grants
the buyer of the option the right to purchase from (call option) or sell to (put
option) the writer a designated instrument at a specified price
36
<PAGE>
Notes to Financial Statements
================================================================================
within a specified period of time. Certain options, including options on
indices, will require cash settlement by a Fund if the option is exercised.
If a Fund writes an option and the option expires unexercised, the Fund
would realize a capital gain to the extent of the amount received for the option
(the "premium"). If a Fund elects to close out the option, it would recognize a
gain or loss based on the difference between the cost of closing the option and
the initial premium received. If a Fund purchases an option and allows the
option to expire, it would realize a loss to the extent of the premium paid. If
a Fund elects to close out the option, it would recognize a gain or loss equal
to the difference between the cost of acquiring the option and the amount
realized upon the sale of the option.
The gain or loss recognized by a Fund upon the exercise of a written call
or purchased put option is adjusted for the amount of option premium. If a
written put or purchased call option is exercised, a Fund's cost basis of the
acquired security or currency would be the exercise price adjusted for the
amount of the option premium.
The liability representing a Fund's obligation under an exchange-traded
written option or investment in the purchased option is valued at the last sale
price or, in absence of a sale, the mean between the closing bid and ask price
or at the most recent ask price (bid for purchased options) if no bid and ask
prices are available. Over-the-counter written or purchased options are valued
using dealer-supplied quotations.
When a Fund writes a covered call option, the Fund forgoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When a Fund writes a put option, it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts.
A Fund's maximum exposure to purchased options is limited to the premium
initially paid. In addition, certain risks may arise upon entering into options
contracts, including the risk that an illiquid secondary market will limit a
Fund's ability to close out an option contract prior to the expiration date, and
that a change in the value of the option contract may not correlate exactly with
changes in the value of the securities or currencies hedged.
g. Futures Contracts
Each Fund may engage in futures transactions. The Funds may use futures
contracts to manage their exposure to the stock market for hedging and non-
hedging purposes. The underlying value of a futures contract is incorporated
within the unrealized appreciation/(depreciation). This amount reflects each
contract's exposure to the underlying instrument or index at September 30, 1998.
Buying futures contracts tends to increase the Fund's exposure to the underlying
instrument or index. Selling futures contracts tends to either decrease the
Fund's exposure to the underlying instrument or index, or to hedge other Fund
investments.
Upon entering into a futures contract, the Fund is required to deposit with
the broker an amount of cash or cash equivalents equal to a certain percentage
of the contract amount. This is known as the "initial margin." Subsequent
payments ("variation margin") are made or received by the Fund each day,
depending on the daily fluctuation of the value of the contract. The daily
changes in contract value are recorded as unrealized gains or losses, and the
Fund recognizes a realized gain or loss when the contract is closed.
37
<PAGE>
Notes to Financial Statements
================================================================================
There are several risks in connection with the use of futures contracts.
Futures contracts involve, to a varying degree, potentially unlimited risk of
loss in excess of the futures variation margin. The change in the value of
futures contracts primarily corresponds with the value of their underlying
instruments or index. In addition, there is a risk that the Fund may not be able
to enter into a closing transaction because of an illiquid secondary market.
Subject to the regulations of the Commodity Futures Trading Commission,
each Fund may invest in futures contracts and options on futures contracts for
bona fide hedging purposes without limitation as to a percentage of its assets
but subject to a limit for non-bona fide hedging purposes of 5% of net assets
for initial margins and premiums on those futures.
h. Dividends and Distributions
Dividends, if any, from net investment income are declared and paid at
least annually. Distributions of any short-term capital gains earned by the
Funds are distributed no less frequently than annually. Additional distributions
of net investment income and capital gains for each Fund may be in order to
avoid the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and capital-
gain distributions are determined in accordance with income-tax regulations,
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by a Fund, timing differences and differing
characterization of distributions made by a Fund.
i. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis. Realized gain
and loss from securities transactions are recorded on the specific identified
cost basis. Dividend income is recorded on the ex-dividend date, except certain
cash dividends from foreign securities, which are recorded as soon as a Fund is
informed of the ex-dividend date. Interest income, including, where applicable,
amortization of discount on short-term investments, is recognized on the accrual
basis.
j. Federal Income Taxes
Each Fund intends to elect and qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve each Fund
from all or substantially all federal income taxes.
As of March 31, 1998, the Emerging Markets Focus Fund had for federal
income-tax purposes unused capital losses of $23,804, which will expire in 2006
if not used to offset capital gains in future periods.
k. Organization Costs
Expenses incurred in connection with the organization of the Funds amounted
to $27,989 and $20,666 for the Global Long-Short Fund and the Emerging Markets
Focus Fund, respectively, and are amortized on a straight-line basis over a
period of five years from the commencement of operations. Organization costs
payable represent amounts due Montgomery Asset Management, LLC, for expenses
incurred on behalf of the Funds.
l. Cash
Cash, as used in the Statement of Cash Flows for the Global Long-Short
Fund, is the amount reported in the Statements of Assets and Liabilities. The
Fund issues and redeems its shares, invests in securities and distributes
dividends from net investment income and net realized gains (which are either
paid in cash or
38
<PAGE>
Notes to Financial Statements
================================================================================
reinvested at the discretion of shareholders). These activities are reported in
the Statement of Changes in Net Assets. Information on cash payments is
presented in the Statement of Cash Flows. Accounting practices that do not
affect reporting activities on a cash basis include unrealized gain or loss on
investment securities, accretion income recognized on investment securities and
amortization of organization costs.
m. Expenses
General expenses of the Trust are allocated to the relevant Funds based on
relative net assets. Operating expenses directly attributable to a Fund or a
class of shares are charged to that Fund's or class' operations. Expenses of
each Fund not directly attributable to the operations of any Fund or class of
shares are prorated among the classes based on the relative average net assets
of each Fund or class of shares. Registration and filing fees payable represent
amounts due Montgomery Asset Management, LLC, for expenses incurred on behalf of
the Funds.
2. Management Fees and Other Transactions with Affiliates and Other
Contractual Commitments:
a. Montgomery Asset Management, LLC, is the Funds' Manager (the "Manager").
The Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisors Act of 1940, as amended (the "Advisors Act"). The Manager is a
subsidiary of Commerzbank AG, one of the largest publicly held commercial banks
in Germany.
Pursuant to an investment management agreement between the Manager and the
Trust with respect to each Fund ("Investment Management Agreement"), the Manager
provides the Funds with advice on buying and selling securities, manages the
investments of the Funds including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides the personnel needed by the Trust with respect to the
Manager's responsibilities under such agreement. The Manager has agreed to
reduce some or all of its Management fee or absorb Fund expenses if necessary to
keep the Funds' annual operating expenses, exclusive of Rule 12b-1 fees,
dividend expense, interest and taxes, at or below 2.35% and 2.10% for the Global
Long-Short Fund and the Emerging Markets Focus Fund, respectively. Any
reductions or absorptions made to a Fund by the Manager are subject to recovery
within the following three years, provided a Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager may terminate these reductions or absorptions at any time.
Montgomery Asset Management, LLC, serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Funds' administrative operations.
As compensation, the Funds have accrued a monthly management and
administration fee (accrued daily) based on the average daily net assets of the
Funds at the following annualized rates:
Management Fee Including
Effect of Fees Deferred
Management and Expenses Administration
Name of Fund Fee Absorbed Fee
Global Long-Short Fund 1.50% 1.04% .07%
Emerging Markets- Focus Fund 1.25% (3.69)% .07%
39
<PAGE>
Notes to Financial Statements
================================================================================
For the six months ended September 30, 1998, the Manager has deferred fees
subject to recoupment as follows:
<TABLE>
<CAPTION>
Deferred Management Fees and Absorbed
Fees Expenses Expenses Subject
Name of Fund Deferred Absorbed to Recoupment
<S> <C> <C> <C>
Global Long-
Short Fund $87,078 -- $137,667
Emerging Markets
Focus Fund $25,410 $74,911 $145,265
</TABLE>
b. Certain officers and Trustees of the Trust are, with respect to the Trust's
manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all Trusts advised by
the Manager ($5,000 of which will be allocated to the Montgomery Funds II).
3. Borrowing From Custodian and Line of Credit:
The Funds have entered into an arrangement with the Custodian to
periodically borrow money for temporary or emergency purposes or to leverage
their portfolios in an effort to increase total return. Such borrowings bear
interest at fixed rates ranging from 6.03% to 7.02%, depending on the balance
outstanding. During the six months ended September 30, 1998, the Global Long-
Short Fund borrowed money to leverage the portfolio, resulting in $36,023 of
interest expense being incurred by the Fund. At September 30, 1998, there were
no borrowings under this agreement. The Fund maintains collateral assets
consisting of cash or liquid debt and equity securities sufficient to
collateralize 300% of the borrowed amount.
In addition, under an unsecured Revolving Credit Agreement with
DeutscheBank (New York), the Global Long-Short Fund (through August 28, 1998)
and the Emerging Markets Focus Fund, along with other Funds of The Montgomery
Funds I, The Montgomery Funds II and The Montgomery Funds III, may borrow
consistent with applicable law and their investing policies provided that the
aggregate principal amount of outstanding loans under the agreement to all Funds
does not exceed $175,000,000. Each Fund pays its quarterly pro-rata share of the
0.08% annual commitment fee of the unutilized credit line balance.
During the six months ended September 30, 1998, the Global Long-Short Fund
borrowed money to leverage the portfolio, resulting in $48,639 of interest
expense being incurred by the Fund.
At September 30, 1998, there were no loans outstanding under this
agreement. For the period ended September 30, 1998, borrowing by the Funds under
the agreement were as follows:
Average Maximum Average Average
Amount Debt Interest Average Debt
Fund Outstanding Outstanding Rate Shares per Share
Global Long-
Short Fund $4,291,667 $7,000,000 8.5% 2,365,448 $1.88
40
<PAGE>
Notes to Financial Statements
================================================================================
Beginning August 28, 1998, the Global Long-Short Fund may borrow money from
Bank of America NT&SA up to one-third of its assets under a Credit Agreement
dated August 28, 1998. This Fund makes quarterly payments of 0.10% annual
commitment fee of the unutilized credit line balance. At September 30, 1998,
there were no borrowings under this Agreement.
4. Shareholder Servicing and Distribution Plans:
The Funds have adopted a shareholder servicing plan for Class A, Class B
and Class C shares and a distribution plan for Class B and Class C shares of
each Fund. The shareholder servicing plan permits the Funds to compensate or
reimburse servicing agents for shareholder servicing provided by the servicing
agents. The distribution plan, adopted pursuant to Rule 12b-1 under the 1940
Act, permits the Funds to compensate or reimburse Funds Distributor, Inc. (the
"Distributor") for activities or expenses primarily intended to result in the
sale of the class's shares. Payments under the shareholder servicing plan are
limited to 0.25% of average daily net assets. Payments under the distribution
plan are limited to 0.75% of Class B and Class C average net assets.
The Funds were advised by the Distributor that for the six months ended
September 30, 1998, the Distributor received $80,436 in shareholder servicing
and distribution fees. The Distributor also received the proceeds of sales
commissions paid by shareholders upon the purchase of Class A shares, and the
contingent deferred sales charge paid upon certain redemptions of Class B and
Class C shares. For the six months ended September 30, 1998, the Distributor
earned $6,632 and $3,813 in contingent deferred sales charges on Class B and
Class C shares, respectively, of the Funds. Certain employees of the Distributor
serve as officers of the Funds.
5. Securities Transactions:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. government securities, during the six months ended
September 30, 1998, were:
Purchases Sales
Global Long-Short Fund $79,069,726 $40,771,979
Emerging Markets Focus Fund $8,580,628 $4,555,691
b. At September 30, 1998, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value were as follows:
Taxable Taxable
<TABLE>
<CAPTION>
Unrealized Unrealized
Appreciation Depreciation
<S> <C> <C> <C> <C>
Global Long-Short Fund $8,330,254 $9,883,665
Emerging Markets Focus Fund $ 176,918 $1,448,013
</TABLE>
41
<PAGE>
Notes to Financial Statements
================================================================================
c. The schedule of forward foreign-currency exchange contracts for the Global
Long-Short Fund and Emerging Markets Focus Fund at September 30, 1998, were
as follows:
<TABLE>
<CAPTION>
Net Unrealized
Foreign-Currency Settlement In Exchange for Appreciation
Amount Date (US$) (Depreciation)
<S> <C> <C> <C>
Global Long-Short Fund:
Forward Foreign-Currency Exchange Contracts to Receive
36,341,019 Hungarian Forint 10/01/98 $ 166,358 $ (612)
464,398 Singapore Dollar 10/01/98 275,117 894
Total $ 441,475 $ 282
Forward Foreign-Currency Exchange Contracts to Deliver
608,300 Singapore Dollar 10/14/98 $ 350,000 $(10,550)
Net Unrealized Depreciation $ (10,268)
</TABLE>
Emerging Markets Focus Fund:
Forward Foreign-Currency Exchange Contracts to Deliver
150,000 South African Rand 03/29/99 $ 239,616
$ 2,237
<TABLE>
<CAPTION>
<S> <C> <C>
Net Unrealized Appreciation $ 2,237
d. Written options activity for the Global Long-Short Fund for the six months ended September 30,
1998,
were as follows:
Written Options Premiums Number of Contracts
Options outstanding at March 31, 1998 $ 71,092 260
Options written 163,393 12,880
Options expired 23,189 105
Options closed 207,776 9,535
Options exercised 3,520 3,500
Written Options outstanding at September 30, 1998 $ 0 0
</TABLE>
42
<PAGE>
Notes to Financial Statements
================================================================================
6. Illiquid and Special Situation Securities:
Each Fund may not invest more than 15% of its net assets in illiquid
securities. The securities shown in the following table have been determined by
the Manager to be illiquid because they are restricted or because there is an
exceptionally low trading volume in the primary trading market for the security
at September 30, 1998. These securities are valued in good faith by the Board of
Trustees:
<TABLE>
<CAPTION>
Acquisition 9/30/98 Value
% of Total
Security Date Shares Market Value per
Share Cost Net Assets
<S> <C> <C> <C> <C>
Global Long-Short Fund:
Advanced Semiconductor
Engineering, GDR 09/24/98 30,000 $ 273,000 $ 9.10
$255,000 0.47%
Anglogold 09/28/98 2,600 136,240 52.40
134,764 0.23
AnnTaylor Stores
Corporation 09/28/98 1,000 20,310 20.31
23,123 0.04
Autoliv, Inc. 09/22/98 5,600 172,200 30.75
164,314 0.30
DBS Land 09/24/98 218,000 151,102 0.69
151,273 0.25
John Hancock Life
Insurance 03/19/98 270,000 119,368 0.44 129,873 0.21
Liberty Life Association
of Africa, Ltd. 09/25/98 13,300 202,518 15.23 203,485 0.35
Malaysia International
Shipping Berhad 08/19/98 102,000 138,237 1.36 106,388 0.24
Matav RT 09/08/98 23,400 103,048 4.40 103,970 0.18
Mol Magyar Olaj-es
Gazipari 09/24/98 8,300 161,099 19.41 166,035 0.28
New Straits Times 09/09/98 177,000 85,239 0.48 87,250 0.15
PPB Oil Palms Berhad 01/13/98 306,000 175,547 0.57 241,749 0.30
Security One Public
Company Ltd. 06/15/98 350,000 7,965 0.02 -- 0.01
Selangor Properties Berhad 03/20/98 178,000 62,768 0.35 80,697 0.11
South African
Breweries, Ltd. 09/25/98 17,400 262,284 15.07 268,823 0.45
Uniphase Corporation 09/29/98 3,000 122,820 40.94 123,750 0.21
$ 2,193,745 3.78%
</TABLE>
7. Foreign Securities:
The Funds may purchase securities on foreign security exchanges. Securities
of foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and the
U.S. government. These risks include, among others, revaluation of currencies,
less-reliable information about issuers, different securities transactions
clearance and settlement practices, and potential future adverse political and
economic developments. These risks are heightened for investments in emerging
markets countries. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
43
<PAGE>
Notes to Financial Statements
================================================================================
Transactions in Shares of a Beneficial Interest
<TABLE>
<CAPTION>
Global Long-Short Fund Emerging Markets Fund
Six Months Ended 9/30/98 Six Months Ended 9/30/98
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
A Shares:
Sold 2,349,352 $32,662,269 664,811 $ 6,901,857
Redeemed (475,403) (6,576,675) (338,547) (2,717,564)
Net increase 1,873,949 $26,085,594 326,264 $ 4,184,293
B Shares:
Sold 856,008 $11,984,600 1,629 $ 16,972
Redeemed (35,445) (559,986) -- --
Net increase 820,563 $11,424,614 1,629 $ 16,972
C Shares:
Sold 360,863 $ 4,638,477 26,589 $ 239,571
Redeemed (33,347) (347,252) (25,694) (219,583)
Net increase 327,516 $ 4,291,225 895 $ 19,988
Global Long-Short Fund Emerging Markets Fund
Period Ended 3/31/98/*/ Period Ended 3/31/98/*/
Shares Dollars Shares Dollars
A Shares:
Sold 1,351,456 $15,266,337 156,519 $1,576,045
Redeemed (46,369) (551,342) -- --
Net increase 1,305,087 $14,714,995 156,519 $1,576,045
B Shares:
Sold 4,825 $ 59,080 22 $ 220
Redeemed -- -- -- --
Net increase 4,825 $ 59,080 22 $ 220
C Shares:
Sold 20,057 $ 221,260 13,008 $ 145,507
Redeemed (3,000) (26,190) -- --
Net increase 17,057 $ 195,070 13,008 $ 145,507
</TABLE>
/*/ The Funds commenced operations on December 31, 1998.
The accompanying notes are an integral part of these financial statements.
44
