As filed with the Securities and Exchange Commission on October 30, 1998
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 38
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 39
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
Greg M. Siemons, Assistant Secretary
101 California Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
__X__ on October 31, 1998, pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ______________ pursuant to Rule 485(a)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheets for Class R Prospectus for shares of Montgomery
Growth Fund, Montgomery Equity Income Fund, Montgomery Small
Cap Fund, Montgomery Small Cap Opportunities Fund, Montgomery
U.S. Emerging Growth Fund, Montgomery Global Opportunities
Fund, Montgomery Global Communications Fund, Montgomery
International Small Cap Fund, Montgomery International Growth
Fund, Montgomery Latin America Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery U.S. Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Total Return Bond
Fund, Montgomery Government Reserve Fund, Montgomery Federal
Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund and Montgomery California Tax-Free
Money Fund
Cross-Reference Sheets for Class P Prospectus for shares of Montgomery
Growth Fund, Montgomery Equity Income Fund, Montgomery Small
Cap Opportunities Fund, Montgomery U.S. Asset Allocation Fund,
Montgomery Select 50 Fund, Montgomery Government Reserve Fund,
Montgomery Short Duration Government Bond Fund, Montgomery
International Growth Fund, Montgomery Emerging Markets Fund,
Montgomery International Small Cap Fund, and Montgomery
California Tax-Free Intermediate Bond Fund
Cross-Reference Sheet for Prospectus for shares of Montgomery
Institutional Emerging Markets Fund
Part A - Prospectus for Class R shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap Fund,
Montgomery Small Cap Opportunities Fund, Montgomery U.S.
Emerging Growth Fund, Montgomery Global Opportunities Fund,
Montgomery Global Communications Fund, Montgomery
International Small Cap Fund, Montgomery International Growth
Fund, Montgomery Latin America Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery U.S. Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Total Return Bond
Fund, Montgomery Government Reserve Fund, Montgomery Federal
Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund and Montgomery California Tax-Free
Money Fund
Part A - Prospectus for Class P shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap
Opportunities Fund, Montgomery U.S. Asset Allocation Fund,
Montgomery Select 50 Fund, Montgomery Government Reserve Fund,
Montgomery Short Duration Government Bond Fund, Montgomery
International Growth Fund, Montgomery Emerging Markets Fund,
Montgomery International Small Cap Fund, and Montgomery
California Tax-Free Intermediate Bond Fund
Part A - Prospectus for shares of Montgomery Institutional Emerging
Markets Fund
Part B - Statement of Additional Information for Class R and Class P
shares of Montgomery Growth Fund, Montgomery Equity Income
Fund, Montgomery Small Cap Fund, Montgomery Small Cap
Opportunities Fund, Montgomery U.S. Emerging Growth Fund,
Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Latin America
Fund, Montgomery Emerging Asia Fund, Montgomery Emerging
Markets Fund, Montgomery Select 50
<PAGE>
Fund, Montgomery U.S. Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Total Return Bond
Fund, Montgomery Government Reserve Fund, Montgomery Federal
Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund and Montgomery California Tax-Free
Money Fund
Part B - Statement of Additional Information for shares of Montgomery
Institutional Emerging Markets Fund.
Part C - Other Information
Signature Page
Exhibits
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(For Class R Prospectus)
<CAPTION>
New Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
<S> <C> <C>
1. Front and Back Cover Pages Front and Back Cover Pages
2. Risk/Return Summary: "Objective," "Strategy," "Risks," "Past Fund Performance,"
Investment, Risks and and "Additional Investment Strategies and Related Risks"
Performance
3. Risk/Return Summary: Fee Table "Investor Expenses"
4. Investment Objectives, Principal "Objective," "Strategy," "Risks," "Past Fund Performance,"
Investment Strategies, and and "Additional Investment Strategies and Related Risks"
Related Risks
5. Management's Discussion of Fund "Past Fund Performance"
Performance
6. Management, Organization and "Portfolio Management"
Capital Structure
7. Shareholder Information "What You Need to Know About Your Montgomery Account"
8. Distribution Arrangements "Investor Expenses" and "What You Need to Know About Your
Montgomery Account"
9. Financial Highlights Information "Financial Highlights"
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(For Combined Class P and Institutional Emerging Markets Fund Prospectus)
Old Location in the
N-1A Registration Statement
Item No. Item By Heading
- -------- ---- ----------
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Fund"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "The Fund's Investment Objectives and
Policies," "Portfolio Securities," "Other Investment
Practices," "Risk Considerations" and "General
Information"
5. Management of the Fund "The Fund's Investment Objectives and Policies,"
"Management of the Funds" and "How to Invest in the
Funds"
5A. Management's Discussion of Fund Contained in the Fund's Annual Report
Performance
6. Capital Stock and Distributions "Dividends and Distributions," "Taxation" and "General
Information"
7. Purchase of Securities Being "How to Invest in the Funds," "How Net Asset Value Is
Offered Determined," "General Information" and "Backup
Withholding Instructions"
8. Redemption or Purchase "How to Redeem an Investment in the Funds" and "General
Information"
9. Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
(Combined Class R and Class P Statement of Additional Information)
<CAPTION>
New Old Location in the
N-1A N-1A Registration Statement
Item No. Item No. Item by Heading
- -------- -------- ---- ----------
<S> <C> <C> <C>
10. Cover Page and Table of Cover Page, Table of Contents
Contents
10. Cover Page Cover Page
11. Table of Contents Table of Contents
11. 12. Fund History "The Trusts"
12. 13. Description of the Fund and "The Trusts," "Investment Objectives and Policies of the
Its Investments and Risks Funds," and "Investment Restrictions"
13. 14. Management of the Fund "Investment Objectives and Policies of the Funds," "Risk
Factors," and "Investment Restrictions"
14. 15. Control Persons and Principal "Trustees and Officers" and "General Information"
Holders of Securities
15. 16. Investment Advisory and Other "Investment Management and Other Services"
Services
16. 17. Brokerage Allocation and Other "Execution of Portfolio Transactions"
Practices
17. 18. Capital Stock and Other "The Trusts," "Additional Purchase and Redemption
Securities Information," and "General Information"
18. 19. Purchase, Redemption "Additional Purchase and Redemption Information" and
and Pricing of Securities "Determination of Net Asset Value"
Being Offered
19. 20. Taxation of the Fund "Distributions and Tax Information"
20. 21. Underwriters "Principal Underwriters"
21. 22. Calculation of Performance Data "Performance Information"
22. 23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
(Montgomery Institutional Emerging Markets Fund
Statement of Additional Information)
<CAPTION>
Old Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
<S> <C> <C>
Cover Page and Table of Cover Page, Table of Contents
Contents
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Fund History "The Trust"
13. Description of the Fund and Its "The Trust," "Investment Objectives and Policies of the
Investments and Risks Funds," and "Investment Restrictions"
14. Management of the Fund "Investment Objectives and Policies of the Funds,"
"Risk Factors," and "Investment Restrictions"
15. Control Persons and Principal "Trustees and Officers" and "General Information"
Holders of Securities
16. Investment Advisory and Other "Investment Management and Other Services"
Services
17. Brokerage Allocation and Other "Execution of Portfolio Transactions"
Practices
18. Capital Stock and Other "The Trust," "Additional Purchase and Redemption
Securities Information," and "General Information"
19. Purchase, Redemption and Pricing "Additional Purchase and Redemption Information" and
of Securities Being Offered "Determination of Net Asset Value"
20. Taxation of the Fund "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of Performance Data "Performance Information"
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS R SHARES OF
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 1998
The Montgomery FundsSM
U.S. Equity Funds
Growth Fund
Small Cap Opportunities Fund
Small Cap Fund
(closed to new investors)
U.S. Emerging Growth Fund
Equity Income Fund
International & Global Equity Funds
International Growth Fund
International Small Cap Fund
Global Opportunities Fund
Global Communications Fund
Emerging Markets Fund
Emerging Asia Fund
Latin America Fund
Multi-Strategy Funds
Select 50 Fund
U.S. Asset Allocation Fund
U.S. Fixed-Income & Money Market Funds
Total Return Bond Fund
Short Duration Government Bond Fund
Government Reserve Fund
Federal Tax-Free Money Fund
California Tax-Free Intermediate Bond Fund
California Tax-Free Money Fund
The Montgomery Funds have registered each mutual fund offered in this prospectus
with the U.S. Securities and Exchange Commission (SEC). That registration does
not imply, however, that the SEC endorses the Funds.
The SEC has not approved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
1====
<PAGE>
[inside front cover of prospectus]
This prospectus contains important information about the investment objectives,
strategies and risks of The Montgomery Funds that you should know before you
invest in them. Please read it carefully and keep it on hand for future
reference.
Please be aware that The Montgomery Funds:
* Are not bank deposits.
* Are not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC).
* May not achieve their stated goal(s).
You should also know that:
* The Funds' shares may rise and fall in value.
* You could lose money by investing in the Funds.
This prospectus describes only the Funds' Class R shares. The Montgomery Funds
offer other classes of shares to eligible investors.
2====
<PAGE>
[Table of Contents]
TABLE OF CONTENTS
U.S. Equity Funds
Montgomery Growth Fund....................................................4
Montgomery Small Cap Opportunities Fund...................................6
Montgomery Small Cap Fund (closed to new investors).......................8
Montgomery U.S. Emerging Growth Fund.....................................10
Montgomery Equity Income Fund............................................12
International and Global Equity Funds
Montgomery International Growth Fund.....................................14
Montgomery International Small Cap Fund..................................16
Montgomery Global Opportunities Fund.....................................18
Montgomery Global Communications Fund....................................20
Montgomery Emerging Markets Fund.........................................22
Montgomery Emerging Asia Fund............................................24
Montgomery Latin America Fund............................................26
Multi-Strategy Funds
Montgomery Select 50 Fund................................................28
Montgomery U.S. Asset Allocation Fund....................................30
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund........................................32
Montgomery Short Duration Government Bond Fund...........................34
Montgomery Government Reserve Fund.......................................36
Montgomery Federal Tax-Free Money Fund...................................38
Montgomery California Tax-Free Intermediate Bond Fund....................40
Montgomery California Tax-Free Money Fund................................42
Portfolio Management..........................................................44
Additional Investment Strategies and Risks....................................48
Montgomery Latin America Fund............................................48
The Euro: Single European Currency......................................49
Defensive Investments....................................................49
Portfolio Turnover.......................................................50
The Year 2000............................................................50
Alternative Structures...................................................51
Financial Highlights..........................................................52
Account Information...........................................................62
Becoming a Montgomery Shareholder........................................63
How Fund Shares are Priced...............................................63
Buying Additional Shares.................................................64
Exchanging Shares........................................................66
Selling Shares...........................................................67
Other Policies...........................................................68
Tax Information..........................................................69
<PAGE>
After You Invest.........................................................70
[Sidebar]
- -------------------------
How to Contact Us
- -------------------------
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 5 A.M. to 5 P.M.
pacific time
Montgomery Web Site
www.montgomeryfunds.com
Address General
Correspondence to:
The Montgomery Funds
101 California Street
San Francisco, CA
94111-9361
3====
<PAGE>
Growth Fund | MNGFX
Objective
* Seeks long-term capital appreciation by investing in growth-oriented U.S.
companies of any size
[Graphic indicating Montgomery Growth Fund has a potential risk/reward profile
that is slightly more than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund may invest in U.S. companies of any size, but invests at least 65% of
its total assets in those companies whose shares have a total stock market value
(market capitalization) of at least $1 billion.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to the firms' growth potential. The
managers rigorously analyze each prospective holding by subjecting it to the
following three steps of their investment process:
* Identify companies with improving business fundamentals
* In-depth analysis of the company's current business and future prospects
* Analyze the company's price to determine whether its growth have been
discovered by the market
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is over-weighted in certain market
sectors compared with the Standard and Poor's 500 Composite Price Index, the
Fund may be more volatile than the S&P 500.
4====
<PAGE>
Past Fund Performance The chart at the left below, shows the risks of investing
in the Fund and how the Fund's total return has varied from year-to-year. The
chart at the right compares the Fund's performance to the most commonly used
index for its market segment. Of course, past performance is no guarantee of
future results.
[bar chart]
1994 1995 1996 1997
- ------------------ ---------------- ----------------- ----------------
20.91% 23.65% 20.20% 24.16%
Average Annual Returns through 12/31/97.
Growth Fund 24.16% 25.67%
S&P 500 Index 33.35% 22.11%
- --------------------------------------------------------------------------------
1 Year Inception (9/30/93)
During the four-year period shown above, the Fund's best quarter was Q2 1997
(+15.70%) and its worst quarter was Q4 1997 (-5.77%). The Fund's 1998 return
through 9/30/98 is -12.70%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fee 0.91%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.29%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.20%
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
$122 $380 $658 $1,450
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
Roger Honour, Kathryn Peters, Andrew Pratt For financial highlights,
For more details see page 44. see page 52
5====
<PAGE>
Small Cap Opportunities Fund | MNSOX
Objective
* Seeks long-term capital appreciation by investing in growth-oriented U.S.
small-cap companies
[Graphic indicating Montgomery Small Cap Opportunities Fund has a potential
risk/reward profile that is significantly more than that of the S&P 500.] This
Fund's potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of U.S.
companies whose shares have a total stock market value (market capitalization)
of $1.5 billion or less.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to their growth potential. The managers
rigorously analyze each prospective holding by subjecting it to the following
three steps of their investment process:
* Identify companies with improving business fundamentals
* In-depth analysis of the company's current business and future prospects
* Analyze the company's price to determine whether its growth have been
discovered by the market
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is over-weighted in certain market
sectors compared with the Russell 2000 Index, the Fund may be more volatile than
the Russell 2000.
The Fund's focus on small-cap stocks may expose shareholders to additional
risks. Smaller companies typically have more-limited product lines, markets and
financial resources than larger companies, and their securities may trade less
frequently and in more-limited volume than those of larger, more mature
companies. As a result, small-cap stocks--and therefore the Fund--may fluctuate
significantly more in value than larger-cap stocks and funds that focus on them.
6====
<PAGE>
Past Fund Performance The chart at the left below shows the risks of investing
in the Fund and how the Fund's total return has varied from year-to-year. The
chart at the right compares the Fund's performance to the most commonly used
index for its market segment. Of course, past performance is no guarantee of
future results.
[bar chart]
1996 1997
- ------------------ ----------------
37.28% 16.45%
Average Annual Returns through 12/31/97.
Small Cap Opportunities Fund 16.45% 26.36%
Russell 2000 Index 22.36% 19.39%
- --------------------------------------------------------------------------------
1 Year Inception (12/29/95)
During the 2-year period shown above, the Fund's best quarter was Q1 1996
(+22.92%) and its worst quarter was Q1 1997 (-10.32%). The Fund's 1998 return
through 9/30/98 was -23.32%.
FEES & EXPENSES [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.20%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.58%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.78%
Fee Waiver and/or Expense Reimbursement 0.28%
Net Expenses 1.50%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.50%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
$152 $473 $816 $1,784
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
Roger Honour, Kathryn Peters, Andrew Pratt For financial
For more details see page 44. highlights,
see page 53
7====
<PAGE>
Small Cap Fund | MNSCX
The Montgomery Small Cap Fund is currently closed to new investors*
Objective
* Seeks long-term capital appreciation by investing in rapidly growing U.S.
small-cap companies
[Graphic indicating Montgomery Small Cap Fund has a potential risk/reward
profile that is significantly more than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of U.S.
companies whose shares have a total stock market value (market capitalization)
of $1.5 billion or less.
The Fund's portfolio managers follow a growth strategy to invest in potentially
attractive small-cap companies that are at an early or transitional stage of
their development. The managers look for companies that they believe can thrive
even in adverse economic conditions. Specifically, they search for companies
that they think have the potential to:
* Gain market share within their industries
* Deliver consistently high profits to shareholders
* Increase their corporate earnings each quarter
* Provide solutions for current or impending problems in their respective
industries or in society overall.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is over-weighted in certain market
sectors compared with the Russell 2000 Index, the Fund may be more volatile than
the Russell 2000.
The Fund's focus on small-cap stocks may expose shareholders to additional
risks. Smaller companies typically have more-limited product lines, markets and
financial resources than larger companies, and their securities may trade less
frequently and in more-limited volume than those of larger, more mature
companies. As a result, small-cap stocks--and therefore the Fund--may fluctuate
significantly more in value than larger-cap stocks and funds that focus on them.
[Footnote to page] *From time to time, Montgomery may reopen and close the Small
Cap Fund to new investors, at its discretion. Current shareholders who maintain
open accounts in the Fund may make additional investments in it. Please be
advised that if you redeem your total investment in the Small Cap Fund, your
account will be closed and you will not be able to make any additional
investments in the Fund.
8====
<PAGE>
Past Fund Performance The chart at the left below shows the risk of investing in
the Fund and how the Fund's total return has varied from year-to-year. The chart
at the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
1991 1992 1993 1994 1995 1996 1997
- ------------ ---------- ---------- ---------- ----------- ----------- ----------
98.75% 9.59% 24.31% -9.96% 35.12% 18.69% 23.86%
Average Annual Returns through 12/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Small Cap Fund 23.86% 17.33% 21.47%
Russell 2000 Index 22.36% 16.40% 15.38%*
- --------------------------------------------------------------------------------------------------------
*calculated from 6/30/90 1 Year 5 Years Inception (7/13/90)
<FN>
During the 7-year period shown above, the Fund's best quarter was Q1 1991
(+39.57%) and its worst quarter was Q1 1997 (-11.68%). The Fund's 1998 return
through 9/30/98 is -28.62%.
</FN>
</TABLE>
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
Fund Fees and Expenses
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fee 1.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.24%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.24%
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
$126 $393 $679 $1,495
PORTFOLIO MANAGEMENT TEAM[clipart] [sidebar]
Stuart Roberts, Brad Kidwell, Cam Philpott For financial highlights
For more details see page 44. see page 53
9====
<PAGE>
U.S. Emerging Growth Fund | MNMCX
Objective
* Seeks long-term capital appreciation by investing in growth-oriented U.S.
smaller-cap companies
[Graphic indicating Montgomery U.S. Emerging Growth Fund has a potential
risk/reward profile that is significantly more than that of the S&P 500.] This
Fund's potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of U.S.
companies whose shares have a total stock market value (market capitalization)
of $1 billion or less.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to their growth potential. The managers
rigorously analyze each prospective holding by subjecting them to the following
three steps of their investment process:
* Identify companies with improving business fundamentals
* In-depth analysis of the company's current business and future prospects
* Analyze the company's price to determine whether its growth have been
discovered by the market
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is overweighted in certain market sectors
compared with the Russell 2000 Index, the Fund may be more volatile than the
Russell 2000.
The Fund's focus on micro- and small-cap stocks may expose shareholders to
additional risks. Small companies typically have more-limited product lines,
markets and financial resources than larger companies, and their securities may
trade less frequently and in more-limited volume than those of larger, more
mature companies. This is especially true of micro-cap companies. As a result,
micro-cap stocks--and therefore the Fund--may fluctuate significantly more in
value than larger-cap stocks and funds that focus on them.
10====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1995 1996 1997
- ------------------ ---------------- -----------------
28.66% 19.12% 27.05%
Average Annual Returns through 12/31/97
U.S. Emerging Growth Fund 27.05% 24.85%
Russell 2000 Index 22.36% 22.34%
- --------------------------------------------------------------------------------
1 Year Inception (12/30/94)
During the 3-year period shown above, the Fund's best quarter was Q2 1997
(+18.82%) and its worst quarter was Q1 1997 (-5.44%). The Fund's 1998 return
through 9/30/98 is -10.88%
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fee 1.33%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.24%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.57%
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
$159 $495 $853 $1,860
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
Roger Honour, Kathryn Peters, Andrew Pratt For financial highlights,
For more details see page 44. see page 54
11====
<PAGE>
Equity Income Fund | MNEIX
Objective
* Seeks current income and long-term capital appreciation while striving to
minimize portfolio volatility by investing in large, dividend-paying U.S.
companies
[Graphic indicating Montgomery Equity Income Fund has a potential risk/reward
profile that is a little less than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund seeks to provide a greater yield than the average yield of Standard &
Poor's 500 Composite Price Index stocks by investing at least 65% of its total
assets in dividend-paying stocks of large U.S. companies.
The Fund's strategy is to identify mature companies that have a history of
paying regular dividends to shareholders and offer a dividend yield well above
their historical average and/or the market's average. (Dividend yield is
calculated by dividing the dividend a company pays out per share of common stock
by the stock market price of those shares.) The Fund typically invests in
companies for two to four years. The manager usually will begin to reduce the
Fund's position in a company as its share price moves up and its dividend yield
drops to the lower end of its historical range. He may also pare back or sell
the Fund's position in a company that reduces or eliminates its dividend, or if
he believes that the company is about to do so.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. Increased interest rates may reduce the value of your investment in
this Fund. Although the Fund seeks to provide a consistent level of income to
shareholders, its yield may fluctuate significantly in the short term.
12====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1995 1996 1997
- ------------------ ---------------- -----------------
35.17% 18.34% 26.10%
Average Annual Returns through 12/31/97
Equity Income Fund 26.10% 23.74%
S&P 500 Index 33.35% 28.42%
- --------------------------------------------------------------------------------
1 Year Inception (9/30/94)
During the 3-year period shown above, the Fund's best quarter was Q2 1997
(+10.49%) and its worst quarter was Q1 1997 (+2.42%). The Fund's 1998 return
through 9/30/98 was -1.81%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.60%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.78%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.38%
Fee Waiver and/or Expense Reimbursement 0.52%
Net Expenses 0.86%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.85%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
$87 $274 $475 $1,058
PORTFOLIO MANAGER [clipart] [sidebar]
William King For financial highlights,
For more details see page 44. see page 54
13====
<PAGE>
International Growth Fund | MNIGX
Objective
* Seeks long-term capital appreciation by investing in medium- and large-cap
companies in developed stock markets outside the United States
[Graphic indicating Montgomery International Growth Fund has a potential
risk/reward profile that is a little more than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the common stocks of
companies outside the United States whose shares have a stock market value
(market capitalization) of more than $1 billion. The Fund currently concentrates
its investments in the stock markets of western Europe, particularly the United
Kingdom, France, Germany, Italy and the Netherlands, as well as developed
markets in Asia, such as Japan and Hong Kong. The Fund typically invests in at
least three countries outside the United States, with no more than 40% of its
assets in any one country.
The portfolio managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis. In
addition, the portfolio managers must consider the shares of these companies to
be under- or reasonably-valued relative to their long-term prospects. The
managers favor companies that they believe have a competitive advantage, offer
innovative products or services and may profit from such trends as deregulation
and privatization. On a strategic basis, the Fund's assets may be allocated
among countries in an attempt to take advantage of market trends. The Fund's
portfolio managers and analysts frequently travel to the countries in which the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends that affect investments in those countries.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies.
By investing primarily in foreign stocks, the Fund may expose shareholders to
additional risks. Foreign stock markets tend to be more volatile than the U.S.
market due to economic and political instability and regulatory conditions in
some countries.
In addition, most of the foreign securities in which the Fund invests are
denominated in foreign currencies, whose value may decline against the U.S.
dollar. Furthermore, the January 1, 1999, introduction by the European Union of
a single European currency (the "euro") may cause market uncertainties and even
market disruptions which can negatively affect the Fund's investments in
European companies.
14====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1996 1997
- ------------------ ----------------
20.96% 10.15%
Average Annual Returns through 12/31/97
International Growth Fund 10.15% 17.18%
MSCI EAFE Index 1.78% 6.48%
- --------------------------------------------------------------------------------
*calculated from 6/30/95 1 Year Inception (7/3/95)
During the 2-year period shown above, the Fund's best quarter was Q2 1997
(+10.77%) and its worst quarter was Q4 1977 (-5.98%). The Fund's 1998 return
through 9/30/98 was +4.61%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.10%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.03%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.13%
Fee Waiver and/or Expense Reimbursement 0.47%
Net Expenses 1.66%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.65%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$168 $522 $900 $1,958
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
John Boich, Oscar Castro For financial highlights,
For more details see page 45. see page 55
15====
<PAGE>
International Small Cap Fund | MNISX
Objective
* Seeks long-term capital appreciation by investing in small-cap companies in
developed stock markets outside the United States
[Graphic indicating Montgomery International Small Cap Fund has a potential
risk/reward profile that is much more than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of companies
outside the United States whose shares have a market value (market
capitalization) of less than $1 billion. The portfolio managers typically invest
most of its assets in the developed stock markets of western Europe and Asia,
particularly the United Kingdom, France, Germany, Italy, Sweden and Japan. The
Fund invests in at least three different countries outside the United States,
with no more than 40% of its assets in any one country.
The Fund's portfolio managers seek well-managed, small-cap companies that they
believe will be able to increase their sales and corporate earnings on a
sustained basis. The portfolio managers must consider the shares of these
companies to be under- or reasonably valued relative to their long-term
prospects. The managers favor companies that they believe have a competitive
advantage, offer innovative products or services and may profit from such trends
as deregulation and privatization. On a strategic basis, the Fund's assets may
be allocated among countries in an attempt to take advantage of market trends.
The Funds portfolio managers and analysts frequently travel to the countries in
which the Fund invests or may invest to gain firsthand insight into the
economic, political and social trends that affect investments there.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies.
In addition, foreign stock markets tend to be more volatile than the U.S. market
due to economic and political instability and regulatory conditions in some
countries. Most of the foreign securities in which the Fund invests are
denominated in foreign currencies, whose value may decline against the U.S.
dollar. Other risks of focusing on small foreign companies include limited or
inaccurate information, limited product lines, markets or financial resources
than larger companies, and their securities may trade less frequently and in
limited volume. As a result, small-cap stocks--and therefore the Fund--may
fluctuate significantly more in value than funds that focus on larger-cap
stocks. Furthermore, the January 1, 1999 introduction by the European Union of a
single European currency (the "euro") may cause market uncertainties and even
market disruptions which can affect negatively the Fund's investments in
European companies.
16====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1994 1995 1996 1997
- ------------------ ---------------- ----------------- ----------------
-13.29% 11.72% 14.97% -0.78%
Average Annual Returns through 12/31/97
International Small Cap Fund -0.78% 5.46%
Salomon Smith Barney World
Extended (ex-U.S.) Market Index -6.61% 2.51%
- --------------------------------------------------------------------------------
1 Year Inception (9/30/93)
During the 4-year period shown above, the Fund's best quarter was Q2 1997
(+9.93%) and its worst quarter was Q4 1997 (11.22%). The Fund's 1998 return
through 9/30/98 was -0.24%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.28%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.53%
Fee Waiver and/or Expense Reimbursement 0.61%
Net Expenses 1.92%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.90%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
$194 $602 $1,034 $2,234
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
John Boich For financial highlights,
For more details see page 45. see page 55
17====
<PAGE>
Global Opportunities Fund | MNGOX
Objective
* Seeks long-term capital appreciation by investing in companies of any size
in the United States and abroad
[Graphic indicating Montgomery Global Opportunities Fund has a potential
risk/reward profile that is a little more than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of companies of
any size throughout the world. The portfolio managers typically invest most of
the Fund's assets in the United States and in the developed stock markets of
western Europe and Asia, particularly the United Kingdom, France, Germany,
Italy, the Netherlands and Japan. The Fund invests in at least three different
countries, one of which may be the United States. With the exception of the
United States, no country may represent more than 40% of its total assets.
The portfolio managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis. In
addition, the portfolio managers much consider the shares of these companies to
be under- or reasonably valued relative to their long-term prospects. The
managers favor companies that they believe have a competitive advantage, offer
innovative products or services and may profit from such trends as deregulation
and privatization. On a strategic basis, the Fund's assets may be allocated
among countries in an attempt to take advantage of market trends. The Fund's
portfolio managers and analysts frequently travel to the countries in which the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends that may affect investments in those countries.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies.
By investing in foreign stocks, the Fund exposes shareholders to additional
risks. Foreign stock markets tend to be more volatile than the U.S. market due
to economic and political instability and regulatory conditions in some
countries. In addition, most of the foreign securities in which the Fund invests
are denominated in foreign currencies, whose value may decline against the U.S.
dollar. Furthermore, the January 1, 1999, introduction by the European Union of
a single European currency (the "euro") may cause market uncertainties and even
market disruptions which can affect negatively the Fund's investments in
European companies.
18====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1994 1995 1996 1997
- ------------------ ---------------- ----------------- ----------------
-8.55% 17.26% 20.18% 11.05%
Average Annual Returns through 12/31/97
Global Opportunities Fund 11.05% 13.23%
MSCI World Index 15.76% 13.19%*
- --------------------------------------------------------------------------------
1 Year Inception (9/30/93)
During the 4-year period shown above, the Fund's best quarter was Q2 1997
(+12.83%) and its worst quarter was Q4 1997 (-7.94%). The Fund's 1998 return
through 9/30/98 was +4.44%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.12%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.37%
Fee Waiver and/or Expense Reimbursement 0.41%
Net Expenses 1.96%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.90%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$198 $614 $1,054 $2,275
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
John Boich, Oscar Castro For financial highlights,
For more details see page 45. see page 55
19====
<PAGE>
Global Communications Fund | MNGCX
Objective
* Seeks long-term capital appreciation by investing in companies involved in
the communications industry in the United States and abroad
[Graphic indicating Montgomery Global Communications Fund has a potential
risk/reward profile that is significantly more than that of the S&P 500.] This
Fund's potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund concentrates its investments in the global communications industry by
investing at least 65% of its total assets in the stocks of communications
companies throughout the world, including companies involved in
telecommunications, broadcasting, publishing, computer systems and the Internet,
among other industries.
The Fund seeks well-managed communications companies that the portfolio manager
believes will be able to increase their sales and corporate earnings on a
sustained basis. The portfolio manager must consider the shares of these
companies to be under- or reasonably valued relative to their long-term
prospects and favors companies that he believes have a competitive advantage,
offer innovative products or services and may profit from such trends as
deregulation and privatization. On a strategic basis, the Fund's assets may be
allocated among countries in an attempt to take advantage of market trends. The
portfolio manager and analysts frequently travel to the countries in which the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends that affect investments in those countries.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies.
Because the Fund concentrates its investments in the global communications
industry, its share value may be more volatile than that of more-diversified
funds. The Fund's share value will reflect trends (whether positive or negative)
in the global communications industry, which may be subject to greater changes
in governmental policies and regulation than many other industries.
In addition, Foreign stock markets tend to be more volatile than the U.S. market
due to greater economic and political instability in some countries. In
addition, most of the foreign securities in which the Fund invests are
denominated in foreign currencies, whose value may decline against the U.S.
dollar. Furthermore, the January 1, 1999, introduction by the European Union of
a single European currency (the "euro") may cause market uncertainties and even
market disruptions which can affect negatively the Fund's investments in
European companies.
20====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1994 1995 1996 1997
- ------------------ ---------------- ----------------- ----------------
-13.41% 16.88% 8.02% 15.83%
Average Annual Returns through 12/31/97
Global Communications Fund 15.83% 12.39%
MSCI Telecom Index 19.33% 10.82%*
- --------------------------------------------------------------------------------
1 Year Inception (6/1/93)
During the four-year period shown above, the Fund's best quarter was Q2 1997
(+16.05%) and its worst quarter was Q4 1994 (-9.84%). The Fund's 1998 return
through 9/30/98 was +17.28%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.23%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.70%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.93%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.90%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$195 $605 $1,039 $2,244
PORTFOLIO MANAGER [clipart] [sidebar]
Oscar Castro For financial highlights,
For more details see page 45. see page 56
21====
<PAGE>
Emerging Markets Fund | MNEMX
Objective
* Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies throughout the world
[Graphic indicating Montgomery Emerging Markets Fund has a potential risk/reward
profile that is much more than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of companies
based in the world's developing economies. The Fund typically maintains
investments in at least six of these countries at all times, with no more than
35% of its assets in any single one of them. These may include:
* Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
* Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
* Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
* Middle East: Israel and Jordan
* Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Fund's strategy combines computer-based screening techniques with in-depth
financial review and on-site analysis of companies, countries and regions to
identify potential investments. The Fund's portfolio managers and analysts
frequently travel to the emerging markets to gain firsthand insight into the
economic, political and social trends that affect investments in those
countries. These techniques help determine in which stocks and countries the
Fund will invest. The portfolio managers strive to keep the Fund well
diversified across individual stocks, industries and countries to reduce its
overall risk.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in a stock market. In addition, the risks of
investing in emerging markets are considerable. Emerging stock markets tend to
be much more volatile than the U.S. market due to the relative immaturity, and
occasional instability, of their political and economic systems. In the past
many emerging markets restricted the flow of money into or out of their stock
markets, and some continue to impose restrictions on foreign investors. These
markets tend to be less liquid and offer less regulatory protection for
investors. The economies of emerging countries may be predominantly based on
only a few industries or on revenue from particular commodities, international
aid and other assistance. In addition, most of the foreign securities in which
the Fund invests are denominated in foreign currencies, whose value may decline
against the U.S. dollar.
22====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1993 1994 1995 1996 1997
- ----------------- --------------- ---------------- --------------- -------------
58.66% -7.72% -9.08% 12.32% -3.14%
<TABLE>
<CAPTION>
Average Annual Returns through 12/31/97
<S> <C> <C> <C>
Emerging Markets Fund -3.14% 7.69% 6.61%
IFC Global Index -14.54% 6.13% 3.26%
- --------------------------------------------------------------------------------------------------------
1 Year 5 Years Inception (3/1/92)
<FN>
During the 5-year period shown above, the Fund's best quarter was Q4 1993
(+29.14%) and its worst quarter was Q4 1997 (-17.07%). The Fund's 1998 return
through 9/30/98 was -42.54%.
</FN>
</TABLE>
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fee 1.07%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.58%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.65%
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
$167 $519 $895 $1,947
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
Josephine Jimenez, Bryan Sudweeks, Frank Chiang, For financial highlights,
Jesus Duarte, Jose Fiuza, Stuart Quint see page 56
For more details see page 46.
23====
<PAGE>
Emerging Asia Fund | MNEAX
Objective
* Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies of Asia
[Graphic indicating Montgomery Emerging Asia Fund has a potential risk/reward
profile that is far more than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
<TABLE>
<CAPTION>
Strategy [clipart]
The Fund's strategy is to identify potential investments in the Asian markets by
conducting in-depth financial review and on-site analysis of companies and
countries in that region. The Fund invests at least 65% of its total assets in
the stocks of companies that are based or operate mainly in developing Asian
countries:
<S> <C> <C>
* Bangladesh * Indonesia * South Korea
* China/Hong Kong * Malaysia * Sri Lanka
China/Hong Kong is considered to * Pakistan * Taiwan
be a single emerging Asian country. * The Philippines * Thailand
* India * Singapore * Vietnam
</TABLE>
The Fund typically invests in at least three emerging Asia countries at all
times, with no more than one-third of its assets in any one country. The two
exceptions are China/Hong Kong and Malaysia, where the Fund may invest more than
90% of its assets. Usually, the Fund will not invest in Japan, Australia or New
Zealand, but the portfolio manager may choose to do so as a defensive strategy.
The manager frequently travels to the countries in which the Fund invests, or
may invest, to gain firsthand insight into the economic, political and social
trends that affect investments in those countries. These techniques help
determine in which stocks and countries the Fund will invest. The portfolio
manager strives to keep the Fund diversified across individual stocks and
industries to reduce its overall risk.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in a stock market. Also, the Fund's volatility may
be magnified by its heavy concentration in emerging Asia markets, particularly
China/Hong Kong and Malaysia, as they tend to be much more volatile than the
U.S. market due to the relative immaturity and occasional instability. For
example, the economies of emerging countries may be predominantly based on only
a few industries or on revenue from particular commodities, international aid
and other assistance. Some emerging Asia countries, such as Malaysia in 1998,
have restricted the flow of money into or out of the country. Emerging markets
also tend to be less liquid and offer less regulatory protection for investors.
Since mid-1997, Asia has faced serious economic problems and disruptions causing
the devastating losses for some investors. Please note that most of the
securities in which the Fund invests are denominated in foreign currencies,
whose value may decline against the U.S. dollar.
24====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1997
- ------------------
-28.30%
Average Annual Returns through 12/31/97
Emerging Asia Fund -28.30% -10.71%
MSCI All-Country
Asia Free (ex-Japan) Index -40.31% -32.56%
- --------------------------------------------------------------------------------
1 Year Inception (9/30/96)
During the 1-year period shown above, the Fund's best quarter was Q2 1997
(+18.87%) and its worst quarter was Q4 1997 (-38.16%). The Fund's 1998 return
through 9/30/98 was -36.56%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.02%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.27%
Fee Waiver and/or Expense Reimbursement 0.36%
Net Expenses 1.91%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.90%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
$193 $599 $1,029 $2,223
PORTFOLIO MANAGER [clipart] [sidebar]
Frank Chiang For financial highlights,
For more details see page 46. see page 57
25====
<PAGE>
Latin America Fund | MNLAX
Objective
* Seeks long-term capital appreciation by investing in companies based in or
operating primarily in Latin America
[Graphic indicating Montgomery Latin America Fund has a potential risk/reward
profile that is far more than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund's strategy is to identify potential investments by conducting in-depth
financial review and on-site analysis of the companies and countries in that
region. The Fund invests at least 65% of its total assets in the stocks of
companies that are located in Mexico, Central America, South America and the
Caribbean. The Fund invests in at least three Latin American countries at all
times, with no more than 50% of its assets in any one of them. The two
exceptions are Brazil and Mexico which are not subject to this limit.
The manager frequently travels to the countries in which the Fund invests, or
may invest, to gain firsthand insight into the economic, political and social
trends that affect investments in those countries. These techniques help
determine in which stocks and countries the Fund will invest. The portfolio
manager strives to keep the Fund well diversified across individual stocks,
industries and countries to reduce its overall risk. In managing the Latin
America Fund, the portfolio manager is supported by the Emerging Markets team.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. In addition, the risks of
investing in emerging markets, and especially of concentrated exposure to Latin
America, are considerable. Latin American stock markets tend to be much more
volatile than the U.S. market due to the relative immaturity, and occasional
instability, of their political and economic systems. In the past many Latin
American countries restricted the flow of money into or out of their stock
markets, and some continue to impose restrictions on foreign investors. These
markets tend to be less liquid and offer less regulatory protection for
investors. The economies of emerging countries may be predominantly based on
only a few industries or on revenue from particular commodities, international
aid and other assistance. In addition, most of the securities in which the Fund
invests are denominated in foreign currencies, whose value may decline against
the U.S. dollar. Investors should also note the particular risks of investing in
Brazil and Mexico (which include government controls and currency devaluations),
because the Fund may place, respectively, up to 75% and 67% of its assets in
these countries. The risks peculiar to Brazil and Mexico are discussed in
"Additional Investment Strategies and Related Risks" on pages 48-49.
26====
<PAGE>
Past Fund Performance The Latin America Fund commenced operations on June 30,
1997. Past Fund performance information has not been provided because the Fund
has less than one full calendar year of operations.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.79%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.04%
Fee Waiver and/or Expense Reimbursement 1.14%
Net Expenses 1.90%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.90%. This contract has a
one-year term, renewable at the end of each fiscal year. The actual
expenses for the Fund (after reimbursement including interest and tax
expenses) were 0.26%.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$192 $595 $1,024 $2,213
PORTFOLIO MANAGER [clipart] [sidebar]
Jesus Duarte For financial highlights,
For more details see page 45 see page 57
27====
<PAGE>
Select 50 Fund | MNSFX
Objective
* Seeks long-term capital appreciation by investing in approximately 10
companies from each of five different investment disciplines, for a total
of 50 securities
[Graphic indicating Montgomery Select 50 Fund has a potential risk/reward
profile that is a little more than that of the S&P 500.] This Fund's potential
risk/reward relative to other Montgomery Funds
Strategy [clipart]
Five of Montgomery's portfolio management teams each select approximately 10
stocks that they believe may offer the greatest capital appreciation potential
from their respective areas of expertise. These currently include:
* U.S. growth * U.S. equity income * Emerging markets
* U.S. emerging growth * International equity
The result is a concentrated portfolio of at least 50 stocks that is allocated
approximately equally among Montgomery's five equity disciplines and is well
diversified with typically 60% allotted to U.S. securities of all capitalization
ranges and 40% invested internationally. Kevin Hamilton, chairman of
Montgomery's Oversight Committee, ensures that the portfolio remains diversified
and performs other oversight responsibilities for the Fund. For details about
the teams' individual strategies, please see the sections on the Montgomery
Growth, U.S. Emerging Growth, Equity Income, International Growth and Emerging
Markets Funds in this prospectus.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. Although the Select 50 Fund
diversifies its assets across different industries, market segments and
countries, it typically invests in just 50 securities. As a result, the value of
shares in the Select 50 Fund may vary more than those of mutual funds investing
in a greater number of securities.
In addition, the Select 50 Fund invests in companies in developed foreign
markets and in emerging markets (each typically 20%), which may expose it to
additional risks. Foreign and emerging stock markets tend to be more volatile
than the U.S. market due to economic and political instability and regulatory
conditions. This risk is heightened in the case of emerging markets because of
their relative economic and political immaturity and, in many instances,
dependence on only a few industries. They also tend to be less liquid, more
volatile, and offer less regulatory protection for investors. Also, most of the
foreign securities in which the Fund invests are denominated in foreign
currencies, whose value may decline against the U.S. dollar.
The Fund also invests a significant portion of its assets (typically 20%) in
smaller companies, which may offer greater capital appreciation potential than
larger companies but at potentially greater risk. Smaller companies may have
more-limited product lines, markets or financial resources than larger
companies, and their securities may trade less frequently and in more-limited
volume than those of larger, more mature companies. As a result, small-cap
stocks--and therefore the Fund--may fluctuate significantly more in value than
larger-cap stocks and funds that focus exclusively on them.
28====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1996 1997
- ------------------ ----------------
20.46% 29.27%
Average Annual Returns through 12/31/97
Select 50 Fund 29.27% 30.01%
S&P 500 Index 33.35% 27.85%*
- --------------------------------------------------------------------------------
*calculated since 9/30/95 1 Year Inception (10/2/95)
During the 2-year period shown above, the Fund's best quarter was Q2 1997
(+18.82%) and its worst quarter was Q4 1997 (-8.31%). The Fund's 1998 return
through 9/30/98 is -7.59%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 1.23%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.58%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.81%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.80%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------
$183 $568 $977 $2,118
PORTFOLIO MANAGER (Fund Oversight) [clipart] [sidebar]
Kevin Hamilton (Fund Oversight) For financial highlights,
For more details see page 46. see page 58
29====
<PAGE>
U.S. Asset Allocation Fund | MNAAX
Objective
* Seeks to provide shareholders with high total return (consisting of both
capital appreciation and income) while also seeking to reduce risk by
actively allocating its assets among stocks, bonds and money market
securities
[Graphic indicating Montgomery U.S. Asset Allocation Fund has a potential
risk/reward profile that is a little less than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
As a "fund-of-funds," the Montgomery U.S. Asset Allocation Fund currently
invests its assets in three underlying Montgomery Funds:
* Montgomery Growth Fund, for U.S. equity exposure
* Montgomery Total Return Bond Fund, for U.S. bond exposure
* Montgomery Government Reserve Fund (a money market fund), for cash exposure
The Fund's strategy is to seek high total return by analyzing various market
factors, including relative risk and return, using a quantitative proprietary
computer program that helps the portfolio manager determine what he believes to
be an optimal asset allocation among stocks, bonds and cash.
The Fund's total equity and bond exposure may both range from 20 to 80% of its
assets. It may invest anywhere from 0 to 50% of its assets in a Montgomery money
market fund. At times, the Fund may invest in other Montgomery Funds that have
similar investment exposure to the Funds listed above.
The Fund's portfolio manager regularly adjusts the proportion of assets allotted
to the underlying portfolios in response to changing market conditions.
Risks [clipart]
By investing a substantial portion of its assets in stock and bond mutual funds,
the Fund may expose you to certain risks that could cause you to lose money. The
value of the Fund's investments in the Montgomery Growth Fund, like investments
in any stock fund, will fluctuate on a daily basis with movements in the stock
market, as well as in response to the activities of the individual companies in
the Montgomery Growth Fund. The value of the Fund's investment in the Total
Return Bond Fund will fluctuate along with interest rates. When interest rates
rise, a bond's market price generally declines. When interest rates fall, the
bond's price usually increases. In addition, if the manager does not accurately
predict changing market conditions and other economic factors, the Fund's assets
might be allocated in a manner that is disadvantageous to you.
30====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1995 1996 1997
- ------------------ ---------------- -----------------
32.61% 12.85% 19.01%
Average Annual Returns through 12/31/97
U.S. Asset Allocation Fund 19.01% 22.39%
S&P 500 Index 33.35% 25.93%
Lehman Brothers Aggregate
Bond Index 9.65% 8.23%
- --------------------------------------------------------------------------------
1 Year Inception (3/31/94)
During the 3-year period shown above, the Fund's best quarter was Q2 1997
(+11.94%) and its worst quarter was Q4 1997 (-1.51%). The Fund's 1998 return
through 9/30/98 was -0.72%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses
Top Fund Expenses 0.31%
Underlying Fund Expenses 1.25%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.56%
Fee Waiver and/or Expense Reimbursement 0.26%
Net Expenses 1.30%
<FN>
+ In addition to the 0.31% total operating expenses of the Fund, a
shareholder also indirectly bears the Fund's pro rata share of the fees and
expenses incurred by each underlying Fund. The total expense ratio before
reimbursement, including indirect expenses for the fiscal year ended June
30, 1998, was 1.56%, calculated based on the Fund's total operating expense
ratio (0.31%) plus a weighted average of the expense ratios of the
underlying Funds in which it invested (1.25%). Montgomery Asset Management
has contractually agreed to reduce its fees and/or absorb expenses to limit
the Fund's total annual operating expenses (excluding interest and tax
expenses) to 1.30% (including the expenses of the underlying Funds). This
contract has a one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
$132 $411 $711 $1,563
PORTFOLIO MANAGER (Asset Allocation) [clipart] [sidebar]
Kevin Hamilton For financial highlights,
For more details see page 46. see page 58
31====
<PAGE>
Total Return Bond Fund | MNTRX
Objective
* Seeks maximum total return consisting of both income and capital
appreciation, while striving to preserve shareholders' initial investment
(principal) by investing in investment-grade bonds
[Graphic indicating Montgomery Total Return Bond Fund has a potential
risk/reward profile that is much less than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in a broad range of
investment-grade bonds, including U.S. government securities, corporate bonds,
mortgage-related securities, asset-backed securities--bonds backed by the income
stream from sources such as car loans or credit-card payments--and money market
securities. Investment-grade bonds are those rated within the four highest
grades by rating agencies such as Standard & Poor's (at least BBB), Moody's (at
least Baa) or Fitch (at least BBB). From time to time the Fund may also invest
in unrated bonds that the portfolio manager believes are comparable to
investment-grade securities.
The Fund may include bonds of any maturity, but generally the portfolio's
overall interest rate sensitivity--duration--ranges between four and
five-and-a-half years. Typically, a lower duration means that the bond or
portfolio has less sensitivity to interest rates. The Fund invests in bonds that
the portfolio manager believes offer attractive yields and are undervalued
relative to issues of similar credit quality and interest rate sensitivity.
Risks [clipart]
By investing in bonds, the Fund may expose you to certain risks that could cause
you to lose money. As with most bond funds, the value of shares in the
Montgomery Total Return Bond Fund will fluctuate along with interest rates. When
interest rates rise, a bond's market price generally declines. When interest
rates fall, the bond's price usually increases. A fund, such as this one, that
invests most of its assets in bonds will behave largely the same way. As a
result, the Fund is not appropriate for investors whose primary investment
objective is absolute principal stability. The Montgomery Total Return Bond Fund
is not a money market fund.
32====
<PAGE>
Past Fund Performance The Total Return Bond Fund commenced operations on June
30, 1997. Past Fund performance information has not been provided because the
Fund has less than one full calendar year of operations.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.84%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.34%
Fee Waiver and/or Expense Reimbursement 0.05%
Net Expenses 1.29%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.70%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$131 $408 $706 $1,551
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 59
33====
<PAGE>
Short Duration Government Bond Fund | MNSGX
Objective
* Seeks maximum total return consisting of both income and capital
appreciation, while striving to preserve shareholders' initial investment
(principal) by investing in short-term U.S. government securities.
[Graphic indicating Montgomery Short Duration Government Bond Fund has a
potential risk/reward profile that is far less than that of the S&P 500.] This
Fund's potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 65% of its total assets in short-term U.S. government
securities, which may include Treasuries in addition to bonds and notes issued
by government agencies such as the Federal Home Loan Bank, Government National
Mortgage Association (GNMA or "Ginnie Mae"), Federal National Mortgage
Association (FNMA or "Fannie Mae") and Student Loan Marketing Association (SLMA
or "Sallie Mae").
The Fund may purchase bonds of any maturity, but generally the portfolio's
overall interest rate sensitivity--duration--is comparable to that of a
three-year U.S. Treasury note. Typically, a lower duration means that the bond
or portfolio has less sensitivity to interest rates. The Fund invests in bonds
that the portfolio manager believes offer attractive yields and are undervalued
relative to issues of similar credit quality and interest rate sensitivity.
Risks [clipart]
By investing in bonds, the Fund may expose you to certain risks that could cause
you to lose money. As with most bond funds, the value of shares in the
Montgomery Short Duration Government Bond Fund will fluctuate along with
interest rates. When interest rates rise, a bond's market price generally
declines. When interest rates fall, the bond's price usually increases. A fund,
such as this one, that invests most of its assets in bonds will behave largely
the same way. As a result, the Fund is not appropriate for investors whose
primary investment objective is absolute principal stability. The Montgomery
Short Duration Government Bond Fund is not a money market fund.
34====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1993 1994 1995 1996 1997
- ----------------- --------------- ---------------- --------------- -------------
8.09% 1.13% 11.51% 5.14% 6.97%
<TABLE>
<CAPTION>
Average Annual Returns through 12/31/97
<S> <C> <C> <C>
Short Duration Gov't Bond Fund 6.97% 6.51% 6.56%
Lehman Brothers Gov't. Bond 1-3 Yr.
Index (calculated from 12/31/98) 6.65% 5.65% 5.64%
- --------------------------------------------------------------------------------------------------------
1 Year 5 Years Inception (12/18/92)
<FN>
During the 5-year period shown above, the Fund's best quarter was Q1 1995
(+3.39%) and its worst quarter was Q1 1994 (-0.23%). The Fund's 1998 return
through 9/30/98 was +6.75%.
</FN>
</TABLE>
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.23%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.73%
Fee Waiver and/or Expense Reimbursement 0.58%
Net Expenses 1.15%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.70%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what Yours truly, would pay in expenses over time, whether or
not you sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$117 $365 $632 $1,393
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 59
35====
<PAGE>
Government Reserve Fund | MNGXX
Objective
* Money Market Fund: Seeks to provide shareholders with current income
consistent with liquidity and preservation of capital by investing in
short-term U.S. government securities
[Graphic indicating Montgomery Government Reserve Fund has a potential
risk/reward profile that is far less than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests exclusively in short-term U.S. government securities, which may
include bills, notes and bonds issued by government agencies such as the Federal
Home Loan Bank, Federal National Mortgage Association (FNMA) and Student Loan
Marketing Association (SLMA), and in repurchase agreements for U.S. government
securities and similar money market funds.
The Fund invests in short-term U.S. government securities that the portfolio
manager believes offer attractive yields and are undervalued relative to issues
of similar credit quality and interest rate sensitivity.
Risks [clipart]
Although the Fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in this Fund. Also, a decline
in short-term interest rates would lower the Fund's yield and the return on your
investment. An investment in The Montgomery Government Reserve Fund is neither
insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or
any other government agency.
36====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1993 1994 1995 1996 1997
- ----------------- --------------- ---------------- --------------- -------------
2.83% 3.78% 5.54% 5.04% 5.16%
Call (800) 572-FUND [3863] between 6 A.M. and 5 P.M. PACIFIC TIME for the
current yield.
Average Annual Returns through 12/3/97
Govt. Reserve Fund 5.32%
- -----------------------------------------------------------------
Inception 9/14/92 Seven day yield as of 12/31/97
During the 5-year period shown above, the Fund's best quarter was Q2 1995
(+1.39%) and its worst quarters were Q3 & Q4 1993 (+0.68%). The Fund's 1998
return through 9/30/98 was 3.91%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fee 0.30%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.23%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.53%
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$54 $170 $296 $664
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 60
37====
<PAGE>
Federal Tax-Free Money Fund | MFFXX
Objective
* Money Market Fund: Seeks to provide shareholders with current income exempt
from federal income taxes consistent with liquidity and preservation of
capital by investing in short-term municipal bonds
[Graphic indicating Montgomery Federal Tax-Free Money Fund has a potential
risk/reward profile that is far less than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 80% of its total assets in short-term, high-quality
municipal bonds and notes. High quality bonds are those rated within the two
highest short-term grades by rating agencies such as Standard & Poor's (at least
AA), Moody's (at least Aa) or Fitch (at least AA). The Fund may also invest in
unrated bonds that the portfolio manager believes are comparable to high-quality
bonds and notes.
The Fund invests in short-term municipal bonds that the portfolio manager
believes offer attractive yields and are undervalued relative to issues of
similar credit quality and interest rate sensitivity. The portfolio manager
strives to diversify the portfolio across bonds from several different states,
sectors and issuers.
Risks [clipart]
Although the Fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in this Fund. Also, a decline
in short-term interest rates would lower the Fund's yield and the return on your
investment. An investment in the Montgomery Federal Tax-Free Money Fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any
other government agency. The Fund's objective is to provide income exempt from
federal income taxes, but some of its income may be subject to the alternative
minimum tax.
38====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1997
- -------------------
3.18%
Federal Tax-Free Money Fund 3.47%
- -----------------------------------------------------------------------
Inception 7/15/96 Seven day yield as of 12/31/97
During the 1-year period shown above, the Fund's best quarter was Q2 1997
(+0.81%) and its worst quarter was Q1 1997 (+0.75%). The Fund's 1998 return
through 9/30/98 was +2.29%.
[sidebar] Call (800) 572-FUND [3863] between 6 a.m. and 5 p.m. PACIFIC TIME for
the current yield.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.40%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.41%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.81%
Fee Waiver and/or Expense Reimbursement 0.21%
Net Expenses 0.60%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.60%. This contract has a
one-year term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$61 $192 $334 $749
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 60
39====
<PAGE>
California Tax-Free Intermediate Bond Fund | MNCTX
Objective
* Seeks to provide shareholders with maximum income exempt from federal and
California state personal income taxes, while striving to preserve
shareholders' initial investment (principal) by investing in
intermediate-maturity California municipal bonds
[Graphic indicating Montgomery California Tax-Free Intermediate Bond Fund has a
potential risk/reward profile that is much less than that of the S&P 500.] This
Fund's potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 80% of its total assets in intermediate-term,
high-quality California municipal bonds. High-quality bonds are those rated
within the three highest grades by rating agencies such as Standard & Poor's (at
least BBB), Moody's (at least Baa) or Fitch (at least BBB). From time to time
the Fund may also invest in unrated bonds that the portfolio manager believes
are comparable to investment-grade securities.
The Fund may purchase bonds of any majority, but generally the portfolio's
average dollar-weighted maturity ranges from 5 to 10 years. The Fund's portfolio
managers invest in California municipal bonds that they believe offer attractive
yields and are under-valued relative to issues of similar credit quality and
interest rate sensitivity. Although the Fund concentrates its assets in
California municipal bonds, the portfolio manager strives to diversify the
portfolio across sectors and issuers within that market.
Risks [clipart]
By investing in bonds, the Fund may expose you to certain risks that could cause
you to lose money. As with most bond funds, the value of shares in the
Montgomery California Tax-Free Intermediate Bond Fund will fluctuate along with
interest rates. When interest rates rise, a bond's market price generally
declines. When interest rates fall, a bond's price usually increases. A fund,
such as this one, that invests most of its assets in bonds will behave largely
the same way. As a result, the Fund is not appropriate for investors whose
primary investment objective is absolute principal stability. The Montgomery
California Tax-Free Intermediate Bond Fund is not a money market fund.
The Fund's concentration in California municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in California's economy that may weaken or jeopardize the ability of
California municipal-bond issuers to pay interest and principal on their bonds.
As a result, the Fund's shares may fluctuate more widely in value than those of
a fund investing in municipal bonds from a number of different states. The
Fund's objective is to provide income exempt from federal and California state
personal income taxes, but some of its income may be subject to the alternative
minimum tax.
40====
<PAGE>
Past Fund Performance The chart at the left shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The chart at
the right compares the Fund's performance to the most commonly used index for
its market segment. Of course, past performance is no guarantee of future
results.
[bar chart]
1994 1995 1996 1997
- ------------------ ---------------- ----------------- ----------------
0.05% 11.41% 4.51% 7.50%
<TABLE>
<CAPTION>
Average Annual Returns through 12/31/97
<S> <C> <C>
CA Tax-Free Intermediate Bond Fund 7.50% 5.67%
Merrill Lynch CA Municipal Intermediate Bond Index 6.55% 4.73%*
- -------------------------------------------------------------------------------------------------
*calculated from 6/30/93 1 Year Inception (7/1/93)
<FN>
During the 4-year period shown above, the Fund's best quarter was Q1 1995
(+3.37%) and its worst quarter was Q1 1994 (-1.43%). The Fund's 1998 return
through 9/30/98 was 5.66%.
</FN>
</TABLE>
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.69%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.19%
Fee Waiver and/or Expense Reimbursement 0.49%
Net Expenses 0.70%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.70%. This contract has a
one-year term, renewable at the end of each fiscal year. The actual
expenses for the Fund (after reimbursement including interest and tax
expenses) were 0.69%.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$71 $223 $389 $869
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 61
41====
<PAGE>
California Tax-Free Money Fund | MCFXX
Objective
* Money Market Fund: Seeks to provide shareholders with current income exempt
from federal and California state income taxes consistent with liquidity
and preservation of capital by investing in short-term California municipal
bonds
[Graphic indicating Montgomery California Tax-Free Money Fund has a potential
risk/reward profile that is far less than that of the S&P 500.] This Fund's
potential risk/reward relative to other Montgomery Funds
Strategy [clipart]
The Fund invests at least 80% of its net assets short-term high-quality in
municipal securities and at least 65% of its total assets in debt securities, in
the interest from which is expected to be exempt California personal income
taxes. High quality bonds are those rated within the two highest grades by
rating agencies such as Standard & Poor's (at least AA), Moody's (at least Aa)
or Fitch (at least AA). From time to time the Fund may also invest in unrated
bonds that the portfolio manager believes are comparable to high-quality bonds
and notes.
The Fund invests in short-term California municipal bonds that offer attractive
yields and are considered to be undervalued relative to issues of similar credit
quality and interest rate sensitivity. Although the Fund concentrates its assets
in California municipal bonds, its portfolio manager strives to diversify the
portfolio across sectors and issuers within that market.
Risks [clipart]
Although the Fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in this Fund. Also, a
short-term decline in interest rates may lower the Fund's yield and the return
on your investment. An investment in The Montgomery California Tax-Free Money
Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or any other government agency.
The Fund's concentration in California municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in California's economy that may weaken or jeopardize the ability of
California municipal-bond issuers to pay interest and principal on their bonds.
Although the Fund's objective is to provide income exempt from federal and
California State personal income taxes, some of its income may be subject to the
alternative minimum tax.
42====
<PAGE>
Past Fund Performance The chart at the left below shows the risks of investing
in the Fund and how the Fund's total return has varied from year-to-year. The
chart at the right shows the Fund's seven-day yield as of 12/31/97. Yield will
fluctuate.
[bar chart]
1995 1996 1997
- ------------------ ---------------- -----------------
3.36% 2.90% 3.03%
Call (800) 572-FUND [3863] between 6 A.M. and 5 P.M. PACIFIC TIME for the
current yield.
CA Tax-Free Money Fund 3.39%
- --------------------------------------------------------------------------
Inception 9/30/94 Seven day yield as of 12/31/97
During the 3-year period shown above, the Fund's best quarter was Q1 1998
(+0.87%) and its worst quarter was Q1 1996 (+0.69%). The Fund's 1998 return
through 9/30/98 was +2.17%.
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund and does not charge shareholders for exchanging shares or
reinvesting dividends.
<TABLE>
<CAPTION>
<S> <C>
Fund Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)+
Management Fee 0.40%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.28%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.68%
Fee Waiver and/or Expense Reimbursement 0.08%
Net Expenses 0.60%
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.60%. This contract has a
one-year term, renewable at the end of each fiscal year. The actual
expenses for the Fund (after reimbursement including interest and tax
expenses) were 0.58%.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
$61 $192 $334 $749
PORTFOLIO MANAGEMENT TEAM [clipart] [sidebar]
William Stevens For financial highlights,
For more details see page 46. see page 61
43====
<PAGE>
PORTFOLIO MANAGEMENT
The investment manager of the Montgomery Funds is Montgomery Asset Management,
LLC. Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank
AG, one of the largest publicly held commercial banks in Germany. As of June 30,
1998, Montgomery Asset Management managed approximately $5.5 billion on behalf
of some 300,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, senior portfolio manager of the Montgomery Growth (since
1993), Small Cap Opportunities (since 1995) and U.S. Emerging Growth Funds
(since 1994). Prior to joining Montgomery in June 1993, Roger Honour was a vice
president and portfolio manager at Twentieth Century Investors in Kansas City,
Missouri. From 1990 to 1992, he served as vice president and portfolio manager
at Alliance Capital Management.
[photo] BRADFORD KIDWELL, portfolio manager of the Montgomery Small Cap Fund
(since 1991). Prior to joining Montgomery in 1991, Bradford Kidwell was the sole
general partner and portfolio manager of Oasis Financial Partners. From 1987 to
1989, he covered the savings and loan industry for Dean Witter Reynolds.
[photo] WILLIAM KING, CFA, senior portfolio manager of the Montgomery Equity
Income Fund (since 1994). Before joining Montgomery in 1994, Bill King gained
analytical and portfolio management experience at Merus Capital Management.
Previously, he was a financial analyst/manager for SEI and a division controller
and financial analyst for Kaiser Aluminum and Kaiser Industries.
[photo] KATHRYN PETERS, portfolio manager of the Montgomery Growth Funds (since
1995), Small Cap Opportunities (since 1995) and U.S. Emerging Growth Funds
(since 1996). Kathy Peters joined Montgomery in 1995. From 1992 to 1995, she was
an associate in the investment banking division of Donaldson, Lufkin & Jenrette
in New York. Prior to that she analyzed mezzanine investments for Barclays de
Zoete Wedd.
[photo] JEROME "CAM" PHILPOTT, CFA, portfolio manager of the Montgomery Small
Cap Fund (since 1991). Before joining Montgomery in 1991, Cam Philpott was a
securities analyst with Boettcher & Company in Denver.
[photo] ANDREW PRATT, CFA, portfolio manager of the Montgomery Growth (since
1993), Small Cap Opportunities (since 1995), and U.S. Emerging Growth Funds
(since 1994). Andrew Pratt joined Montgomery in 1993 from Hewlett-Packard
Company, where, as an equity analyst, he managed a portfolio of small-cap
technology companies and researched private placement and venture capital
investments.
44====
<PAGE>
[photo] STUART ROBERTS, senior portfolio manager of the Montgomery Small Cap
Fund (since 1990). Stuart Roberts has specialized in small-cap investing since
1993. Prior to joining Montgomery in 1990, he was a portfolio manager and
analyst at Founders Asset Management in Denver, where he managed three
growth-oriented mutual funds.
International and Global Equity Funds
[photo] JOHN BOICH, CFA, senior portfolio manager of the Montgomery
International Growth (since 1995), International Small Cap (since 1993) and
Global Opportunities Funds (since 1993). John Boich joined Montgomery in 1993.
From 1990 to 1993, John Boich was a vice president and portfolio manager at The
Boston Company Institutional Investors, Inc. From 1989 to 1990, he was
co-founder and co-manager of The Common Goal World Fund, a global equity
partnership.
[photo] OSCAR CASTRO, CFA, senior portfolio manager of the Montgomery
International Growth (since 1995), International Small Cap (since 1993), Global
Opportunities (since 1993) and Global Communications Funds. Oscar Castro joined
Montgomery in 1993. From 1991 to 1993 he was a vice president and portfolio
manager at G.T. Capital Management, Inc. From 1989 to 1990, he was co-founder
and co-manager of The Common Goal World Fund, a global equity partnership.
[photo] FRANK CHIANG, portfolio manager of the Montgomery Emerging Asia (since
1996) and Emerging Markets Funds since 1996. Frank Chiang joined Montgomery in
1996. From 1993 to 1996 he was a portfolio manager and managing director at TCW
Asia Ltd. in Hong Kong. Prior to that he was Associate Director and Portfolio
Manager at Wardley Investment Services, Hong Kong.
[photo] JESUS ISIDORO DUARTE, portfolio manager of the Montgomery Latin America
(since 1997) and Emerging Markets Funds (since 1997). Prior to joining
Montgomery in 1997, Jesus Duarte was a director and vice president at Latinvest,
where he was responsible for research and portfolio management for the firm's
Latin American funds. Previous to Latinvest, Mr. Duarte worked at W.I. Carr in
Tokyo as a securities analyst of Japanese equities.
45====
<PAGE>
[photo] JOSE DE GUSMAO FIUZA, senior portfolio manager of the Montgomery
Emerging Markets Fund (since 1996). Jose Fiuza began his investment career in
1987 covering the Portuguese market at Banco Portugues do Atlantico. He then
moved to Banco Espirito Santo, Schroder Securities (as Manager) and Carnegie
International (as Managing Director). Mr. Fiuza joined Montgomery in 1995.
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager of the Montgomery
Emerging Markets Fund (since 1992). Before joining the Montgomery in 1991,
Josephine Jimenez worked at Emerging Markets Investors Corp./Emerging Markets
Management in Washington, D.C., as a senior analyst and portfolio manager. She
has more than 17 years' experience in the industry. The research and analysis
methods she helped develop--including a proprietary stock valuation model for
hyperinflationary economies--are the foundation of her investment strategy.
[photo] STUART PATTERSON QUINT, CFA, portfolio manager of the Montgomery
Emerging Markets Fund (since 1997). Stuart Quint joined Montgomery from Sanford
C. Bernstein & Company where he as a research associate for the U.S.
financial services industry.
[photo] BRYAN SUDWEEKS, PH.D., CFA, senior portfolio manager of the Montgomery
Emerging Markets Fund (since 1992). Before joining Montgomery in 1991, Bryan
Sudweeks was a senior analyst and portfolio manager at Emerging Markets
Investors Corp./Emerging Markets Management in Washington, D.C. Prior to that he
was a professor of international finance and investments at George Washington
University and served as adjunct professor of international investments from
1988 until May 1991.
Multi-Strategy Funds
[photo] KEVIN HAMILTON, CFA, chair of Montgomery Asset Management's Investment
Oversight Committee. Kevin Hamilton coordinates and oversees the investment
decisions of Montgomery's portfolio management teams. He is responsible for
allocating assets among the underlying funds of the U.S. Asset Allocation Fund
(since 1994) and also has oversight responsibilities for the Select 50 Fund
(since 1995). Prior to joining Montgomery Asset Management in 1991, he was a
senior vice president and portfolio manager at Analytic Investment Management.
U.S. Fixed-Income and Money Market Funds
[photo] WILLIAM STEVENS, senior portfolio manager of the Montgomery Fixed-Income
Funds (since 1992). Prior to joining Montgomery in 1992, Bill Stevens worked at
Barclays de Zoete Wedd Securities, where he started its collateralized mortgage
obligation (CMO) and asset-backed securities trading. From 1990 to 1991, Mr.
Stevens traded stripped mortgage securities and mortgage-related interest rate
swaps for the First Boston Company.
46====
<PAGE>
Management Fees
The table below shows the management fee rate paid to Montgomery Asset
Management over the last fiscal year.
FUND ANNUAL RATE
- --------------------------------------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund 0.91%
Montgomery Small Cap Opportunities Fund 1.10%
Montgomery Small Cap Fund (closed to new investors) 1.00%
Montgomery U.S. Emerging Growth Fund (closed to new investors) 1.33%
Montgomery Equity Income Fund 0.39%
International and Global Equity Funds
Montgomery International Growth Fund 1.06%
Montgomery International Small Cap Fund 1.29%
Montgomery Global Opportunities Fund 1.26%
Montgomery Global Communications Fund 1.33%
Montgomery Emerging Markets Fund 1.06%
Montgomery Emerging Asia Fund 1.12%
Montgomery Latin America Fund 0.00%
Multi-Strategy Funds
Montgomery Select 50 Fund 1.29%
Montgomery U.S. Asset Allocation Fund 0.00%
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund 0.45%
Montgomery Short Duration Government Bond Fund 0.00%
Montgomery Government Reserve Fund 0.33%
Montgomery Federal Tax-Free Money Fund 0.42%
Montgomery California Tax-Free Intermediate Bond Fund 0.31%
Montgomery California Tax-Free Money Fund 0.41%
47====
<PAGE>
Additional Investment Strategies and Related Risks
Montgomery Latin America Fund
Because of its geographic concentration in Latin American countries, the Latin
American Fund is exposed to certain risks that are associated with these
markets. For example, most of the region's economies have experienced
considerable difficulties in the past decade, such as extremely high rates of
inflation. This problem, coupled with rapid fluctuation in interest rates, has
had negative effects on the economics and securities markets of several Latin
American countries and may continue to do so in the future.
In addition, certain Latin American countries are among the world's largest
debtors to commercial banks and foreign governments. In the past, some Latin
American governments defaulted on their bonds. Should the portfolio manager
choose to invest in these bonds, the Fund may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
If a Latin American government or other issuer defaults on this debt, the Fund
might not be able to collect its outstanding principal or interest because of
Latin America's weak creditors' protection laws.
Despite a trend in Latin America toward less government involvement in business,
several governments in the region continue to exercise substantial influence
over commerce. In a few cases, the government still owns or controls many
companies, including some of the largest enterprises in the country. Future
government intervention could have a negative impact on Latin American
economies, stock markets and, ultimately, the Fund.
Due to the risks associated with these markets, the Latin America Fund's
portfolio manager limits its investment in any one Latin American country to 10
times that country's weighting in a broad-based Latin America stock index. These
weightings reflect each stock market's total value (market capitalization) in
U.S. dollar terms. The larger a country's market capitalization, the larger its
weighting in the index. As of June 30, 1998, the market capitalization of the
top five Latin America markets was as follows:
48====
<PAGE>
Country Market Capitalization (in US$ millions)
-------------------------------------------------------------------------
Brazil $ 143,334
Mexico $ 96,075
Chile $ 39,798
Argentina $ 47,675
Venezuela $ 4,015
Source: Datastream.. Note: Because Latin American stock markets are volatile,
the market capitalizations shown above can change frequently and dramatically.
Investors should note the particular risks of investing in Brazil and Mexico,
because the Fund may place, respectively, up to 75% and 67% of its assets in
these countries. In the past Brazil's government exerted control in foreign
investment in the country's stock market and may again do so in the future. The
Fund may also be unable to readily exchange Brazilian currency (Reals) for U.S.
dollars, which could make it more difficult for the portfolio manager to sell a
security at an opportune time. Although Brazil's stock market is Latin America's
largest (in terms of market capitalization), quite a few of its securities trade
infrequently and/or in low volumes.
The Fund's investments in Mexican securities also involve certain risks. As in
other Latin American countries, the Mexican government exerted control over the
Mexican economy in the past. If the government again intervenes in the
economy--especially by exercising control over state--owned enterprises-the
Mexican stock market could decline dramatically.
The Euro: Single European Currency
On January 1, 1999, the European Union will introduce a single European currency
called the "euro." The first group of countries that will begin to convert their
currencies to the euro includes Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
introduction of the euro causes three primary uncertainties:
* Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
* After January 1, 1999, what are the legal implications of outstanding
financial contracts that refer to currencies that were replaced by the
euro?
* How will suitable clearing and settlement payment systems for the euro be
developed?
These, and other factors (including political and economic risks), could cause
market disruptions before or after the introduction of the euro. We understand
that our key service providers are taking steps to address euro-related issues
but they are not provided any guarantees.
Defensive Investments
At the discretion of its portfolio manager(s), each Montgomery Fund may invest
up to 100% of its assets in cash for temporary defensive purposes. Such as
stance may help a Fund minimize or avoid losses during adverse market, economic
or political conditions. During such a period, a Fund may not achieve its
investment objective. For example, should the market advance during this period,
a Fund may not participate as much as it would have if it had been more fully
invested.
49====
<PAGE>
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Fund has owned that security.
Buying and selling securities generally involves some expense to a Fund, such as
commission paid to brokers and other transaction costs. By selling a security, a
Fund may realize taxable capital gains that it will subsequently distribute to
shareholders. Generally speaking, the higher a Fund's annual portfolio turnover,
the greater its brokerage costs and the greater the likelihood that it will
realize taxable capital gains. Increased brokerage costs may adversely affect a
Fund's performance. Also, unless you are a tax-exempt investor or you purchase
shares your after-tax return. Annual portfolio turnover of 100% or more is
considered high. The following Montgomery Funds that invest in stocks will
typically have annual turnover in excess of that rate because of their portfolio
managers' investment style: Growth, Small Cap Opportunities, International
Growth, International Small Cap, Global Opportunities, Emerging Asia, Latin
America, Select 50, and the U.S. Asset Allocation. See "Financial Highlights,"
beginning on page 52, for each Fund's historical portfolio turnover.
The Year 2000
Montgomery and our service providers depend on the smooth functioning of our
computer systems. Unfortunately, because of the way dates are encoded and
calculated, many computer systems in use today cannot recognize the year 2000,
but revert to 1900 or another incorrect date. A computer failure due to the year
2000 problem could negatively impact the handling of securities trades, pricing
and account services.
Our software vendors and service providers have assured us that their systems
will be adapted in sufficient time to avoid serious problems. There can be no
guarantee, however, that all of these computer systems will be adapted in time.
We do not expect year 2000 conversion costs to be substantial for the Funds
because those costs are borne by our vendors and service providers and not
directly by the Funds. Furthermore, brokers and other intermediaries that hold
shareholder accounts may still experience incompatibility problems. It is also
important to keep in mind that year 2000 issues may negatively impact the
companies in which the Funds invest and by extension the value of the shares
held in The Montgomery Funds. We are in the process of putting in place a
contingency plan to evaluate other vendors and service providers if the existing
vendors and service providers fail to adequately adapt their systems in a timely
manner.
Alternative Structures
In the future each Fund has reserved the right, if approved by the Board, to
convert to a "Master-Feeder" structure. In this structure, the assets of mutual
funds with common investment objectives and similar parameters are combined into
a pool, rather than being managed separately. The individual funds are know as
"feeder" funds and the pool as the "master" fund. While combining assets in the
way allows for economies of scale and other advantages, this change will not
affect the investment objectives, philosophies or disciplines currently employed
by The Montgomery Funds. You would receive prior notice before we take any such
action. As of the date of this prospectus we have not proposed instituting
alternative structures for any of The Montgomery Funds.
50====
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
The following selected per-share data and ratios for the period ended June 30,
1998, were audited by PricewaterhouseCoopers LLP. Their August 14, 1998, report
appears in the 1998 Annual Report of the Funds. Information for the periods
ended June 30, 1991, through June 30, 1997, was audited by other independent
accountants. Their report is not included here.
<CAPTION>
[table]
- ---------------------------------------------------------------------------------------------------------
U.S. Equity Funds
- ---------------------------------------------------------------------------------------------------------
Growth Fund
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA FOR 1998## 1997## 1996 1995 1994(a)
THE YEAR OR PERIOD ENDED JUNE 30:
Net Asset Value - Beginning of Year $23.07 $21.94 $19.16 $15.27 $12.00
Net investment income/(loss) 0.17 0.15 0.17 0.12 0.04
Net realized and unrealized gain/(loss) on
investments. 3.51 3.90 4.32 3.91 3.31++
Net increase/(decrease) in net assets 3.68 4.05 4.49 4.03 3.35
resulting from investment operations
Distributions:
Dividends from net investment income (0.15) (0.15) (0.17) (0.07) (0.01)
Distribution from net realized capital gains (2.92) (2.77) (1.54) (0.07) -
Distribution in excess of net realized
capital gains - - - - (0.07)
Total Distributions (3.07) (2.92) (1.71) (0.14) (0.08)
Net Asset Value - End of Year $23.68 $23.07 $21.94 $19.16 $15.27
Total Return** 17.31% 20.44% 24.85% 26.53% 27.98%
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data
Net assets, end of year (in 000's) $1,382,874 $1,137,343 $926,382 $878,776 $149,103
Ratio of net investment income/(loss) to
average net assets 0.71% 0.69% 0.78% 0.98% 1.09%+
Net investment income/(loss) before deferral
of fees by Manager $0.17 - - - $0.03
Portfolio turnover rate 53.68% 61.10% 118.14% 128.36% 110.65%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.20% - - - 1.79%+
Expense ratio including interest and tax expense 1.20% 1.27% 1.35% 1.50% 1.49%+
Expense ratio excluding interest and tax expense 1.19% - - - -
- ---------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total for the periods indicated.
+ Annualized.
++ The amount shown here for each share outstanding throughout the period may
not agree with the net realized and unrealized gain/(loss) for the period
due to the timing of purchases and withdrawal of shares in relation to the
fluctuating market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with the results of
operations.
</FN>
</TABLE>
51====
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
U.S. Equity Funds
- ----------------------------------------------------------------------------------------------
Small Cap Opportunities Fund
- ----------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998## 1997 1996(b)##
THE YEAR OR PERIOD ENDED JUNE 30:
<S> <C> <C> <C>
Net Asset Value - Beginning of Year $ 17.53 $ 15.80 $ 12.00
Net investment income/(loss) (0.20) (0.13) 0.02
Net realized and unrealized gain/(loss) on
investments. 2.25 1.86 3.78++
Net increase/(decrease) in net assets
resulting from investment operations 2.05 1.73 3.80
Distributions:
Dividends from net investment income _ (0.00)# _
Distribution from net realized capital gains (0.42) _ _
Distribution in excess of net realized
capital gains _ _ _
Total Distributions (0.42) (0.00)# _
Net Asset Value - End of Year $ 19.16 $ 17.53 $ 15.80
Total Return** 11.86% 10.97% 31.67%
- ----------------------------------------------------------------------------------------------
Ratios To Average Net Assets/
Supplemental Data
Net assets, end of year (in 000's) $201,738 $226,318 $136,140
Ratio of net investment income/(loss) to
average net assets (1.05)% (0.86)% 0.23%+
Net investment income/(loss) before
deferral of fees by Manager $ (0.26) $ (0.16) $ (0.04)
Portfolio turnover rate 82.47% 154.50% 81.29%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.78% 1.75% 2.16%+
Expense ratio including interest and tax expense 1.50% 1.50% 1.50%+
Expense ratio excluding interest and tax expense 1.50% _ _
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998## 1997 1996 1995 1994 1993 1992 1991 1991(c)
THE YEAR OR PERIOD ENDED JUNE 30:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $19.52 $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $10.05 $10.62
Net investment income/(loss) (0.15) (0.18) (0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07)
Net realized and unrealized gain/(loss)
on investments. 4.33 1.43 6.31 3.04 (0.47) 4.04 3.25 3.27 2.71
Net increase/(decrease) in net assets
resulting from investment operations 4.18 1.25 6.22 2.94 (0.59) 3.93 3.19 3.21 2.64
Distributions:
Dividends from net investment income _ _ _ _ _ _ _ _ _
Distribution from net realized capital
gains (2.97) (3.28) (1.78) (0.98) (1.09) _ (2.75) (0.02) (0.02)
Total Distributions (2.97) (3.28) (1.78) (0.98) (1.09) _ (3.53) (0.02) (0.02)
Net Asset Value - End of Year $20.73 $19.52 $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24
Total Return** 23.23% 6.81% 39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of year (in 000's) $203,437 $198,298 $275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181
Ratio of net investment income/(loss) to
average net assets (0.70)% (0.78)% (0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+
Net investment income/(loss) before
deferral of fees by Manager $(0.15) _ _ _ _ _ _ _ _
Portfolio turnover rate 68.65% 58.71% 80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16%
Expense ratio including interest expense 1.24% 1.20% 1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+
Expense ratio before deferral of fees by
Manager, including interest expense 1.24% _ _ _ _ _ _ _ _
Expense ratio excluding interest expense 1.24% _ _ _ _ _ _ _ _
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R shares started operations on September 30, 1993.
(b) The Small Cap Opportunities Fund's Class R shares commenced operations on
December 29, 1995.
(c) The Small Cap Fund's Class R shares became available for investment by the
public on July 13, 1990.
</FN>
</TABLE>
52====
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Emerging Growth Fund Equity Income Fund
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998## 1997 1996 1995(a)## 1998 1997## 1996 1995(b)
THE YEAR OR PERIOD ENDED JUNE 30:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $19.00 $17.82 $13.75 $12.00 $17.91 $16.09 $13.38 $12.00
Net investment income/(loss) (0.18) (0.13) (0.04) 0.09 0.44 0.49 0.43 0.31
Net realized and unrealized gain/(loss)
on investments. 4.21 2.54 4.26 1.66 2.27 3.35 2.82 1.38
Net increase/(decrease) in net assets
resulting from investment operations 4.03 2.41 4.22 1.75 2.71 3.84 3.25 1.69
Distributions:
Dividends from net investment income _ _ (0.04) _ (0.44) (0.46) (0.42) (0.31)
Distribution from net realized capital
gains (1.14) (1.23) (0.11) _ (1.91) (1.56) (0.12) _
Distribution in excess of net realized
capital gains _ _ _ _ (2.35) (2.02) (0.54) (0.31)
Total distributions (1.14) (1.23) (0.15) _
Net Asset Value - End of Year $21.89 $19.00 $17.82 $13.75 $18.27 $17.91 $16.09 $13.38
Total Return** 22.18% 14.77% 30.95% 14.58% 15.83% 26.02% 24.56% 14.26%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data
Net assets, end of year (in 000's) $391,973 $317,812 $306,217 $162,949 $40,260 $38,595 $19,312 $6,383
Ratio of net investment income/(loss) to
average net assets (0.84)% (0.75)% (0.11)% 1.40%+ 2.32% 2.93% 3.03% 4.06%+
Net investment income/(loss) before
deferral of fees by Manager $(0.18) _ $(0.05) $0.07 $0.34 $0.39 $0.34 $0.13
Portfolio turnover rate 23.63% 79.00% 88.98% 36.81% 68.23% 62.31% 89.77% 29.46%
Expense ratio before deferral of fees by _
Manager, including interest and tax
expense 1.57% 1.79% 2.07%+ 1.38% 1.46% 1.45% 3.16%+
Expense ratio including interest expense 1.57% 1.71% 1.75% 1.75%+ 0.86% _ _ _
Expense ratio excluding interest expense 1.56% _ _ _ 0.85% 0.86% 0.85% 0.84%+
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
53====
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- --------------------------------------------------------------------------------------------------------------------------
International Growth Fund International Small Cap Fund
- --------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998## 1997## 1996(c) 1998## 1997 1996 1995 1994(d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $16.24 $15.31 $12.00 $17.16 $14.86 $11.75 $12.02 $12.00
Net investment income/(loss) 0.04 0.08 0.02 (0.01) (0.05) 0.03 0.12 0.00#
Net realized and unrealized gain/(loss)
on investments 3.48 2.53 3.29 0.31 2.35 3.10 (0.39) 0.02
Net increase/(decrease) in net assets
resulting from investment operations 3.52 2.61 3.31 0.30 2.30 3.13 (0.27) 0.02
Distributions:
Dividends from net investment income (0.02) _ _ _ _ (0.02) (0.00)# _
Distributions in excess of net investment
income (0.00)# _ _ (0.13) _ _ _ _
Distributions from net realized capital
gains (1.07) (1.68) _ (2.19) _ _ _ _
Distributions in excess of net realized
capital gains _ _ _ _ _ _ _ _
Total distributions (1.09) (1.68) _ (2.32) _ (0.02) (0.00)# _
Net Asset Value-End of Year $18.67 $16.24 $15.31 $15.14 $17.16 $14.86 $11.75 $12.02
Total Return** 23.27% 19.20% 27.58% 4.46% 15.48% 26.68% (2.23)% 0.17%
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $64,820 $33,912 $18,303 $50,491 $53,602 $41,640 $28,516 $34,555
Ratio of net investment income/(loss) to
average net assets 0.22% 0.57% 0.26%+ (0.03)% (0.34)% 0.20% 0.95% 0.04%+
Net investment income/(loss) before
deferral of fees by Manager $(0.04) $(0.02) $(0.07) $(0.10) $(0.14) $(0.08) $0.05 $(0.02)
Portfolio turnover rate 127.13% 95.02% 238.91% 110.58% 84.91% 177.36% 156.13% 123.50%
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 2.13% 2.37% 2.91%+ 2.53% 2.60% 2.76% 2.50% 2.32%+
Expense ratio including interest and tax 1.66% _ _ 1.92% _ 1.96% 1.91% 1.99%+
Expense ratio excluding interest and tax 1.65% 1.66% 1.65%+ 1.90% 1.90% 1.90% 1.90% 1.90%+
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The U.S. Emerging Growth Fund's Class R shares commenced operations on
December 30, 1994.
(b) The Equity Income Fund's Class R shares commenced operations on September
30, 1994.
(c) The International Growth Fund's Class R shares commenced operations on July
3, 1995.
(d) The International Small Cap Fund's Class R shares commenced operations on
September 30, 1993.
(e) The Global Opportunities Fund's Class R shares commenced operations on
September 30, 1993.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- --------------------------------------------------------------------------------------------------------
Global Opportunities Fund
- --------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998## 1997 1996 1995 1994(e)
THE YEAR OR PERIOD ENDED JUNE 30:
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $19.17 $16.96 $13.25 $12.92 $12.00
Net investment income/(loss) 0.00# (0.11) (0.06) 0.13 0.01
Net realized and unrealized gain/(loss) on
investments. 3.87 3.14 3.84 0.70 0.91
Net increase/(decrease) in net assets
resulting from investment operations 3.87 3.03 3.78 0.83 0.92
Distributions:
Dividends from net investment income _ _ (0.07) _ _
Distributions in excess of net investment
Income _ _ _ _ _
Distributions from net realized capital gains (3.85) (0.82) _ (0.50) _
Total distributions (3.85) (0.82) (0.07) (0.50) _
Net Asset Value-End of Year $19.19 $19.17 $16.96 $13.25 $12.92
Total Return 27.12% 18.71% 28.64% 6.43% 7.67%
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $96,412 $32,371 $28,496 $13,677 $12,504
Ratio of net investment income/(loss) to
average net assets (0.02)% (0.62)% (0.56)% 1.03% 0.02%+
Net investment income/(loss) before
deferral of fees by Manager $0.00 $(0.23) $(0.16) $(0.01) $(0.05)
Portfolio turnover rate 135.03% 117.10% 163.80% 118.75% 67.22%
Expense ratio before deferral of fees by
Manager including interest and tax expense 2.37% 2.62% 3.10% 2.99% 2.75%+
Expense ratio including interest and tax expense 1.96% _ 2.05% 1.91% 1.99%+
Expense ratio excluding interest and tax expense 1.90% 1.90% 1.90% 1.90% 1.90%+
- --------------------------------------------------------------------------------------------------------
</TABLE>
54====
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- --------------------------------------------------------------------------------------------------------------------
Global Communications Fund
- --------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998## 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $19.61 $18.05 $15.42 $14.20 $12.45 $12.00
Net investment income/(loss) (0.17) (0.25) (0.20) (0.03) (0.05) 0.00#
Net realized and unrealized gain/(loss) on
investments 7.19 2.72 2.83 1.28 1.80++ 0.45
Net increase/(decrease) in net assets
resulting from investment operations 7.02 2.47 2.63 1.25 1.75 0.45
Distributions:
Dividends from net investment income _ _ _ _ _ _
Distributions in excess of net investment
Income _ _ _ _ _ _
Distributions from net realized capital gains (3.75) (0.91) _ _ _ _
Distributions in excess of net realized
capital gains _ _ _ (0.03) _ _
Total distributions (3.75) (0.91) _ (0.03) _ _
Net Asset Value-End of Year $22.88 $19.16 $18.05 $15.42 $14.20 $12.45
Total Return** 45.45% 14.43% 17.06% 8.83% 14.06% 3.75%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $267,113 $153,995 $206,671 $209,644 $234,886 $4,670
Ratio of net investment income/(loss) to
average net assets (0.85)% (1.05)% (1.01)% (0.10)% (0.46)% (0.05)%+
Net investment income/(loss) before
deferral of fees by Manager $(0.17) $(0.27) $(0.22) $(0.07) $(0.06) $(0.04)
Portfolio turnover rate 79.67% 75.79% 103.73% 50.17% 29.20% 0.00%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.93% 2.00% 2.11% 2.09% 2.04% 8.96%+
Expense ratio including interest and tax expense 1.93% _ 2.01% 1.91% 1.94% _
Expense ratio excluding interest and tax expense 1.90% 1.91% 1.90% 1.90% 1.90% 1.90%+
- --------------------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized gain/(loss)
for the period due to the timing of purchases and withdrawal of shares in
relation to the fluctuating market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with the results of
operations.
</FN>
</TABLE>
55====
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- -----------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund
- -----------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998 1997 1996 1995## 1994 1993 1992(b)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $16.85 $14.19 $13.17 $13.68 $11.07 $9.96 $10.00
Net investment income/(loss) 0.07 0.07 0.08 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on
investments (6.58) 2.66 0.94 0.25++ 2.92 1.05 (0.07)
Net increase/(decrease) in net assets
resulting from investment operations (6.51) 2.73 1.02 0.28 2.89 1.12 (0.04)
Distributions:
Dividends from net investment income (0.15) (0.07) _ _ _ (0.01) _
Distributions in excess of net investment
income _ _ _ _ _ _ _
Distributions from net realized capital gains (0.33) _ _ (0.42) (0.28) (0.00)# _
Distributions in excess of net realized
capital gains _ _ _ (0.37) _ _ _
Total distributions (0.48) (0.07) _ (0.79) (0.28) (0.01) _
Net Asset Value-End of Year $9.86 $16.85 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** (39.20)% 19.34% 7.74% 1.40% 26.10% 11.27% (0.40)%
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $758,911 $1,259,457 $994,378 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) to
average net assets 0.55% 0.48% 0.58% 0.23% (0.14)% 0.66% 1.70%+
Net investment income/(loss) before
deferral of fees by Manager $0.07 _ _ _ _ $0.06 $0.01
Portfolio turnover rate 96.76% 83.08% 109.92% 92.09% 63.79% 21.40% 0.19%
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 1.65% _ _ _ _ 1.93% 2.80%+
Expense ratio including interest and tax
expense 1.65% _ _ _ _ _ _
Expense ratio excluding interest and tax
expense 1.60% 1.67% 1.72% 1.80% 1.85% 1.90% 1.90%+
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- --------------------------------------------------------------------------------------------------------------
Emerging Asia Fund Latin America Fund
- --------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998 1997(c) 1998(d)
THE YEAR OR PERIOD ENDED JUNE 30:
<S> <C> <C> <C>
Net Asset-Value Beginning of Year $18.91 $12.00 $12.00
Net investment income/(loss) 0.13 (0.01) 0.33
Net realized and unrealized gain/(loss) on (11.74) 6.95
investments (3.34)
Net increase/(decrease) in net assets
resulting from investment operations (11.61) 6.94 (3.01)
Distributions:
Dividends from net investment income (0.17) _ (0.07)
Distribution in excess of net investment (0.00)# (0.03) _
income
Distribution from net realized capital gains (0.95) _ (0.15)
Distribution in excess of net realized _ _ _
capital gains
Total distributions (1.12) (0.03) (0.22)
Net Asset Value-End of Year $6.18 $18.91 $8.77
Total Return** (63.45)% 57.80% (25.42)%
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data
Net assets, end of year (in 000's) $24,608 $68,095 $4,465
Ratio of net investment income/(loss) to
average net assets 0.22% (0.42)%+ 3.18%
Net investment income/(loss) before
deferral of fees by Manager $(0.08) $(0.02) $0.04
Portfolio turnover rate 153.97% 72.18% 168.18%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 2.27% 2.69%+ 3.04%
Expense ratio including interest and tax expense 1.91% 2.20%+ 0.26%
Expense ratio excluding interest and tax expense 1.90% 1.80%+ 0.00%
- --------------------------------------------------------------------------------------------------------------
<FN>
(a) The Global Communications Fund's Class R shares commenced operations on
June 1, 1993.
(b) The Emerging Markets Fund's Class R shares commenced operations on March 1,
1992.
(c) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
(d) The Latin America Fund's Class R shares commenced operations on June 30,
1997.
</FN>
</TABLE>
56====
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- ------------------------------------------------------------------------------------------------
Select 50 Fund
- ------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998## 1997## 1996(a)
<S> <C> <C> <C>
Net Asset Value-Beginning of Year $20.01 $16.46 $12.00
Net investment income/(loss) 0.12 0.01 0.06
Net realized and unrealized gain/(loss) on
investments 2.70 4.16 4.45
Net increase/(decrease) in net assets
resulting from investment operations 2.82 4.17 4.51
Distributions:
Dividends from net investment income - (0.10) (0.04)
Distributions in excess of net investment
Income - - -
Distributions from net realized capital gains (1.85) (0.52) -
Distributions in excess of net realized
capital gains - - (0.01)
Distributions from capital - - -
Total distributions (1.85) (0.62) (0.05)
Net Asset Value-End of Year $20.98 $20.01 $16.46
Total Return** 15.44% 26.35% 37.75%
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $269,667 $172,509 $77,955
Ratio of net investment income/(loss) to
average net assets 0.58% 0.04% 0.42%+
Net investment income/(loss) before
deferral of fees by Manager $0.12 $(0.01) $0.02
Portfolio turnover rate 151.43% 157.93% 105.98%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.81% 1.92% 2.11%+
Expense ratio including interest and tax expense 1.81% - -
Expense ratio excluding interest and tax expense 1.80% 1.82% 1.80%+
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- ---------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund
- ---------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998 1997## 1996 1995 1994(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $19.89 $19.33 $16.33 $12.24 $12.00
Net investment income/(loss) 1.66 0.48 0.26 0.25 0.06
Net realized and unrealized gain/(loss) on
investments 0.99 2.13 3.54 4.11 0.18
Net increase/(decrease) in net assets
resulting from investment operations 2.65 2.61 3.80 4.36 0.24
Distributions:
Dividends from net investment income (0.93) (0.39) (0.25) (0.17) -
Distributions in excess of net investment
Income (0.70) - - - -
Distributions from net realized capital gains (1.83) (1.66) (0.55) (0.10) -
Distributions in excess of net realized
capital gains - - - - -
Total distributions (3.46) (2.05) (0.80) (0.27) -
Net Asset Value-End of Year $19.08 $19.89 $19.33 $16.33 $12.24
Total Return** 14.67% 14.65% 23.92% 35.99% 2.00%
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $128,075 $127,214 $132,511 $60,234 $1,548
Ratio of net investment income/(loss) to
average net assets 3.10% 2.55% 1.85% 3.43% 2.54%+
Net investment income/(loss) before
deferral of fees by Manager $1.63 $0.47 $0.24 $0.19 $(0.11)
Portfolio turnover rate 84.23% 168.51% 225.91% 95.75% 190.94%
Expense ratio before deferral of fees by
Manager, including interest and tax 0.31%ss. 1.49% 1.55% 2.07% 9.00%+
expense
Expense ratio including interest and tax
expense 0.26%ss. 1.43% 1.42% 1.31% 1.43%+
Expense ratio excluding interest and tax
expense 0.25%ss. 1.31% 1.30% 1.30% 1.30%+
- ---------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total for the periods indicated.
+ Annualized.
++ The amount shown here for each share outstanding throughout the period may
not agree with the net realized and unrealized gain/(loss) for the period
due to the timing of purchases and withdrawal of shares in relation to the
fluctuating market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with the results of
operations.
ss. The expense ratios reflect only the direct expenses of the U.S. Asset
Allocation Fund and do not include the expenses of the underlying funds.
</FN>
</TABLE>
57====
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------------------------------------------------------------------------
Total Return Short Duration Government Bond Fund
Bond Fund
- -------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998(c) 1998 1997## 1996 1995 1994 1993(d)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $12.00 $9.99 $9.92 $9.95 $9.80 $10.23 $10.00
Net investment income/(loss) 0.72 0.57 0.59 0.60 0.62 0.61 0.33
Net realized and unrealized gain/(loss)
on investments 0.56 0.16 0.07 (0.04) 0.16 (0.34) 0.23
Net increase/(decrease) in net assets
resulting from investment operations 1.28 0.73 0.66 0.56 0.78 0.27 0.56
Distributions:
Dividends from net investment income (0.72) (0.56) (0.59) (0.59) (0.62) (0.56) (0.33)
Distributions in excess of net investment
income (0.00)# _ (0.00)# (0.00)# _ (0.07) _
Distributions from net realized capital
gains (0.12) (0.02) _ _ _ _ _
Distributions in excess of net realized
capital gains _ _ _ _ _ (0.07) _
Distributions from capital _ _ _ _ (0.01) _ (0.00)#
Total distributions (0.84) (0.58) (0.59) (0.59) (0.63) (0.70) (0.33)
Net Asset Value-End of Year $12.44 $10.14 $9.99 $9.92 $9.95 $9.80 $10.23
Total Return** 10.92% 7.56% 6.79% 5.74% 8.28% 2.49% 5.66%
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $77,694 $66,357 $47,265 $22,681 $17,093 $21,937 $22,254
Ratio of net investment income/(loss) to
average net assets 5.81% 5.83% 5.87% 5.88% 6.41% 5.93% 6.02%+
Net investment income/(loss) before
deferral of fees by Manager $0.71 $0.51 $0.54 $0.52 $0.54 $0.51 $0.27
Portfolio turnover rate 390.08% 502.23% 450.98% 349.62% 284.23% 603.07% 213.22%
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 1.29% 1.73% 2.05% 2.31% 2.23% 1.75% 2.07%+
Expense ratio including interest and tax 1.34% 1.15% 1.55% 1.55% 1.38% 0.71% _
Expense ratio excluding interest and tax 0.70% 0.28% 0.60% 0.60% 0.47% 0.25% 0.22%+
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Select 50 Fund's Class R shares commenced operations on October 2,
1995.
(b) The U.S. Asset Allocation Fund's Class R shares commenced operations on
March 31, 1994.
(c) The Total Return Bond Fund's Class R shares commenced operations on June
30, 1997.
(d) The Short Duration Government Bond Fund's Class R shares commenced
operations on December 18, 1992.
</FN>
</TABLE>
58====
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
U.S. Fixed Income and Money Market Fund
- ---------------------------------------------------------------------------------------------------------------------
Government Reserve Fund
- ---------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income/(loss) 0.052 0.049 0.052 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on
investments 0.000### 0.000### 0.000### 0.000### 0.000### 0.000###
Net increase/(decrease) in net assets
resulting from investment operations 0.052 0.049 0.052 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.052) (0.049) (0.052) (0.049) (0.029) (0.024)
Distributions in excess of net investment
income _ _ _ _ _ _
Distributions from net realized capital gains _ _ _ _ _ _
Total distributions $(0.052) (0.049) (0.052) (0.049) (0.029) (0.024)
Net Asset Value-End of Year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return** 5.27% 5.03% 5.28% 4.97% 2.96% 2.41%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $724,619 $473,154 $439,423 $258,956 $211,129 $124,795
Ratio of net investment income/(loss) to
average net assets 5.15% 4.93% 5.17% 4.92% 2.99% 2.96%+
Net investment income/(loss) before
deferral of fees by Manager $0.052 $0.049 $0.050 $0.047 $0.028 $0.013
Portfolio turnover rate _ _ _ _ _ _
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 0.48% 0.62% 0.74% 0.79% 0.71% 0.77%+
Expense ratio including interest and tax
expense 0.53% _ _ 0.63% _ _
Expense ratio excluding interest and tax
expense 0.53% 0.60% 0.60% 0.60% 0.60% 0.38%+
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
U.S. Fixed Income and Money Market Funds
- -----------------------------------------------------------------------------------------------------------------------
Federal Tax-Free California Tax-Free
Money Fund Intermediate Bond Fund
- -----------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998 1997(b) 1998 1997 1996 1995 1994(c)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $1.00 $1.00 $12.53 $12.23 $12.04 $11.79 $12.00
Net investment income 0.031 0.032 0.51 0.53 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on
investments. 0.000### 0.000### 0.33 0.30 0.19 0.25 (0.21)
Net increase in net assets
resulting from investment operations 0.031 0.032 0.84 0.83 0.73 0.69 0.20
Distributions:
Dividends from net investment income (0.031) (0.032) (0.51) (0.53) (0.54) (0.44) (0.41)
Distribution sin excess of net investment
income _ (0.000)### _ _ _ (0.00)# _
Distributions from net realized capital gains _ _ _ _ _ _ _
Total distributions (0.31) (0.032)+ (0.51) (0.53) (0.54) (0.44) (0.41)
Net Asset Value-End of Period $1.00 $1.00 $12.86 $12.53 $12.23 $12.04 $11.79
Total Return** 3.12% 3.26% 6.85% 6.91% 6.11% 6.03% 1.65%
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Supplemental Data
Net assets, end of year (in 000's) $117,283 $114,197 $35,667 $21,681 $13,948 $5,153 $11,556
Ratio of net investment income/(loss) to
average net assets 3.08% 3.24%+ 4.03% 4.27% 4.34% 3.71% 3.44%+
Net investment income/(loss) before
deferral of fees by Manager $0.031 $0.030 $0.44 $0.47 $0.43 $0.34 $0.25
Portfolio turnover rate _ _ 42.36% 25.60% 58.11% 37.93% 77.03%
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 0.81% 0.69%+ 1.19% 1.18% 1.43% 1.41% 1.63%+
Expense ratio including interest and tax
expense 0.60% 0.33%+ 0.69% 0.68% 0.61% 0.56% 0.23%+
Expense ratio excluding interest and tax
expense 0.60% _ 0.68% _ _ _ _
- -----------------------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawals of shares
in relation to the fluctuating market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results
of operations.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
59====
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
U.S. Fixed Income and Money Market Funds
California Tax-Free Money Fund
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED JUNE 30: 1998 1997 1996 1995(d)
<S> <C> <C> <C> <C>
Net Asset Value-Beginning of Year $1.00 $1.00 $1.00 $1.00
Net investment income 0.029 0.029 0.030 0.027
Net realized and unrealized gain/(loss) on
investments 0.000### 0.000### 0.000### 0.000###
Net increase/(decrease) in net assets
resulting from investment operations 0.029 0.029 0.030 0.027
Distributions:
Dividends from net investment income (0.029) (0.029) (0.030) (0.027)
Distributions in excess of net investment
Income _ _ _ (0.000)###
Distributions from net realized capital gains _ _ _ _
Total Distributions (0.029) (0.029) (0.030) (0.027)
Net Asset Value-End of Year $1.00 $1.00 $1.00 $1.00
Total Return** 3.00% 2.95% 3.03% 2.68%
Ratios to Average Net Assets/
Supplemental Data:
Net assets, end of year (in 000's) $187,216 $118,723 $98,134 $64,780
Ratio of net investment income to
average net assets 2.96% 2.91% 2.99% 3.55%+
Net investment income/(loss) before deferral
of fees by Manager $0.029 $0.028 $0.028 $0.023
Portfolio turnover rate _ _ _ _
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 0.68% 0.73% 0.80% 0.86%+
Expense ratio including interest and tax
expense 0.58% 0.58% 0.59% 0.33%+
Expense ratio excluding interest and tax
expense 0.58% _ _ _
- -------------------------------------------------------------------------------------------------
<FN>
(a) The Government Reserve Fund's Class R shares commenced operations on
September 14, 1992.
(b) The Federal Tax-Free Money Fund's Class R shares commenced on July 15,
1996.
(c) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(d) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
</FN>
</TABLE>
60====
<PAGE>
Account Information
[table]
INVESTMENT OPTIONS
* Trade requests received after 1 p.m. PST (4 p.m. EST) will be executed at
the following business day's closing price.
Checks should be made out to:
The Montgomery Funds
The minimum initial investment for each fund is $1,000. The minimum subsequent
investment is $100 ($500 for the U.S. Emerging Growth Fund, currently closed to
new investors).
* To open a new account, complete and mail the New Account application in the
back of this Prospectus.
Once an account is established, you can:
* Buy, sell or exchange shares by phone. Contact The Montgomery Funds at
800.572.FUND [3863]. Press 1 for a shareholder service representative.
Press 2 for the automated Montgomery Star System.
* Buy, sell or exchange shares online. Go to www.montgomeryfunds.com. Follow
online instructions to enable this service.
* Buy or sell shares by mail:
Mail buy/sell order(s) with your check:
By regular mail:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
By express or overnight service:
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street, 7th Floor
Kansas City, MO 64105
* Buy or sell shares by wiring funds:
To: Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: [shareholder(s) name]
Shareholder account number:
[shareholder(s) account number]
Name of Fund: [Montgomery Fund name]
61====
<PAGE>
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in The Montgomery Funds. The minimum initial
investment for each Fund is $1,000. The minimum subsequent investment is $100
($500 for the U.S. Emerging Growth Fund, currently closed to new investors).
Under certain conditions we may waive these minimums. If you buy shares through
a broker or investment advisor, different requirements may apply. All
investments must be made in U.S. dollars.
We must receive payment from you within three business days of your purchase. In
addition, we reserve the right to reject any purchase.
Becoming a Montgomery Shareholder
To open a new account:
* By Mail Send your completed application, with a check payable to The
Montgomery Funds, to the appropriate address at right. Your check must be in
U.S. dollars and drawn only on a bank located in the United States. We do not
accept third-party checks, "starter" checks, credit-card checks, instant-loan
checks or cash investments. We may impose a charge on checks that do not clear.
Note that if you are investing in a U.S. Fixed-Income or Money Market Fund,
dividends will not begin to accrue on your account until your check clears.
* By Wire Call us at (800) 572-FUND [3863] to let us know that you intend to
make your initial investment by wire. Tell us your name, the amount you want to
invest and the fund(s) in which you want to invest. We will give you further
instructions and a fax number to which you should send your completed New
Account application. To ensure that we handle your investment accurately,
include complete account information in all wire instructions.
Then, request your bank to wire money from your account to the attention of:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Fund: [Montgomery Fund]
Please note: Your bank may charge a wire-transfer fee.
* By Phone To make an initial investment by phone, you must have been a current
Montgomery shareholder for at least 30 days. Shares for Individual Retirement
Accounts (IRAs) may not be purchased by phone. Your purchase of a new fund must
meet its investment minimum and is limited to the total value of your existing
accounts or $10,000, whichever is greater. To complete the transaction, we must
receive payment within three business days. We reserve the right to collect any
losses from your account if we do not receive payment within that time.
<PAGE>
[sidebar]
GETTING STARTED
To invest, complete the New Account Application at the back of this prospectus.
Send it with a check payable to The Montgomery Funds.
Regular Mail
The Montgomery Funds
P.O. Box 419073
Kansas City, MO 64141
Express Mail or Overnight Courier
The Montgomery Funds
210 West 10th Street
7th Floor
Kansas City, MO 64105
Foreign Investors:
Foreign citizens and resident aliens of the United States living abroad may not
invest in The Montgomery Funds.
62====
<PAGE>
How Fund Shares Are Priced
How and when we calculate the Funds' price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate a fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the fund's investments on their market value, usually the last
price reported for each security before the close of market that day. A market
price may not be available for securities that trade infrequently. Occasionally,
an event that affects a security's value may occur after the market closes. This
is more likely to happen for foreign securities traded in foreign markets that
have different time zones from the United States. Major developments that may
affect the price of those securities may happen after the foreign markets in
which such securities trade have closed but before a Fund Calculates its NAV. In
this case, Montgomery, in consultation with the Fund's Board of Trustees, will
make a good-faith estimate of the security's "fair value", which may be higher
or lower than security's closing price in its relevant market. More details
about how we calculate the funds' NAV are in the Statement of Additional
Information.
We calculate the net asset value (NAV) of each Montgomery Fund, after the close
of trading on the New York Stock Exchange (NYSE) every day the NYSE is open. We
do not calculate NAVs on the days on which the NYSE is closed for trading.
Certain exceptions apply as described below. If we receive your order by the
close of trading on the NYSE, you can purchase shares at the price calculated
for that day. The NYSE usually closes at 4 p.m. on weekdays, except for
holidays. If your order and payment are received after the NYSE has closed, your
shares will be priced at the next NAV we determine after receipt of your order.
- - Money Market Funds. The price of the money market funds is determined at 12
noon EST on most business days. If we receive your order by that time, your
shares will be priced at the NAV calculated at 12 noon that day. If we receive
your order after 12 noon eastern time, you will pay the next price we determine
after receiving your order.
- - Foreign Funds. Several of our funds invest in securities denominated in
foreign currencies and traded on foreign exchanges. To determine their value, we
convert their foreign-currency price into U.S. dollars by using the exchange
rate last quoted by a major bank. Exchange rates fluctuate frequently and may
affect the U.S. dollar value of foreign-denominated securities, even if their
market price does not change. In addition, some foreign exchanges are open for
trading when the U.S. market is closed. As a result, a fund's foreign
securities--and its price--may fluctuate during periods when you can't buy, sell
or exchange shares in the fund.
- - Bank Holidays. On bank holidays we will not calculate the price of the U.S.
Fixed-Income and Money Market Funds, even if the NYSE is open that day. Shares
in these funds will be sold at the next NAV we determine after receipt of your
order.
Buying Additional Shares
* By Mail Complete the form at the bottom of any Montgomery statement and mail
it with your check payable to The Montgomery Funds. Or mail the check with a
signed letter noting the name of the Fund in which you want to invest, your
account number and telephone number. We will mail you a confirmation of your
investment. Note that we may impose a charge on checks that do not clear.
[Sidebar]
TRADING TIMES
Whether buying, exchanging or selling shares, transaction requests received
after 1 p.m. PST (4 p.m. EST) will be executed at the next business day's
closing price.
63====
<PAGE>
[table]
How Shares Are Priced
U.S. Equity Funds This information will be updated. The table
will summarize information already in the
text.
Money Market Funds This information will be
updated. The table will summarize
information already in the text.
Fixed-Income Funds This information will be updated. The
table will summarize information already in
the text.
International Funds This information will be updated. The
table will summarize information already in
the text.
[sidebar]
Our Electronic Link program allows us to automatically debit or credit your bank
account for transactions made by phone or online. To take advantage of this
service, simply mail us a voided check or preprinted deposit slip from your bank
account along with a request to establish an Electronic Link.
64====
<PAGE>
* By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a fund you currently own or to invest in a new fund,
call (800) 572-FUND [3863]. Shares for IRAs may not be purchased by phone. There
are restrictions on the dollar amount of shares you may buy by phone. Call for
more details.
We must receive payment for your purchase within three business days of your
request. To ensure that we do, you can:
- - Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account).
- - Send us a check by overnight or second-day courier service.
- - Instruct your bank to wire money to our affiliated bank using the information
in "Becoming A Montgomery Shareholder" (page 65).
* Online To buy shares online, you must first set up an Electronic Link
(described in the note at left above). Then visit our Web site,
www.montgomeryfunds.com, where you can purchase up to $25,000 per day in
additional shares of any fund, except those held in a retirement account. The
cost of the shares will be automatically deducted from your bank account.
* By Wire There is no need to contact us when buying additional shares by wire.
Simply instruct your bank to wire money to our affiliated bank using the
information in "Opening A New Account" (page 65).
Exchanging Shares
Montgomery shareholders may exchange Class R shares in one Fund for Class R
shares in another with the same registration, Taxpayer Identification number and
address. There is a $100 minimum to exchange into a fund you currently own ($500
for the U.S. Emerging Growth Fund) and a $1,000 minimum for investing in a new
Fund. Note that an exchange may result in a realized gain or loss for tax
purposes. You may exchange shares by phone, at (800) 572-FUND [3863] or through
our online shareholder service center at www.montgomeryasset.com.
Other Exchange Policies
* Depending on what time we receive your request, we will process your exchange
order at the next calculated NAV.
* You may exchange shares only in Funds that are qualified for sale in your
state and that are offered in this prospectus. You may not exchange shares in
one Fund for shares of another that is currently closed to new shareholders
unless you are already a shareholder in the closed fund.
* Because excessive exchanges can harm a Fund's performance, we reserve the
right to terminate your exchange privileges if you make more than four exchanges
out of any one fund during a 12-month period. We may also refuse an exchange
into a fund from which you have sold shares within the previous 90 days
(accounts under common control and accounts having the same Taxpayer
Identification number will be counted together). Exchanges out of the U.S.
Fixed-Income and Money Market Funds are exempt from this restriction.
65====
<PAGE>
* We may restrict or refuse your exchanges if we receive, or anticipate
receiving, simultaneous orders affecting a large portion of a Fund's assets or
if we detect a pattern of exchanges that suggests a market-timing strategy.
* We reserve the right to refuse exchanges into a Fund by any person or group
if, in our judgment, the Fund would be unable to effectively invest the money in
accordance with its investment objective and policies, or might be adversely
affected in other ways.
[sidebar]
Shareholder service is available Monday through Friday from 5 a.m. to 4 p.m.
PST. Shareholders can get information or perform transactions around-the-clock
through the Montgomery Star System or www.montgomeryfunds.com.
Selling Shares
You may sell some or all of your fund shares on days that the New York Stock
Exchange is open for trading (except bank holidays for the U.S. Fixed-Income and
Money Market Funds).
Your shares will be sold at the next NAV we calculate for the Fund after
receiving your order. We will promptly pay the proceeds to you, normally within
three business days of receiving your order and all necessary documents
(including a written redemption order with the appropriate signature guarantee).
We will mail or wire you the proceeds, depending on your instructions. If you
purchase shares and sell them shortly thereafter, we will not mail the proceeds
until 15 days from the date you first purchased the shares.
Generally, we will not charge you any fees when you sell your shares, although
there are some minor exceptions:
* We reserve the right to charge a redemption fee of up to 1% on shares sold
within 90 days of their purchase.
* Shareholders who sell shares by wire pay a $10 wire transfer fee that will be
deducted directly from their proceeds.
* Shareholders who want redemption checks sent by Federal Express must pay a $10
fee, deducted directly from their redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC) we
reserve the right to suspend redemptions under extraordinary circumstances.
Shares can be sold in several ways:
* By Mail Send us a letter including your name, Montgomery account number, the
fund from which you would like to sell shares and the dollar amount or number of
shares you want to sell. You must sign the letter the same way your account is
registered. If you have a joint account, all accountholders must sign the
letter.
If you want the proceeds to go to a party other than the account owner(s) or
your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other NASD member firms.
If you want to wire your redemption proceeds but do not have a predesignated
bank account, include a voided check or deposit slip with your letter. The
minimum wire amount is $500. Wire charges, if any, will be deducted from the
redemption proceeds. We may permit lesser wire amounts or fees at our
discretion. Call (800) 572-FUND [3863] for more details.
66====
<PAGE>
* By Check If you have check writing privileges in your account, you may write a
check to redeem some of your shares, but not to close your account in the
fixed-income or money market funds. This option is not available for funds in an
IRA. Checks may not be written for amounts below $250. Checks require only one
signature unless otherwise indicated. We will return your checks at the end of
the month. Note that we may impose a charge for a stop-payment request.
* By Phone You may accept or decline telephone redemption privileges on your New
Account application. If you accept, you will be able to sell up to $50,000 in
shares through one of our shareholder service representatives or through our
automated Star System at (800) 572-FUND [3863]. You may not buy, sell or
exchange shares in an IRA account by phone. If you included bank wire
information on your New Account application or made arrangements later for wire
redemptions, proceeds can be wired to your bank account. Please allow at least
two business days for the proceeds to be credited to your bank account. If you
want proceeds to arrive at your bank on the same business day (subject to bank
cutoff times), there is a $10 fee. For more information about our telephone
transaction policies, see "Other Policies."
* Online You can sell up to $50,000 in shares in a regular account online
through our online shareholder service center at www.montgomeryfunds.com.
[sidebar]
Buying and Selling Shares Through Brokers and Other Intermediaries You may
choose to invest in The Montgomery Funds through brokers, dealers or other
financial intermediaries, like your 401k. Contact them directly for their rules
about buying and selling shares, and any service or transaction fees that they
may charge.
OTHER POLICIES
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum combined
account balance of $1,000 ($5,000 for the U.S. Emerging Growth Fund). If your
account balance falls below that amount for any reason other than market
fluctuations, we will ask you to add to your account. If your account balance is
not brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Uncashed Redemption Checks
If you receive your Fund redemption proceeds or distributions by check (instead
of by wire) and it does not arrive within a reasonable period of time, call us
at (800) 572-FUND [3863]. Please note that we are responsible only for mailing
redemption or distribution checks and are not responsible for tracking uncashed
checks or determining why checks are uncashed. If your check is returned to us
by the U.S. Postal Service or other delivery service, we will hold it on your
behalf for a reasonable period of time. We will not invest the money in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
67====
<PAGE>
Telephone Transactions
By buying, selling or exchanging shares over the phone, you agree to reimburse
the Funds for any expenses or losses incurred in connection with transfers of
money from your account. This includes any losses or expenses caused by your
bank's failure to honor your debit or act in accordance with your instructions.
If your bank makes erroneous payments or fails to make payment after you buy
shares, we may cancel the purchase and immediately terminate your telephone
transaction privilege. In addition, we may discontinue these privileges at any
time upon 30 days' written notice. You may discontinue phone privileges at any
time.
The shares you purchase by phone will be priced at the next net asset value we
determine after receiving your purchase. However, you will not actually own the
shares until we receive your payment in full. If we do not receive your payment
within three business days of your request, we will cancel your purchase. You
may be responsible for any losses incurred by a fund as a result.
Please note that we cannot be held liable for following telephone instructions
that we reasonably believe to be genuine. We use several safeguards to ensure
that the instructions we receive are accurate and authentic, such as:
- - recording certain calls,
- - requiring a special authorization number or other personal information not
likely to be known by others, and
- - sending a transaction confirmation to the investor.
The Funds and our Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone privilege of any shareholder at any
time if he or she has used abusive language or misused the phone privilege by
making purchases and redemptions that appear to be part of a systematic
market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend your
telephone redemption privileges until 30 days after your notification to protect
you and your account. We require all redemption requests made during this period
to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of volatile economic or market conditions. In these cases you may
want to try the following to transmit your redemption request:
- - using the automated Star System
- - online
- - by overnight courier
- - by telegram
[sidebar]
Investment Minimums
For regular accounts and IRAs, the minimum initial investment is $1,000. Minimum
subsequent investment is $100 ($500 for the U.S. Emerging Growth Fund, which is
closed to new investors).
68====
<PAGE>
AFTER YOU INVEST
Taxes
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting your local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a certified Social Security number, federal tax law may require us
to withhold 31% of your taxable dividends, capital-gains distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account application. Foreign shareholders should note that any dividends the
Funds pay to them may be subject to up to 30% withholding instead of backup
withholding.
The Funds' distribution, whether received in cash or reinvested in additional
shares of the Funds, may be subject to tax. Furthermore, any exchange of a
Fund's shares for shares of another Fund will be treated as a sale of the Fund's
shares and any gain on the transaction may be subject to tax.
IRS rules require that the Funds distribute all of their net investment income
and capital gains, if any, to shareholders. We will inform you about the source
of any dividends and capital gains upon payment. After the close of each
calendar year, we will advise you of their tax status.
Additional information about tax issues relating to the Funds can be found in
our Statement of Additional Information, available free by calling (800)
572-FUND [3863]. Consult your tax advisor about the potential tax consequences
of investing in the Funds.
[table]
<TABLE>
<CAPTION>
DIVIDENDS DISTRIBUTIONS
<S> <C> <C>
EQUITY FUNDS (EXCEPT THE Declared and paid in the last Declared and paid in the
last EQUITY INCOME FUND) quarter of each calendar year* quarter of each calendar year*
EQUITY INCOME FUND Declared and paid on or about the Declared and paid in the last
last business day of each quarter quarter of each calendar year*
MULTI-STRATEGY FUNDS Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
U.S. FIXED-INCOME AND MONEY Declared daily and paid monthly on Declared and paid in the last
MARKET FUNDS or about the last business day of quarter of each calendar year*
each month
<FN>
* Following their fiscal year end (June 30), the Funds may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
[sidebar]
Our Partners
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently. Funds Distributor, Inc., located in New York City
and Boston, distributes The Montgomery Funds.
Investors Fiduciary Trust Company, located in Kansas City, Missouri, is the
Funds' master transfer agent. It performs certain record keeping and accounting
functions for the Funds.
DST Systems, also located in Kansas City, Missouri, assists Investors Fiduciary
Trust with certain record
<PAGE>
keeping and accounting functions for the Funds.
69====
<PAGE>
A Note on the Montgomery Tax-Free Funds
The Montgomery Federal Money, California Money and California Intermediate Bond
Funds intend to continue paying what the IRS calls "exempt-interest dividends"
to shareholders by maintaining, as of the close of each quarter of their taxable
year, at least 50% of the value of their assets in municipal bonds. If the Funds
satisfy this requirement, any distributions paid to shareholders from their net
investment income will be exempt from federal income, to the extent that they
derive their net investment income from interest on municipal bonds. Any
distributions paid from other sources of net investment income, such as market
discounts on certain municipal bonds, will be treated as ordinary income by the
IRS.
Dividends and Distributions
As a shareholder in The Montgomery Funds, you may receive dividends and
distributions for which you will owe taxes (unless you invest solely through a
tax-advantaged account such as an IRA or a 401k plan). Dividends and
distributions are paid to all shareholders in the Fund on a "record date."
If you would like to receive distributions in cash, indicate that choice on your
New Account application. Otherwise, the distribution will be reinvested in
additional Fund shares.
Keeping You Informed
After you invest you will receive our Shareholder Services Guide, which includes
more information about buying, exchanging and selling shares in the Montgomery
Funds. It also describes in more detail useful tools for investors such as the
Montgomery Star System and online transactions.
During the year, we will also send you the following communications:
* Confirmation Statements
* Account Statements-Mailed after the close of each calendar quarter.
* Annual and Semiannual Reports Mailed approximately 60 days after June 30
and December 31.
* 1099 Tax Form-Sent by January 31.
* Annual Updated Prospectus-Mailed to existing shareholders in the Fall.
To save you money, we will send only one copy of each shareholder report or
other mailing to your household if you hold accounts under common ownership or
at the same address (regardless of the number of shareholders or accounts at
that household or address), unless you request additional copies.
[sidebar]
How to avoid "buying a dividend"
If you plan to purchase shares in a Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of a Fund just
before a distribution, you'll pay full price for the shares but receive a
portion of your purchase price back as a taxable distribution. This is called
"buying a dividend." Unless you hold the Fund in a tax-deferred account, you
will have to include the distribution in your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
70====
<PAGE>
[Back page]
You can find more information about The Montgomery Fund's investment policies in
the Statement of Additional Information (SAI), which is incorporated by
reference into this Prospectus and is available free of charge.
To request a free copy of the SAI copy, please call us at (800) 572-FUND [3863].
If you have access to the Internet, you can view the SAI at the Security and
Exchange Commission's Web site at www.sec.gov. You may also request a copy by
writing to the Public Reference Section of the SEC, Washington, D.C.,
20549-6009. The SEC charges a duplicating fee for this service.
You can find further information about The Montgomery Funds in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected each Fund's performance during
its most recent fiscal year. To request a free copy of the most recent annual or
semiannual report, please call us at (800) 572-FUND [3863].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
(800) 572-FUND [3863]
www.montgomeryfunds.com
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
71====
<PAGE>
[Outside back cover: The Montgomery Family of Funds (complete listing); Contact
Info; Logo]
You can find more information about The Montgomery Funds' investment policies in
the Statement of Additional Information (SAI), which is available free of
charge.
To request a copy, please call us at (800) 572-FUND [3863]. If you have access
to the Internet, you can also view a copy of The Montgomery Funds' SAI at the
Security and Exchange Commission's Web site: www.sec.gov. You may also request a
copy by writing to the Public Reference Section of the SEC, Washington, D.C.,
20549-6009. The SEC charges a duplicating fee for this service. You can also
visit the SEC's Public Reference Room (telephone 800.SEC.0330)
You can find further information about The Montgomery Funds in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected each Fund's performance during
its most recent fiscal period. To request a copy of the most recent annual or
semiannual report, please call us at (800) 572-FUND [3863].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
(800) 572-FUND [3863]
www.montgomeryfunds.com
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/98
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
----------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS(SM)
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
www.montgomeryfunds.com
Invest wisely.(R)
Prospectus
October 31, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Fees and Expenses of the Funds 3 How to Redeem an Investment in the Funds 32
Financial Highlights 5 Exchange Privileges and Restrictions 34
The Funds' Investment Objectives and Policies 12 Brokers and Other Intermediaries 34
Portfolio Securities 17 How Net Asset Value Is Determined 35
Other Investment Practices 21 Dividends and Distributions 35
Risk Considerations 23 Taxation 36
Management of the Funds 25 General Information 36
How to Contact the Funds 29 Backup Withholding Instructions 38
How to Invest in the Funds 29 Glossary 39
</TABLE>
Each Fund's shares offered in this prospectus (the "Class P shares") are sold
only through financial intermediaries and financial professionals at net asset
value ("NAV") with no sales load, no commissions, and no redemption or exchange
fees. The Class P shares are subject to a Rule 12b-1 distribution fee as
described in this prospectus. The minimum initial investment in each Fund is
$1,000, and subsequent investments must be at least $100. The Manager or the
Distributor may waive these minimums.
See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies managed by Montgomery
Asset Management, LLC (the "Manager"), a subsidiary of Commerzbank AG. Funds
Distributor, Inc., which is not affiliated with the Manager, is the distributor
of the Funds (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated October 31,
1998, as may be revised, has been filed with the Securities and Exchange
Commission (the "SEC"), is incorporated by this reference and is available
without charge by calling (800) 572-FUND [3863]. If you are viewing the
electronic version of this prospectus through an online computer service, you
may request a printed version free of charge by calling (800) 572-FUND [3863].
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding The
Montgomery Funds and The Montgomery Funds II.
An investment in the Funds is neither insured nor guaranteed by the U.S.
government. There can be no assurance that Montgomery Government Reserve Fund
will be able to maintain a stable net asset value of $1 per share.
Like all mutual funds, these securities have not been approved or disapproved by
the Securities and Exchange Commission nor has the Securities and Exchange
Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
1
<PAGE>
The following eleven mutual funds (the "Funds") are offered in this Prospectus:
- -------------------------------------------------------------------
Montgomery U.S. Equity Funds
- -------------------------------------------------------------------
Growth Fund
- -------------------------------------------------------------------
Small Cap Opportunities Fund
- -------------------------------------------------------------------
Equity Income Fund
- -------------------------------------------------------------------
Montgomery International and Global Equity Funds
- -------------------------------------------------------------------
International Growth Fund
- -------------------------------------------------------------------
International Small Cap Fund
- -------------------------------------------------------------------
Emerging Markets Fund
- -------------------------------------------------------------------
Montgomery Multi-Strategy Funds
- -------------------------------------------------------------------
Select 50 Fund
- -------------------------------------------------------------------
U.S. Asset Allocation Fund
- -------------------------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------------------
Short Duration Government Bond Fund
- -------------------------------------------------------------------
Government Reserve Fund
- -------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund
- -------------------------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund
Invests in U.S. companies of any size, but invests at least 65% of its total
assets in those companies whose shares have a total stock market value (market
capitalization) of at least $1 billion.
Montgomery Small Cap Opportunities Fund
Invests at least 65% of its total assets in stocks of U.S. companies with small
market capitalizations. The Fund currently considers companies with market
capitalizations of $1.5 billion or less to be small capitalization companies.
Montgomery Equity Income Fund
Invests at least 65% of its total assets in large capitalization,
dividend-paying U.S. stocks.
International and Global Equity Funds
Montgomery International Growth Fund
Invests at least 65% of its total assets in the common stocks of companies
outside the United States whose shares have a stock market value (market
capitalization) of more than $1 billion.
Montgomery International Small Cap Fund
Invests at least 65% of its total assets in the stocks of companies outside the
United States whose shares have a market value (market capitalization) of less
than $1 billion.
Montgomery Emerging Markets Fund
Invests at least 65% of its total assets in the stocks of companies based in the
world's developing economies.
Multi-Strategy Funds
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
Montgomery U.S. Asset Allocation Fund
A fund-of-funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities, and cash or cash
equivalents--using funds from The Montgomery Funds family.
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund
Invests at least 65% of its total assets in short-term U.S. government
securities, which may include Treasuries in addition to bonds and notes issued
by government agencies such as the Federal Home Loan Bank, Government National
Mortgage Association
2
<PAGE>
(GNMA or "Ginnie Mae"), Federal National Mortgage Association (FNMA or "Fannie
Mae") and Student Loan Marketing Association (SLMA or "Sallie Mae"). It seeks to
maintain an average portfolio effective duration comparable to or less than
three-year U.S. Treasury notes. It targets higher yields than money market funds
generally, with less fluctuation in the value of its shares than long-term bond
funds. This Fund does not maintain a stable net asset value of $1 per share.
Montgomery Government Reserve Fund
Invests at least 65% of its total assets in short-term U.S. government
securities, which may include bills, notes and bonds issued by government
agencies such as the Federal Home Loan Bank, the Federal Farm Credit Bank,
Federal National Mortgage Association (FNMA) and Student Loan Marketing
Association (SLMA). It seeks to maintain a stable net asset value of $1 per
share.
Montgomery California Tax-Free Intermediate Bond Fund
Invests at least 65% of its total assets in intermediate-term, investment-grade
California municipal bonds. It does not maintain a stable net asset value of $1
per share. This Fund is available to California residents only.
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
prospectus, call The Montgomery Funds at (800) 572-FUND [3863] or contact sales
representatives or financial intermediaries who offer those classes.
Fees and Expenses of the Funds
<TABLE>
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD
MAXIMUM SALES LOAD IMPOSED IMPOSED ON REINVESTED MAXIMUM DEFERRED REDEMPTION FEES+ EXCHANGE FEES
ON PURCHASES DIVIDENDS (AND OTHER SALES LOAD
DISTRIBUTIONS)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
None None None None None
-----------------------------------------------------------------------------------------------------------------------------
<FN>
+Shareholders effecting redemptions via wire transfer may be required to
pay fees, including a $10 wire fee that will be directly deducted from
redemption proceeds. Shareholders who request redemption checks to be sent
by Federal Express may be required to pay a $10 fee that will be directly
deducted from redemption proceeds.
</FN>
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
MANAGEMENT 12b-1 OTHER EXPENSES TOTAL FUND OPERATING
FEES* FEES* (AFTER REIMBURSEMENT EXPENSES
UNLESS NOTED)* (AFTER REIMBURSEMENT
UNLESS NOTED)*
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
Growth Fund 0.91% 0.25% 0.29% 1.45%
-----------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 1.20% 0.25% 0.30% 1.75%
-----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 0.60% 0.25% 0.25% 1.10%
-----------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
-----------------------------------------------------------------------------------------------------------------------------
International Growth Fund 1.10% 0.25% 0.55% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
-----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.08% 0.25% 0.57% 1.90%
-----------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
-----------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 1.23% 0.25% 0.57% 2.05%
-----------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 0.00% 0.25% 1.30%** 1.55%**
-----------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0.50% 0.25% 0.65% 1.40%
-----------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0.30% 0.25% 0.23% .78%
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund 0.50% 0.25% 0.20%*** 0.95%***
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
This table is intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year. Because Rule 12b-1 distribution charges are accounted for
on a class-level basis (and not an individual shareholder-level basis),
individual long-term investors in the Class P shares of the Funds
3
<PAGE>
may over time pay more than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities Dealers, Inc.
(the "NASD"), even though all shareholders of that class in the aggregate will
not.
*Expenses for the Funds are based on actual expenses (excluding interest
and tax expenses) and expense limitations for the fiscal year ended June
30, 1998, for the Class P shares (or, if no Class P shares were
outstanding, for another class of shares, but adjusted to include the Rule
12b-1 fees). The total operating expenses paid by shareholders (including
Rule 12b-1 fees and interest and tax expense and reductions by the
Manager) for the fiscal year ended June 30, 1998, for the Class P shares
were: Montgomery Equity Income Fund, 1.11% (0.26% other expenses);
Montgomery International Growth Fund, 1.91% (0.56% other expenses);
Montgomery International Small Cap Fund, 2.17% (0.67% other expenses);
Montgomery Select 50 Fund, 2.06% (0.58% other expenses); and Montgomery
California Tax-Free Intermediate Bond Fund, 0.94% (0.19% other expenses).
The Manager will reduce its fees and may absorb or reimburse a Fund for
certain expenses to the extent necessary to limit total annual Fund
operating expenses (excluding interest and tax expenses) to the
corresponding expense cap for that Fund. A Fund is required to reimburse
the Manager for any reductions in the Manager's fee only during the three
years following that reduction and only if such reimbursement can be
achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for
fees and expenses for the current year. Absent reduction and including the
Rule 12b-1 fees for the Class P shares, actual total Fund operating
expenses for the period ended June 30, 1998 (annualized), would have been
as follows: Montgomery Small Cap Opportunities Fund, 2.03% (0.58% other
expenses); Montgomery Equity Income Fund, 1.63% (0.77% other expenses);
Montgomery International Growth Fund, 2.38% (1.03% other expenses);
Montgomery International Small Cap Fund, 2.78% (1.28% other expenses);
Montgomery Select 50 Fund, 2.06% (0.58% other expenses); Montgomery U.S.
Asset Allocation Fund, 1.81% (0.56% for the top fund of which 0.31% were
other expenses plus 1.25% weighted average expenses for the underlying
funds); Montgomery Short Duration Government Bond Fund, 1.98% (1.23% other
expenses); and Montgomery California Tax-Free Intermediate Bond Fund,
1.44% (0.69% other expenses). See "Management of the Funds."
** In addition to the 0.56% (including the 0.25% 12b-1 fee) total
operating expenses of the Fund, a shareholder also indirectly bears the
Fund's pro rata share of the fees and expenses incurred by each underlying
fund. The total expense ratio including indirect expenses for the fiscal
year ended June 30, 1998, was 1.81%, calculated based on the Fund's total
operating expense ratio (0.56%) plus a weighted average of the expense
ratios of the underlying funds in which it is invested (1.25%).
***Expenses for Montgomery California Tax-Free Intermediate Bond Fund's
Class P shares are estimated.
<TABLE>
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
- -------------------------------------------------------------------------------------------------------------------------------
Growth Fund $15 $46 $79 $173
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund $18 $55 $95 $205
- -------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund $11 $35 $60 $134
- -------------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- -------------------------------------------------------------------------------------------------------------------------------
International Growth Fund $19 $60 $102 $221
- -------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund $22 $67 $115 $247
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund $19 $60 $102 $221
- -------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- -------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund $21 $64 $110 $237
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund $16 $49 $84 $184
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund $14 $44 $76 $167
- -------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund $8 $25 $43 $96
- -------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund $10 $30 $52 $116
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
4
<PAGE>
<TABLE>
Financial Highlights
Selected Per-Share Data and Ratios
The following financial information for the period ended June 30, 1998, was
audited by PricewaterhouseCoopers LLP, whose report, dated August 14, 1998,
appears in the 1998 Annual Report of the Funds. The following financial
information for the periods ended June 30, 1992, through June 30, 1997, was
audited by other independent accountants. The financial information for periods
indicated with the note "R" relates to another class of shares of the Funds not
subject to the Class P Rule 12b-1 fees because Class P shares were not offered
during those periods.
<CAPTION>
GROWTH FUND
FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1998## 1997## 1996(a) 1995R 1994(a)R
<S> <C> <C> <C> <C> <C>
Net Asset Value--Beginning of Period $23.12 $21.94 $19.22 $ 15.27 $ 12.00
Net investment income/(loss) 0.11 0.09 0.03 0.12 0.04
Net realized and unrealized gain on investments 3.55 3.96 2.69 3.91 3.31++
Net increase/(decrease) in net assets resulting 3.66 4.05 2.72 4.03 3.35
from investment operations
Distributions:
Dividends from net investment income (0.09) (0.10) -- (0.07) (0.01)
Distributions from net realized capital gains (2.92) (2.77) -- (0.07) --
Distributions in excess of net realized -- -- -- -- (0.07)
capital gains
Total distributions (3.01) (2.87) -- (0.14) (0.08)
Net Asset Value--End of Period $23.77 $23.12 $21.94 $ 19.16 $ 15.27
Total Return** 17.09% 20.41% 14.15% 26.53% 27.98%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $198 $ 212 $ 82 $878,776 $149,103
Ratio of net investment income/(loss) to average 0.46% 0.44% 0.53%+ 0.98% 1.09%+
net assets
Net investment income/(loss) before deferral of $ 0.11 -- -- -- $ 0.03
fees by Manager
Portfolio turnover rate 53.68% 61.10% 18.14% 128.36% 110.65%
Expense ratio including interest and tax expense 1.45% 1.52% 1.60%+ 1.50% 1.49%+
Expense ratio before deferral of fees by 1.45% -- -- -- 1.79%+
Manager, including interest and tax expense
Expense ratio excluding interest and tax expense 1.44% -- -- -- --
<FN>
(a) The Growth Fund's Class R and Class P shares commenced operations on
September 30, 1993, and January 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in retaliation to the fluctuating market values of
the portfolio.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period, as
the use of the undistributed income method did not accord with the results
of operations.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity Income Fund
Opportunities Fund
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1998## 1997(a) 1996(a)##R 1998 1997## 1996(b) 1995(b)R
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value--Beginning of Period $17.53 $14.37 $12.00 $17.90 $16.09 $15.66 $12.00
Net investment income/(loss) (0.25) (0.11) 0.02 0.38 0.44 0.08 0.31
Net realized and unrealized gain/(loss) on 2.03 3.27 3.78++ 2.27 3.35 0.35 1.38
investments
Net increase/(decrease) in net assets resulting 1.78 3.16 3.80 2.65 3.79 0.43 1.69
from investment operations
Distributions:
Dividends from net investment income -- (0.00)# -- (0.39) (0.42) -- (0.31)
Distributions in excess of net investment -- -- -- -- -- -- --
income
Distributions from net realized capital gains (0.42) -- -- (1.91) (1.56) -- --
Total distributions (0.42) (0.00)# -- (2.30) (1.98) -- (0.31)
Net Asset Value--End of Period $18.89 $17.53 $15.80 $18.25 $17.90 $16.09 $13.38
Total Return** 10.26% 22.09% 31.67% 15.49% 25.64% 2.75% 14.26%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $ 10 $ 9 $136,140 $ 2,719 $ 868 $ 2 $ 6,383
Ratio of net investment income/(loss) to (1.30)% (1.11)%+ 0.23%+ 2.07% 2.68% 2.78%+ 4.06%+
average net asset
Net investment income/(loss) before deferral of $(0.30) $(0.14) $(0.04) $0.28 $0.34 $0.06 $0.13
fees by Manager
Portfolio turnover rate 82.47% 154.50% 81.29% 68.23% 62.31% 89.77% 29.46%
Expense ratio including interest and tax expense 1.75% 1.75%+ 1.50%+ 1.11% -- -- --
Expense ratio before deferral of fees by 2.03% 2.00%+ 2.16%+ 1.63% 1.71% 1.70%+ 3.16%+
Manager, including interest and tax expense
Expense ratio excluding interest and tax expense 1.75% -- -- 1.10% 1.11% 1.10%+ 0.84%+
<FN>
(a) The Small Cap Opportunities Fund's Class R shares and Class P shares
commenced operations on December 29, 1995, and July 29, 1996, respectively.
(b) The Equity Income Fund's Class R shares and Class P shares commenced
operations on September 30, 1994, and March 12, 1996, respectively.
(c) The International Growth Fund's Class P shares commenced operations on
March 12, 1996.
(d) The International Small Cap Fund's Class R shares and Class P shares
commenced operations on September 30, 1993, and June 9, 1997, respectively.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
International Growth Fund International Small Cap Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1998## 1997## 1996(c) 1998## 1997(d) 1996R 1995R 1994(d)R
<S> <C> <C> <C> <C> <C> <C> <C>
$16.22 $15.31 $13.66 $17.16 $16.96 $11.75 $12.02 $12.00
(0.01) 0.05 0.00# (0.05) 0.00# 0.03 0.12 0.00#
3.50 2.54 1.65 0.30 0.20 3.10 (0.39) 0.02
3.49 2.59 1.65 0.25 0.20 3.13 (0.27) 0.02
-- -- -- -- -- (0.02) (0.00)# --
(0.00)# -- -- (0.09) -- -- -- --
(1.07) (1.68) -- (2.19) -- -- -- --
(1.07) (1.68) -- (2.28) -- (0.02) (0.00)# --
$18.64 $16.22 $15.31 $15.13 $17.16 $14.86 $11.75 $12.02
23.03% 19.13% 12.08% 4.13% 1.18% 26.68% (2.23)% 0.17%
$ 5 $ 5 $ 1 $ 5 $ 15 $41,640 $28,516 $34,555
(0.03)% 0.32% 0.01%+ (0.28)% (0.59)%+ 0.20% 0.95% 0.04%+
$(0.08) $(0.06) $(0.05) $(0.16) $(0.01) $(0.08) $0.05 $(0.02)
127.13% 95.02% 238.91% 110.58% 84.91% 177.36% 156.13% 123.50%
1.91% -- -- 2.17% -- 1.96% 1.91% 1.99%+
2.38% 2.62% 3.16%+ 2.78% 2.85%+ 2.76% 2.50% 2.32%+
1.90% 1.91% 1.90%+ 2.15% 2.15%+ 1.90% 1.90% 1.90%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period, as
the use of the undistributed income method did not accord with the results
of operations.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets Fund
FISCAL YEAR ENDED JUNE 30,
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1998 1997 1996(a) 1995##R 1994R 1993R 1992(a)R
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value--Beginning of Period $16.77 $14.19 $12.62 $13.68 $11.07 $9.96 $10.00
Net investment income/(loss) 0.03 0.06 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on (6.61) 2.58 1.56 0.25++ 2.92 1.05 (0.07)
investments
Net increase/(decrease) in net assets resulting (6.58) 2.64 1.57 0.28 2.89 1.12 (0.04)
from investment operations
Distributions:
Dividends from net investment income (0.12) (0.06) -- -- -- (0.01) --
Distributions in excess of net investment -- -- -- -- -- -- --
income
Distributions from net realized capital gains (0.33) -- -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized -- -- -- (0.37) -- -- --
capital gains
Distributions from capital -- -- -- -- -- -- --
Total distributions (0.45) (0.06) -- (0.79) (0.28) (0.01) --
Net Asset Value--End of Period $9.74 $16.77 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** (39.75)% 18.62% 12.44% 1.40% 26.10% 11.27% (0.40)%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $413 $ 607 $ 2 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) to average 0.30% 0.23% 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
net assets
Net investment income/(loss) before deferral of $0.03 -- -- -- -- $0.06 $0.01
fees by Manager
Portfolio turnover rate 96.76% 83.08% 109.92% 92.09% 63.79% 21.40% 0.19%
Expense ratio including interest and tax expense 1.90% -- -- -- -- -- --
Expense ratio before deferral of fees by 1.90% -- -- -- -- 1.93% 2.80%+
Manager, including interest and tax expense
Expense ratio excluding interest and tax expense 1.85% 1.92% 1.97%+ 1.80% 1.85% 1.90% 1.90%+
<FN>
(a) The Emerging Markets Fund's Class R shares and Class P shares commenced
operations on March 1, 1992, and March 12, 1996, respectively.
(b) The Select 50 Fund's Class R shares and Class P shares commenced operations
on October 2, 1995, and December 12, 1996, respectively.
(c) The U.S. Asset Allocation Fund's Class R shares and Class P shares
commenced operations on March 31, 1994, and January 2, 1996, respectively.
(d) The Short Duration Government Bond Fund's Class R shares and Class P shares
commenced operations on December 18, 1992, and March 12, 1996,
respectively.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Select 50 Fund U.S. Asset Allocation Fund Short Duration Government Bond Fund
FISCAL YEAR ENDED JUNE 30, FISCAL YEAR ENDED JUNE 30, FISCAL YEAR ENDED JUNE 30,
1998## 1997(b)## 1996(b)R 1998 1997## 1996(c) 1995R 1994(c)R 1998 1997## 1996(d) 1995R 1994(d)R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$19.98 $15.89 $12.00 $19.89 $19.33 $17.86 $12.24 $12.00 $9.99 $9.92 $9.98 $9.80 $10.23
0.09 (0.02) 0.06 1.62 0.43 0.09 0.25 0.06 0.61 0.59 0.16 0.62 0.61
2.46 4.11 4.45 1.01 2.13 1.38 4.11 0.18 0.12 0.06 (0.05) 0.16 (0.34)
2.55 2.63 1.47 4.36 0.24 0.73 0.65 0.11 0.78 0.27
4.09 4.51 2.56
-- -- (0.04) (0.84) (0.34) -- (0.17) -- (0.57) (0.58) (0.17) (0.62) (0.56)
-- -- -- (0.74) -- -- -- -- -- (0.00)# -- -- (0.07)
(1.85) -- -- (1.83) (1.66) -- (0.10) -- -- -- -- -- --
-- -- (0.01) -- -- -- -- -- -- -- -- -- (0.07)
-- -- -- -- -- -- -- -- -- -- -- (0.01) --
(1.85) -- (0.05) (3.41) (2.00) -- (0.27) -- (0.57) (0.58) (0.17) (0.63) (0.70)
$20.68 $19.98 $16.46 $19.11 $19.89 $19.33 $16.33 $12.24 $10.15 $9.99 $9.92 $9.95 $9.80
14.12% 25.74% 37.75% 14.53% 14.35% 8.23% 35.99% 2.00% 7.34% 6.69% 1.12% 8.28% 2.49%
$52 $9 $77,955 $71 $74 $43 $60,234 $1,548 $3 $0 $1 $17,093 $21,937
0.34% (0.21)%+ 0.42%+ 2.85% 2.30% 1.60%+ 3.43% 2.54%+ 5.58% 5.62% 5.63%+ 6.41% 5.93%
$0.09 $(0.03) $0.02 $1.59 $0.42 $0.08 $0.19 (0.11) 0.55 $0.54 $0.14 $0.54 $0.51
151.43% 157.93% 105.98% 84.23% 168.51% 225.91% 95.75% 190.94% 502.23% 450.98% 349.62% 284.23% 603.07%
2.06% -- -- 0.51% 1.68% 1.67%+ 1.43%+ 1.40% 1.80% 1.80%+ 1.38% 0.71%
1.31%
2.06% 2.17%+ 2.11%+ 0.56% 1.74% 1.80%+ 2.07% 9.00%+ 1.98% 2.30% 2.56%+ 2.23% 1.75%
2.05% 2.07%+ 1.80%+ 0.50% 1.56% 1.55%+ 1.30% 1.30%+ 0.53% 0.85% 0.85%+ 0.47% 0.25%
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in retaliation to the fluctuating market values of
the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period, as
the use of the undistributed income method did not accord with the results
of operations.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
California Tax-Free Intermediate Bond Fund
FISCAL YEAR ENDED JUNE 30,
1998R 1997R 1996R 1995R 1994(a)R
<S> <C> <C> <C> <C> <C>
Net Asset Value--Beginning of Period $12.53 $12.23 $12.04 $11.79 $12.00
Net investment income 0.51 0.53 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on 0.33 0.30 0.19 0.25 (0.21)
investments
Net increase in net assets resulting from 0.84 0.83 0.73 0.69 0.20
investment operations
Distributions:
Dividends from net investment income (0.51) (0.53) (0.54) (0.44) (0.41)
Dividends in excess of net investment income -- -- -- (0.00)# --
Dividends from net realized capital gains -- -- -- -- --
Total distributions (0.51) (0.53) (0.54) (0.44) (0.41)
Net Asset Value--End of Period $12.86 $12.53 $12.23 $12.04 $11.79
Total Return** 6.85% 6.91% 6.11% 6.03% 1.65%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $35,667 $21,681 $13,948 $5,153 $11,556
Ratio of net investment income to average net 4.03% 4.27% 4.34% 3.71% 3.44%+
assets
Net investment income before deferral of fees by $0.44 $0.47 $0.43 $0.34 $0.25
Manager
Portfolio turnover rate 42.36% 25.60% 58.11% 37.93% 77.03%
Expense ratio including interest and tax expense 0.69% 0.68% 0.61% 0.56% 0.23%+
Expense ratio before deferral of fees by Manager,
including interest and tax expense 1.19% 1.18% 1.43% 1.41% 1.63%+
Expense ratio excluding interest and tax expense 0.68% -- -- -- --
<FN>
(a) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(b) The Government Reserve Fund's Class R shares and Class P shares commenced
operations on September 14, 1992, and March 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
### Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
Government Reserve Fund
FISCAL YEAR ENDED JUNE 30,
1998 1997 1996(b) 1995R 1994(b)R
$1.00 $1.00 $1.00 $1.00 $1.00
0.049 0.048 0.014 0.049 0.029
0.000### 0.000### 0.000### 0.000### 0.000###
0.049 0.048 0.014 0.049 0.029
(0.049) (0.048) (0.014) (0.049) (0.029)
-- -- -- -- --
-- -- -- -- --
(0.049) (0.048) (0.014) (0.049) (0.029)
$1.00 $1.00 $1.00 $1.00 $1.00
5.00% 4.88% 1.38% 4.97% 2.96%
-- -- $1 $258,956 $211,129
4.90% 4.68% 4.91%+ 4.92% 2.99%
$0.049 $0.048 $0.013 $0.047 $0.028
-- -- -- -- --
0.78% -- -- 0.63% --
0.87% 0.99%+ 0.79% 0.71%
0.73%
0.78% 0.85% 0.85%+ 0.60% 0.60%
<PAGE>
The Funds' Investment Objectives and Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investing in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used in this
prospectus are defined in the Glossary at the end of this prospectus.
<TABLE>
Summary Comparison of Funds
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM TYPICAL MARKET
EQUITY DEBT CAPITALIZATION OF
EXPOSURE EXPOSURE FOCUS PORTFOLIO COMPANIES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
- -------------------------------------------------------------------------------------------------------------------------------
Growth Fund 65 to 100% 35% Growth More than $1 billion
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 65 to 100% 35% Small-cap Less than $1.5 billion
- -------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 65 to 100% 35% Large-cap dividend More than $1 billion
- -------------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- -------------------------------------------------------------------------------------------------------------------------------
International Growth Fund 65 to 100% 35% Foreign growth More than $1 billion
- -------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 65 to 100% 35% Foreign small-cap Less than $1 billion
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 65 to 100% 35% Foreign emerging growth Any size
- -------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- -------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 65 to 100% 35% Capital appreciation Any size
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 20 to 80% 20 to 80% U.S. balanced Any size
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0% 100% Total return N/A
- -------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0% 100% Income N/A
- -------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate 0% 100% California tax-free income N/A
Bond Fund
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Equity Funds
Montgomery Growth Fund ("Growth Fund")
The investment objective of the Growth Fund is to seek long-term capital
appreciation by investing in growth-oriented U.S. companies of any size. The
Fund may invest in U.S. companies of any size, but invests at least 65% of its
total assets in those companies whose shares have a total stock market value
(market capitalization) of at least $1 billion.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to the firms' growth potential. The
Manager rigorously analyzes each prospective holding by subjecting them to the
following three steps of its investment process: (1) identify companies with
improving business fundamentals, (2) in-depth analysis of the company's current
business and future prospectus, and (3) analyze the company's price to determine
whether its growth prospects have been discovered by the market.
Montgomery Small Cap Opportunities Fund ("Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is to seek
long-term capital appreciation by investing in growth-oriented U.S. small-cap
companies. The Fund invests at least 65% of its total assets in the stocks of
U.S. companies whose shares have a total stock market value (market
capitalization) of $1.5 billion or less.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to their growth potential. The Manager
rigorously analyzes each prospective holding by subjecting them to the following
three steps of its investment process: (1) identify companies with improving
business fundamentals, (2) in-depth analysis of the company's current business
and future prospectus, and (3) analyze the company's price to determine whether
its growth prospects have been discovered by the market.
Montgomery Equity Income Fund ("Equity Income Fund")
The investment objective of the Equity Income Fund is to seek current income and
long-term capital appreciation while striving to minimize portfolio volatility
by investing in large, dividend-paying U.S. companies. The Fund seeks to provide
a greater yield than
12
<PAGE>
the average yield of Standard & Poor's 500 Composite Price Index stocks by
investing at least 65% of its total assets in dividend-paying stocks of large
U.S. companies.
The Fund's strategy is to identify mature companies that have a history of
paying regular dividends to shareholders and offer a dividend yield well above
their historical average and/or the market's average. (Dividend yield is
calculated by dividing the dividend a company pays out per share of common stock
by the stock market price of those shares.) The Fund typically invests in
companies for two to four years. The Manager will usually begin to reduce the
Fund's position in a company as its share price moves up and its dividend yield
drops to the lower end of its historical range. The Manager may also pare back
or sell the Fund's position in a company that reduces or eliminates its
dividend, or if it believes that the company is about to do so.
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in investment-grade debt
instruments. In addition, the Fund may invest up to 20% of its total assets in
the equity or debt securities of non-U.S. issuers. See "Portfolio Securities."
International and Global Equity Funds
Montgomery International Growth Fund ("International Growth Fund")
The investment objective of the International Growth Fund is to seek long-term
capital appreciation by investing in medium- and large-cap companies in
developed stock markets outside the United States.
The Fund invests at least 65% of its total assets in the common stocks of
companies outside the United States whose shares have a stock market value
(market capitalization) of more than $1 billion. The Fund currently concentrates
its investments in the stock markets of western Europe, particularly the United
Kingdom, France, Germany, Italy and the Netherlands, as well as developed
markets in Asia, such as Japan and Hong Kong. The Fund typically invests in at
least three countries outside the United States, with no more than 40% of its
assets in any one country.
The Manager seeks well-managed companies that its believes will be able to
increase their sales and corporate earnings on a sustained basis. In addition,
the Manager must consider the shares of these companies to be under- or
reasonably valued relative to their long-term prospects. The Manager favors
companies that it believes have a competitive advantage, offer innovative
products or services and may profit from such trends as deregulation and
privatization. On a strategic basis, the Fund's assets may be allocated among
countries in an attempt to take advantage of market trends. The Fund's portfolio
managers and analysts frequently travel to the countries in which the Fund
invests or may invest to gain firsthand insight into the economic, political and
social trends that affect investments in those countries.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will strategically allocate assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is to seek
long-term capital appreciation by investing in small-cap companies in developed
stock markets outside the United States.
The Fund invests at least 65% of its total assets in the stocks of companies
outside the United States whose shares have a market value (market
capitalization) of less than $1 billion. The Manager typically invests most of
the Fund's assets in the developed stock markets of western Europe and Asia,
particularly the United Kingdom, France, Germany, Italy, Sweden and Japan. The
Fund invests in at least three different countries outside the United States,
with no more than 40% of its assets in any one country.
The Fund's Manager seeks well-managed, small-cap companies that it believes will
be able to increase their sales and corporate earnings on a sustained basis. In
addition, the Manager must consider the shares of these companies to be under-
or reasonably valued relative to their long-term prospects. The Manager favors
companies that it believes have a competitive advantage, offer innovative
products or services and may profit from such trends as deregulation and
privatization. On a strategic basis, the Fund's assets may be allocated among
countries in an attempt to take advantage of market trends. The Fund's portfolio
manager and analysts frequently travel to the countries in which the Fund
invests or may invest to gain firsthand insight into the economic, political and
social trends that affect investments in those countries.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. The Manager uses it financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will strategically allocate assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
13
<PAGE>
Montgomery Emerging Markets Fund ("Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is to seek long-term
capital appreciation by investing in companies based or operating primarily in
developing economies throughout the world.
The Fund invests at least 65% of its total assets in the stocks of companies
based in the world's developing economies. The Fund typically maintains
investments in at least six of these countries at all times, with no more than
35% of its assets in any single one of them. These may include:
* Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
* Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
* Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
* Middle East: Israel and Jordan
* Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Fund's strategy combines computer-based screening techniques with in-depth
financial review and on-site analysis of companies, countries and regions to
identify potential investments. The Fund's portfolio managers and analysts
frequently travel to the emerging markets to gain firsthand insight into the
economic, political and social trends that affect investments in those
countries. These techniques help determine in which stocks and countries the
Fund will invest. The Manager strives to keep the Fund well diversified across
individual stocks, industries and countries to reduce its overall risk.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging markets companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity-derivative securities. See "Portfolio
Securities."
Multi-Strategy Funds
Montgomery Select 50 Fund ("Select 50 Fund")
The investment objective of the Select 50 Fund is to seek long-term capital
appreciation by investing in approximately 10 companies from each of five
different investment disciplines, for a total of 50 securities.
Five of Montgomery's portfolio management teams select 10 stocks that they
believe may offer the greatest capital appreciation potential from their
respective areas of expertise. These currently include:
* U.S. growth
* U.S. emerging growth
* U.S. equity income
* International equity
* Emerging markets
The result is a concentrated portfolio of at least 50 stocks that is allocated
approximately equally among Montgomery's five equity disciplines and is well
diversified with typically 60% allotted to U.S. securities of all capitalization
ranges and 40% invested internationally. Kevin Hamilton, chairman of
Montgomery's Oversight Committee, ensures that the portfolio remains diversified
and performs other oversight responsibilities for the Fund. For details about
the teams' individual strategies, please see the sections on the Montgomery
Growth, Equity Income, International Growth and Emerging Markets Funds in this
prospectus. See also "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
Montgomery U.S. Asset Allocation Fund ("U.S. Asset Allocation Fund")
The investment objective of the U.S. Asset Allocation Fund is to seek to provide
shareholders with high total return (consisting of both capital appreciation and
income) while also seeking to reduce risk by actively allocating its assets
among stocks, bonds and money market securities.
14
<PAGE>
As a "fund-of-funds," the Montgomery U.S. Allocation Fund currently invests its
assets in three underlying Montgomery Funds:
* Montgomery Growth Fund, for U.S. equity exposure
* Montgomery Total Return Bond Fund, for U.S. bond exposure
* Montgomery Government Reserve Fund (a money market fund) for cash exposure
The Fund's total equity and bond exposure may both range from 20 to 80% of its
assets. It may invest anywhere from 0 to 50% of its assets in a Montgomery money
market fund. At times, The Fund may invest in other Montgomery Funds that have
similar investment exposure to the Funds listed above.
<TABLE>
The Fund's Manager regularly adjusts the proportion of assets allotted to the
underlying portfolios in response to changing market conditions. The Manager
uses a quantitative computer program to help determine what it believes is an
optimal asset allocation for the Fund.
<CAPTION>
---------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund Allocation
---------------------------------------------------------------------------------------------------------------
INVESTMENT FOCUS ANTICIPATED RANGE OF UNDERLYING FUND
ASSET ALLOCATION
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. stocks 20 to 80% Growth Fund or other U.S. equity funds
advised by the Manager
---------------------------------------------------------------------------------------------------------------
Debt instruments 20 to 80% Total Return Bond Fund or other general
investment-grade bond funds advised by the
Manager
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0 to 50% Government Reserve Fund
---------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager will implement its allocation strategy with the use of a
quantitative risk model and computer optimization program. The Manager may
temporarily increase the Fund's cash allocation from its set strategy in order
to meet anticipated redemptions.
<TABLE>
Characteristics of the Underlying Funds
The characteristics of the Growth Fund and the Government Reserve Fund are
discussed elsewhere in this prospectus. The following summarizes the
characteristics of the Total Return Bond Fund and its investment objective and
policies.
<CAPTION>
------------------------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM TYPICAL MARKET
EQUITY DEBT FOCUS CAPITALIZATION OF PORTFOLIO
EXPOSURE EXPOSURE COMPANIES
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund 0% 100% Total return N/A
------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment objective of the Total Return Bond Fund is to seek maximum total
return (which consists of both income and capital appreciation), consistent with
preservation of capital and prudent investment management. Under normal
conditions, the Fund seeks to achieve its objective by investing at least 65%
(and typically more than 90%) of its total assets in a broad range of
investment-grade bonds, including marketable corporate bonds, U.S. government
securities, mortgage-related securities, other asset-backed securities, and cash
or money market instruments. The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies and may invest beyond this limit in
U.S. dollar-denominated securities of non-U.S. issuers. The portfolio securities
that the Total Return Bond Fund may invest in, the other investment practices of
the Total Return Bond Fund and the risks involved with an investment in the
Total Return Bond Fund are similar to those of the Short Duration Government
Bond Fund with the following exceptions:
* The Total Return Bond Fund may invest more than 10% of its total assets in
stripped mortgage securities.
* It may use leverage even if, as a result, the Fund's portfolio duration
would not be comparable to or less than that of three-year U.S. Treasury
notes.
* It may invest in forward currency contracts.
* It may invest up to 20% of its net assets in non-U.S. securities.
As with the Short Duration Government Bond Fund, the portfolio turnover rate of
the Total Return Bond Fund is expected to exceed 100% annually. See "Portfolio
Securities," "Other Investment Practices" and "Risk Considerations."
Duration of the Total Return Bond Fund. The Total Return Bond Fund may purchase
individual securities of any maturity. The Fund, however, seeks to maintain an
average portfolio duration of between four and five and a half years.
15
<PAGE>
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund ("Short Bond Fund")
The investment objective of the Short Duration Government Bond Fund is to seek
maximum total return consisting of both income and capital appreciation, while
striving to preserve shareholders' initial investment (principal) by investing
in short-term U.S. government securities.
The Fund invests at least 65% of its total assets in short-term U.S. government
securities, which may include Treasuries in addition to bonds and notes issued
by government agencies such as the Federal Home Loan Bank, Government National
Mortgage Association (GNMA or "Ginnie Mae"), Federal National Mortgage
Association (FNMA or "Fannie Mae") and Student Loan Marketing Association (SLMA
or "Sallie Mae").
The Fund may purchase bonds of any maturity, but generally the portfolio's
overall interest rate sensitivity--duration--is comparable to that of a
three-year Treasury note. Typically, a lower duration means that the bond or
portfolio has less sensitivity to interest rates. The Fund invests in bonds that
the Manager believes offer attractive yields and are undervalued relative to
issues of similar credit quality and interest rate sensitivity.
The Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not
appropriate for investors whose primary investment objective is absolute
principal stability. Because the values of the securities in which the Fund
invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value of $1 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Bond Fund may purchase individual
securities of any maturity, and the dollar-weighted average maturity (or period
until the next interest rate reset date) of its portfolio securities may exceed
three years. The Fund, however, seeks to maintain an average portfolio duration
comparable to or less than that of three-year U.S. Treasury notes.
Montgomery Government Reserve Fund ("Reserve Fund")
The investment objective of the Government Reserve Fund is to seek to provide
shareholders with current income consistent with liquidity and preservation of
capital by investing in short-term U.S. government securities.
The Fund invests at least 65% of its total assets in short-term U.S. government
securities, which may include bills, notes and bonds issued by government
agencies such as the Federal Home Loan Bank, the Federal Farm Credit Bank,
Federal National Mortgage Association (FNMA) and Student Loan Marketing
Association (SLMA).
The Fund invests in short-term U.S. government securities that the Manager
believes offer attractive yields and are undervalued relative to issues of
similar credit quality and interest rate sensitivity.
The Fund seeks to maintain a stable net asset value of $1 per share in
compliance with Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Investment Company Act") and, pursuant to procedures adopted under such
Rule, limits its investments to those U.S. government securities that the Board
of Trustees (the "Board") determines present minimal credit risks and have
remaining maturities, as determined under the Rule, of 397 calendar days or
less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
Montgomery California Tax-Free Intermediate Bond Fund ("California Bond Fund")
The investment objective of the Tax-Free Intermediate Bond Fund is to seek to
provide shareholders with maximum income exempt from federal and California
state personal income taxes, while striving to preserve shareholders' initial
investment (principal) by investing in intermediate-maturity California
municipal bonds.
The Fund may purchase bonds of any maturity, but generally the portfolio's
average dollar-weighted maturity ranges from 5 to 10 years. The Fund's Manager
invests in California municipal bonds that it believes offer attractive yields
and are undervalued relative to issues of similar credit quality and interest
rate sensitivity. Although the Fund concentrates its assets in California
municipal bonds, the Manager strives to diversify the portfolio across sectors
and issuers within that market.
The Fund is designed primarily for investors who seek higher yields than
tax-free money market funds generally offer and are willing to accept some
fluctuation in the Fund's share value but who are not willing to accept the
greater fluctuations that long-term tax-free bond funds might entail. This Fund
is not appropriate for investors whose primary investment objective is absolute
16
<PAGE>
principal stability. Because the values of the securities in which the Fund
invests generally change with interest rates, the value of its shares will
fluctuate, unlike shares of a money market fund, which seeks to maintain a
stable net asset value of $1 per share. Consequently, the Fund seeks to reduce
such fluctuations by managing the effective duration, and thus the interest
risk, of its portfolio. (Effective duration is an indicator of a security's
sensitivity to interest rate change. See duration in the Glossary.) Under normal
conditions, the average dollar-weighted portfolio maturity of the Fund is
expected to stay within a range of five to ten years. The Fund may invest in
securities of any maturity, however. The Fund is not suitable for investors who
cannot benefit from the tax-exempt character of its dividends, such as IRAs,
qualified retirement plans or tax-exempt entities.
At least 80% of the value of the Fund's net assets must consist of California
municipal securities that, at the time of purchase, are rated investment grade,
that is, within the four highest ratings of municipal securities (AAA to BBB)
assigned by Standard & Poor's Rating Group ("S&P") (Aaa to Baa) assigned by
Moody's Investors Service, Inc. ("Moody's"), or (AAA to BBB) assigned by Fitch
Investors Service, L.P. ("Fitch"); or have S&P's short-term municipal rating of
SP-2 or higher, or a municipal commercial paper rating of A-2 or higher; Moody's
short-term municipal securities rating of MIG-2 or higher, or VMIG-2 or higher
or a municipal commercial paper rating of P-2 or higher; or have Fitch's
short-term municipal securities rating of FIN-2 or higher or a municipal
commercial paper rating of Fitch-2 or higher; or, if unrated by S&P, Moody's or
Fitch, are deemed by the Manager to be of comparable quality, using guidelines
approved by the Board, but not to exceed 20% of the Fund's net assets. Debt
securities rated in the lowest category of investment-grade debt may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than is the case with higher-grade bonds. There is no
assurance that any municipal issuer will make full payments of principal and
interest or remain solvent, however. For a description of the ratings, see the
Appendix in the Statement of Additional Information. See also "Risk
Considerations."
Under normal conditions, the Fund seeks to invest in California municipal
securities to the greatest extent practicable, but it may invest in other
municipal securities if, in the Manager's opinion, suitable California municipal
securities are not available. The Fund may invest up to 20% of its net assets in
cash, U.S. government securities and obligations of U.S. possessions, commercial
paper and other eligible debt securities, including corporate debt instruments
or instruments the interest from which is subject to the federal alternative
minimum tax ("AMT") for individuals. Additionally, the Fund may invest up to 20%
of its net assets in eligible municipal securities other than California
municipal securities. From time to time, the Fund may invest more than 20% of
its net assets in private activity bonds and industrial development bonds of
issuers located in California.
Portfolio Securities
The following describes portfolio securities in which the Funds may invest.
Investors in the U.S. Asset Allocation Fund should note that the portfolio
securities of the U.S. Asset Allocation Fund consist of the portfolio securities
of each of its Underlying Funds.
Equity Securities
The U.S. Equity Funds, the International and Global Equity Funds and the Select
50 Fund emphasize investments in common stocks. These Funds may also invest in
other types of equity securities (such as preferred stocks or convertible
securities) and equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The U.S. Equity Funds, the International and Global Equity Funds and the Select
50 Fund may invest in ADRs, EDRs, GDRs and convertible securities which the
Manager regards as a form of equity security. Each such Fund may also invest up
to 5% of its net assets in warrants. (See Glossary for definitions.)
Privatizations
The International and Global Equity Funds and the Select 50 Fund believe that
foreign governmental programs of selling interests in government-owned or
- -controlled enterprises ("privatizations") may represent opportunities for
significant capital appreciation, and these Funds may invest in privatizations.
The ability of U.S. entities, such as these Funds, to participate in
privatizations may be limited by local law, and the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be successful.
Special Situations
The International and Global Equity Funds and the Select 50 Fund believe that
carefully selected investments in joint ventures, cooperatives, partnerships,
private placements, unlisted securities and similar vehicles (collectively,
"special situations") could enhance their capital appreciation potential. These
Funds also may invest in certain types of vehicles or derivative securities that
represent indirect investments in foreign markets or securities in which it is
impracticable for the Funds to invest directly.
17
<PAGE>
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. These Funds do not invest more than 15%
of their net assets in illiquid investments, including special situations.
Investment Companies
Each Fund may invest up to 10% (except for the U.S. Asset Allocation Fund which
may invest up to 100%) of its total assets in shares of other investment
companies (including closed-end funds and mutual funds), investing exclusively
in securities in which it may otherwise invest. Because of restrictions on
direct investment by U.S. entities in certain countries, other investment
companies may provide the most practical or only way for the International and
Global Equity Funds to invest in certain markets. Such investments may involve
the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act. The International and Global Equity Funds also may
incur tax liability to the extent that they invest in the stock of a foreign
issuer that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Funds.
See the Statement of Additional Information.
The Funds do not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed the associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees,
resulting in an extra layer of fees for shareholders.
Debt Securities
All Funds may purchase debt securities that complement their objective of
capital appreciation through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers. Debt securities may constitute up to 35% of the U.S. Equity Funds', the
International and Global Equity Funds' and the Select 50 Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy, which may be changed by the Board, the
International and Global Equity Funds and the Select 50 Fund may invest up to 5%
of their total assets in debt securities rated lower than investment grade.
Subject to this limitation, each of these Funds may invest in any debt security,
including securities in default. After its purchase by a Fund, a debt security
may cease to be rated or its rating may be reduced below that required for
purchase by the Fund. A security downgraded below the minimum level may be
retained if determined by the Manager and the Board to be in the best interests
of the Fund. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit-quality standards of each Fund and will be limited to 5%
of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the U.S. Equity Funds and the International and Global
Equity Funds may invest in external (i.e., to foreign lenders) debt obligations
issued by the governments, government entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in governmental
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. Government Securities
All Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and mortgage-related securities of the Government
National Mortgage Association (the "GNMA"), are issued or guaranteed by the U.S.
government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank; whereas
others, such as those issued by the Federal National Mortgage Association (the
"FNMA"), Farm Credit System and Student Loan Marketing Association, have an
additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Funds' shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The U.S. Fixed-Income and Money Market Funds may invest in mortgage-related
securities. A mortgage-related security is an interest in a pool of mortgage
loans and is considered a derivative security. Most mortgage-related securities
are pass-through securities, which means that investors receive payments
consisting of a pro rata share of both principal and interest (less servicing
18
<PAGE>
and other fees), as well as unscheduled prepayments, as mortgages in the
underlying mortgage pool are paid off by the borrowers. Certain mortgage-related
securities are subject to high volatility. These Funds use these derivative
securities in an effort to enhance return and as a means to make certain
investments not otherwise available to the Funds. See "Hedging and Risk
Management Practices" under "Other Investment Practices" for a discussion of
other reasons why these Funds invest in derivative securities.
Agency Mortgage-Related Securities
The Short Bond Fund, the Reserve Fund and the California Bond Fund may invest in
agency mortgage-related securities. Currently the dominant issuers or guarantors
of these securities are the GNMA, the FNMA and the Federal Home Loan Mortgage
Corporation (the "FHLMC"). The GNMA creates pass-through securities from pools
of government-guaranteed or -insured (Federal Housing Authority or Veterans
Administration) mortgages. The FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by the GNMA and backed by the full faith and credit of the U.S.
government. The FNMA guarantees full and timely payment of all interest and
principal, and the FHLMC guarantees timely payment of the interest and ultimate
collection of principal of its pass-through securities. Securities from the FNMA
and FHLMC are not backed by the full faith and credit of the U.S. government but
are generally considered to offer minimal credit risks. The yields provided by
these mortgage-related securities have historically exceeded the yields on other
types of U.S. government securities with comparable "lives" largely due to the
risks associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The U.S. Fixed-Income and Money Market Funds consider GNMA-, FNMA- and
FHLMC-issued pass-through certificates, Collateralized Mortgage Obligations
("CMOs") and other mortgage-related securities to be U.S. government securities
for purposes of their investment policies. The Reserve Fund does not invest in
stripped mortgage securities, however, and the Short Bond Fund limits its
stripped mortgage securities investments to 10% of total assets. The Short Bond
Fund may invest in derivative securities known as "floaters" and "inverse
floaters," the values of which vary in response to interest rates. These
securities may be illiquid, and their values may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives
The Short Bond Fund may invest in mortgage-related securities offered by private
issuers, including pass-through securities for pools of conventional residential
mortgage loans; mortgage pay-through obligations and mortgage-backed bonds,
which are considered to be obligations of the institution issuing the bonds and
are collateralized by mortgage loans; and bonds and CMOs collateralized by
mortgage-related securities issued by the GNMA, the FNMA or the FHLMC or by
pools of conventional mortgages and multi-family or commercial mortgage loans.
Privately issued mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. government and
agency mortgage-related securities, because they offer no direct or indirect
governmental guarantees. Many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal, however. The Short Bond Fund may purchase some mortgage-related
securities through private placements that are restricted as to further sale.
See illiquid securities in the Glossary. The value of these securities may be
very volatile.
Structured Notes and Indexed Securities
The Funds may invest in structured notes and indexed securities. Structured
notes are debt securities, the interest rate or principal of which is determined
by an unrelated indicator. Indexed securities include structured notes as well
as securities other than debt securities, the interest rate or principal of
which is determined by an unrelated indicator. Indexed securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent a
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Variable-Rate Demand Notes
The U.S. Fixed-Income and Money Market Funds may invest in variable-rate demand
notes ("VRDNs").
Zero Coupon Bonds
The U.S. Fixed-Income and Money Market Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require
19
<PAGE>
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the Short Bond Fund) of its
total assets in asset-backed securities. Like mortgage-related securities, these
securities are subject to the risk of prepayment. See "Risk Considerations."
20
<PAGE>
<TABLE>
Other Investment Practices
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain risks. The Glossary at
the end of this prospectus briefly describes each of the investment techniques
summarized below. The Statement of Additional Information, under the heading
"Investment Objectives and Policies of the Funds," contains more-detailed
information about certain of these practices, including limitations designed to
reduce risks.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
International and
U.S. Equity Funds Global Equity Funds
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity International International Emerging
Growth Opportunities Income Growth Small Cap Markets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total |X| |X| |X| |X| |X| |X|
Fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total |X| |X| |X| |X| |X| |X|
Fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts4 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies5 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices5 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options5 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options5 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts6 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures6 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swaps7 |X| |X| |X| |X| |X| |X|
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of Fund's
net assets)
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of Fund's |X| |X| |X| |X| |X| |X|
net assets)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income
Multi-Strategy and Money Market
Funds Funds
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Short Duration Government California Tax-Free
Select 50 Allocation Government Bond Reserve Intermediate Bond
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) |X| * |X| |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions(1) * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total |X| * |X| |X| |X|
Fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements |X| * |X| |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage |X| * |X|2 |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total |X| * |X| |X| |X|
Fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities |X| * |X3 |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts4 |X| *
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies5 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices5 |X| *
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options5 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options5 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts6 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures6 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps7 |X| * |X| |X|
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% of Fund's * |X|
net assets)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% of Fund's |X| * |X| |X|
net assets)
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
(2) The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
(3) The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
(4) A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
21
<PAGE>
(5) A Fund will not enter into any options on securities, securities indices,
or currencies or related options (including options on futures) if the sum
of the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
(6) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
(7) A Fund that may invest in equity swaps may invest up to 10% of its total
assets in such investment.
* To the extent allowed in each Underlying Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund. A Fund may not attain its
investment objective when it has made temporary defensive investments.
Portfolio securities are sold whenever the Manager believes it appropriate to
further a Fund's investment objective or when it appears that a position of the
desired size cannot be accumulated. Portfolio turnover generally involves some
expense to a Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital " for portfolio
turnover information. Even when portfolio turnover exceeds 100% for a Fund, that
Fund does not regard portfolio turnover as a limiting factor. Portfolio turnover
in excess of 100% is considered high, increases brokerage costs incurred by a
Fund and may cause recognition of gain by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Reserve Fund) may employ certain risk management practices using certain
derivative securities and techniques (known as "derivatives"). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate, and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and goals. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
22
<PAGE>
Risk Considerations
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund should note the risks involved with
each Underlying Fund, because the U.S. Asset Allocation Fund is a
"fund-of-funds."
The Year 2000 Problem
The Funds and their service providers depend upon the smooth functioning of
their computer systems. Unfortunately, because of the way dates are encoded and
calculated, many computer systems in use today cannot recognize the year 2000,
but revert to 1900 or another incorrect date. Computer failures due to the year
2000 problem could negatively impact the handling of securities trades and
pricing and account services.
The Funds' software vendors and service providers have assured the Funds that
their systems will be adapted in sufficient time to avoid serious problems.
There can be no guarantee, however, that all of their computer systems will be
adapted in time. The Funds do not expect year 2000 conversion costs to be
substantial for the Funds because those costs are borne by the Funds' vendors
and service providers and not directly by the Funds.
Brokers and other intermediaries that hold shareholder accounts may still
experience incompatibility problems. It is also important to keep in mind that
year 2000 issues may negatively impact the companies in which the Funds invest
and, by extension, the value of those companies' shares held by the Funds. The
Funds are in the process of putting in place a contingency plan to evaluate
other vendors and service providers in the event the existing vendors and
service providers fail to adequately adapt their systems in a timely manner.
Single European Currency
On January 1, 1999, the European Union will introduce a single European currency
called the "euro." The first group of countries to begin converting their
currencies to the euro include Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
introduction of the euro causes three primary uncertainties. The first is
whether the payment and operational systems of banks and other financial
institutions will be ready by the scheduled launch date. The second is the legal
implications of outstanding financial contracts that refer to currencies that
will be replaced by the euro after January 1, 1999. Finally, there are questions
about how suitable clearing and settlement payment systems for the euro will be
developed. These and other factors (including political and economic risks)
could cause market disruptions before or after the introduction of the euro and
could negatively affect companies in which the Funds may invest.
Small Companies
The Small Cap Opportunities Fund and the International Small Cap Fund emphasize,
and the Growth Fund, the International Growth Fund, the Emerging Markets Fund
and the Select 50 Fund may make investments in, smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the International and Global Equity Funds and the Select
50 Fund may purchase securities in foreign countries. Accordingly, shareholders
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks of loss inherent in domestic investments. The
International and Global Equity Funds, particularly the Emerging Markets Fund,
and the Select 50 Fund may invest in securities of companies domiciled in, and
in markets of, so-called emerging markets countries. These investments may be
subject to higher risks than investments in more-developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation; taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities; and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about non-U.S. issuers than those in the United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, these Funds may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts. Additional risk
factors, including use of domestic and foreign custodian banks and depositories,
are described elsewhere in the prospectus and in the Statement of Additional
Information.
23
<PAGE>
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the United States.
Foreign markets have different clearance and settlement procedures from those in
the United States, and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions. The inability of a
Fund to make intended security purchases due to settlement difficulties could
cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund. In certain countries there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the United States. The securities markets of many of the
countries in which these Funds may invest may also be smaller, less liquid and
subject to greater price volatility than those in the United States.
Because certain non-U.S. securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions among currencies. A change in the value of a foreign
currency against the U.S. dollar results in a corresponding change in the U.S.
dollar value of a Fund's securities denominated in the currency. Such changes
also affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign-investment laws.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the International and Global Equity Funds and the Select 50 Fund are
permitted to invest in medium-quality debt securities, but do not invest more
than 5% of their total assets in high-risk debt securities below
investment-grade quality (sometimes called "junk bonds").
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates, and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities, but may not be attractive to as many
buyers. Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less-diversified
mutual funds may be more sensitive to changes in the market value of a single
issuer or industry. The Select 50 Fund may present greater risk than is usually
associated with widely diversified mutual funds, because it may invest in the
securities of as few as 50 issuers. Therefore, the Select 50 Fund is not
appropriate as your sole investment.
24
<PAGE>
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value, and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a U.S. Fixed-Income and Money Market Fund, to the
extent that it retains the same percentage of debt securities, may have to
reinvest the proceeds of prepayments at lower interest rates than those of its
previous investments. If this occurs, that Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
a U.S. Fixed-Income and Money Market Fund purchases mortgage-related securities
at a premium, unscheduled prepayments, which are made at par, result in a loss
equal to any unamortized premium. Duration is one of the fundamental tools used
by the Manager in managing interest rate risks including prepayment risks. See
duration in the Glossary.
Equity Swaps
The U.S. Equity Funds, the International and Global Equity Funds and the Select
50 Fund may invest in equity swaps. Equity swaps are derivatives, and their
values can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, a Fund may suffer a loss. The value of some components of an
equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults. See equity swaps in the
Glossary.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees (a "Board") that establishes its Funds' policies and supervises and
reviews their management. Day-to-day operations of the Funds are administered by
the officers of the Trusts and by the Manager pursuant to the terms of an
investment management agreement with each Fund.
The investment manager of the Funds is Montgomery Asset Management, LLC. Founded
in 1990, Montgomery Asset Management is a subsidiary of Commerzbank AG, one of
the largest publicly held commercial banks in Germany. As of June 30, 1998,
Montgomery Asset Management managed approximately $5.5 billion on behalf of some
300,000 investors in The Montgomery Funds and The Montgomery Funds II.
Portfolio Managers
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Roger Honour is senior portfolio manager of the Growth Fund (since 1993) and
Small Cap Opportunities Fund (since 1995). Prior to joining the Manager in June
1993, Mr. Honour was a vice president and portfolio manager at Twentieth Century
Investors in Kansas City, Missouri. From 1990 to 1992, he served as vice
president and portfolio manager at Alliance Capital Management. From 1978 to
1990, Mr. Honour was a vice president with Merrill Lynch Capital Markets.
Kathryn Peters is a portfolio manager of the Growth Fund (since 1995) and the
Small Cap Opportunities Fund (since 1995). Ms. Peters joined the Manager in
1995. From 1992 to 1995, she was an associate in the investment banking division
of Donaldson, Lufkin & Jenrette in New York. Prior to that she analyzed
mezzanine investments for Barclays de Zoete Wedd. From 1988 to 1990, Ms. Peters
worked in the leveraged buyout group of Marine Midland Bank.
Andrew Pratt, CFA is a portfolio manager of the Growth Fund (since 1993) and
Small Cap Opportunities Fund (since 1995). Mr. Pratt joined the Manager in 1993
from Hewlett-Packard Company, where, as an equity analyst, he managed a
portfolio of small-cap technology companies and researched private placement and
venture capital investments. From 1983 through 1988, he worked in the Capital
Markets Group of Fidelity Investments, Boston.
25
<PAGE>
Montgomery Equity Income Fund
William King, CFA is portfolio manager of the Equity Income Fund (since 1994).
Before joining the Manager in 1994, Mr. King gained analytical and portfolio
management experience at Merus Capital Management. Previously, he was a
financial analyst/manager for SEI and a division controller and financial
analyst for Kaiser Aluminum and Kaiser Industries.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
John Boich, CFA is a senior portfolio manager of the International Growth Fund
(since 1995) and International Small Cap Fund (since 1993). Mr. Boich joined the
Manager in 1993. From 1990 to 1993, he was a vice president and portfolio
manager at The Boston Company Institutional Investors, Inc. From 1989 to 1990,
he was co-founder and co-manager of The Common Goal World Fund, a global equity
partnership. From 1988 to 1989, Mr. Boich was a financial advisor with
Prudential-Bache Securities and E.F. Hutton & Company.
Oscar Castro, CFA is a senior portfolio manager of the International Growth Fund
(since 1995) and the International Small Cap Fund (since 1993). Mr. Castro
joined the Manager in 1993. From 1991 to 1993 he was a vice president and
portfolio manager at G.T. Capital Management, Inc. From 1989 to 1990, he was
co-founder and co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1990, Mr. Castro was a deputy portfolio
manager/analyst at Templeton International.
Montgomery Emerging Markets Fund
Josephine Jimenez, CFA is a senior portfolio manager of the Montgomery Emerging
Markets Fund (since 1992). Before joining the Manager in 1991, Ms. Jimenez
worked at Emerging Markets Investors Corp./Emerging Markets Management in
Washington, D.C., as a senior analyst and portfolio manager. She has more than
17 years' experience in the industry. The research and analysis methods she
helped develop--including a proprietary stock valuation model for
hyperinflationary economies--are the foundation of her investment strategy.
Bryan Sudweeks, Ph.D.,CFA is a senior portfolio manager of the Emerging Markets
Fund (since 1992). Before joining the Montgomery in 1991, Mr. Sudweeks was a
senior analyst and portfolio manager at Emerging Markets Investors
Corp./Emerging Markets Management in Washington, D.C. Prior to that he was a
professor of international finance and investments at George Washington
University and served as adjunct professor of international investments from
1988 until May 1991.
Frank Chiang has been a portfolio manager of the Emerging Markets Fund since
joining the Manager in 1996. Mr. Chiang joined the Manager in 1996. From 1993 to
1996 he was a portfolio manager and managing director at TCW Asia Ltd. in Hong
Kong. Prior to that he was associate director and portfolio manager at Wardley
Investment Services Hong Kong.
Jesus Isidoro Duarte is a portfolio manager of the Emerging Markets Fund (since
1997). Prior to joining the Manager in 1994, he was a director and vice
president at Latinvest, where he was responsible for research and portfolio
management for the firm's Latin American funds. Previous to Latinvest, Mr.
Duarte worked at W.I. Carr in Tokyo as a securities analyst of Japanese
equities.
Jose De Gusmao Fiuza is a portfolio manager of the Emerging Markets Fund (since
1996). Mr. Fiuza began his investment career in 1987 covering the Portuguese
market at Banco Portugues do Atlantico. He then moved to Banco Espirito Santo,
Schroder Securities (as manager) and Carnegie International (as managing
director). Mr. Fiuza joined the Manager in 1995.
Stuart Patterson Quint, CFA is a portfolio manager of the Emerging Markets Fund
(since 1997). Mr. Quint joined the Manager from Sanford C. Bernstein & Company
where he was a research associate for the U.S. financial services industry.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller-Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers" section
and below.
Kevin Hamilton, CFA is chair of Montgomery Asset Management's Investment
Oversight Committee. Kevin Hamilton coordinates and oversees the investment
decisions of Montgomery's portfolio management teams. He is responsible for
allocating assets among the Underlying Funds of the Montgomery U.S. Asset
Allocation Fund (since 1994) and also has oversight responsibilities for the
Montgomery Select 50 Fund (since 1995). Prior to joining the Manager in 1991, he
was a senior vice president and portfolio manager at Analytic Investment
Management, where he managed both equity and fixed-income portfolios.
Montgomery U.S. Asset Allocation Fund
The U.S. Asset Allocation Fund invests its assets in up to three separate Funds,
representing three different investment disciplines.
26
<PAGE>
Kevin Hamilton, CFA is responsible selecting the Funds to be included in each
fund-of-funds structure and also for coordinating and implementing the
investment decisions of the U.S. Asset Allocation Fund. For the background and
business experience of Mr.
Hamilton, see the discussion under the Montgomery Select 50 Fund above.
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
Montgomery California Tax-Free Intermediate Bond Fund
William Stevens is senior portfolio manager of the Fixed-Income and Money Market
Funds (since 1992). Prior to joining Montgomery in 1992, Mr. Stevens worked at
Barclays de Zoete Wedd Securities, where he started its collateralized mortgage
obligation (CMO) and asset-backed securities trading. From 1990 to 1991, Mr.
Stevens traded stripped mortgage securities and mortgage-related interest rate
swaps for the First Boston Company. Prior to that he worked at Drexel Burnham
Lambert, where he was responsible for originating and trading all of the firm's
derivative mortgage-related securities.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities;
manages the Funds' investments, including the placement of orders for portfolio
transactions; furnishes the Funds with office space and certain administrative
services; and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
who are interested persons of the Manager, and assumes the costs of printing
prospectuses and shareholder reports for dissemination to prospective investors.
As compensation, each Fund pays the Manager a management fee (accrued daily but
paid when requested by the Manager) based upon the value of the average daily
net assets of that Fund, according to the following table.
The management fees for the Funds are higher than those for most mutual funds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
(ANNUAL RATE)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Equity Funds
- ---------------------------------------------------------------------------------------------------------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
More than $1 billion 0.80%
- ---------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
More than $500 million 1.00%
- ---------------------------------------------------------------------------------------------------------------------
Equity Income Fund First $500 million 0.60%
More than $500 million 0.50%
- ---------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
- ---------------------------------------------------------------------------------------------------------------------
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
- ---------------------------------------------------------------------------------------------------------------------
International Small Cap Fund First $250 million 1.25%
More than $250 million 1.00%
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund First $250 million 1.25%
More than $250 million 1.00%
- ---------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- ---------------------------------------------------------------------------------------------------------------------
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
More than $500 million 0.90%
- ---------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund All amounts 0.00%*
- ---------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- ---------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- ---------------------------------------------------------------------------------------------------------------------
Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
More than $500 million 0.20%
- ---------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
* This amount represents only the management fee of the U.S. Asset Allocation
Fund and does not include management fees attributable to the Underlying
Funds, which ultimately are to be borne by shareholders of the U.S. Asset
Allocation Fund.
</FN>
</TABLE>
27
<PAGE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: Each of the Growth and Equity Income
Funds pays seven one-hundredths of one percent (0.07%) of average daily net
assets (0.06% of average daily net assets over $500 million); each of the Small
Cap Opportunities, International Growth, International Small Cap, Emerging
Markets and Select 50 Funds pays seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million); each of
the Short Bond, California Bond and Reserve Funds pays five one-hundredths of
one percent (0.05%) of average daily net assets (0.04% of average daily net
assets over $500 million for the Short Bond Fund and the California Bond Fund
and over $250 million for the Reserve Fund). In the case of the U.S. Asset
Allocation Fund, the Administrator does not charge a fee for performing
administrative services, although it charges a fee for such services performed
for the Underlying Funds, which ultimately are borne by shareholders of the U.S.
Asset Allocation Fund.
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, Statements of Additional Information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission under the
Investment Company Act permits an investment company directly or indirectly to
pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
and approved by its shareholders. Pursuant to that Rule, the Trust's Board and
the initial shareholder of the Class P shares of each Fund have approved, and
each Fund has entered into, a Share Marketing Plan (the "Plan") with the
Distributor, as the distribution coordinator, for the Class P shares. Under the
Plan, each Fund will pay distribution fees to the Distributor at an annual rate
of 0.25% of the Fund's aggregate average daily net assets attributable to its
Class P shares, to reimburse the Distributor for its distribution costs with
respect to that class.
The Plan provides that the Distributor may use the distribution fees received
from the class to pay for the distribution expenses of that class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct-mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that class; (ii) costs
of printing and distributing prospectuses, Statements of Additional Information
and reports of the Funds to prospective investors in that class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that class; and (iv) costs involved in obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that class. Distribution fees are accrued daily and paid
monthly and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Boards determined that there was a reasonable
likelihood that the Plan would benefit the Funds and the shareholders of Class P
shares. Information with respect to distribution revenues and expenses is
presented to the Boards quarterly for their consideration in connection with
their deliberations as to the continuance of the Plan. In their review of the
Plan, the Boards are asked to take into consideration expenses incurred in
connection with the separate distribution of the Class P shares. The Class P
shares are not obligated under the Plan to pay any distribution expenses in
excess of the distribution fee. Thus, if the Plan was terminated or otherwise
not continued, no amounts (other than current amounts accrued but not yet paid)
would be owed by the class to the Distributor.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Distributor to compensate those persons on an ongoing basis in
connection with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Boards of the Trusts, including a majority of the
Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
28
<PAGE>
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the Rules of Conduct of NASD Regulation, Inc.
For certain Funds, the Manager has agreed to reduce its management fee and/or
absorb operating expenses if necessary to keep total annual operating expenses
(excluding Rule 12b-1 fees and interest and tax expenses) at or below the
following percentages of each Fund's average net assets: the Growth Fund, one
and five-tenths of one percent (1.50%); the Small Cap Opportunities Fund, one
and five-tenths of one percent (1.50%); the Equity Income Fund, eighty-five
one-hundredths of one percent (0.85%); the International Growth Fund, one and
sixty-five one-hundredths of one percent (1.65%); the International Small Cap
and Emerging Markets Funds, one and nine-tenths of one percent (1.90%); the
Select 50 Fund, one and eight-tenths of one percent (1.80%); the U.S. Asset
Allocation Fund, one and three-tenths of one percent (1.30%) through limits in
the Underlying Funds; the Short Bond and the California Bond Funds, seven-tenths
of one percent (0.70%); and the Reserve Fund, six-tenths of one percent (0.60%).
The Manager also may voluntarily reduce additional amounts to increase the
return to a Fund's investors. The Manager entered into a one-year renewable
agreement with respect to these limitations. Any reductions made by the Manager
in its fees are subject to reimbursement by that Fund within the following three
years, provided that the Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Funds
for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. To the extent
the Manager performs a service or assumes an operating expense for which a Fund
is obligated to pay, and the performance of such service or payment of such
expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from that Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager also may compensate broker-dealers and other intermediaries who
distribute a Fund's shares as well as other service providers of shareholder and
administrative services. The Manager may also sponsor seminars and educational
programs on the Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions, quality of services, and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
that the Funds receive prompt execution at competitive prices, the Manager also
may consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How to Contact the Funds
For information on the Funds or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND [3863]
<TABLE>
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
<CAPTION>
- ---------------------------------------------------------------- --------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT COURIER
- ---------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 7th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- ---------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
Visit The Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Funds Distributor, Inc.,
29
<PAGE>
the Funds' Distributor, 101 California Street, San Francisco, California 94111,
(800) 572-FUND [3863], and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or securities brokers, dealers and other financial
intermediaries that have an agreement with the Distributor by the close of
trading (generally, 4:00 P.M. eastern time, except when the market closes
earlier due to a holiday or for any other reason) on any day that the New York
Stock Exchange (the "NYSE") is open, Fund shares will be purchased at the public
offering price calculated that day for the applicable class of shares. Orders
and payment for the Reserve Fund must be received by 12:00 noon eastern time or
earlier if the market closes earlier due to a holiday or for any other reason.
Orders for Fund shares received after close of trading will be purchased at the
next-determined net asset value after receipt of the order. Shares of the U.S.
Fixed-Income and Money Market Funds will not be priced on national bank
holidays.
The minimum initial investment in each Fund is $1,000 (including Individual
Retirement Accounts ["IRAs"]) and $100 for subsequent investments. The Manager
or the Distributor, at its discretion, may waive these minimums. If you buy
shares through a broker or investment advisor instead of directly from the
Distributor, different minimum investment requirements may apply. The Funds do
not accept third-party checks, starter checks, or cash investments. Checks must
be in U.S. dollars and, to avoid fees and delays, drawn only on banks located in
the United States. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
Initial Investment
Minimum initial investment (including IRAs) ..............................$1,000
| The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investment by Check
| Complete the New Account application. Tell us which Fund(s) you wish to
invest in and make your check payable to The Montgomery Funds.
| A charge may be imposed on checks that do not clear.
| Dividends do not begin to accrue on the U.S. Fixed-Income and Money Market
Funds until your check has cleared.
Initial Investment by Wire
| Call the Transfer Agent to tell it that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, the dollar
amount to be invested and the Fund(s) in which you want to invest. It will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
| A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
| Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder account number: [shareholder(s) account number]
Name of Fund: [Montgomery Fund name]
| Your bank may charge a fee for any wire transfers.
Initial Investment by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
| You must be a shareholder in another Montgomery Fund.
| You must have been a shareholder for at least 30 days.
| Your existing account registration will be duplicated in the new Fund.
| Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
30
<PAGE>
| The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
| The Fund reserves the right to collect any losses to the Fund from your
existing account(s) that result from a telephone purchase not funded within
three business days.
Subsequent Investments
Minimum subsequent investment (including IRAs) .............................$100
| The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Subsequent Investments by Check
| Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
| A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
| You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investment by Wire."
Subsequent Investments by Telephone
| Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND [3863] before
the Fund cutoff time.
| Shares for IRAs may not be purchased by phone.
| The maximum telephone purchase is an amount up to five times your account
value on the previous day.
| Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
| You should do one of the following to ensure that payment is received in
time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under "Initial Investment by
Wire."
Automatic Account Builder ("AAB")
| AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
| Your bank must be a member of the Automated Clearing House.
| To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your Montgomery account from your checking or savings
account.
| Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th day of each month will be selected.
| You should allow 20 business days for this service to become effective.
| You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
| Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
| You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Funds account.
| Please call the Transfer Agent for instructions on establishing this
service.
31
<PAGE>
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued by the
Funds at any time upon prior written notice, or by you at any time by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
an authorization number or other personal information not likely to be known by
others. The Funds and the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Shares of the Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Certain of the Funds are
available for purchase through administrators for retirement plans. Investors
who purchase shares as part of a retirement plan should address inquiries and
seek investment servicing from their plan administrators. Plan administrators
may receive compensation from the Funds for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
noncertificated form, registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the U.S. Fixed-Income and Money
Market Funds). The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption and such request
is received by the Transfer Agent or other agents of the Funds. Payment of
redemption proceeds is made promptly, regardless of when redemption occurs and
normally within three business days after receipt of all documents in proper
form, including a written redemption order with appropriate signature guarantee.
Redemption proceeds will be mailed or wired in accordance with the shareholder's
instructions. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the SEC. If you
purchase shares by check and then sell them shortly after, the Transfer Agent
will not mail the proceeds until 15 days from the date you first purchased the
shares. During that holding period, the proceeds will be invested in an
interest-bearing account. Shares tendered for redemptions through brokers or
dealers (other than the Distributor) may be subject to a service charge by such
brokers or dealers. Procedures for requesting a redemption are set forth below.
Redeeming by Written Instruction
| Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
| The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
| Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s) or your predesignated bank
account, or if the dollar amount of the redemption exceeds $50,000.
Signature guarantees may be provided by an eligible guarantor institution
such as a commercial bank, an NASD member firm such as a stock broker, a
savings association or a national securities exchange. Contact the Transfer
Agent for more information.
| If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion.
32
<PAGE>
Redeeming by Check
| Checkwriting is available on the Short Duration Government Bond Fund, the
Government Reserve Fund and the California Tax-Free Intermediate Bond Fund.
| Checkwriting is not available for Individual Retirement Accounts.
| The minimum amount per check is $250. A check for less may be returned to
you.
| All checks will require only one signature unless otherwise indicated.
| You should not write a check to close your U.S. Fixed-Income and Money
Market Funds account.
| Checks will be returned to you at the end of each month.
| A charge may be imposed for any stop payments requested.
| Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
| Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for Individual Retirement Accounts.
| If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
| Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
| Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon prior written notice to shareholders. The Funds will
not be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income-tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption from the Funds by a
check (instead of a bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Funds are
responsible only for mailing the distribution or redemption checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Funds, the Funds will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
33
<PAGE>
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make such an involuntary redemption, the shareholder will
first be notified that the value of the shareholder's account is less than the
minimum level and will be allowed 30 days to make an additional investment to
bring the value of that account to at least the minimum investment required to
open an account before the Fund takes any action.
Exchange Privileges and Restrictions
You may exchange Class P shares in one Fund for Class P shares in another Fund
with the same registration, Taxpayer Identification number and address. An
exchange may result in a recognized gain or loss for income-tax purposes. See
the discussion of telephone procedures and limitations of liability under
"Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
| You are automatically eligible to make telephone exchanges with your
Montgomery Funds account.
| Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Funds'
cutoff times.
| Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
| You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this
prospectus.
| You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
| Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together).
Exchanges out of the U.S. Fixed-Income and Money Market Funds are exempt. A
shareholder's exchanges may be restricted or refused if a Fund receives, or
the Manager anticipates, simultaneous orders affecting significant portions
of that Fund's assets and, in particular, a pattern of exchanges coinciding
with a market-timing strategy. The Trusts reserve the right to refuse
exchanges by any person or group if, in the Manager's judgment, a Fund
would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trusts attempt to provide prior notice to
affected shareholders when it is reasonable to do so, it may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the U.S. Fixed-Income and Money Market
Funds into any other Fund. The minimum exchange is $100. Periodically investing
a set dollar amount into a Fund is also referred to as dollar-cost averaging,
because the number of shares purchased will vary depending on the price per
share. Your account with the recipient Fund must meet the minimum investment of
$1,000. Exchanges out of the U.S. Fixed-Income and Money Market Funds are exempt
from the four-exchanges-limit policy.
Directed Dividend Service
If you own shares of the U.S. Fixed-Income and Money Market Funds, you may elect
to use your monthly dividends to automatically purchase additional shares of
another Fund. Your account with the recipient Fund must meet the minimum
investment of $1,000.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from selected securities brokers or
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as for information pertaining to accounts and any service or transaction
fees that may be charged by these agents. Some of these agents may appoint
subagents. Purchase orders through securities brokers, dealers and other
financial intermediaries are effected at the next-
34
<PAGE>
determined net asset value after receipt of the order by such agent before the
relevant Fund's daily cutoff time. Orders received after that time will be
purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Funds, they may receive
fees from the Funds or the Manager for such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the applicable Fund's cutoff time on a day that
the Fund redeems shares. Orders received after that time are entitled to the net
asset value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of the Fund's
cutoff time on each day that the NYSE is open for trading (but not on bank
holidays for the U.S. Fixed-Income and Money Market Funds). Generally, this is
4:00 P.M. eastern time (12:00 noon for the Reserve Fund), or earlier when
trading closes earlier. The Short Bond Fund will determine its net asset value
earlier when the fixed-income markets close earlier. Per-share net asset value
is calculated by dividing the value of each Fund's total net assets by the total
number of that Fund's shares then outstanding. For the U.S. Asset Allocation
Fund, when an Underlying Fund (such as a Fixed-Income or Money Market Fund) does
not calculate a new net asset value on a day (such as a bank holiday), this Fund
may, in calculating its net asset value, use the most recently available net
asset value for each such Underlying Fund.
As described more fully in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign- currency-denominated values of such
securities.
Because non-U.S. securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected in the Funds' calculations of net asset
values unless the Manager, under the supervision of the Board, determines that a
particular event would materially affect a Fund's net asset value.
<TABLE>
Dividends and Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS CAPITAL GAINS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Equity Funds Declared and paid in the last quarter of each Declared and paid in the last quarter of each
(except Equity Income Fund) year* year*
- ----------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the last Declared and paid in the last quarter of each
business day of each quarter year*
- ----------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in the last quarter of each Declared and paid in the last quarter of each
year* year*
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Declared daily and paid monthly on or about Declared and paid in the last quarter of each
Money Market Funds the last business day of each month year*
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Additional distributions, if necessary, may be made following each Fund's fiscal year end (June 30) in order to avoid the
imposition of tax on a Fund.
</FN>
</TABLE>
35
<PAGE>
Unless you request cash distributions in writing at least seven business days
before a distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to your account at the closing net asset value on
the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by distributing substantially all of its
net investment income and net capital gains to its shareholders and meeting
other requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that their earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code. If a Fund is unable to meet certain
Code requirements, it may be subject to taxation as a corporation. Funds
investing in non-U.S. securities also may incur tax liability to the extent that
they invest in "passive foreign investment companies." See "Portfolio
Securities" and the Statement of Additional Information.
For federal income-tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gains over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trusts
All of the Funds with the exception of the U.S. Asset Allocation Fund are series
of The Montgomery Funds, a Massachusetts business trust organized on May 10,
1990. The U.S. Asset Allocation Fund is a series of The Montgomery Funds II, a
Delaware business trust organized on September 10, 1993. The Agreement and
Declarations of Trust of both Trusts permit their Boards to issue an unlimited
number of full and fractional shares of beneficial interest, $0.01 par value, in
any number of series. The assets and liabilities of each series within either of
the two Trusts are separate and distinct from each other series.
This prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may, in the future, designate
other classes of shares for specific purposes. The other classes of shares may
have different fees and expenses that may affect performance. For information
concerning the other classes of shares not offered in this prospectus, call
36
<PAGE>
The Montgomery Funds at (800) 572-FUND [3863] or contact sales representatives
or financial intermediaries who offer those classes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so the holders of more than 50% of the shares voting in any election of Trustees
can, if they so choose, elect all of the Trustees of that Trust. Although the
Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust, for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax-equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated in a similar manner,
except that the results are not annualized. Total return figures will reflect
all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during either a 7-day period or a 30-day period. For
yield computed from a 7-day period, base period return is simply annualized by
multiplying the base period return by 365 divided by 7; the effective yield
computed from a 7-day period is calculated by adding 1 to the base period return
and raising the result to the (365 / 7)th power and then subtracting 1. When the
yield is computed from a 30-day period, the yield is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder servicing fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered a representation of what an investor's total return or current yield
may be in any future period. The Funds' annual report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND [3863].
Legal Opinion
The validity of shares offered by this prospectus has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
| Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
| Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
| Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
| 1099 tax form(s) are mailed by January 31.
| Annual updated prospectus is mailed to existing shareholders in October or
November.
37
<PAGE>
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address, regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND [3863].
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
taxable dividends, capital-gains distributions, redemptions, exchanges and other
payments made to a shareholder's account. Any tax withheld may be credited
against taxes owed on a shareholder's federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS"). Backup withholding could apply to payments
made to a shareholder's account while awaiting receipt of a TIN. Other rules
apply for certain entities. For example, for an account established under the
Uniform Gifts to Minors Act, the TIN of the minor should be furnished. If a
shareholder has been notified by the IRS that he or she is subject to backup
withholding because he or she failed to report all interest and dividend income
on his or her tax return and the shareholder has not been notified by the IRS
that such withholding will cease, the shareholder should cross out the
appropriate item on the New Account application. Dividends paid to a foreign
shareholder's account by a Fund may be subject to up to 30% withholding instead
of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers, and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Funds' official sales literature.
38
<PAGE>
Glossary
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g.,
credit card) agreements.
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
collateralized mortgage obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools
into different classes or tranches. Stripped mortgage securities are CMOs
that allocate different proportions of interest and principal payments on a
pool of mortgages. One class may receive all of the interest (the interest
only, or IO class) whereas another may receive all of the principal
(principal only, or PO class). The yield to maturity on any IO or PO class is
extremely sensitive not only to changes in interest rates but also to the
rate of principal payments and prepayments on underlying mortgages. In the
most extreme cases, an IO class may become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
covered call option. A call option is "covered" if the Fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the Fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, and swaps
and options on futures contracts on U.S. government and foreign government
securities and currencies.
dollar roll transaction. This is similar to a reverse repurchase agreement
except that it requires a Fund to repurchase a similar rather than the same
security.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates. "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a more
precise measure of interest rate risk than "term to maturity." Determining
duration may involve the Manager's estimates of future economic parameters,
which may vary from actual future values. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective
duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or
from sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or
would be considered by the World Bank or the United Nations to be emerging or
developing.
equity-derivative securities. These include, among other things, options on
equity securities, warrants and futures contracts on equity securities.
equity swaps. These allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity
securities or an index)
39
<PAGE>
for a component of return on another non-equity or equity investment. Equity
swap transactions may be volatile and may present a Fund with counterparty
risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price
at a future date. The Funds generally do not enter into forward contracts
with terms greater than one year. A Fund generally enters into forward
contracts only under two circumstances. First, if a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Manager believes that the
currency of a particular foreign country will substantially rise or fall
against the U.S. dollar, it may enter into a forward contract to buy or sell
the currency approximating the value of some or all of a Fund's portfolio
securities denominated in such currency. A Fund will not enter into a forward
contract if, as a result, it would have more than one-third of its total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate segregable
assets having a value sufficient to cover its obligations). Although forward
contracts are used primarily to protect a Fund from adverse currency
movements, they involve the risk that currency movements will not be
accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each Fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA. The Government National Mortgage Association.
illiquid securities. The Funds treat as illiquid any securities subject to
restrictions on repatriation for more than seven days and securities issued
in connection with foreign debt conversion programs that are restricted as to
remittance of invested capital or profit. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under
the Securities Act of 1933 and that, subject to the review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch
(at least Baa), or unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by the Board of Trustees.
leverage. Some Funds may use leverage in an effort to increase return. Leverage
refers to borrowing money or engaging in a transaction that has the same
economic effect. Although leverage creates an opportunity for increased
income and gain, it can also magnify losses and create certain risk
considerations. Leveraging also creates interest expenses that can exceed any
income from the assets retained.
options on securities, securities indices and currencies. A Fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the
U.S. dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indices in order to
hedge against risks of stock market or industrywide stock price fluctuations.
repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
reverse dollar roll transactions. When a Fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees
to resell a similar security to that institution at a later date at an
agreed-upon price.
reverse repurchase agreement. In a reverse repurchase agreement, a Fund sells to
a financial institution a security that it holds and agrees to repurchase at
an agreed-upon date and price.
S&P 500. Standard & Poor's 500 Composite Price Index.
securities lending. A Fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or
40
<PAGE>
even a loss of rights in collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
variable-rate demand notes (VRDNs). These are instruments with rates of interest
adjusted periodically or that "float" continuously according to specific
formulas and often have a demand feature entitling the purchaser to resell
the securities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a Fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a Fund. At the time a Fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be
marked-to-market daily. There is a risk that the securities may not be
delivered and that the Fund may incur a loss.
zero coupon bonds. These are debt obligations that do not pay current interest
and are consequently issued at a significant discount from face value. The
discount approximates the total interest the bonds will accrue and compound
over the period to maturity or the first interest-payment date at a rate of
interest reflecting the market rate of interest at the time of issuance.
41
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
(800) 572-3863
Independent Auditors
PricewaterhouseCoopers LLP
555 California Street
San Francisco, California 94104
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
www.montgomeryfunds.com
Invest wisely.(R)
42
<PAGE>
- --------------------------------------------------------------------------------
PART A
PROSPECTUS FOR SHARES OF MONTGOMERY
INSTITUTIONAL EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Montgomery Asset Management
101 California Street
San Francisco, California 94111
(415) 248-6032
www.montgomeryfunds.com
Prospectus
October 31, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Fees and Expenses of the Fund 3 Dividends and Distributions 11
Financial Highlights 4 Taxation 11
The Fund's Investment Objective and Policies 5 Portfolio Securities 11
Management of the Fund 5 Other Investment Practices 14
How to Invest in the Fund 8 Risk Considerations 17
How to Redeem an Investment in the Fund 9 General Information 20
How Net Asset Value Is Determined 10 Backup Withholding Instructions 21
</TABLE>
Montgomery Institutional Series: Emerging Markets Portfolio (the "Fund") seeks
capital appreciation for institutional investors by investing primarily in
equity securities of companies in countries having economies and markets that
are or would be considered by the World Bank or the United Nations to be
emerging or developing.
The Fund is managed by Montgomery Asset Management, LLC, an affiliate of
Commerzbank AG (the "Manager"). The Fund is a series of The Montgomery Funds II,
an open-end management investment company, and is intended primarily for
institutional investors. Fund Distributors, Inc., which is not affiliated with
the Manager, is the Fund's distributor (the "Distributor"). As is the case for
all mutual funds, attainment of the Fund's investment objective cannot be
assured.
The Fund's shares are sold at net asset value ("NAV") with no sales load, no
commissions, no Rule 12b-1 fees and no dividend reinvestment or exchange fees.
Purchases and redemptions may be made in certain circumstances with the payment
of securities. When purchases or redemptions are made in cash, the Fund charges
a fee to cover the expenses related to the investment of cash received by the
Fund or related to the sale of securities to obtain cash, as appropriate, in
order to prevent the dilution of the investments of existing shareholders.
Shares purchased after November 1, 1995, will not be subject to both fees.
Shares purchased by the Manager on behalf of advisory clients for which it has
investment discretion may not be subject to these fees. The Fund, rather than
the Manager, ultimately receives these fees. In general, the minimum initial
investment in the Fund is $2,000,000, and subsequent investments must be at
least $100,000. The Manager or the Distributor, at its discretion, may waive
these minimums. See "How to Invest in the Fund."
Please read this prospectus before investing and retain it for future reference.
A Statement of Additional Information dated October 31, 1998, as may be revised,
has been filed with the Securities and Exchange Commission (the "SEC"), is
incorporated by this reference and is available without charge by calling (415)
248-6659. If you are viewing the electronic version of this prospectus through
an online computer service, you may request a printed version free of charge by
calling (415) 248-6659.
The Securities and Exchange Commission maintains a Web site (www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information regarding The Montgomery Funds II.
The Fund may, in the future, offer other classes of shares to investors eligible
to purchase those shares. The other classes of shares may have different fees
and expenses than the class of shares offered in this prospectus, and those
different fees and expenses may affect performance.
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
- --------------------------------------------------------------------------------
1
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Fees and Expenses of the Fund
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of
the Fund in cash:
- -------------------------------------------------------------------------------
Maximum Sales Load Imposed on Purchases (as a percentage of None
offering price)
- -------------------------------------------------------------------------------
Maximum Sales Load Imposed on Reinvested Dividends (as a None
percentage of offering price)
- -------------------------------------------------------------------------------
Maximum Deferred Sales Load (as a percentage of original purchase None
price or redemption proceeds, as applicable)
- -------------------------------------------------------------------------------
Investment Expense Reimbursement Fee* 0.75%
- -------------------------------------------------------------------------------
Redemption Fees*+ (as a percentage of amount redeemed) 0.75%
- -------------------------------------------------------------------------------
Exchange Fees None
- -------------------------------------------------------------------------------
* Investment expense reimbursement fees and redemption expense reimbursement
fees are paid to the Fund to offset certain costs, such as brokers'
commissions, incurred by the Fund in either investing the cash received
from shareholders or selling securities to obtain cash to pay redemptions.
These fees are paid directly to the Fund. The investment expense
reimbursement fee will not be charged on investments made in the form of
securities acceptable to the Manager and the redemption expense
reimbursement fee will not be charged on redemptions when the proceeds are
paid in securities (although reregistration fees may be incurred). Shares
purchased after November 1, 1995, will not be subject to both the
investment expense reimbursement fees and the redemption expense
reimbursement fees. For those shares, shareholders may elect in their
discretion which fee to pay. Shares purchased by the Manager on behalf of
advisory clients for which it has investment discretion will not be subject
to these fees. See "Management of the Fund--Investment Expense and
Redemption Expense Reimbursement Fees."
+ Redemptions effected via wire transfer may be required to pay a third-party
service provider charge that will be directly deducted from redemption
proceeds. This would be in addition to any redemption expense reimbursement
fee. See "How to Redeem an Investment in the Fund--General."
Annual Fund Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees** 1.01%
- --------------------------------------------------------------------------------
Rule 12b-1 Fees None
- --------------------------------------------------------------------------------
Other Expenses** 0.24%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses** 1.25%
- --------------------------------------------------------------------------------
** Expenses are based on actual expenses for the fiscal year ended June 30,
1998. The Manager will reduce its fees and may absorb or reimburse the Fund
for certain expenses to the extent necessary to limit total annual Fund
operating expenses (excluding interest and tax expense) to the amount shown
in the table above, subject to possible reimbursement by the Fund within
the following three years if such reimbursement can be achieved within the
foregoing expense limit. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year. Absent the reduction, actual total Fund
operating expenses for the year ended June 30, 1998, would have been 1.66%
(0.65% other expenses). The Manager has agreed to these reductions for the
current fiscal year in an agreement with the Fund. See "Management of the
Fund."
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
- --------------------------------------------------------------------------------
2
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Example of Fund Expenses
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares (assuming application of the redemption expense reimbursement fee):
-----------------------------------
1 Year $ 20
-----------------------------------
3 Years $ 47
-----------------------------------
5 Years $ 76
-----------------------------------
10 Years $158
-----------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
Financial Highlights
Selected Per-Share Data and Ratios
The following financial information for the period ended June 30, 1998, was
audited by PricewaterhouseCoopers LLP, whose report, dated August 14, 1998,
appears in the 1998 Annual Report of the Fund. The following financial
information for the periods ended June 30, 1994, through June 30, 1997, was
audited by other independent accountants.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995++ 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 58.52 $ 49.09 $ 44.61 $ 43.71 $ 50.00
Net investment income 0.32 0.43 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on investments (22.44) 9.46 3.93 0.67 (6.67)
Net increase/(decrease) in net assets resulting from investment
operations (22.12) 9.89 4.43 0.80 (6.58)
Effect of redemption expense reimbursement fee -- 0.02 0.09 0.11 0.29
Distributions from net investment income (0.64) (0.48) (0.04) (0.01) --
Distribution from net realized gains on investments (0.15) -- -- -- --
Net asset value, end of period $ 35.61 $ 58.52 $ 49.09 $ 44.61 $ 43.71
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return** (38.05)% 20.45% 10.14% 2.09% (12.58)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $197,578 $334,181 $270,878 $186,666 $127,085
Ratio of net investment income to average net assets 0.96% 0.86% 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets 1.25% 1.26% 1.29% 1.40% 1.40%+
Portfolio turnover rate 104% 85% 88% 101% 33%
Net investment income/(loss) before deferral of fees by Manager $0.03 $0.26 $0.33 $(0.05) $0.01
Ratio of expenses before deferral of fees by Manager 1.66% 1.61% 1.70% 1.79% 1.81%+
<FN>
- --------------------
* The Montgomery Institutional Series: Emerging Markets Portfolio commenced operations on December 17, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per-share numbers have been calculated using the monthly average share method, which more appropriately represents the
per-share data for the period, as the use of the undistributed income method did not accord with the results of operations.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
The Fund's Investment Objective and Policies
The Fund's investment objective and general investment policies are described
below. Specific portfolio securities that the Fund may purchase are described in
"Portfolio Securities." Specific investment practices that the Fund may employ
are described in "Other Investment Practices." Certain risks associated with
investments in the Fund are described in those sections as well as in "Risk
Considerations."
The investment objective of the Fund is to seek long-term capital appreciation
by investing in companies based or operating primarily in developing economies
throughout the world. The Fund invests at least 85% of its total assets in the
stocks of companies based in the world's developing economies. The Fund
typically maintains investments in at least six of these countries at all times,
with no more than 25% of its assets in any single one of them. These may
include:
* Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
* Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
* Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
* Middle East: Israel and Jordan
* Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Fund's strategy combines computer-based screening techniques with in-depth
financial review and on-site analysis of companies, countries and regions to
identify potential investments. The Fund's portfolio managers and analysts
frequently travel to the emerging markets to gain firsthand insight into the
economic, political and social trends that affect investments in those
countries. These techniques help determine in which stocks and countries the
Fund will invest. The Manager strives to keep the Fund well diversified across
individual stocks, industries and countries to reduce its overall risk.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 15% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging markets companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity-derivative securities. See "Portfolio
Securities."
Management of the Fund
The Montgomery Funds II (the "Trust") has a Board of Trustees (the "Board") that
establishes the Fund's policies and supervises and reviews the management of the
Fund. The day-to-day operations of the Fund are administered by the officers of
the Trust and by the Manager pursuant to the terms of an Investment Management
Agreement with the Fund.
Founded in 1990, the Manager is a subsidiary of Commerzbank AG, one of the
largest publicly held commercial banks in Germany.
Portfolio Managers
Josephine Jimenez, CFA has been a senior portfolio manager of the Fund since
1992. Before joining the Manager in 1991, Ms. Jimenez worked at Emerging Markets
Investors Corp./Emerging Markets Management in Washington, D.C., as a senior
analyst and portfolio manager. She has more than 17 years' experience in the
industry. The research and analysis methods she helped develop--including a
proprietary stock valuation model for hyperinflationary economics--are the
foundation of her investment strategy.
Bryan Sudweeks, Ph.D., CFA has been a senior portfolio manager of the Fund since
1992. Before joining the Manager in
- --------------------------------------------------------------------------------
4
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
1991, Mr. Sudweeks was a senior analyst and portfolio manager at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C. Prior to
that he was a professor of international finance and investments at George
Washington University and served as adjunct professor of international
investments from 1988 until May 1991.
Frank Chiang has been a portfolio manager of the Fund since joining the Manager
in 1996. From 1993 to 1996, Mr. Chiang was a portfolio manager and managing
director at TCW Asia Ltd. in Hong Kong. Prior to that he was an associate
director and portfolio manager at Wardley Investment Services, Hong Kong.
Jesus Isidoro Duarte is a portfolio manager of the Fund. Prior to joining the
Manager in 1994, he was a director and vice president at Latinvest, where he was
responsible for research and portfolio management for the firm's Latin American
funds. Prior to Latinvest, Mr. Duarte worked at W.I. Carr in Tokyo as a
securities analyst of Japanese equities.
Jose De Gusmao Fiuza has been a portfolio manager of the Fund since 1996. Mr.
Fiuza began his investment career in 1987 covering the Portuguese market at
Banco Portugues do Atlantico. He then moved to Banco Espirito Santo, Schroder
Securities (as manager) and Carnegie International (as managing director). Mr.
Fiuza joined the Manager in 1995.
Stuart Patterson Quint, CFA has been a portfolio manager of the Fund since 1997.
Mr. Quint joined the Manager from Sanford C. Bernstein & Company where he was a
research associate for the U.S. financial services industry.
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities;
manages the investments of the Fund, including the placement of orders for
portfolio transactions; furnishes the Fund with office space and certain
administrative services; and provides the personnel needed by the Fund with
respect to the Manager's responsibilities under the Manager's Investment
Management Agreement with the Fund. The Manager also compensates the members of
the Trust's Board who are interested persons of the Manager, and assumes the
costs of printing prospectuses and shareholder reports for dissemination to
prospective investors. As compensation, the Fund pays the Manager a management
fee (accrued daily but paid when requested by the Manager) based upon the value
of the average daily net assets of the Fund, at the annual rate 1.25% of the
first $50 million in average daily net assets, 1.00% of the next $50 million of
daily net assets, and 0.90% of amounts over $100 million in average daily net
assets. The management fee for the Fund is higher than that for most mutual
funds.
Montgomery Asset Management, LLC, also serves as the Fund's Administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative operations. As compensation, the Fund pays
the Administrator a monthly fee at an annual rate of five one-hundredths of one
percent (0.05%) of average daily net assets.
The Fund is responsible for its own operating expenses including but not limited
to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage and
commission expenses, if any; interest charges on any borrowings; transfer agent,
custodian, legal and auditing fees; shareholder servicing fees including fees to
third-party servicing agents; fees and expenses of Trustees who are not
interested persons of the Manager; salaries of certain personnel; costs and
expenses of calculating its daily net asset value; costs and expenses of
accounting, bookkeeping and recordkeeping required under the Investment Company
Act of 1940 (the "Investment Company Act"); insurance premiums; trade
association dues; fees and expenses of registering and maintaining registrations
of its shares for sale under federal and applicable state securities laws; all
costs associated with shareholders meetings and the preparation and
dissemination of proxy materials, except for meetings called solely for the
benefit of the Manager or its affiliates; printing and mailing prospectuses,
Statements of Additional Information and reports to shareholders; and other
expenses relating to the Fund's operations, plus any extraordinary and
nonrecurring expenses that are not expressly assumed by the Manager.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding interest and tax expense) at or below 1.25%
of the Fund's average net assets. The Manager has agreed to these reductions for
the current fiscal year in an agreement with the Fund. The Manager also may
voluntarily reduce additional amounts to increase the return to the Fund's
investors. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following three years provided the Fund is
able to effect such reimbursement and remain in compliance with applicable
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses for the
current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return
- --------------------------------------------------------------------------------
5
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
to the Fund's investors. To the extent the Manager performs a service or assumes
an operating expense for which the Fund is obligated to pay, and the performance
of such service or payment of such expense is not an obligation of the Manager
under the Investment Management Agreement, the Manager is entitled to seek
reimbursement from the Fund for the Manager's costs incurred in rendering such
service or assuming such expense. The Manager, out of its own funds, also may
compensate broker-dealers and other financial intermediaries who distribute the
Fund's shares as well as other providers of shareholder and administrative
services.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These are discussed more
fully in the Statement of Additional Information. The factors include, but are
not limited to, the reasonableness of commissions, the quality of services and
execution, and the availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider the sale of the Fund's shares as a factor in selecting broker-dealers
for the Fund's portfolio transactions. See "Execution of Portfolio Transactions"
in the Statement of Additional Information for further information regarding the
Fund's policies concerning the execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
Investment Expense and Redemption Expense Reimbursement Fees
The Board of Trustees of the Trust and the Manager have determined that payment
of an investment expense reimbursement fee by certain investors is appropriate
to defray the significant costs, listed below, associated with investing the
proceeds received by the Fund and to offset the dilutive effect such costs would
otherwise have on the net asset value of shares held by existing shareholders.
Likewise, the redemption expense reimbursement fee is used to defray the
significant costs, listed below, associated with the sale of portfolio
securities needed to pay cash redemption requests. Therefore, the shares of the
Fund are sold at a public offering price that is equal to the net asset value of
such shares plus the investment expense reimbursement fee. In addition,
redemption requests are paid at net asset value less the redemption expense
reimbursement fee.
The amounts of the reimbursement fees represent the Manager's estimate of the
costs reasonably anticipated to be associated with the purchase of securities
with cash received from investors and the sale of securities to obtain cash. The
fees are paid to the Fund and used by it to defray those costs. Those costs
include brokerage commissions on listed securities, imputed commissions on
over-the-counter securities, and, in the case of foreign countries, commissions,
duties and taxes (other than taxes based on net income) imposed on the purchase
or sale of securities. These costs do not include distribution-related expenses.
It is possible that the amount of the reimbursement fees will be more or less
than the actual costs they are intended to defray. The Fund will incur any extra
costs or receive any excess fees, as applicable.
The Fund charges an investment expense reimbursement fee of 0.75% of the amount
invested and a redemption expense reimbursement fee of 0.75% of the amount
redeemed. Shares purchased after November 1, 1995, will not be subject to both
fees. For those shares, shareholders may elect in their discretion which fee to
pay. Shares purchased by the Manager on behalf of advisory clients for which it
has investment discretion will not be subject to these fees. Reinvestments of
dividends, capital-gains distributions paid by the Fund and investments in kind
are not subject to the expense reimbursement fees. Purchases and redemptions in
kind are not subject to the expense reimbursement fees. See "How to Invest in
the Fund's In-Kind Purchases."
How to Invest in the Fund
The Fund's shares are offered directly to the public at their current net asset
value plus any applicable investment expense reimbursement fee, with no sales
load. The Fund's shares are offered for sale by Funds Distributor, Inc., the
Fund's Distributor, 101 California Street, San Francisco, California 94111,
(800) 572-3863, and through selected securities brokers and dealers.
The minimum initial investment in the Fund is $2,000,000. Subsequent investments
in the Fund must be at least $100,000. The Manager or the Distributor, in its
discretion, may waive these minimums. Purchases may also be made in certain
circumstances by payment of securities. See "In-Kind Purchases" and the
Statement of Additional Information for further details.
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Initial Investments by Check
* Complete the New Account application.
* Make your check(s) payable to Montgomery Institutional Series: Emerging
Markets Portfolio.
* Mail or deliver the completed New Account application and your check(s) to
the Transfer Agent: Montgomery Institutional Series: Emerging Markets
Portfolio, P.O. Box 419073, Kansas City, MO 64141-6073.
Initial Investments by Wire
* Before wiring funds, call the Transfer Agent at (800) 572-3863 to advise
the Transfer Agent that you intend to make an initial investment by wire
and to receive an account number.
* Provide the Transfer Agent with the name of the investor and the dollar
amount to be invested.
* Complete the New Account application. Be sure to include the date and the
account number. Mail or deliver the completed New Account application to
the appropriate address shown at the end of the New Account application.
* Request the investor's bank to immediately transmit available funds by wire
for purchase of shares in the investor's name to the Transfer Agent's
affiliated bank, as follows:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: Montgomery Institutional Series:
Emerging Markets Portfolio
For credit to: [shareholder's name]
[shareholder's account number]
Subsequent Investments by Check
* Detach and complete the stub attached to your account statement. If you do
not have an investment stub, mail your check with written instructions
indicating the Fund name and your account number.
* Make your check(s) payable to Montgomery Institutional Series: Emerging
Markets Portfolio.
* Write your shareholder account number on the check.
* Mail the check(s) and investment stub to the Transfer Agent: Montgomery
Institutional Series: Emerging Markets Portfolio, P.O. Box 419073, Kansas
City, MO 64141-6073.
Subsequent Investments by Wire
* Instruct the bank to wire funds as indicated above. It is not necessary to
contact the Transfer Agent prior to making subsequent investments by wire.
It is essential that complete information regarding your account be included in
all wire instructions in order to facilitate prompt and accurate handling of
investments. Investors may obtain further information about remitting funds in
this manner and any fees that may be imposed from their own banks.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the United States. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor each
- --------------------------------------------------------------------------------
7
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
reserve the right to reject any purchase order in whole or in part.
If an order, together with payment in proper form, is received by the Transfer
Agent by the close of trading (generally, 4:00 P.M. eastern time) on any day
that the New York Stock Exchange (the "NYSE") is open, Fund shares will be
purchased at the Fund's next-determined net asset value. Orders for Fund shares
received after the Fund's cutoff times will be purchased at the next-determined
net asset value after receipt of the order.
In-Kind Purchases
An investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. The Manager however, expressly reserves the right to reject in its
discretion any and all securities proposed to be tendered as payment in kind for
shares of the Fund. For purposes of in-kind purchases, a security will be
considered "readily marketable" if it is in the process of undergoing customary
settlement and/or registration in its primary market. For the purposes of sales
of shares of the Fund for such securities, the tendered securities shall be
valued at the identical time and in the identical manner that the portfolio
securities of the Fund are valued for the purpose of calculating the net asset
value of the Fund's shares.
Purchases of the Fund's shares with acceptable securities will not be charged an
investment expense reimbursement fee. See "Fees and Expenses of the Fund" and
"Management of the Fund--Investment Expense and Redemption Expense Reimbursement
Fees."
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form, registered on the books of the Fund and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share, less any redemption
expense reimbursement fee, next determined after the shares are validly tendered
for redemption and such request is received by the Transfer Agent or, when
appropriate, securities dealers. The procedures for requesting a redemption are
set forth below.
Direct Redemption by Check or Wire
Redemptions can be requested by writing to the Fund's Transfer Agent. If you
want to have redemption proceeds wired directly to your bank account, include a
voided check with your letter. Send your letter to Montgomery Institutional
Series: Emerging Markets Portfolio, P.O. Box 419073, Kansas City, MO 64141-6073.
The minimum amount that may be wired is $100,000 (wire charges, if any, will be
deducted from redemption proceeds). The Fund reserves the right to permit lesser
wire amounts or fees at the Manager's discretion. The Transfer Agent requires
that the signature(s) on any written request be guaranteed by an eligible
guarantor institution, such as a commercial bank, a member firm of a domestic
stock exchange or the National Association of Securities Dealers, Inc., an
authorized credit union, a national securities exchange, a registered securities
association, a clearing agency or a savings association. Please contact the
Transfer Agent for more information.
In-Kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Fund, an investor may elect to redeem shares of the Fund and receive
securities from the Fund's portfolio selected by the Manager at its sole
discretion, provided that such redemption is not expected to affect the Fund's
ability to attain its investment objective or otherwise materially affect its
operations. The Manager may reject a request for a redemption in kind in its
discretion. For the purposes of redemptions in kind, the redeemed securities
shall be valued at the identical time and in the identical manner that the other
portfolio securities are valued for purposes of calculating the net asset value
of the Fund's shares.
Redemptions of the Fund's shares for securities will not be charged any
redemption expense reimbursement fee. See "Fees and
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Expenses of the Fund" and "Management of the Fund--Investment Expense and
Redemption Expense Reimbursement Fees."
General
Payment of redemption proceeds is made promptly regardless of when redemption
occurs, but not later than three days after the receipt of all documents in
proper form, including a written redemption order with appropriate signature
guarantee. Redemption proceeds will be mailed or wired in accordance with the
shareholder's instructions on the New Account application to a predesignated
account. The minimum amount that may be wired is $100,000 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion. The Fund may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account is
less than $100,000. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than $100,000 and will be allowed 30 days to make
an additional investment to bring the value of that account to at least $100,000
before the Fund takes any action.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally, this is 4:00 P.M.
Eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As described more fully in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed- income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board of the Trust, respectively, in accordance with methods
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency-denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of net asset value unless the Manager, under supervision of the
Board, determines that the particular event would materially affect the Fund's
net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made on or about the last
quarter of each year with respect to any undistributed capital gains earned
during the one-year period ended October 31 of such calendar year. Another
distribution of any undistributed capital gains will be made following the
Fund's fiscal year end (June 30). The amount and frequency of distributions by
the
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Fund are not guaranteed and are at the discretion of the Trust's Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the New Account application, all dividends
and other distributions will be reinvested automatically in additional shares of
the Fund and credited to the shareholder's account at the closing net asset
value on the reinvestment date, without the imposition of an investment expense
reimbursement fee.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of its assets. Accordingly, the Fund generally will not be
liable for federal income tax or excise tax based on the net income except to
the extent that its earnings are not distributed or are distributed in a manner
that does not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent that it invests in "passive foreign investment
companies." See the Statement of Additional Information for further information.
For federal income-tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. A portion of the distributions paid by the Fund may not be eligible for
the dividends-received deduction allowed to corporate shareholders under the
Code. Distributions of the excess of net long-term capital gains over net
short-term capital loss from transactions of the Fund are treated by
shareholders as long-term capital gains regardless of the length of time the
Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt investors and non-U.S. investors) are
advised to consult their own tax advisors regarding the particular tax
consequences to them of an investment in shares of the Fund. Additional
information on tax matters relating to the Fund and its shareholders is included
in the Statement of Additional Information.
Portfolio Securities
The following describes portfolio securities in which the Fund may invest.
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stocks. The Fund also may invest in other types of equity securities and
equity-derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund also may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other depositary receipts. Depositary receipts are
receipts typically issued in connection with a U.S. or foreign bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Unsponsored depositary receipts programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored depositary receipts, and the prices of unsponsored
depositary receipts may be more volatile than if such depositary receipts were
sponsored by the issuer.
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Montgomery Institutional Series: Emerging Markets Portfolio
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Convertible Securities
The Fund also may invest in convertible securities as a form of equity
securities. A convertible security is a fixed-income security (a bond or
preferred stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock; it tends to increase as the market value
of the underlying stock rises, and to decrease as the market value of the
underlying stock declines. For purposes of allocating the Fund's investments,
the Manager regards convertible securities as a form of equity securities.
Securities Warrants
The Fund may invest up to 5% of its net assets in warrants, including warrants
that are not listed on a securities exchange. A warrant typically is a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified number of shares of the underlying common stock of the issuer at a
specified exercise price at any time on or before an expiration date. Stock
index warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
Privatizations
The Fund believes that foreign governments' programs of selling all or part of
the interests in government-owned or -controlled enterprises ("privatizations")
may represent opportunities for significant capital appreciation and may invest
in privatizations as it deems appropriate. The ability of U.S. entities such as
the Fund to participate in privatizations in certain foreign countries may be
limited by local law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that foreign governments will continue to sell their interests
in companies currently owned or controlled by them or that privatization
programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar vehicles (collectively, "special situations") could enhance the Fund's
capital appreciation potential. This Fund also may invest in certain types of
vehicles or derivative securities that represent indirect investments in foreign
markets or securities in which it is impracticable for the Fund to invest
directly. Investments in special situations may be illiquid, as determined by
the Manager based on criteria established by the Board of Trustees. The Fund
will not invest more than 15% of its total assets in all types of illiquid
investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies (including closed-end funds and mutual funds) investing exclusively in
securities in which it may otherwise invest. Because of restrictions on direct
investment by U.S. entities in certain countries, other investment companies may
provide the most practical or only way for Fund to invest in certain markets.
Such investments may involve the payment of substantial premiums above the net
asset value of those investment companies' portfolio securities and are subject
to limitations under the Investment Company Act. The Fund also may incur tax
liability to the extent that it invests in the stock of a foreign issuer that is
a "passive foreign investment company" regardless of whether such "passive
foreign investment company" makes distributions to the Fund. See the Statement
of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
judgment of the Manager, the potential benefits of such investment exceed the
associated costs. As a shareholder in an investment company, the Fund bears its
ratable share of that investment company's expenses, including advisory and
administration fees, resulting in an additional layer of fees for shareholders.
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Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation, either through anticipated favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers. In selecting debt securities, the Manager will seek out good credits.
The Manager also analyzes interest rate trends and specific developments that
may affect individual issuers. As an operating policy which may be changed by
the Board of Trustees, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investor Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board.
Subject to this limitation, the Fund may invest in any debt security, including
securities in default. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external debt obligations issued by the
governments, governmental entities and companies of emerging markets countries.
External debt obligations are those issued to foreign lenders by an emerging
markets country or company.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rates of
economic growth and corporate profits growth; changes in governmental policies,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of government
finances; and the conditions of the balance of payments and changes in the terms
of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the Government National Mortgage Association
(the "GNMA"), are issued or guaranteed by the U.S. government. Other securities
issued by U.S. government agencies or instrumentalities are supported only by
the credit of the agency or instrumentality, for example those issued by the
Federal Home Loan Bank; whereas others, such as those issued by the Federal
National Mortgage Association (the "FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain risks. The Statement of Additional Information, under
the heading "Investment Objective and Policies of the Fund," contains
more-detailed information about certain of these practices, including
limitations designed to reduce these risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a bank, a broker-dealer or other financial
institution that simultaneously agrees to repurchase the same security from the
Fund at a specified time and price. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return, which
is not determined by the coupon rate on the underlying security. Under the
Investment Company Act, repurchase agreements are considered to be loans by the
Fund and must be fully collateralized by cash, letters of credit, U.S.
government securities or other liquid equity or debt securities ("Collateral
Assets") separately identified and rendered unavailable for investment. If the
seller defaults on its obligation to repurchase the underlying security, the
Fund may experience delay or difficulty in exercising its rights to realize upon
the security and might incur a loss if the value of the security declines, as
well as disposition costs in liquidating the security. See the Statement of
Additional Information for further information.
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Borrowing
The Fund may borrow money from banks in an aggregate amount not to exceed 10% of
the Fund's total assets to meet temporary or emergency purposes, and the Fund
may pledge its assets in connection with such borrowings. The Fund will not
purchase any securities while any such borrowings exceed 5% of the Fund's total
assets.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 30% of the Fund's
total assets. Each securities loan is collateralized with Collateral Assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. If the seller should default on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security and might incur a loss if
the value of the security declines, as well as disposition costs in liquidating
the security. See the Statement of Additional Information for further
information.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. government or other securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or
"delayed-delivery" basis. The price is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date, normally
seven to 15 days later. When-issued securities and forward commitments may be
sold prior to the settlement date, but the Fund will enter into when-issued and
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. No income accrues on securities that have
been purchased pursuant to a forward commitment or on a when-issued basis prior
to delivery to the Fund. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition, or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its Custodian to collateralize the Fund's obligation
with Collateral Assets equal to the value of the when-issued or forward
commitment securities, marked-to-market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effects of adverse changes in the financial
markets in which the Fund invests, or against currency exchange rate or interest
rate changes that are adverse to the present or prospective positions of the
Fund, the Fund may employ certain risk management practices using the following
derivative securities and techniques (known as "derivatives"): forward currency
exchange contracts, stock options, currency options, and stock and stock index
options; futures contracts; and swaps and options on futures contracts on U.S.
government and foreign-government securities and currencies. The Board has
adopted derivatives guidelines that require the Board to review each new type of
derivative that may be used by the Fund. Some markets currently do not have
instruments available for hedging transactions relating to currencies or to
securities denominated in such currencies or to securities of issuers domiciled
or principally engaged in business in such markets. To the extent that such
markets do not exist, the Manager may not be able to effectively hedge its
investment in such countries. Furthermore, the Fund will engage in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment. The
Statement of Additional Information contains further information on the Fund's
hedging and risk management practices, including related risks and other special
considerations.
Forward Currency Contracts
A forward currency contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date, which is individually negotiated
and privately traded by currency traders and their customers. The Fund normally
conducts its foreign-currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign-currency exchange market
at the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into a forward contract with a term greater than one year.
The Fund generally enters into forward contracts under two circumstances. First,
if the Fund enters into a contract for the
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Montgomery Institutional Series: Emerging Markets Portfolio
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purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security in relation to another
currency by entering into a forward contract to buy or sell the amount of
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country may suffer or
substantially benefit against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency of such country approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency. The Fund will not enter into forward contracts if, as a result, the
Fund will have more than one-third of its total assets committed to the
consummation of such contracts or unless the Fund owns the currency that it is
obligated to deliver or has caused its Custodian to collateralize the Fund's
obligation with Collateral Assets having a value sufficient to cover its
obligations to purchase the currency. Although forward contracts will be used
primarily to protect the Fund from adverse currency movements, they also involve
the risk that anticipated currency movements will not be predicted accurately.
Options on Securities, Securities Indices and Currencies
The Fund also may purchase put and call options on securities and currencies
traded on U.S. exchanges and, to the extent permitted by law, foreign exchanges,
as well as in the over-the-counter market. The Fund may purchase call options on
securities that it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency relative to the U.S. dollar). The Fund also may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). The ability to purchase put options allows the Fund to protect the
unrealized gain in an appreciated security in its portfolio without actually
selling the security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from such a sale will depend upon
whether the amount received is more or less than the premium paid for the option
plus the related transaction cost.
The Fund also may purchase put and call options on stock indices in order to
hedge against the risk of stock market or industrywide stock price fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
The Fund may purchase and write options in the over-the-counter market ("OTC
options") to the same extent that they may engage in transactions in
exchange-traded options. OTC options differ from exchange-traded options in that
they are negotiated individually and terms of the contract are not standardized
as is the case with exchange-traded options. Moreover, because there is no
clearing corporation involved in an OTC option, there is a risk of
non-performance by the counterparty to the option. However, OTC options
generally are much more available for securities in a wider range of expiration
dates and exercise prices than exchange-traded options. It is the current
position of the staff of the SEC that OTC options (and securities underlying the
OTC options) are illiquid securities except to the extent that OTC options are
entered into with U.S. government securities dealers designated by the Federal
Reserve Bank of New York under guidelines specified by the SEC staff.
Accordingly, the Fund will treat OTC options as subject to the Fund's
limitations on illiquid securities until such time as there is a change in the
SEC's position.
Futures and Options on Futures
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement by the Fund to purchase or sell debt securities,
usually U.S. government securities, at a specified date and price. The Fund may
sell interest rate futures contracts (i.e., enter into a futures contract to
sell the underlying debt security) in an attempt to hedge its portfolio against
an anticipated increase in interest rates and a corresponding decline in the
Fund's portfolio debt securities. The Fund may purchase an interest rate futures
contract (i.e., enter into a futures contract to purchase an underlying
security) to hedge against an interest rate decrease and corresponding increase
in the value of debt securities it anticipates purchasing. The Fund also may
purchase and sell put and call options on interest rate futures contracts in
lieu of, and for the same purposes as, entering into the underlying interest
rate futures contracts. The Fund collateralizes its obligation with Collateral
Assets equal to the purchase price of the portfolio securities represented by
the underlying interest rate futures contracts for which it has an obligation to
purchase.
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The Fund will not enter into any futures contracts or related options if the sum
of the initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options purchased by the Fund would exceed 5% of the value of
the Fund's total assets. The Fund will not purchase futures contracts or related
options if, as a result, more than one-third of the value of the Fund's total
assets would be so invested.
Hedging Considerations
Hedging transactions involve certain risks. Although the Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments. The Fund also could be exposed to risks if it could not close
out its futures or options positions because of an illiquid secondary market.
The Statement of Additional Information contains further information on the
Fund's hedging and risk management practices, including related risks and other
considerations.
Futures, options and options on futures have effective durations which, in
general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (supported by
Collateral Assets) may lengthen the effective duration of the Fund's portfolio.
Although utilization of options, futures contracts and related options and
similar instruments may be advantageous to the Fund, if the Manager is not
successful in employing such instruments in managing the Fund's investments or
in predicting changes in the market, the Fund's performance will be worse than
if the Fund did not make such investments. In addition, the Fund pays
commissions and other costs in connection with such investments, which may
increase the Fund's expenses and reduce its return. See the Statement of
Additional Information for further discussion of the possible risks involved in
transactions in options and futures contracts and related options.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund will treat as illiquid any securities that are subject to restrictions
on repatriation for more than seven days, as well as any securities issued in
connection with foreign debt conversion programs that are restricted as to
remittance of invested capital or profit. The Fund also treats repurchase
agreements with maturities in excess of seven days as illiquid securities.
Illiquid securities do not include securities that are restricted from trading
on formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under the
Securities Act of 1933, as amended, and that, subject to review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes in an effort to
minimize portfolio losses. Depending upon the Manager's analysis of the various
markets and other considerations, all or part of the assets of the Fund may be
held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it is appropriate,
regardless of how long the securities have been held by the Fund. The Manager
therefore changes the Fund's investments whenever it believes doing so will
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to the Fund, including brokerage commissions or dealer markups and
other transaction costs on the sale of securities and reinvestment in other
securities. Portfolio turnover also may result in the recognition of capital
gains that may be distributed to shareholders. Portfolio turnover in excess of
100% is considered high and increases such costs. See "Financial Highlights" for
the Fund's past portfolio turnover information. The annual portfolio turnover
for the Fund is anticipated to be
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less than 100%. The Manager does not regard portfolio turnover as a limiting
factor, however.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval; but unless otherwise stated, the Fund's other
investment policies may be changed by the Trust's Board. If there is a change in
the investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Risk Considerations
The Year 2000 Problem
The Fund and its service providers depend upon the smooth functioning of their
computer systems. Unfortunately, because of the way dates are encoded and
calculated, many computer systems in use today cannot recognize the year 2000,
but revert to 1900 or another incorrect date. Computer failures due to the year
2000 problem could negatively impact the handling of securities trades and
pricing and account services.
The Fund's software vendors and service providers have assured the Fund that its
systems will be adapted in sufficient time to avoid serious problems. There can
be no guarantee, however, that all of their computer systems will be adapted in
time. The Fund does not expect year 2000 conversion costs to be substantial for
the Fund because those costs are borne by the Fund's vendors and service
providers and not directly by the Fund.
Brokers and other intermediaries that hold shareholder accounts may still
experience incompatibility problems. It is also important to keep in mind that
year 2000 issues may negatively impact the companies in which the Fund invest
and, by extension, the value of those companies' shares held by the Fund. The
Fund is in the process of putting in place a contingency plan to evaluate other
vendors and service providers if the existing vendors and service providers fail
to adequately adapt their systems in a timely manner.
Single European Currency
On January 1, 1999, the European Union will introduce a single European currency
called the "euro." The first group of countries to begin converting their
currencies to the euro include Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
introduction of the euro causes three primary uncertainties. The first is
whether the payment and operational systems of banks and other financial
institutions will be ready by the scheduled launch date. The second what will be
the legal implications of outstanding financial contracts that refer to
currencies that will be replaced by the euro after January 1, 1999. Finally,
there are questions about how suitable clearing and settlement payment systems
for the euro will be developed. These and other factors (including political and
economic risks) could cause market disruptions before or after the introduction
of the euro and could negatively affect companies in which the Fund may invest
and by extension the value of the shares held in the Fund.
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may invest in smaller companies that can benefit
from the development of new products and services. These smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than larger, more mature issuers. Such smaller companies may have
limited product lines, markets or financial resources, and their securities may
trade less frequently and in more limited volume than the securities of larger,
more mature companies. As a result, the prices of the securities of such smaller
companies may fluctuate to a greater degree than those of the securities of
other issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should carefully consider the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Investments in securities of companies
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Montgomery Institutional Series: Emerging Markets Portfolio
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domiciled in, and markets of, emerging markets countries may be subject to
higher risks than investments in more-developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign-government securities, and
political or social instability or diplomatic developments that could adversely
affect investment in securities of issuers in foreign nations. In addition,
there is often less publicly available information about foreign issuers than
those in the United States. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to U.S.
companies. Further, the Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. Further risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services, and other costs relating to
investments by the Fund in other countries generally are greater than in the
United States. Such markets have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
settle certain transactions. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result either in loss to the Fund if the value of the
portfolio security subsequently declined or, if the Fund entered into a contract
to sell the security, could result in possible claims against the Fund. In
certain countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. The securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States.
Because the securities of the Fund may be denominated in foreign currencies, the
value of such securities to the Fund will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions among currencies. A change in the value of a
foreign currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of the Fund's securities denominated in that currency.
Such changes also will affect the Fund's income and distributions to
shareholders. The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange among the currencies of different
nations, and the Fund therefore may engage in certain foreign-currency hedging
strategies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Manager's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements among,
exchange rates and currency hedges.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not free-floating against the U.S. dollar. Further, certain
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated may
have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. Moreover,
the economies of some countries may differ favorably or unfavorably from the
U.S. economy in such respects as the rate of growth of gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Certain countries also limit the amount of foreign
capital that can be invested in their markets and local companies, creating a
"foreign premium" on capital investments available to foreign investors such as
the Fund. The Fund may pay a "foreign premium" to establish an investment
position which it cannot later recoup because of changes in that country's
foreign-investment laws.
Lower-Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch or Baa by Moody's) or (in limited amounts) high-risk,
lower-quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be
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17
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
of equivalent investment quality as determined by the Manager. Medium-quality
debt securities have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher-grade debt
securities.
As an operating policy, which may be changed by the Board of Trustees without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's or, if unrated,
deemed to be of comparable quality as determined by the Manager using guidelines
approved by the Board. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower-quality debt securities would be consistent with
the interests of the Fund and its shareholders. Unrated debt securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. Regardless of rating levels, all debt securities
considered for purchase (whether rated or unrated) are analyzed by the Manager
to determine, to the extent reasonably possible, that the planned investment is
sound in the Manager's opinion. The Fund, from time to time, may purchase
defaulted debt securities if, in the opinion of the Manager, the issuer may
resume interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates; i.e., a decline in
interest rates produces an increase in market value, whereas an increase in
interest rates produces a decrease in market debt value, of these securities.
Moreover, the longer the remaining maturity of a security, the greater the
effect of interest rate changes on the market value of the security. In
addition, changes in the ability of an issuer to make payments of interest and
principal and in the market's perception of an issuer's creditworthiness also
affect the market value of the debt securities of that issuer.
Equity Swaps
The Fund may invest in equity swaps. Equity swaps are derivatives, and their
value can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
General Information
The Trust
The Fund is a separate series of The Montgomery Funds II, a Delaware business
trust which was organized on September 8, 1993. The Agreement and Declaration of
Trust permits the Board of Trustees to issue an unlimited number of full and
fractional shares of beneficial interest, $0.01 par value, in any number of
series. The Fund is one of several series of the Trust, the assets and
liabilities of which are separate and distinct from each other.
This prospectus relates only to the Class R shares of the Fund. The Fund may in
the future designate other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share shall be entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share shall be entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust will vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so the holders of more
than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. Although the Trust is not required to and
does not intend to hold annual meetings of shareholders, such meetings may be
called by the Trustees at their discretion, or upon demand by the holders of 10%
or more of the outstanding shares of the Trust for the
- --------------------------------------------------------------------------------
18
<PAGE>
purpose of electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions contained in Section 16(c) of the
Investment Company Act.
Performance Information
From time to time, the Fund may publish its total return in advertisements and
communications to investors. Total return information generally will include the
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations.
The Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 cash investment that
includes capital appreciation and depreciation for the stated period according
to a specific formula, but is subject to the expense reimbursement fees
discussed elsewhere in this prospectus. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against the Fund's income. See
"Performance Information" in the Statement of Additional Information.
The investment results of the Fund will fluctuate over time, and any
presentation of the Fund's total return for any prior period should not be
considered a representation of what an investor's total return may be in any
future period.
Legal Opinion
The validity of shares of beneficial interest offered by this prospectus has
been passed on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street,
San Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material will be sent to each address regardless of the number of shareholders
or accounts at that address. Shareholder inquiries generally should be directed
to (415) 248-6032.
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN, to check the appropriate boxes on the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS"). Backup withholding could apply to payments
made to a shareholder's account while awaiting receipt of a TIN. Other rules
apply for certain entities. For example, for an account established under the
Uniform Gifts to Minors Act, the TIN of the minor should be furnished.
If a shareholder has been notified by the IRS that the shareholder is subject to
backup withholding because the shareholder failed to report all interest and
dividend income on his, her or its tax return and the shareholder has not been
notified by the IRS that such withholding should cease, the shareholder should
cross out the backup withholding certification in the signature portion of the
New Account application.
If a shareholder is a nonresident alien or a foreign entity, a completed Form
W-8 must be provided to the Fund in order to avoid backup withholding on
redemptions and other payments. Dividends paid to a shareholder account by the
Fund may be subject to up to 30% withholding instead of backup withholding.
If a shareholder is an exempt recipient, the shareholder should furnish a TIN.
Exempt recipients include certain corporations, certain tax-exempt entities,
tax-exempt pension plans and IRAs, government agencies, financial institutions,
registered
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19
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
securities and commodities dealers, and others.
For further information regarding backup withholding, see Section 3406 of the
Code and consult a tax advisor.
---------------------------------
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20
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
This prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Fund's official sales literature.
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111-9361
(415) 248-6032
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111-9361
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
(800) 572-3863
Independent Auditors
PricewaterhouseCoopers LLP
555 California Street
San Francisco, California 94104
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
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21
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR CLASS R AND CLASS P SHARES OF
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
---------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS
- --------------------------------------------------------------------------------
MONTGOMERY GROWTH FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
October 31, 1998
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery U.S. Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). This Statement of Additional Information contains
information in addition to that set forth in the combined prospectus for the
Class R shares for all Funds dated October 31, 1998, and that set forth in the
combined prospectuses for the Class P shares of certain Funds dated October 31,
1998, as those prospectuses may be revised from time to time (in reference to
the appropriate Fund or Funds, the "Prospectuses"). The Prospectuses may be
obtained without charge at the address or telephone number provided above. This
Statement of Additional Information is not a prospectus and should be read in
conjunction with a Prospectus. The Annual Report to Shareholders for each Fund
for the fiscal year ended June 30, 1998, containing financial statements for
each Fund for that fiscal year, is incorporated by reference to this Statement
of Additional Information and also may be obtained without charge as noted
above.
B-1
<PAGE>
TABLE OF CONTENTS
PAGE
STATEMENT OF ADDITIONAL INFORMATION............................................1
THE TRUSTS.....................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS................................4
RISK FACTORS..................................................................25
INVESTMENT RESTRICTIONS.......................................................35
DISTRIBUTIONS AND TAX INFORMATION.............................................38
TRUSTEES AND OFFICERS.........................................................43
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................47
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................52
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................55
DETERMINATION OF NET ASSET VALUE..............................................57
PRINCIPAL UNDERWRITER.........................................................60
PERFORMANCE INFORMATION.......................................................60
GENERAL INFORMATION...........................................................66
FINANCIAL STATEMENTS..........................................................79
Appendix......................................................................81
B-2
<PAGE>
THE TRUSTS
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and The Montgomery
Funds II is an open-end management investment company organized as a Delaware
business trust on September 10, 1993. Both are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trusts
currently offer shares of beneficial interest, $0.01 par value per share, in
various series. Each series offers three classes of shares (Class R, Class P and
Class L). This Statement of Additional Information pertains to the following
series of The Montgomery Funds:
>> Montgomery Growth Fund (the "Growth Fund");
>> Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities
Fund");
>> Montgomery Small Cap Fund (the "Small Cap Fund");
>> Montgomery U.S. Emerging Growth Fund (the "U.S. Emerging Growth Fund,"
prior to 6/98, called "Montgomery Micro Cap Fund");
>> Montgomery Equity Income Fund (the "Equity Income Fund");
>> Montgomery International Growth Fund (the "International Growth Fund");
>> Montgomery International Small Cap Fund (the "International Small Cap
Fund");
>> Montgomery Emerging Markets Fund (the "Emerging Markets Fund");
>> Montgomery Emerging Asia Fund (the "Emerging Asia Fund");
>> Montgomery Latin America Fund (the "Latin America Fund");
>> Montgomery Global Opportunities Fund (the "Opportunities Fund");
>> Montgomery Global Communications Fund (the "Communications Fund");
>> Montgomery Select 50 Fund (the "Select 50 Fund");
>> Montgomery Total Return Bond Fund (the "Total Return Bond Fund");
>> Montgomery Short Duration Government Bond Fund (the "Short Bond Fund,"
prior to 2/97, called "Montgomery Short Government Bond Fund");
>> Montgomery Government Reserve Fund (the "Reserve Fund");
>> Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund," prior to 6/95, called "Montgomery California
Tax-Free Short/Intermediate Fund," prior to 12/94, called "Montgomery
California Tax-Free Bond Fund");
>> Montgomery California Tax-Free Money Fund (the "California Money
Fund");
>> Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund");
as well as one series of The Montgomery Funds II:
>> Montgomery U.S. Asset Allocation Fund (the "U.S. Asset Allocation
Fund," prior to 10/97, called "Montgomery Asset Allocation Fund").
Throughout this Statement of Additional Information, certain Funds may
be referred to together using the following terms: the Growth, Small Cap
Opportunities, Small Cap, U.S. Emerging Growth and Equity Income Funds as the
"U.S. Equity Funds"; the International Growth, International Small Cap, Emerging
Markets, Emerging Asia, Latin America, Opportunities and Communications Funds as
the "Foreign and Global Equity Funds"; the Select 50 and U.S. Asset Allocation
Funds as the "Multi-Strategy Funds"; the Total Return Bond, Short Bond and
California Intermediate Bond Funds as the "Fixed Income Funds"; the California
B-3
<PAGE>
Intermediate Bond, California Money and Federal Money Funds as the "Tax-Free
Funds"; the Reserve, California Money and Federal Money Funds as the "Money
Market Funds"; and all of the Funds other than the Tax-Free Funds as the
"Taxable Funds."
Note that the two Trusts share responsibility for the accuracy of the
Prospectuses and this Statement of Additional Information, and that each Trust
may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Funds are managed by Montgomery Asset Management, LLC (the
"Manager") and their shares are distributed by Funds Distributor, Inc. (the
"Distributor"). The investment objectives and policies of the Funds are
described in detail in its Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free Funds, which
are nondiversified series of either the Montgomery Funds or The Montgomery Funds
II. The achievement of each Fund's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
The U.S. Asset Allocation Fund is a fund-of-funds. Other than U.S.
government securities, the U.S. Asset Allocation Fund does not own securities of
its own. Instead, the U.S. Asset Allocation Fund invests its assets in a number
of funds in The Montgomery Funds family (each, an "Underlying Fund"). Investors
of the U.S. Asset Allocation Fund should therefore review the discussion in this
Statement of Additional Information that relates to each Underlying Fund of the
U.S. Asset Allocation Fund.
SPECIAL INVESTMENT STRATEGIES AND RISKS
Certain of the Funds have special investment policies, strategies and
risks in addition to those discussed in the Prospectus, as described below.
MONTGOMERY EQUITY INCOME FUND. The Equity Income Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers,
which may involve special risks. See "Risk Factors" below.
MONTGOMERY EMERGING ASIA FUND. The Emerging Asia Fund invests primarily
in "emerging Asian companies." This Fund considers a company to be an emerging
Asian company if its securities are principally traded in the capital market of
an emerging Asian country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging Asian countries or from
sales made in such emerging Asian countries, regardless of where the securities
of such company are primarily traded; or it is organized under the laws of, and
with a principal office in, an emerging Asian country.
Investing in Asia involves special risks. Emerging Asian countries are
in various stages of economic development, with most being considered emerging
markets. Each country has its unique risks. Most emerging Asian countries are
heavily dependent on international trade. Some have prosperous economies but are
sensitive to world commodity prices. Others are especially vulnerable to
recession in other countries. Some emerging Asian countries have experienced
rapid growth, although many suffer from obsolete financial systems, economic
problems or archaic legal systems. The Fund may invest in certain debt
securities issued by the governments of emerging Asian countries that are, or
may be eligible for, conversion into investments in
B-4
<PAGE>
emerging Asian companies under debt conversion programs sponsored by such
governments. The Fund deems securities that are convertible to equity
investments to be equity-derivative securities.
The Emerging Asia Fund concentrates its investments in companies that
have their principal activities in emerging Asian countries. Consequently, the
Fund's share value may be more volatile than that of investment companies not
sharing this geographic concentration. The value of the Fund's shares may vary
in response to political and economic factors affecting issuers in emerging
Asian countries. Although the Fund normally does not expect to invest in
Japanese companies, some emerging Asian economies are directly affected by
Japanese capital investment in the region and by Japanese consumer demands. Many
of the emerging Asian countries are developing both economically and
politically. Emerging Asian countries may have relatively unstable governments,
economies based on only a few commodities or industries, and securities markets
trading infrequently or in low volumes. Some emerging Asian countries restrict
the extent to which foreigners may invest in their securities markets.
Securities of issuers located in some emerging Asian countries tend to have
volatile prices and may offer significant potential for loss as well as gain.
Further, certain companies in emerging Asian may not have firmly established
product markets, may lack depth of management or may be more vulnerable to
political or economic developments such as nationalization of their own
industries.
MONTGOMERY LATIN AMERICA FUND. The Latin America Fund invests primarily
in Latin American companies. The Fund considers a company to be a Latin American
company if its securities are principally traded in the capital market of a
Latin American country; it derives at least 50% of its total revenues from
either goods produced or services rendered in Latin American countries or from
sales made in such Latin American countries, regardless of where the securities
of such company are primarily traded; or it is organized under the laws of, and
with a principal office in, a Latin American country.
The Fund invests primarily in common stock, but also may invest in
other types of equity-derivative securities. It also may invest up to 35% of its
total assets in debt securities, including up to 15% in high-yield debt
securities rated below investment grade (also known as "junk bonds"). The debt
securities may be dollar-denominated U.S. securities or debt securities of
companies or governments of Latin America. The Fund may also invest in certain
debt securities issued by the governments of Latin American countries that are,
or may be eligible for, conversion into investments in Latin American companies
under debt conversion programs sponsored by such governments. The Fund deems
securities that are convertible to equity investments to be equity-derivative
securities.
The Latin America Fund concentrates its investments in companies that
have their principal activities in Latin American countries. Consequently, the
Latin America Fund's share value may be more volatile than that of investment
companies not sharing this geographic concentration. The value of the Latin
America Fund's shares may vary in response to political and economic factors
affecting issuers in Latin American countries. Investors should be aware that
the Latin American economies have experienced considerable difficulties in the
past decade. Although there have been significant improvements in recent years,
the Latin American economies continue to experience challenging problems,
including high inflation rates and high interest rates relative to the United
States. The emergence of the Latin American economies and securities markets
will require continued economic and fiscal discipline, which has been lacking at
times in the past, as well as stable political and social conditions. Recovery
may also be influenced by international economic conditions, particularly those
in the United States, and by world prices for oil and other commodities. There
is no assurance that recent economic initiatives will be successful.
B-5
<PAGE>
Certain risks associated with international investments and investing
in smaller, developing capital markets are heightened for investments in Latin
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of these currencies periodically. In
addition, although there is a trend toward less government involvement in
commerce, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government still owns or controls many companies,
including some of the largest in the country. Accordingly, government actions in
the future could have a significant effect on economic conditions in Latin
American countries, which could affect private sector companies and the Fund, as
well as the value of securities in the Fund's portfolio.
MONTGOMERY GLOBAL COMMUNICATIONS FUND. The Communications Fund defines
a "communications company" as a company engaged in the development, manufacture
or sale of communications equipment or services that derived at least 50% of
either its revenues or earnings from these activities, or that devoted at least
50% of its assets to these activities, based on the company's most recent fiscal
year.
The Communications Fund's portfolio management believes that worldwide
demand for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers, and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
The Communications Fund may invest up to 35% of its total assets in
debt securities, including up to 5% in debt securities rated below investment
grade. The Communications Fund invests in companies that, in the opinion of the
Manager, have potential for above-average, long-term growth in sales and
earnings on a sustained basis and that are reasonably priced. The Manager
considers a number of factors in evaluating potential investments, including a
company's per-share sales and earnings growth; return on capital; balance sheet;
financial and accounting policies; overall financial strength; industry sector;
competitive advantages and disadvantages; research, product development and
marketing; development of new technologies; service; pricing flexibility;
quality of management; and general operating characteristics.
The Communications Fund may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Communications Fund invests in at least three different countries, which may
include the United States, but no country other than the United States may
represent more than 40% of its assets. A significant portion of the
Communications Fund's assets are invested in the securities of foreign issuers,
because many attractive investment opportunities, including many of the world's
communications companies, are outside the United States.
MONTGOMERY FEDERAL MONEY FUND, CALIFORNIA MONEY FUND AND CALIFORNIA
INTERMEDIATE BOND FUND. The Federal Money Fund seeks to, under normal
conditions, achieve its objective by investing at least 80% of its net assets in
municipal securities, the interest from which is, in the opinion of counsel to
the issuer, exempt from federal income tax. The California Money Fund seeks to
achieve its objective by investing at least 80% of its net assets in municipal
securities and at least 65% of its net assets in debt securities, the interest
from which is, in the opinion of counsel to the issuer, also exempt from
California personal income taxes ("California municipal securities"). Under
normal conditions, the California Intermediate Bond Fund seeks to achieve its
B-6
<PAGE>
objective by investing at least 80% of its net assets in California municipal
securities. The California Money Fund and the California Intermediate Bond Fund
are not suitable for investors who cannot benefit from the tax-exempt character
of its dividends, such as IRAs, qualified retirement plans or tax-exempt
entities.
At least 80% of the value of the California Intermediate Bond Fund's
net assets must consist of California municipal securities that, at the time of
purchase, are rated investment grade, that is, within the four highest ratings
of municipal securities (AAA to BBB) assigned by Standard & Poor's Corporation
("S&P"), (Aaa to Baa) assigned by Moody's Investors Service, Inc. ("Moody's"),
or (AAA to BBB) assigned by Fitch Investor Services ("Fitch"); or have S&P's
short-term municipal rating of SP-2 or higher, or a municipal commercial paper
rating of A-2 or higher; Moody's short-term municipal securities rating of MIG-2
or higher, or VMIG-2 or higher or a municipal commercial paper rating of P-2 or
higher; or have Fitch's short-term municipal securities rating of FIN-2 or
higher or a municipal commercial paper rating of Fitch-2 or higher; or, if
unrated by S&P, Moody's or Fitch, are deemed by the Manager to be of comparable
quality, using guidelines approved by the Board of Trustees, but not to exceed
20% of the Fund's net assets. Debt securities rated in the lowest category of
investment-grade debt may have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than is the case with higher-grade
bonds. There is no assurance that any municipal issuers will make full payments
of principal and interest or remain solvent, however. For a description of the
ratings, see the Appendix.
The Federal Money and California Money Funds seek to maintain a stable
net asset value of $1 per share in compliance with Rule 2a-7 under the
Investment Company Act and, pursuant to procedures adopted under that Rule,
limit their investments to those securities that the Board determines present
minimal credit risks and have remaining maturities, as determined under the
Rule, of 397 calendar days or less. These Funds also maintain a dollar-weighted
average maturity of their portfolio securities of 90 days or less.
PORTFOLIO SECURITIES
DEPOSITARY RECEIPTS, CONVERTIBLE SECURITIES AND SECURITIES WARRANTS.
The Foreign and Global Equity Funds, the Select 50 Fund and the U.S. Equity
Funds may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depository
Receipts ("GDRs"), and other similar global instruments available in emerging
markets, or other securities convertible into securities of eligible issuers.
These securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. Generally, ADRs in registered form
are designed for use in U.S. securities markets, and EDRs and other similar
global instruments in bearer form are designed for use in European securities
markets. For purposes of a Fund's investment policies, a Fund's investments in
ADRs, EDRs and similar instruments will be deemed to be investments in the
equity securities representing the securities of foreign issuers into which they
may be converted. Each such Fund may also invest in convertible securities and
securities warrants.
OTHER INVESTMENT COMPANIES. Each Fund may invest in securities issued
by other investment companies. Those investment companies must invest in
securities in which the Fund can invest in a manner consistent with the Fund's
investment objective and policies. Applicable provisions of the Investment
Company Act require that a Fund limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 10% (or 35%
for the Money Market Funds) of the value of a Fund's total assets will be
invested in the aggregate in securities of investment companies as a group; and
(b) either (i) a Fund and affiliated persons
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of that Fund not own together more than 3% of the total outstanding shares of
any one investment company at the time of purchase (and that all shares of the
investment company held by that Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid), or (ii) a Fund not invest more than 5%
of its total assets in any one investment company and the investment not
represent more than 3% of the total outstanding voting stock of the investment
company at the time of purchase.
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the Foreign and Global Equity Funds to invest in certain markets.
Such investments may involve the payment of substantial premiums above the net
asset value of those investment companies' portfolio securities and are subject
to limitations under the Investment Company Act. The Foreign and Global Equity
Funds also may incur tax liability to the extent that they invest in the stock
of a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds.
The U.S. Equity Funds, the Foreign and Global Equity Funds, the Select
50 Fund and the U.S. Fixed-Income and Money Market Funds do not intend to invest
in other investment companies unless, in the Manager's judgment, the potential
benefits exceed associated costs. As a shareholder in an investment company,
these Funds bear their ratable share of that investment company's expenses,
including advisory and administration fees. The Manager has agreed to waive its
own management fee with respect to the portion of these Funds' assets invested
in other open-end (but not closed-end) investment companies.
DEBT SECURITIES. Each Fund may purchase debt securities that complement
its objective of capital appreciation through anticipated favorable changes in
relative foreign exchange rates, in relative interest rate levels or in the
creditworthiness of issuers. Debt securities may constitute up to 35% of the
U.S. Equity Funds', the Foreign and Global Equity Funds' and the Select 50
Fund's total assets. In selecting debt securities, the Manager seeks out good
credits and analyzes interest rate trends and specific developments that may
affect individual issuers. As an operating policy, which may be changed by the
Board, each Fund may invest up to 5% (except the Latin America Fund which may
invest up to 15%) of their total assets in debt securities rated lower than
investment grade. Subject to this limitation, each of these Funds may invest in
any debt security, including securities in default. After its purchase by a
Fund, a debt security may cease to be rated or its rating may be reduced below
that required for purchase by the Fund. A security downgraded below the minimum
level may be retained if determined by the Manager and the Board to be in the
best interests of the Fund.
Debt securities may also consist of participation certificates in large
loans made by financial institutions to various borrowers, typically in the form
of large unsecured corporate loans. These certificates must otherwise comply
with the maturity and credit-quality standards of each Fund and will be limited
to 5% of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the Equity Income Fund and the Foreign and Global Equity
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, government entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
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U.S. GOVERNMENT SECURITIES. Each Fund may invest a substantial portion,
if not all, of its net assets in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, including repurchase agreements
backed by such securities. ("U.S. Government securities"). These Funds generally
will have a lower yield than if they purchased higher yielding commercial paper
or other securities with correspondingly greater risk instead of U.S. Government
securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Funds' shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
PRIVATIZATIONS. The Select 50 Fund and the Foreign and Global Equity
Funds may invest in privatizations. Foreign governmental programs of selling
interests in government-owned or -controlled enterprises ("privatizations") may
represent opportunities for significant capital appreciation and these Funds may
invest in privatizations. The ability of U.S. entities, such as these Funds, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be successful.
SPECIAL SITUATIONS. The Select 50 Fund and the Foreign and Global
Equity Funds may invest in special situations. The Funds believe that carefully
selected investments in joint ventures, cooperatives, partnerships, private
placements, unlisted securities and similar vehicles (collectively, "special
situations") could enhance their capital appreciation potential. These Funds
also may invest in certain types of vehicles or derivative securities that
represent indirect investments in foreign markets or securities in which it is
impracticable for the Funds to invest directly. Investments in special
situations may be illiquid, as determined by the Manager based on criteria
reviewed by the Board. These Funds do not invest more than 15% of their net
assets in illiquid investments, including special situations.
Mortgage-Related Securities and Derivative Securities. The U.S.
Fixed-Income and Money Market Funds may invest in mortgage-related securities. A
mortgage-related security is an interest in a pool of mortgage loans and is
considered a derivative security. Most mortgage-related securities are
pass-through securities, which means that investors receive payments consisting
of a pro rata share of both principal and interest (less servicing and other
fees), as well as unscheduled prepayments, as mortgages in the underlying
mortgage pool are paid off by the borrowers. Certain mortgage-related securities
are subject to high volatility. These Funds use these derivative securities in
an effort to enhance return and as a means to make certain investments not
otherwise available to the Funds.
AGENCY MORTGAGE-RELATED SECURITIES. Investors in the U.S. Fixed-Income
and Money Market Funds should note that the dominant issuers or guarantors of
mortgage-related securities today are GNMA, FNMA and the FHLMC. GNMA creates
pass-through securities from pools of government-guaranteed or -insured (Federal
Housing Authority or Veterans Administration) mortgages. FNMA and FHLMC issue
pass-through securities
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from pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment.
Adjustable rate mortgage securities ("ARMs") are pass-through
securities representing interests in pools of mortgage loans with adjustable
interest rates determined in accordance with a predetermined interest rate index
and which may be subject to certain limits. The adjustment feature of ARMs tends
to lessen their interest rate sensitivity.
The U.S. Fixed-Income and Money Market Funds consider GNMA, FNMA and
FHLMC-issued pass-through certificates, Collateralized Mortgage Obligations
("CMOs") and other mortgage-related securities to be U.S. government securities
for purposes of their investment policies. The Money Market Funds do not invest
in stripped mortgage securities, however, and the Short Bond Fund limits its
stripped mortgage securities investments to 10% of total assets. The liquidity
of Interest-Only bonds ("IOs") and Principal-Only bonds ("POs") issued by the
U.S. government or its agencies and instrumentalities and backed by fixed-rate
mortgage-related securities will be determined by the Manager under the direct
supervision of the Trusts' Pricing Committee and reviewed by the Board, and all
other IOs and POs will be deemed illiquid for purposes of the U.S. Fixed-Income
and Money Market Funds' limitation on illiquid securities. The Short Bond and
Total Return Bond Funds may invest in derivative securities known as "floaters"
and "inverse floaters," the values of which vary in response to interest rates.
These securities may be illiquid and their values may be very volatile.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES/DERIVATIVES. The Total
Return Bond Fund and the Short Bond Fund may invest in mortgage-related
securities offered by private issuers, including pass-through securities for
pools of conventional residential mortgage loans; mortgage pay-through
obligations and mortgage-backed bonds, which are considered to be obligations of
the institution issuing the bonds and are collateralized by mortgage loans; and
bonds and CMOs collateralized by mortgage-related securities issued by GNMA,
FNMA, FHLMC or by pools of conventional mortgages, multifamily or commercial
mortgage loans.
Privately issued mortgage-related securities generally offer a higher
rate of interest (but greater credit and interest rate risk) than U.S.
government and agency mortgage-related securities because they offer no direct
or indirect governmental guarantees. Many issuers or servicers of
mortgage-related securities guarantee or provide insurance for timely payment of
interest and principal, however. The Short Bond Fund and Total Return Bond Fund
may purchase some mortgage-related securities through private placements that
are restricted as to further sale. The value of these securities may be very
volatile.
STRUCTURED NOTES AND INDEXED SECURITIES. The Funds may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these
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securities in its overall assessment of the effective duration of the Fund's
portfolio in an effort to monitor the Fund's interest rate risk.
VARIABLE-RATE DEMAND NOTES. The U.S. Fixed-Income and Money Market
Funds may invest in variable-rate demand notes ("VRDNs"). These are instruments
with rates of interest adjusted periodically or that "float" continuously
according to specific formulas and often have a demand feature entitling the
purchaser to resell the securities.
ASSET-BACKED SECURITIES. Each Fund may invest up to 5% (25% in the case
of the Total Return Bond Fund and the Short Bond Fund) of its total assets in
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g., credit
card) agreements. Like mortgage-related securities, these securities are subject
to the risk of prepayment.
MORTGAGE-RELATED SECURITIES: GOVERNMENT NATIONAL MORTGAGE ASSOCIATION.
GNMA is a wholly owned corporate instrumentality of the U.S. Government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of securities to
qualify for a GNMA guarantee, the underlying collateral must be mortgages
insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949,
as amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. Government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under a guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
MORTGAGE-RELATED SECURITIES: FEDERAL NATIONAL MORTGAGE ASSOCIATION.
FNMA is a federally chartered and privately owned corporation established under
the Federal National Mortgage Association Charter Act. FNMA was originally
organized in 1938 as a U.S. Government agency to add greater liquidity to the
mortgage market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any U.S. Government
agency). The loans contained in those pools consist of one or more of the
following: (1)
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fixed-rate level payment mortgage loans; (2) fixed-rate growing equity mortgage
loans; (3) fixed-rate graduated payment mortgage loans; (4) variable-rate
mortgage loans; (5) other adjustable-rate mortgage loans; and (6) fixed-rate
mortgage loans secured by multifamily projects.
MORTGAGE-RELATED SECURITIES: FEDERAL HOME LOAN MORTGAGE CORPORATION.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
mortgage loan must include whole loans, participation interests in whole loans
and undivided interests in whole loans and participation in another FHLMC
security.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. To the extent allowed in
its Prospectus, a Fund may invest in mortgage-related securities offered by
private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several classes of a CMO in a number of different ways. Generally, the purpose
of the allocation of the cash flow of a CMO to the various classes is to obtain
a more predictable cash flow to some of the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
To the extent allowed in its Prospectus, a Fund may invest in, among
other things, "parallel pay" CMOs and Planned Amortization Class CMOs ("PAC
Bonds"). Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class which, like the other CMO structures, must be retired by its
stated maturity date or final distribution date, but may be retired earlier. PAC
Bonds are parallel pay CMOs that generally require payments of a specified
amount of principal on each payment date; the required principal payment on PAC
Bonds have the highest priority after interest has been paid to all classes.
ADJUSTABLE-RATE MORTGAGE-RELATED SECURITIES. Because the interest rates
on the mortgages underlying adjustable-rate mortgage-related securities ("ARMS")
reset periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally
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decline in value during periods of rising interest rates, ARMS allow a Fund to
participate in increases in interest rates through periodic adjustments in the
coupons of the underlying mortgages, resulting in both higher current yields and
low price fluctuations. Furthermore, if prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, a Fund may be able
to reinvest such amounts in securities with a higher current rate of return.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to a Fund. Further, because of this
feature, the value of ARMS is unlikely to rise during periods of declining
interest rates to the same extent as fixed rate instruments. For further
discussion of the risks associated with mortgage-related securities generally.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are
tax-exempt obligations that contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
prior to specified dates, generally at 30-, 60-, 90-, 180-, or 365-day
intervals. The interest rates are adjustable at intervals ranging from daily to
six months. Adjustment formulas are designed to maintain the market value of the
VRDN at approximately the par value of the VRDN upon the adjustment date. The
adjustments typically are based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their creditworthiness
may be a function of the creditworthiness of the issuer, the institution
furnishing the irrevocable letter of credit, or both. Accordingly, the Tax-Free
Funds may invest in such VRDNs, the issuers or underlying institutions of which
the Manager believes are creditworthy and satisfy the quality requirements of
the Funds. The Manager periodically monitors the creditworthiness of the issuer
of such securities and the underlying institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
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MUNICIPAL SECURITIES. Because the Tax-Free Funds invest at least 80% of
their total assets in obligations either issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, authorities and instrumentalities,
including industrial development bonds, as well as obligations of certain
agencies and instrumentalities of the U.S. Government, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Securities"), or exempt from federal and California personal income
tax ("California Municipal Securities"), and the California Money Fund invests
at least 65% of its total assets in California Municipal Securities, and may
invest in Municipal Securities, these Funds generally will have a lower yield
than if they primarily purchased higher yielding taxable securities, commercial
paper or other securities with correspondingly greater risk. Generally, the
value of the Municipal Securities and California Municipal Securities held by
these Funds will fluctuate inversely with interest rates.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
REVENUE BONDS. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
INDUSTRIAL DEVELOPMENT BONDS. Industrial development bonds, which may
pay tax-exempt interest, are, in most cases, revenue bonds and are issued by or
on behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.
PARTICIPATION INTERESTS. The Tax-Free Funds may purchase from financial
institutions participation interests in Municipal Securities, such as industrial
development bonds and municipal lease/purchase agreements. A participation
interest gives a Fund an undivided interest in a Municipal Security in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Security. These instruments may have fixed, floating or
variable rates of interest. If the participation interest is unrated, it will be
backed by an irrevocable letter of credit or guarantee of a bank that the Board
of Trustees has approved as
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meeting the Board's standards, or, alternatively, the payment obligation will be
collateralized by U.S. Government securities.
For certain participation interests, these Funds will have the right to
demand payment, on not more than seven days' notice, for all or any part of
their participation interest in a Municipal Security, plus accrued interest. As
to these instruments, these Funds intend to exercise their right to demand
payment only upon a default under the terms of the Municipal Securities, as
needed to provide liquidity to meet redemptions, or to maintain or improve the
quality of their investment portfolios. The California Intermediate Bond Fund
will not invest more than 15% of its total assets and the California Money Fund
will not invest more than 10% of its total assets in participation interests
that do not have this demand feature, and in other illiquid securities.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
CUSTODIAL RECEIPTS. The Tax-Free Funds may purchase custodial receipts
representing the right to receive certain future principal and interest payments
on Municipal Securities that underlie the custodial receipts. A number of
different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by one
of these Funds should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private placements and
are subject to these Funds' limitation with respect to illiquid investments. The
Tax-Free Funds also may purchase directly from issuers, and not in a private
placement, Municipal Securities having the same characteristics as the custodial
receipts.
TENDER OPTION BONDS. The Tax-Free Funds may purchase tender option
bonds and similar securities. A tender option bond is a Municipal Security,
generally held pursuant to a custodial arrangement, having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates, coupled with an agreement of a third
party, such as a bank, broker-dealer or other financial institution, granting
the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause
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the securities, coupled with the tender option, to trade at par on the date of
such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. The Manager, on behalf of a Tax-Free Fund, considers
on a periodic basis the creditworthiness of the issuer of the underlying
Municipal Security, of any custodian and of the third party provider of the
tender option. In certain instances and for certain tender option bonds, the
option may be terminable in the event of a default in payment of principal or
interest on the underlying Municipal Obligations and for other reasons. The
California Intermediate Bond Fund will not invest more than 15% of its total
assets and the California Money Fund more than 10% of its total assets in
securities that are illiquid (including tender option bonds with a tender
feature that cannot be exercised on not more than seven days' notice if there is
no secondary market available for these obligations).
OBLIGATIONS WITH PUTS ATTACHED. The Tax-Free Funds may purchase
Municipal Securities together with the right to resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
securities' maturity date. Although an obligation with a put attached is not a
put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue
ruling to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
ZERO COUPON BONDS. The U.S. Fixed-Income and Money Market Funds may
invest in zero coupon securities, which are debt securities issued or sold at a
discount from their face value and do not entitle the holder to any periodic
payment of interest prior to maturity, a specified redemption date or a cash
payment date. The amount of the discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. Zero coupon securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The market
prices of zero coupon securities are generally more volatile than the market
prices of interest-bearing securities and respond more to changes in interest
rates than interest-bearing securities with similar maturities and credit
qualities. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the
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currently accrued original issue discount, and this may require liquidating
securities at times they might not otherwise do so and may result in capital
loss.
RISK FACTORS/SPECIAL CONSIDERATIONS RELATING TO DEBT SECURITIES
The Select 50, International and the Global Funds may invest in debt
securities that are rated below BBB by S&P, Baa by Moody's or BBB by Fitch, or,
if unrated, are deemed to be of equivalent investment quality by the Manager. As
an operating policy, which may be changed by the Board of Trustees without
shareholder approval, a Fund will invest no more than 5% (15% for the Latin
America Fund) of its assets in debt securities rated below Baa by Moody's or BBB
by S&P, or, if unrated, of equivalent investment quality as determined by the
Manager. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. The net asset value of a Fund will reflect
these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of a Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of that Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if that Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment-grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher-rated debt securities but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, a Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
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HEDGING AND RISK MANAGEMENT PRACTICES
In order to hedge against foreign currency exchange rate risks, the
Select 50, International, Global and Equity Income Funds may enter into forward
foreign currency exchange contracts ("forward contracts") and foreign currency
futures contracts, as well as purchase put or call options on foreign
currencies, as described below. Funds may enter into hedging transactions when,
in fact, it is inopportune to do so and, conversely, when it is more opportune
to enter into hedging transactions the Funds might not enter into such
transactions. Such inopportune timing of utilization of hedging practices could
result in substantial losses to the Funds.
The Funds also may conduct their foreign currency exchange transactions
on a spot (I.E., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
The Funds (except the Money Market Funds) also may purchase other types
of options and futures and may, in the future, write covered options.
FORWARD CONTRACTS. The Select 50, International and Global Funds may
enter into forward contracts to attempt to minimize the risk from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract, which is individually negotiated and privately traded by
currency traders and their customers, involves an obligation to purchase or sell
a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of that Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an amount of
the Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, a Fund always
will have cash, cash equivalents or liquid equity or debt securities denominated
in the appropriate currency available in an amount sufficient to cover any
commitments under these contracts. Segregated assets used to cover forward
contracts will be marked to market on a daily basis. While these contracts are
not presently regulated by the Commodity Futures Trading Commission ("CFTC"),
the CFTC may in the future regulate them, and the ability of a Fund to utilize
forward contracts may be restricted. Forward contracts may limit potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance by a Fund than if it had not entered into such contracts. A
Fund generally will not enter into a forward foreign currency exchange contract
with a term greater than one year.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To hedge against
movements in interest rates, securities prices or currency exchange rates a
Fund, the Funds (except the Money Market Funds) may purchase and sell various
kinds of futures contracts and options on futures contracts. The Fund also may
enter into closing purchase and sale transactions with respect to any such
contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant
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to Section 4.5 of the regulations under the Commodity Exchange Act, the notice
of eligibility included the representation that these Funds will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that a Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of that Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
These Funds will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by these Funds or
which they expect to purchase. These Funds' futures transactions generally will
be entered into only for traditional hedging purposes--I.E., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by these Funds are traded on
U.S. exchanges or boards of trade licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that Fund has acquired or
expects to acquire.
As part of its hedging strategy, a Fund also may enter into other types
of financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for that Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in a Fund's portfolio may be more or less volatile than prices of
such futures contracts, the Manager will attempt to estimate the extent of this
difference in volatility based on historical patterns and to compensate for it
by having that Fund enter into a greater or lesser number of futures contracts
or by attempting to achieve only a partial hedge against price changes affecting
that Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
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The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by a Fund is potentially
unlimited.
A Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. Each Fund
(other than the Money Market Funds) may purchase put and call options on
securities in which it has invested, on foreign currencies represented in its
portfolios and on any securities index based in whole or in part on securities
in which that Fund may invest. A Fund also may enter into closing sales
transactions in order to realize gains or minimize losses on options they have
purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although a Fund will generally purchase only those options for which
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
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Although the Funds do not currently intend to do so, they may, in the
future, write (I.E., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by that Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against a price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price) in the underlying security. In addition, a Fund's ability to sell the
underlying security is limited while the option is in effect unless that Fund
effects a closing purchase transaction.
Each Fund also may write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of
that Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Funds' orders.
EQUITY LINKED DERIVATIVES--SPDRS, WEBS, DIAMONDS and OPALs. Each Fund
may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs") and S&P's
MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity Benchmark Series
("WEBS") Dow Jones Industrial Average instruments ("DIAMONDS") and assets of
Country Securities ("OPALs"). Each of these instruments are derivative
securities whose value follows a well-known securities index as baskets of
securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P
500 Index and the S&P MidCap 400 Index, respectively. WEBS are currently
available in 17 varieties, each designed to follow the performance of a
different Morgan Stanley Capital International country index. DIAMONDS are
designed to follow the performance of the Dow Jones Industrial Average which
tracks the composite stock performance of 30 major U.S. companies in a diverse
range of industries.
OPALs track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxenberg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALs will receive semi-annual distribution
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALs, the holder will reveive the physical securities comprising the underlying
basket. OPALs, like many of these types of instruments, represent an unsecured
obligation and therefore carry with them the risk that the Counterparty will
default.
Because the prices of SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALs are
correlated to diversified portfolios, they are subject to the risk that the
general level of stock prices may decline or that the underlying indices
decline. In addition, because SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALs will
continue to be traded even when trading is halted in component stocks of the
underlying indices, price quotations for these securities may, at times, be
based upon non-current price information with respect to some of even all of the
stocks in the underlying indices. In addition to the risks disclosed in "Foreign
Securities" below, because WEBS mirror the performance of a single country
index, a economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
OTHER INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements.
A Fund's repurchase agreements will generally involve a short-term investment in
a U.S. Government security or other high-grade
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liquid debt security, with the seller of the underlying security agreeing to
repurchase it at a mutually agreed-upon time and price. The repurchase price is
generally higher than the purchase price, the difference being interest income
to that Fund. Alternatively, the purchase and repurchase prices may be the same,
with interest at a stated rate due to a Fund together with the repurchase price
on the date of repurchase. In either case, the income to a Fund is unrelated to
the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Boards,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Funds enter into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Funds regard repurchase agreements with
maturities in excess of seven days as illiquid. A Fund may not invest more than
15% (10% in the case of the Money Market Funds) of the value of its net assets
in illiquid securities, including repurchase agreements with maturities greater
than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from a Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by a Fund subject to a repurchase agreement as
being owned by that Fund or as being collateral for a loan by that Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, that Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor. As such, a Fund would be at risk
of losing some or all of the principal and income involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security. However,
each Fund always requires collateral for any repurchase agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and each Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), a Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price (including interest)
at all times.
The Funds may participate in one or more joint accounts with each other
and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using
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objective criteria. Any such repurchase agreement will have, with rare
exceptions, an overnight, over-the-weekend or over-the-holiday duration, and in
no event have a duration of more than seven days.
REVERSE REPURCHASE AGREEMENTS. The Domestic Equity, Select 50,
International, Opportunities, Short, Reserve and Tax- Free Funds may enter into
reverse repurchase. A Fund typically will invest the proceeds of a reverse
repurchase agreement in money market instruments or repurchase agreements
maturing not later than the expiration of the reverse repurchase agreement. This
use of proceeds involves leverage, and a Fund will enter into a reverse
repurchase agreement for leverage purposes only when the Manager believes that
the interest income to be earned from the investment of the proceeds would be
greater than the interest expense of the transaction. A Fund also may use the
proceeds of reverse repurchase agreements to provide liquidity to meet
redemption requests when sale of the Fund's securities is disadvantageous.
The Funds cause their custodian to segregate liquid assets, such as
cash, U.S. Government securities or other liquid equity or debt securities equal
in value to their obligations (including accrued interest) with respect to
reverse repurchase agreements. Such assets are marked to market daily to ensure
that full collateralization is maintained.
DOLLAR ROLL TRANSACTIONS. The Total Return Bond Fund and the Government
Reserve Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by a Fund of a security to a financial institution concurrently
with an agreement by that Fund to purchase a similar security from the
institution at a later date at an agreed-upon price. The securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase, a
Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional portfolio
securities of that Fund, and the income from these investments, together with
any additional fee income received on the sale, may or may not generate income
for that Fund exceeding the yield on the securities sold.
At the time a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. Government securities or
other liquid equity or debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
LENDING OF PORTFOLIO SECURITIES. Although the Funds currently do not
intend to do so, a Fund may lend its portfolio securities in order to generate
additional income. Such loans may be made to broker-dealers or other financial
institutions whose creditworthiness is acceptable to the Manager. These loans
would be required to be secured continuously by collateral, including cash, cash
equivalents, irrevocable letters of credit, U.S. Government securities, or other
high-grade liquid debt securities, maintained on a current basis (I.E., marked
to market daily) at an amount at least equal to 100% of the market value of the
securities loaned plus accrued interest. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Loans are subject to termination at the option of a Fund or the borrower
at any time. Upon such termination, that Fund is entitled to obtain the return
of the securities loaned within five business days.
For the duration of the loan, a Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
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continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Funds may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
security increases between the date the Fund enters into the forward commitment
and the date on which it must purchase the security it is committed to deliver.
The Fund will realize a gain from this type of forward commitment if the
security declines in price between those dates. The amount of any gain will be
reduced, and the amount of any loss increased, by the amount of the interest or
other transaction expenses the Fund may be required to pay in connection with
this type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
ILLIQUID SECURITIES. A Fund may invest up to 15% (10% for the Money
Market Funds) of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities and includes, among others, repurchase
agreements maturing in more than seven days, certain restricted securities and
securities that are otherwise not freely transferable. Illiquid securities also
include shares of an investment company held by a Fund in excess of 1% of the
total outstanding shares of that investment company. Restricted securities may
be sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the Securities Act
of 1933, as amended
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("1933 Act"). Illiquid securities acquired by a Fund may include those that are
subject to restrictions on transferability contained in the securities laws of
other countries. Securities that are freely marketable in the country where they
are principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time that Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, that Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
however, could adversely affect the marketability of such portfolio securities
and result in a Fund's inability to dispose of such securities promptly or at
favorable prices.
The Boards have delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Boards. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the nature of
the security and how trading is effected (E.G., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
The following describes certain risks involved with investing in the
Funds. Investors in the U.S. Asset Allocation Fund should note the risks
involved with each Underlying Fund, because the U.S. Asset Allocation Fund is a
"fund-of-funds."
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SMALL COMPANIES
Investors in Funds that invests in smaller companies should consider
carefully the special risks involved. Such smaller companies may present greater
opportunities for capital appreciation but may involve greater risk than larger,
more mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than those of larger
issuers.
FOREIGN SECURITIES
The U.S. Equity Funds, the Select 50 Fund, the Total Return Bond Fund
and the Foreign and Global Equity Funds may purchase securities in foreign
countries. According, shareholders should consider carefully the substantial
risks involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation; taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations; foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments); default in
foreign government securities, and political or social instability or diplomatic
developments that could adversely affect investments. In addition, there is
often less publicly available information about foreign issuers than those in
the United States. Foreign companies are often not subject to uniform
accounting, auditing and financial reporting standards. Further, these Funds may
encounter difficulties in pursuing legal remedies or in obtaining judgments in
foreign courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Funds in other countries are generally greater
than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund if it had entered into a contract to sell the security. In certain
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The securities markets of many of the countries in which these
Funds may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
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Some countries in which one of these Funds may invest may also have
fixed or managed currencies that are not freely convertible at market rates into
the U.S. dollar. Certain currencies may not be internationally traded. A number
of these currencies have experienced steady devaluation relative to the U.S.
dollar, and such devaluations in the currencies may have a detrimental impact on
the Fund. Many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuation in inflation rates may have negative
effects on certain economies and securities markets. Moreover, the economies of
some countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
EMERGING MARKET COUNTRIES
The Select 50, International and Global Funds, particularly the Latin
America, Emerging Asia and Emerging Markets Funds, may invest in securities of
companies domiciled in, and in markets of, so-called "emerging market
countries." These investments may be subject to potentially higher risks than
investments in developed countries. These risks include (i) volatile social,
political and economic conditions; (ii) the small current size of the markets
for such securities and the currently low or nonexistent volume of trading,
which result in a lack of liquidity and in greater price volatility; (iii) the
existence of national policies which may restrict these Funds' investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed structures governing private or foreign investment or allowing for
judicial redress for injury to private property; (vi) the absence, until
recently in certain emerging market countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in certain emerging market countries may be slowed or
reversed by unanticipated political or social events in such countries.
EXCHANGE RATES AND POLICIES
The Select 50, International and Global Funds endeavor to buy and sell
foreign currencies on favorable terms. Some price spreads on currency exchange
(to cover service charges) may be incurred, particularly when these Funds change
investments from one country to another or when proceeds from the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent these Funds from
repatriating invested capital and dividends, withhold portions of interest and
dividends at the source, or impose other taxes, with respect to these Funds'
investments in securities of issuers of that country. There also is the
possibility of expropriation, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
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<PAGE>
The Boards of both Trusts consider at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions that
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Boards also consider the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
HEDGING TRANSACTIONS
While transactions in forward contracts, options, futures contracts and
options on futures (I.E., "hedging positions") may reduce certain risks, such
transactions themselves entail certain other risks. Thus, while a Fund may
benefit from the use of hedging positions, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer
overall performance for that Fund than if it had not entered into any hedging
positions. If the correlation between a hedging position and portfolio position
which is intended to be protected is imperfect, the desired protection may not
be obtained, and a Fund may be exposed to risk of financial loss. Furthermore,
the Funds may enter into hedging transactions when, in fact, it is inopportune
to do so and, conversely, when it is more opportune to enter into hedging
transactions the Funds might not enter into such transactions. Such inopportune
timing of utilization of hedging practices could result in substantial losses to
the Funds.
Perfect correlation between a Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
LOWER-QUALITY DEBT
The Select 50, the Foreign and the Global Equity Funds may invest in
lower-quality debts. Medium-quality debt securities are those rated or
equivalent to BBB by S&P or Fitch's, or Baa by Moody's. These Funds, however,
may not invest more than 5% (except for the Latin America Fund which may invest
up to 15%) of its total assets in high-risk debt securities rated below
investment grade (these securities are sometimes called "Junk bonds").
Medium-quality debt securities have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than with higher-grade debt
securities. Junk bonds offer greater speculative characteristics and are
regarded as having a great vulnerability to default although currently having
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The ability to maintain other
terms of the contract over any long period of time may be small. Junk bonds are
more subject to default during periods of economic downturns or increases in
interest rates and their yields will fluctuate over time. It may be more
difficult to dispose of or to value junk bonds. Achievement of a Fund's
investment objective may also be more dependent on the Manager's own credit
analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its
judgment, economic conditions change such that a higher level of investment in
high-risk, lower-quality debt securities would be consistent with the interests
of these Funds and their shareholders. Unrated debt securities are not
necessarily of lower quality than rated securities but may not be attractive to
as many buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) are analyzed by the Manager to determine, to
the extent reasonably possible, that the planned investment is sound. From time
to time, these Funds may purchase
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defaulted debt securities if, in the opinion of the Manager, the issuer may
resume interest payments in the near future.
CONCENTRATION IN COMMUNICATIONS INDUSTRY
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because the Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the
Internal Revenue Code, the Fund may not always be able to take full advantage of
opportunities to invest in certain communications companies.
INTEREST RATES
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities in a Fund's portfolio. Mortgage prepayments are affected by the level
of interest rates and other factors, including general economic conditions and
the underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a U.S. Fixed-Income and Money Market Fund, to the
extent that it retains the same percentage of debt securities, may have to
reinvest the proceeds of prepayments at lower interest rates than those of its
previous investments. If this occurs, that Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
a U.S. Fixed-Income and Money Market Funds purchases mortgage-related securities
at a premium, unscheduled prepayments, which are made at par, result in a loss
equal to any unamortized premium. Duration is one of the fundamental tools used
by the Manager in managing interest rate risks including prepayment risks.
Traditionally, a debt security's "term to maturity" characterizes a security's
sensitivity to changes in interest rates "Term to maturity," however, measures
only the time until a debt security provides its final payment, taking no
account of prematurity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Determining duration may involve the
Manager's estimates of future economic parameters, which may vary from actual
future values. Fixed-income securities with effective durations of three years
are more responsive to interest rate fluctuations
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than those with effective durations of one year. For example, if interest rates
rise by 1%, the value of securities having an effective duration of three years
will generally decrease by approximately 3%.
EQUITY SWAPS
The U.S. Equity, Foreign and Global Funds may invest in equity swaps.
Equity swaps allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swaps are derivatives, and their values can be very volatile.
To the extent that the Manager does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party, a
Fund may suffer a loss. The value of some components of an equity swap (like the
dividends on a common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, the Fund may suffer a loss
if the counterparty defaults.
NON-DIVERSIFIED PORTFOLIO
The California Intermediate Bond Fund is a "non-diversified" investment
company under the Investment Company Act. This means that, with respect to 50%
of its total assets, it may not invest more than 5% of its total assets in the
securities of any one issuer (other than the U.S. government). The balance of
its assets may be invested in as few as two issuers. Thus, up to 25% of the
Fund's total assets may be invested in the securities of any one issuer. For
purposes of this limitation, a security is considered to be issued by the
governmental entity (or entities) the assets and revenues of which back the
security, or, with respect to an industrial development bond, that is backed
only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. The investment return on a
non-diversified portfolio, however, typically is dependent upon the performance
of a smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
CALIFORNIA MUNICIPAL SECURITIES
The information set forth below is a general summary intended to give a
recent historical description. It is not a discussion of any specific factors
that may affect any particular issuer of California Municipal Securities. The
information is not intended to indicate continuing or future trends in the
condition, financial or otherwise, of California. Such information is derived
from official statements utilized in connection with securities offerings of the
State of California that have come to the attention of the Trusts and were
available prior to the date of this Statement of Additional Information. Such
information has not been independently verified by the California Intermediate
Bond and California Money Funds.
Because the California Intermediate Bond and California Money Funds
expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or
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marketability of such securities or the ability of the respective issuers of
such securities acquired by these Funds to pay interest on, or principal of,
such securities. The creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible these Funds
will invest in obligations of particular issuers as to which such specific
factors are applicable.
From mid-1990 to late 1993, California suffered the most severe
recession in the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, have been
severely affected. Since the start of 1994, however, California's economy has
been on a steady recovery. The rate of economic growth in California in 1997, in
terms of job gains, exceeded that of the rest of the United States. The State
added nearly 430,000 non-farm jobs during 1997. In 1996 California surpassed its
pre-recession employment peak of 12.7 million jobs. The unemployment rate, while
still higher than the national average, fell to 5.9% in early 1998, compared to
over 10 percent during the recession. Many of the new jobs were created in such
industries as computer services, software design, motion pictures and high
technology manufacturing. Business services, export trade and other
manufacturing also experienced growth. All major economic regions of the State
grew. The rate of employment growth for the Los Angeles region indicates that
its growth has almost caught up with that in the San Francisco bay region on a
population share basis. The unsettled financial situation occurring in certain
Asian economies may adversely affect the State's export-related industries and,
therefore, the State's rate of economic growth.
The recession severely affected State revenues while the State's health
and welfare costs were increasing. Consequently, the State had a lengthy period
of budget imbalance; the State's accumulated budget deficit approached $2.8
billion at its peak at June 30, 1993. A consequence of the large budget deficits
has been that the State depleted its available cash resources and had to use a
series of external borrowings to meet its cash needs. With the end of the
recession, the State's financial condition has improved in the 1995-96, 1996-97
and 1997-98 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint.
As of June 30, 1997, the State's budget reserve had a positive cash balance of
$461 million. No deficit borrowing has occurred at the end of the last three
fiscal years and the State's cash flow borrowing was limited to $3 billion in
1997-98.
In each of these the 1995-96 and 1996-97 fiscal years, the State budget
contained the following major features:
1. Expenditures for K-14 schools grew significantly, as new
revenues were directed to school spending under Proposition
98.
2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for
greater support from the federal government. The State also
attempted to shift to the federal government a larger share of
the cost of incarceration and social services for illegal
immigrants. Federal support never reached the levels
anticipated when the budgets were enacted. These funding
shortfalls were filled, however, by revenue collections which
exceeded expectations.
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3. General Fund support for the University of California and
California State Universities grew by an average of 5.2
percent and 3.3 percent per year, respectively, and there were
no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons
were approved for construction, however.
5. There were no tax increases and, starting January 1, 1997,
there was a 5 percent cut in corporate taxes. The suspension
of the Renters Tax Credit was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The
Budget Act anticipates General Fund revenues and transfers of $52.5 billion (a
6.8 percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels). On a budgetary basis,
the budget reserve (SFEU) is projected to decrease from $408 million at June 30,
1997, to $112 million at June 30, 1998. The Budget Act also includes Special
Fund expenditures of $14.4 billion (as against estimated Special Fund revenues
of $14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of
the nearly $1.75 billion in increased spending is allocated to
prior fiscal years.
2. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension
contribution to the quarterly basis existing prior to the
deferral actions invalidated by the courts.
3. Continuing the third year of a four-year "compact" which the
State Administration has made with higher education units,
funding from the General Fund for the University of California
and California State University has increased by about 6
percent ($121 million and $107 million, respectively), and
there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally
the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program.
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6. Unlike prior years, this Budget Act does not depend on
uncertain federal budget actions. About $300 million in
federal funds, already included in the federal FY 1997 and
1998 budgets, are included in the Budget Act, to offset
incarceration costs for illegal immigrants.
7. The Budget Act contains no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another
year, saving approximately $500 million.
After enactment of the Budget Act, and prior to the end of the
Legislative Session on September 13, 1997, the Legislature and the Governor
reached certain agreements related to State expenditures and taxes. The
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Legislature
also passed a bill to restore $48 million of welfare cost savings which had been
part of earlier legislation vetoed by the Governor. The Legislature also passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the legislation signed by
the Governor are a variety of phased-in tax cuts, conformity with certain
provisions of the federal tax reform law passed earlier in the year, and reform
of funding for county trial courts, with the State to assume greater financial
responsibility.
The May 1998 Revision to the Governor's proposed budget increases the
General Fund revenue forecast by nearly $1.8 billion in 1997-98 and $2.5 billion
in 1998-99. The May Revision provides for a balanced budget and a budget reserve
for economic uncertainties of $1.6 billion. In the May Revision the
administration proposed, among other things, a two-step reduction in the State's
vehicle license fee (VLF) which, when fully phased in, would reduce State
revenues by more than $3 billion annually. Since VLF is a primary source of
revenue for local governments, the May Revision proposed continuous
appropriation from the General Fund to replace that loss in revenues.
The VLF proposal met significant opposition in the Legislature and
continuing disagreement over the nature and extent of the proposed tax cut
delayed final adoption of the 1998-99 budget. Local government concern about the
potential impact of the VLF proposal on local government revenues underscores
the extent to which California county and other local government budgets are
affected by State budget decisions beyond their control.
In early August, 1998 the Governor and leaders of the State Legislature
reached agreement on a $76 billion State budget that includes a $1.4 billion tax
cut. The main feature of the tax cut is a 25% reduction in the VLF, with future
reductions contingent upon higher than forecast State revenues. The budget
accord included significant additional funding for public schools and community
colleges intended, among other things, to increase the length of the California
school year and extend the class size reduction initiatives already under way.
The budget accord also included a 7.9% increase in welfare recipients' monthly
checks, as well as a variety of smaller tax credits and cuts, including an
increase in the income tax credit for dependents, a modest renters' credit and a
number of tax credits and cuts aimed at specific industries important to the
California economy. The budget must be approved by a two-thirds vote of the
State Senate and Assembly. The Governor may exercise a line-item veto to ensure
the final budget includes sufficient reserves.
In October 1997 the Governor issued Executive Order W-163-97 stating
that Year 2000 solutions would be a State priority and requiring each agency of
the State, no later than December 31, 1998, to address Year 2000 problems in
their essential systems and protect those systems from corruption by
non-compliant systems,
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in accordance with the Department of Information Technology's California 2000
Program. There can be no assurance that steps being taken by state or local
government agencies with respect to the Year 2000 problem will be sufficient to
avoid any adverse impact upon the budgets or operations of those agencies or
upon the California Trust.
Because of the deterioration in the State's budget and cash situation,
the State's credit ratings have been reduced. Since late 1991, all three major
nationally recognized statistical rating organizations have lowered their
ratings for general obligation bonds of the State from the highest ranking of
"AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Services, Inc.
However, prior to the October 8, 1997, sale of $1 billion in general obligation
bonds, Fitch raised California's general obligation bond rating from "A+" to
"AA-", however S&P and Moody's did not follow suit, confirming those ratings at
"A+" and "A1", respectively. It is not presently possible to determine whether,
or the extent to which, Moody's, S&P or Fitch will change such ratings in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State, and there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of the
California Constitution (which resulted from the voter approved Proposition 13
in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum AD VALOREM tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other AD VALOREM property tax for
general purposes. One exception to Article XIII A permits an increase in AD
VALOREM taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by substantial damage, destruction or other factors, or when there is a
"change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax revenue
caused by the passage of Proposition 13, the State enacted legislation to
provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits the
amount of appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California
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Supreme Court recently upheld Proposition 62's requirement that special taxes be
approved by a two-thirds vote of the voters voting in an election on the issue.
This recent decision may invalidate other taxes that have been imposed by local
governments in California and make it more difficult for local governments to
raise taxes.
In 1988 and 1990, California voters approved initiatives known as
Proposition 98 and Proposition 111, respectively. These initiatives changed the
State's appropriations limit under Article XIII B to (i) require that the State
set aside a prudent reserve fund for public education, and (ii) guarantee a
minimum level of State funding for public elementary and secondary schools and
community colleges.
In November 1996, California voters approved Proposition 218. The
initiative applied the provisions of Proposition 62 to all entities, including
charter cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority of
local governments to impose property-related assessments, fees and charges,
requiring that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.
The effect of constitutional and statutory changes and of budget
developments on the ability of California issuers to pay interest and principal
on their obligations remains unclear, and may depend on whether a particular
bond is a general obligation or limited obligation bond (limited obligation
bonds being generally less affected). There is no assurance that any California
issuer will make full or timely payments of principal or interest or remain
solvent. For example, in December 1994, Orange County filed for bankruptcy.
Certain tax-exempt securities in which a Fund may invest may be
obligations payable solely from the revenues of specific institutions, or may be
secured by specific properties, which are subject to provisions of California
law that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.
In addition, it is impossible to predict the time, magnitude, or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund) concentration
in California Municipal Securities provides a greater level of risk than a fund
that is diversified across numerous states and municipal entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of a Fund's outstanding voting
securities as defined in the Investment Company Act. Each Fund MAY NOT:
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1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may
invest in securities of other investment companies as
described above and consistent with restriction number 9
below.
2. With respect to 75% (100% for the Federal Money Fund) of its
total assets, invest in the securities of any one issuer
(other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of
such investment more than 5% of the total assets of a Fund
would be invested in such issuer. There are no limitations
with respect to the remaining 25% of its total assets, except
to the extent other investment restrictions may be applicable
(not applicable to the Federal Money Fund). This investment
restriction does not apply to the U.S. Asset Allocation and
the California Intermediate Bond Fund.
3. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and
policies, (b) through the lending of up to 30% of its
portfolio securities as described above and in its Prospectus,
or (c) to the extent the entry into a repurchase agreement or
a reverse dollar roll transaction is deemed to be a loan.
4.
(a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse
repurchase agreements or dollar roll transactions for
that Fund that uses such investment techniques and
then not in excess of one-third of the value of its
total assets (including the proceeds of such
borrowings, at the lower of cost or fair market
value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of
at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are
in excess of 10% of total assets. Transactions that
are fully collateralized in a manner that does not
involve the prohibited issuance of a "senior
security" within the meaning of Section 18(f) of the
Investment Company Act shall not be regarded as
borrowings for the purposes of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and
permissible forward contracts, futures contracts,
option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities(This does not preclude each Fund from obtaining
such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities.)
6. Buy or sell real estate or commodities or commodity contracts;
however, each Fund, to the extent not otherwise prohibited in
the Prospectus or this Statement of Additional Information,
may invest in securities secured by real estate or interests
therein or issued by companies which invest in real estate or
interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related
options generally as described in the Prospectus and this
Statement of Additional Information.
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7. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed in the Prospectus or this Statement of Additional
Information, or as such securities may be acquired as part of
a merger, consolidation or acquisition of assets.
8. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities,
including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted
securities), securities which are not otherwise readily
marketable, repurchase agreements that mature in more than
seven days and over-the-counter options (and securities
underlying such options) purchased by that Fund. (This is an
operating policy which may be changed without shareholder
approval, consistent with the Investment Company Act, changes
in relevant SEC interpretations).
9. Invest in any issuer for purposes of exercising control or
management of the issuer(This is an operating policy which may
be changed without shareholder approval, consistent with the
Investment Company Act.)
10. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest
more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry(This does
not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California
Municipal Obligations or Municipal Obligations for the
Tax-Free Funds.) For purposes of this restriction, each Fund
generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment Company
Act, except that this restriction shall not be deemed to
prohibit that Fund from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
12. Except as described in the Prospectus and this Statement of
Additional Information, acquire or dispose of put, call,
straddle or spread options subject to the following conditions
(for other than the Total Return Bond, Short Bond and
California Intermediate Bond Funds):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of that Fund's
total assets.
(This is an operating policy which may be changed without
shareholder approval.)
13. Except as described in the Prospectus and this Statement of
Additional Information, engage in short sales of
securities(This is an operating policy which may be changed
without shareholder approval, consistent with applicable
regulations.)
14. Purchase more than 10% of the outstanding voting securities of
any one issuer. This investment restriction does not relate to
the Fixed Income Funds. (This is an operating policy which may
be changed without shareholder approval.)
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15. Invest in commodities, except for futures contracts or options
on futures contracts if, as a result thereof, more than 5% of
that Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial
deposits and premiums on open futures contracts and options on
such contracts. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of
the amount of the initial deposit or premium.
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to value the
assets of the Money Market Funds in accordance with Rule 2a-7 under the
Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS. The Funds receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Funds' net investment income,
substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of ordinary income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year a Fund realizes a
net gain on transactions involving investments held for the period required for
long-term capital gain or loss recognition or otherwise producing long-term
capital gains and losses, the Fund will have a net long-term capital gain. After
deduction of the amount of any net short-term capital loss, the balance (to the
extent not offset by any capital losses carried over from the eight previous
taxable years) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time that Fund's shares
may have been held by the shareholders.
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The maximum long-term federal capital gains rate for individuals is 20%
with respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by a Fund reduces that
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes (except for distributions from
the Tax-Free Funds to the extent not subject to income taxes).
Dividends and other distributions will be reinvested in additional
shares of the applicable Fund unless the shareholder has otherwise indicated.
Investors have the right to change their elections with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
TAX INFORMATION. Each Fund has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year by complying with all applicable requirements regarding the source of its
income, the diversification of its assets, and the timing of its distributions.
Each Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that Fund will not be subject to any federal income tax or excise taxes
based on net income. However, the Boards of Trustees may elect to pay such
excise taxes if it determines that payment is, under the circumstances, in the
best interests of a Fund.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of that Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal
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income tax purposes in each share so received equal to the net asset value of a
share of a Fund on the reinvestment date. Fund distributions also will be
included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which a Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, each Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
A Fund may receive dividend distributions from U.S. corporations. To
the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of a Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by that Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities of foreign corporations, that Fund
will not be entitled under the Code to pass through to its shareholders their
pro rata share of the foreign income taxes paid by that Fund. In this case,
these taxes will be taken as a deduction by that Fund
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that these Funds derive from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, a Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. A Fund will endeavor to limit its exposure to
the PFIC tax by
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investing in PFICs only where the election to be taxed currently will be made.
Because it is not always possible to identify a foreign issuer as a PFIC in
advance of making the investment, a Fund may incur the PFIC tax in some
instances.
THE TAX-FREE FUNDS. Provided that, as anticipated, each Tax-Free Fund
qualifies as a regulated investment company under the Code, and, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of each of the California Intermediate Bond and California Money Funds consist
of obligations (including California Municipal Securities) the interest on which
is exempt from California personal income taxation under the laws of California,
such Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by the Fund on such
obligations, are exempt from California personal income tax. If at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Federal Money Fund consists of obligations (including Municipal
Securities) the interest on which is exempt from federal personal income
taxation under the Constitution or laws of the United States, the Federal Money
Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by the Fund on such
obligations, are exempt from federal personal income tax. The total amount of
exempt-interest dividends paid by these Funds to their shareholders with respect
to any taxable year cannot exceed the amount of interest received by these Funds
during such year on tax-exempt obligations less any expenses attributable to
such interest. Income from other transactions engaged in by these Funds, such as
income from options, repurchase agreements and market discount on tax-exempt
securities purchased by these Funds, will be taxable distributions to its
shareholders.
The Code may also subject interest received on certain otherwise
tax-exempt securities to an alternative minimum tax. In addition, certain
corporations which are subject to the alternative minimum tax may have to
include a portion of exempt-interest dividends in calculating their alternative
minimum taxable income.
Exempt-interest dividends paid to shareholders that are corporations
subject to California franchise tax will be taxed as ordinary income to such
shareholders. Moreover, no exempt-interest dividends paid by these Funds will
qualify for the corporate dividends-received deduction for federal income tax
purposes.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of these Funds is not deductible for federal income tax
purposes. Under regulations used by the IRS for determining when borrowed funds
are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares of these Funds. California personal income tax law restricts the
deductibility of interest on indebtedness incurred by a shareholder to purchase
or carry shares of a fund paying dividends exempt from California personal
income tax, as well as the allowance of losses realized upon a sale or
redemption of shares, in substantially the same manner as federal tax law.
Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their own tax
advisers before investing in these Funds.
Up to 85% of social security or railroad retirement benefits may be
included in federal (but not California) taxable income for benefit recipients
whose adjusted gross income (including income from tax-exempt sources such as
tax-exempt bonds and these Funds) plus 50% of their benefits exceeding certain
base amounts. Income from these Funds, and other funds like them, is included in
the calculation of whether a recipient's income exceeds these base amounts, but
is not taxable directly.
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From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It can be expected that similar proposals may
be introduced in the future. Proposals by members of state legislatures may also
be introduced which could affect the state tax treatment of these Funds'
distributions. If such proposals were enacted, the availability of Municipal
Securities for investment by these Funds and the value of these Funds'
portfolios would be affected. In such event, these Funds would reevaluate their
investment objectives and policies.
HEDGING. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when a Fund purchases an option, the premium
paid by that Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by a Fund upon the
expiration or sale of such options held by that Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held by a Fund
that substantially diminishes that Fund's risk of loss from any other position
held by that Fund may constitute a "straddle" for federal income tax purposes.
In general, straddles are subject to certain rules that may affect the amount,
character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
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Redemptions and exchanges of shares of a Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. Any loss realized upon the redemption or exchange of shares of
a Tax-Free Fund within six months from their date of purchase will be disallowed
to the extent of distributions of exempt-interest dividends with respect to such
shares during such six-month period. All or a portion of a loss realized upon
the redemption of shares of a Fund may be disallowed to the extent shares of
that Fund are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same members on
their Boards), are responsible for the overall management of the Funds,
including establishing the Funds' policies, general supervision and review of
their investment activities. The officers (the two Trusts, as well as an
affiliated Trust, The Montgomery Funds III, have the same officers), who
administer the Funds' daily operations, are appointed by the Boards of Trustees.
The current Trustees and officers of the Trusts performing a policy-making
function and their affiliations and principal occupations for the past five
years are set forth below:
GEORGE A. RIO, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (since
April 1998). From June 1995 to March 1998, he was Senior Vice President, Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of business development for First Data Corporation. From September 1993
to May 1994, he was Senior Vice President and Manager of Client Services; and
Director of Internal Audit at the Boston Company.
KAREN JACOPPO-WOOD, Vice President and Assistant Secretary (born 1966)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
(TBCA)
B-43
<PAGE>
MARGARET W. CHAMBERS, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
CHRISTOPHER J. KELLEY, Vice President and Assistant Secretary (born 1964)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
MARY A. NELSON, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
GARY S. MACDONALD, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
MARIE E. CONNOLLY, Vice President and Assistant Treasurer (born 1957)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
B-44
<PAGE>
DOUGLAS C. CONROY, Vice President and Assistant Treasurer (born 1969)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer (born 1962)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
JOHN A. FARNSWORTH, Trustee (born 1941)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
an executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
ANDREW COX, Trustee (born 1944)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
CECILIA H. HERBERT, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
B-45
<PAGE>
R. STEPHEN DOYLE, Chairman of the Board of Trustees (born 1939).+
101 California Street, San Francisco, California 94111.R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
The officers of the Trusts, and the Trustees who are considered
"interested persons" of the Trusts, receive no compensation directly from the
Trusts for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Funds. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 1998, and to be paid during the fiscal year ending June 30, 1999,
and the aggregate compensation paid to each of the Trustees during the fiscal
year ended June 30, 1998, and to be paid during the fiscal year ending June 30,
1999, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
CALENDAR YEAR CALENDAR YEAR
ENDED ENDING
JUNE 30, 1998 JUNE 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
TOTAL TOTAL
PENSION OR COMPENSATION PENSION OR COMPENSATION
AGGREGATE AGGREGATE RETIREMENT FROM THE AGGREGATE AGGREGATE RETIREMENT FROM THE
COMPENSATION COMPENSATION BENEFITS TRUST AND COMPENSATION COMPENSATION BENEFITS TRUST AND
FROM THE FROM THE ACCRUED AS FUND COMPLEX FROM THE FROM THE ACCRUED AS FUND COMPLED
MONTGOMERY MONTGOMERY PART OF FUND (1 ADDITIONAL MONTGOMERY MONTGOMERY PART OF FUND (1 ADDITIONAL
NAME OF TRUSTEE FUNDS FUNDS II EXPENSES* TRUST) FUNDS FUNDS II EXPENSES* TRUST)
-------------------- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. STEPHEN DOYLE None None -- None None None -- None
-------------------- ------------------------------------------------------------------------------------------------------------
JOHN A. FARNSWORTH $25,000 $5,000 -- $35,000 $35,000 $15,000 -- $55,000
-------------------- ------------------------------------------------------------------------------------------------------------
ANDREW COX $25,000 $5,000 -- $35,000 $35,000 $15,000 -- $55,000
-------------------- ------------------------------------------------------------------------------------------------------------
CECILIA H. HERBERT $25,000 $5,000 -- $35,000 $35,000 $15,000 -- $55,000
-------------------- ------------------------------------------------------------------------------------------------------------
</TABLE>
* The Trusts do not maintain pension or retirement plans.
The Class R, Class P and Class L shares of the Funds are all sold
without a sales load. Therefore, there is no existing arrangement to reduce or
eliminate any sales loads for Trustees and other affiliated persons of the
Trust.
- ------------------------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-46
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT SERVICES. As stated in each Prospectus,
investment management services are provided to the Funds (except the U.S. Asset
Allocation Fund) by Montgomery Asset Management LLC (the "Manager"), pursuant to
an Investment Management Agreement between the Manager and The Montgomery Funds
dated July 31, 1997; and to the U.S. Asset Allocation Fund by the Manager
pursuant to an Investment Management Agreement between the Manager and The
Montgomery Funds II dated July 31, 1997(together, the "Agreements").
The Agreements are in effect with respect to each Fund for two years
after the Fund's inclusion in its Trust's Agreement (on or around its beginning
of public operations) and then continue for each Fund for periods not exceeding
one year so long as such continuation is approved at least annually by (1) the
Board of the appropriate Trust or the vote of a majority of the outstanding
shares of that Fund, and (2) a majority of the Trustees who are not interested
persons of any party to the relevant Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreements may be terminated at any time, without penalty, by a Fund or the
Manager upon 60 days' written notice, and are automatically terminated in the
event of its assignment as defined in the Investment Company Act.
For services performed under the Agreements, each Fund pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Fund at the following annual rates:
<TABLE>
<CAPTION>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C> <C>
U.S. EQUITY FUNDS
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery U.S. Emerging Growth Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
FOREIGN AND GLOBAL EQUITY FUNDS
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
</TABLE>
B-47
<PAGE>
<TABLE>
<CAPTION>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C> <C>
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
MULTI-STRATEGY FUNDS
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery U.S. Asset Allocation Fund All Amounts None*
U.S. FIXED-INCOME AND MONEY MARKET FUNDS
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Short Duration Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
</TABLE>
* This amount represents only the management fee of the U.S. Asset
Allocation.
As noted in the Prospectus, the Manager has agreed to reduce some or
all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the following percentages of each
Fund's average net assets (excluding Rule 12b-1 Plan fees): International Small
Cap, Emerging Markets, Emerging Asia, Latin America, Opportunities and
Communications Funds, 1.90% each; Select 50 Fund, 1.80%; U.S. Emerging Growth
Fund, 1.75%; International Growth Fund, 1.65%; Growth and Small Cap
Opportunities Fund, 1.50%; Small Cap Fund, 1.40%; U.S. Asset Allocation Fund,
the Short Bond, Total Return Bond, and California Intermediate Bond Funds, 0.70%
each; the Equity Income Fund, 0.85%; and the Money Market Funds, 0.60%, each.
The Manager also may voluntarily reduce additional amounts to
B-48
<PAGE>
increase the return to a Fund's investors. Any reductions made by the Manager in
its fees are subject to reimbursement by that Fund within the following three
years provided the Fund is able to effect such reimbursement and remain in
compliance with the foregoing expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Funds
for fees and expenses for the current year.
Operating expenses for purposes of the Agreements include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
expenses incurred in connection with any merger or reorganization or
extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the Boards at
duly called meetings. In considering the Agreements, the Trustees specifically
considered and approved the provision which permits the Manager to seek
reimbursement of any reduction made to its management fee within the three-year
period. The Manager's ability to request reimbursement is subject to various
conditions. First, any reimbursement is subject to a Fund's ability to effect
such reimbursement and remain in compliance with applicable expense limitations
in place at that time. Second, the Manager must specifically request the
reimbursement from the relevant Board. Third, the relevant Board must approve
such reimbursement as appropriate and not inconsistent with the best interests
of the Fund and the shareholders at the time such reimbursement is requested.
Because of these substantial contingencies, the potential reimbursements will be
accounted for as contingent liabilities that are not recordable on the balance
sheet of a Fund until collection is probable; but the full amount of the
potential liability will appear footnote to each Fund's financial statements. At
such time as it appears probable that a Fund is able to effect such
reimbursement, that the Manager intends to seek such reimbursement and that the
Board of Trustees has or is likely to approve the payment of such reimbursement,
the amount of the reimbursement will be accrued as an expense of that Fund for
that current period.
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<TABLE>
<CAPTION>
FUND YEAR OR PERIOD ENDED JUNE 30,
1998 1997 1996
<S> <C> <C> <C>
U.S. EQUITY FUNDS
Montgomery Growth Fund $ 12,414,444 $ 9,429,758 $ 8,336,529
Montgomery Small Cap Opportunities Fund $ 3,268,221 $ 2,352,549 $ 217,603
Montgomery Small Cap Fund $ 2,244,080 $ 2,290,187 $ 2,364,834
Montgomery U.S. Emerging Growth Fund $ 4,997,558 $ 4,042,815 $ 3,732,720
Montgomery Equity Income Fund $ 427,314 $ 244,249 $ 101,709
Montgomery International Growth Fund $ 626,903 $ 378,515 $ 97,137
Montgomery International Small Cap Fund $ 893,323 $ 823,594 $ 611,587
Montgomery Emerging Markets Fund $ 11,315,548 $ 10,621,310 $ 10,262,601
Montgomery Emerging Asia Fund $ 643,231 $ 257,092 N/A
Montgomery Latin America Fund $ 92,848 N/A N/A
</TABLE>
B-49
<PAGE>
<TABLE>
<CAPTION>
YEAR OR PERIOD ENDED JUNE 30,
FUND 1998 1997 1996
<S> <C> <C> <C>
Montgomery Global Opportunities Fund $ 833,421 $ 562,210 $ 381,316
Montgomery Global Communications Fund $ 2,423,093 $ 2,298,528 $ 3,186,649
Montgomery Select 50 Fund $ 3,130,440 $ 1,366,989 $ 359,453
Montgomery U.S. Asset Allocation Fund $ 0+ 1,211,759 $ 998,198
Montgomery Total Return Bond Fund $ 386,758 N/A N/A
Montgomery Short Duration Government Bond Fund $ 296,242 $ 231,870 $ 93,531
Montgomery Government Reserve Fund $ 2,147,103 $ 2,175,561 $ 1,703,723
Montgomery California Tax-Free Intermediate Bond Fund $ 235,081 $ 103,992 $ 48,596
Montgomery California Tax-Free Money Fund $ 886,895 $ 640,819 $ 538,030
Montgomery Federal Tax-Free Money Fund $ 783,661 $ 319,348 N/A
</TABLE>
+ Does not include investment advisory fees paid to the underlying Funds.
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trusts and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trusts and by the Funds is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share Marketing Plan
(or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds pursuant to
Rule 12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of shares.
On that date, the Board of Trustees of the Trusts, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the 12b-1 Plan or in any
agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Distributor for its expenses in connection with
the promotion and distribution of those Classes.
B-50
<PAGE>
The 12b-1 Plan provides that the Distributor may use the distribution
fees received from the Class of the Fund covered by the 12b-1 Plan only to pay
for the distribution expenses of that Class. The 12b-1 Plan reimburses the
Distributor only for expenses incurred.
For the fiscal year ended June 30, 1998, the 12b-1 Plan incurred the
following expenses:
FUND COMPENSATION TO BROKER-DEALERS
Montgomery Growth Fund $ 410.49
Montgomery Equity Income Fund $ 4,440.16
Montgomery Small Cap Fund $31,409.23
Montgomery Small Cap Opportunities Fund $ 17.85
Montgomery U.S. Asset Allocation Fund $ 159.53
Montgomery International Growth Fund $ 12.30
Montgomery International Small Cap Fund $ 505.86
Montgomery Emerging Markets Fund $ 1,412.70
Montgomery Select 50 Fund $ 73.48
Montgomery Short Duration Government Bond Fund $ 0.38
Montgomery Government Reserve Fund $ 0.33
All 12b-1 Plan expenses were used to compensate broker-dealers who sold
the Funds. None of the 12b-1 Plan expenses were used towards advertising,
printing/mailing of prospectuses to other than current shareholders of the
Funds, compensation to underwriters, compensation to sales personnel, interest,
carrying or other financing charges.
Distribution fees are accrued daily and paid monthly, and are charged
as expenses of the Class P and Class L shares as accrued. To the extent that
12b-1 Plan fees are incurred in connection with distribution of the shares of
more than one Fund, the fees paid by each such participating Fund may be used to
finance the distribution of another Fund. In such instances, the distribution
fees incurred will be allocated among the participating Funds according to
relative net asset size of the participating Funds.
Class P and Class L shares are not obligated under the 12b-1 Plan to
pay any distribution expense in excess of the distribution fee. Thus, if the
12b-1 Plan were terminated or otherwise not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by the Class to the
Distributor. As of June 30, 1998, the total 12b-1 Plan expenses accrued but not
paid for The Montgomery Funds and The Montgomery Funds II were $182.86, which
amounted to 0.00% of the Funds' net assets at that time.
The 12b-1 Plan provides that it shall continue in effect from year to
year provided that a majority of the Board of Trustees of the Trust, including a
majority of the Independent Trustees, vote annually to continue the 12b-1 Plan.
The Board determined that there are various anticipated benefits to the Funds
from such continuation, including the likelihood that the Plan will stimulate
sales of shares of the Trusts and assist in increasing the asset base of the
Trusts in the face of competition from a variety of financial products and the
potential advantage to the shareholders of the Trusts of prompt and significant
growth of the asset base of the Trusts, including greater liquidity, more
investment flexibility and achievement of greater economies of scale. The 12b-1
Plan (and any distribution agreement between the Fund, the Distributor or the
Manager and a selling agent with respect to the Class P or Class L shares) may
be terminated without penalty upon at least 60-days'
B-51
<PAGE>
notice by the Distributor or the Manager, or by the Fund by vote of a majority
of the Independent Trustees, or by vote of a majority of the outstanding shares
(as defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies. Neither any "interested person" of the Trusts (as that term is used
under the 1940 Act) nor any trustee of the Trusts who is not any interested
person of the Trusts has any direct or indirect financial interests in the
operation of the 12b-1 Plan.
All distribution fees paid by the Funds under the 12b-1 Plan will be
paid in accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may
change from time to time. Pursuant to the 12b-1 Plan, the Boards of Trustees
will review at least quarterly a written report of the distribution expenses
incurred by the Manager on behalf of the Class P and Class L shares of each
Fund. In addition, as long as the 12b-1 Plan remains in effect, the selection
and nomination of Trustees who are not interested persons (as defined in the
Investment Company Act) of the Trust shall be made by the Trustees then in
office who are not interested persons of the Trust.
SHAREHOLDER SERVICES PLAN. The Trusts have adopted a Shareholder
Services Plan (the "Services Plan") with respect to the Funds. The Manager (or
its affiliate) serves as the service provider under the Services Plan and, as
such, receives any fees paid by the Funds pursuant to the Services Plan. The
Trusts have not yet implemented the Services Plan for any Fund and have not set
a date for implementation. Affected shareholders will be notified at least 60
days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Services
Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of each Fund. The initial
shareholder of the Class P and Class L shares, if any, of each Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L of each
Fund will pay a continuing service fee to the Manager, the Distributor or other
service providers, in an amount, computed and prorated on a daily basis, equal
to 0.25% per annum of the average daily net assets of Class P and Class L shares
of each Fund. Such amounts are compensation for providing certain services to
clients owning shares of Class P or Class L of the Funds, including personal
services such as processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and providing
other information and assistance with respect to a Fund, including responding to
shareholder inquiries.
THE DISTRIBUTOR. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Funds on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Funds, including issuers of
securities in which the Funds may invest. These activities from time to time may
result in a conflict of interests of the Distributor with those of the Funds,
and may restrict the ability of the Distributor to provide services to the
Funds.
THE CUSTODIAN. Morgan Stanley Trust Company serves as principal
Custodian of the Funds' assets, which are maintained at the Custodian's
principal office, One Pierrepont Plaza, Brooklyn, NY 11201, and at the offices
of its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians in accordance with delegation
instructions approved by the Board pursuant to Rule 17f-5 under the Investment
Company Act. The Custodian, its branches and sub-custodians generally hold
certificates
B-52
<PAGE>
for the securities in their custody, but may, in certain cases, have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
Compensation for the services of the Custodian is based on a schedule of charges
agreed on from time to time.
THE INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 333 Market
Street, San Francisco, CA 94105, serves as the independent public accountant to
the Funds. PricewaterhouseCoopers is responsible for auditing the financial
statements of the Funds and has audited the financial statements of the Funds
for the fiscal year ended June 30, 1998, included in the 1998 Annual Report,
incorporated herein by reference. The financial statements referred to above are
incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers given on the authority of that firm as experts in
accounting and auditing.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreements, the Manager determines which securities are to be
purchased and sold by the Funds and which broker-dealers are eligible to execute
the Funds' portfolio transactions, subject to the instructions of, and review
by, the Funds and their Boards. Purchases and sales of securities within the
U.S. other than on a securities exchange will generally be executed directly
with a "market-maker" unless, in the opinion of the Manager or a Fund, a better
price and execution can otherwise be obtained by using a broker for the
transaction.
The Foreign and Global Equity Funds contemplate purchasing most equity
securities directly in the securities markets located in emerging or developing
countries or in the over-the-counter markets. A Fund purchasing ADRs and EDRs
may purchase those listed on stock exchanges, or traded in the over-the-counter
markets in the U.S. or Europe, as the case may be. ADRs, like other securities
traded in the U.S., will be subject to negotiated commission rates. The foreign
and domestic debt securities and money market instruments in which a Fund may
invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
B-53
<PAGE>
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for a Funds are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for one or more Funds and for one or more of
such client accounts. The Manager and its personnel may have interests in one or
more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and a Fund seek to
acquire the same security at the same general time (especially if that security
is thinly traded or is a small-cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, a Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases,
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<PAGE>
however, it is believed that the ability of the Fund to participate in volume
transactions may produce better executions for that Fund.
Other than for the U.S. Fixed Income and Money Market Funds, the
Manager's sell discipline for investments in issuers is based on the premise of
a long-term investment horizon; however, sudden changes in valuation levels
arising from, for example, new macroeconomic policies, political developments,
and industry conditions could change the assumed time horizon. Liquidity,
volatility, and overall risk of a position are other factors considered by the
Manager in determining the appropriate investment horizon.
For each Fund, sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
For the year ended June 30, 1998, the Funds total securities
transactions generated commissions of $21,467,826. For the year ended June 30,
1997, the Funds total securities transactions generated commissions of
$12,725,341, of which $27,015 was paid to Montgomery Securities. For the year
ended June 30, 1996, the Funds' total securities transactions generated
commissions of $14,874,777, of which $164,056 was paid to Montgomery Securities.
Throughout the fiscal years ended June 30, 1996, and June 30, 1997, Montgomery
Securities was affiliated with the Funds through its ownership of Montgomery
Asset Management L.P., the former Manager of the Funds. For the three fiscal
years ended June 30, 1998, The Funds' securities transactions generated
commissions of:
<TABLE>
<CAPTION>
FUND COMMISSIONS FOR FISCAL YEAR ENDED:
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
<S> <C> <C> <C>
Montgomery Growth Fund $2,390,473 $2,419,136 $2,798,653
Montgomery Small Cap Opportunities Fund $ 430,377 $1,637,452 $1,027,948
Montgomery Small Cap Fund $ 658,254 $ 788,684 $1,416,883
Montgomery U.S. Emerging Growth Fund $ 912,650 $1,358,276 $1,209,313
Montgomery Equity Income Fund $ 35,626 $ 72,299 $ 81,709
Montgomery International Growth Fund $ 165,167 $ 243,582 $ 332,532
Montgomery International Small Cap Fund $ 503,070 $ 337,216 $ 413,896
Montgomery Emerging Markets Fund $9,910,296 $8,753,182 $9,442,852
Montgomery Emerging Asia Fund N/A $ 539,472 $ 675,563
Montgomery Latin America Fund N/A N/A $ 125,435
Montgomery Global Opportunities Fund $ 270,415 $ 297,275 $ 532,520
Montgomery Global Communications Fund $1,922,505 $1,334,931 $1,370,035
Montgomery Select 50 Fund $ 422,527 $1,181,215 $2,040,486
Montgomery U.S. Asset Allocation Fund $ 307,877 $ 289,657 $ 0+
Montgomery Short Duration Government Bond Fund $ 650 N/A N/A
</TABLE>
B-55
<PAGE>
+ Does not include commissions paid to the Underlying Funds.
The Funds do not direct brokerage or effect securities transactions
through brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, a Fund may or may
not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. A Funds may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i) suspend the
continued offering of its Funds' shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best interests of a
Fund, an investor may purchase shares of that Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (E.G., the Funds will not acquire restricted securities),
their acquisition is consistent with that Fund's investment objective and
policies, and the tendered securities are otherwise acceptable to that Fund's
Manager. Such securities are acquired by that Fund only for the purpose of
investment and not for resale. For the purposes of sales of shares of that Fund
for such securities, the tendered securities shall be valued at the identical
time and in the identical manner that the portfolio securities of that Fund are
valued for the purpose of calculating the net asset value of that Fund's shares.
A shareholder who purchases shares of a Fund by tendering payment for the shares
in the form of other securities may be required to recognize gain or loss for
income tax purposes on the difference, if any, between the adjusted basis of the
securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed directly from
that Fund will be made as promptly as possible but no later than three days
after receipt by the Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that a Fund
may suspend the right of redemption or postpone the date of payment during any
period when (i) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (ii) an emergency exists as determined by the SEC (upon application by
a Fund pursuant to Section 22(e) of the Investment Company Act) making disposal
of portfolio securities or valuation of net assets of a Fund not reasonably
practicable; or (iii) for such other period as the SEC may permit for the
protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Funds may
make payment partly in their portfolio securities with a current amortized cost
or market value, as appropriate, equal to the redemption price. Although the
Funds do not anticipate that they will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trusts have elected to be governed by
the provisions of Rule 18f-1 under the Investment Company Act, which require
that the Funds pay in cash all
B-56
<PAGE>
requests for redemption by any shareholder of record limited in amount, however,
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Trust's net assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
RETIREMENT PLANS. Shares of the Taxable Funds are available for
purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable Funds
through an IRA, there is available through these Funds a prototype individual
retirement account and custody agreement. The custody agreement provides that
DST Systems, Inc. will act as custodian under the plan, and will furnish
custodial services for an annual maintenance fee per participating account of
$10 (These fees are in addition to the normal custodian charges paid by these
Funds and will be deducted automatically from each Participant's account.) For
further details, including the right to appoint a successor custodian, see the
plan and custody agreements and the IRA Disclosure Statement as provided by
these Funds. An IRA that invests in shares of these Funds may also be used by
employers who have adopted a Simplified Employee Pension Plan. Individuals or
employers who wish to invest in shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
The IRA Disclosure Statement available from the Taxable Funds contains
more information on the amount investors may contribute and the deductibility of
IRA contributions. In summary, an individual may make deductible contributions
to the IRA of up to 100% of earned compensation, not to exceed $2,000 annually
(or $2,250 to two IRAs if there is a non-working spouse). For tax years
beginning after 1996, however, the $2,250 limitation is expended to $4,000. An
IRA may be established whether or not the amount of the contribution is
deductible. Generally, a full deduction for federal income tax purposes will
only be allowed to taxpayers who meet one of the following two additional tests:
(A) the individual and the individual's spouse are each not an
active participant in an employer's qualified retirement plan,
or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less
for married couples filing jointly, or (ii) $25,000 or less
for single individuals. The maximum deduction is reduced for a
married couple filing jointly with a combined adjusted gross
income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income
(before the IRA deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net
B-57
<PAGE>
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of the Funds
generally will be determined at least once daily as of 4:00 P.M. (12:00 noon for
the Money Market Funds), eastern time, (or earlier when trading closes earlier)
on each day the NYSE is open for trading (except national bank holidays for the
Fixed Income Funds). It is expected that the NYSE will be closed on Saturdays
and Sundays and for New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The national bank holidays, in addition to New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas, include: Good Friday, Columbus Day, and
Veteran's Day. The Funds may, but do not expect to, determine the net asset
values of their shares on any day when the NYSE is not open for trading if there
is sufficient trading in their portfolio securities on such days to affect
materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Boards.
The Funds' securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Boards.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Funds are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
appropriate Board, or at fair value as determined in good faith by procedures
approved by the Boards. Any such pricing service, in determining value, will use
information with respect to transactions in the
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<PAGE>
securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships between
securities and yield-to-maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Manager and the Trusts' Pricing
Committees determine their fair value, following procedures approved by the
Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the Boards
in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at amortized
cost, which means that securities are valued at their acquisition cost, as
adjusted for amortization of premium or discount, rather than at current market
value. Calculations are made at least weekly to compare the value of these
Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and
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<PAGE>
these Fund's $1.00 per-share net asset value, or if there were any other
deviation which the Board of Trustees believed would result in a material
dilution to shareholders or purchasers, the Board would promptly consider what
action, if any, should be initiated. If these Funds' per-share net asset values
(computed using market values) declined, or were expected to decline, below
$1.00 (computed using amortized cost), the Board might temporarily reduce or
suspend dividend payments or take other action in an effort to maintain the net
asset value at $1.00 per share. As a result of such reduction or suspension of
dividends or other action by the Board, an investor would receive less income
during a given period than if such a reduction or suspension had not taken
place. Such action could result in investors receiving no dividend for the
period during which they hold their shares and receiving, upon redemption, a
price per share lower than that which they paid. On the other hand, if these
Funds' per-share net asset values (computed using market values) were to
increase, or were anticipated to increase, above $1.00 (computed using amortized
cost), the Board might supplement dividends in an effort to maintain the net
asset value at $1.00 per share.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109, also acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board or the vote of a majority of the outstanding securities of that Fund (as
defined in the Investment Company Act), and (ii) a majority of the Trustees who
are not interested persons of any such party, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement with respect to each Fund may be terminated without
penalty by the parties thereto upon 60 days' written notice and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Funds' shares. The Principal Underwriter has not been paid any underwriting
commissions for underwriting securities of the Funds during each of the Funds'
last three fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time, quote
various performance figures in advertisements and other communications to
illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
THE MONEY MARKET FUNDS. Current yield reflects the interest income per
share earned by these Funds' investments. Current yield is computed by
determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
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<PAGE>
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The Short Bond Fund and California Intermediate Bond Fund. These Funds'
30-day yield figure described in the Prospectus is calculated according to a
formula prescribed by the SEC, expressed as follows:
YIELD = 2[(1+[a-b]/cd)6 - 1]
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for one of the
Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
YIELDS. The yields for the indicated periods ended June 30, 1998, were
as follows:
<TABLE>
<CAPTION>
TAX-EQUIV. TAX-EQUIV.
YIELD EFFECTIVE CURRENT EFFECTIVE CURRENT TAX-EQUIV.
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<PAGE>
FUND (7-DAY) YIELD YIELD* YIELD* YIELD YIELD*
(7-DAY) (7-DAY) (7-DAY) (30-DAY) (30-DAY)
MONTGOMERY TOTAL RETURN BOND
<S> <C> <C> <C> <C> <C> <C>
FUND N/A N/A N/A N/A 5.76% N/A
MONTGOMERY SHORT DURATION
GOVERNMENT BOND FUND N/A N/A N/A N/A 5.80% N/A
MONTGOMERY GOVERNMENT RESERVE
FUND 5.21% 5.35% N/A N/A N/A N/A
MONTGOMERY FEDERAL TAX-FREE
MONEY FUND 3.28% 3.33% 5.43% 5.52% N/A N/A
MONTGOMERY CALIFORNIA TAX-FREE
INTERMEDIATE BOND FUND N/A N/A N/A N/A 3.70% 6.13%
MONTGOMERY CALIFORNIA TAX-FREE
MONEY FUND 2.97% 3.01% 5.42% 5.50% N/A N/A
</TABLE>
* Calculated using a combined federal and California income tax rate of 45.22%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
AVERAGE ANNUAL TOTAL RETURN. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
each respective period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
AGGREGATE TOTAL RETURN. A Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in that Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
B-62
<PAGE>
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods indicated
was as follows:
<TABLE>
<CAPTION>
YEAR 5-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998
<S> <C> <C> <C>
Montgomery Growth Fund 17.31% N/A 24.74%
Montgomery Small Cap Opportunities Fund 11.86% N/A 21.68%
Montgomery Small Cap Fund 23.23% 16.73% 20.82%
Montgomery U.S. Emerging Growth Fund 21.76% N/A 23.57%
Montgomery Equity Income Fund 15.83% N/A 21.54%
Montgomery International Growth Fund 23.27% N/A 23.35%
Montgomery International Small Cap Fund 4.46% N/A 8.86%
Montgomery Emerging Markets Fund (39.20%) 0.01% 1.63%
Montgomery Emerging Asia Fund (63.45%) N/A (27.01%)
Montgomery Latin America Fund (25.42%) N/A (25.42%)
Montgomery Global Opportunities Fund 27.12% N/A 18.34%
Montgomery Global Communications Fund 45.45% 19.32% 19.85%
Montgomery Select 50 Fund 15.44% N/A 28.94%
Montgomery U.S. Asset Allocation Fund 14.67% N/A 21.15%
Montgomery Total Return Bond Fund 10.92% N/A 10.92%
Montgomery Short Duration Government Bond Fund 7.56% 6.15% 6.6%
Montgomery California Tax-Free Intermediate Bond Fund 6.85% N/A 5.51%
</TABLE>
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were:
Growth Fund, September 30, 1993; Small Cap Opportunities Fund, December
29, 1995; Small Cap Fund, July 13, 1990; U.S. Emerging Growth Fund,
December 30, 1994; Equity Income Fund, September 30, 1994;
International Growth Fund, June 30, 1995; International Small Cap Fund,
September 30, 1993; Emerging Markets Fund, March 1, 1992; Emerging Asia
Fund, September 30, 1996; Latin America Fund, June 30, 1997; Global
Opportunities Fund, September 30, 1993; Global Communications Fund,
June 1, 1993; Select 50 Fund, October 27, 1995; U.S. Asset Allocation
Fund, March 31, 1994; Total Return Bond Fund, June 30, 1997; Short
Duration Government Bond Fund, December 18, 1992; Government Reserve
Fund, September 14, 1992; California Intermediate Bond Fund, July 1,
1993; California Tax-Free Money Fund, September 30, 1994; and Federal
Tax-Free Money Fund, June 30, 1996.
B-63
<PAGE>
PRESENTATION OF OTHER PERFORMANCE INFORMATION REGARDING THE GLOBAL OPPORTUNITIES
FUND
John Boich and Oscar Castro jointly managed a limited partnership
called the Common Goal World Fund Limited Partnership (the "Partnership") before
joining the Manager. John Boich has served as the Partnership's General Partner
since its inception on January 7, 1990 until April 1993, when Mr. Castro and Mr.
Boich joined the Manager as Managing Directors and Portfolio Managers. On
September 30, 1993, the Montgomery Global Opportunities Fund, which has a
similar investment strategy as the partnership, was launched On October 1, 1993,
the Partnership was dissolved and the assets were transferred in-kind into the
Opportunities Fund. Consistent with applicable law, the Managers may advertise
the performance of the Partnership as part of materials concerning the
Opportunity Fund.
The annual total return for the Partnership for the periods indicated
was as follows:
------------------------------------ ---------------------------------
PERIOD PARTNERSHIP ANNUAL TOTAL RETURN
(NET OF FEES)
------------------------------------ ---------------------------------
Year ended Dec. 31, 1990* 2.04%
------------------------------------ ---------------------------------
Year ended Dec. 31, 1991 25.32%
------------------------------------ ---------------------------------
Year ended Dec. 31, 1992 4.53%
------------------------------------ ---------------------------------
9-month Period ended Sept. 30, 1993 17.29%
------------------------------------ ---------------------------------
* The Partnership commenced operations on January 7, 1990.
PRESENTATION OF OTHER PERFORMANCE INFORMATION REGARDING THE EMERGING ASIA FUND
From time to time, the Manager may advertise the performance of a
related mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the "Navigator Asia Pacific Fund" commenced
operations on May 19, 1995. The Manager managed that Fund until July 31, 1997.
The performance information of the Navigator Asia Pacific Fund (net of fees) was
as follows:
--------------------------------- ------------------------
PERIOD AGGREGATE TOTAL RETURN
(NET OF FEES)
--------------------------------- ------------------------
Year to date ended July 31, 1997 42.09%
--------------------------------- ------------------------
Since inception 78.70%
--------------------------------- ------------------------
COMPARISONS. To help investors better evaluate how an investment in the
Funds might satisfy their investment objectives, advertisements and other
materials regarding the Funds may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to, the following may be used in discussion
of a Fund's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
B-64
<PAGE>
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Funds to calculate
their figures.
The Funds may also publish their relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
REASONS TO INVEST IN THE FUNDS. From time to time, the Funds may
publish or distribute information and reasons supporting the Manager's belief
that a particular Fund may be appropriate for investors at a particular time.
The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, WEFA, consensus estimates, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic
B-65
<PAGE>
product (GDP) for selected economies. In using this information, the Montgomery
Emerging Asia Fund also may claim that certain Asian countries are regarded as
having high rates of growth for their economies (GDP), international trade and
corporate earnings; thus producing what the Manager believes to be a favorable
investment climate.
RESEARCH. The Manager has developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
the Montgomery Funds style
The portfolio managers for Montgomery's Foreign and Global Equity Funds
work extensively on developing an in-depth understanding of particular foreign
markets and particular companies. And they very often discover that they are the
first analysts from the United States to meet with representatives of foreign
companies, especially those in emerging markets nations.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that crosses a number of the Funds
and is reflected in the number of Funds oriented towards smaller capitalization
businesses
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market. The growth
equity team, for example, has developed its own strategy and proprietary
database for analyzing the growth potential of U.S. companies, often large,
well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (as of June 30, 1998,
approximately $5.5 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Funds (as of June 30,
1998, around 300,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after
B-66
<PAGE>
commencement of those Funds' operations. Investors purchasing shares of a Fund
bear such expenses only as they are amortized daily against that Fund's
investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian") acts as
custodian of the securities and other assets of the Funds. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, is the Funds' Master Transfer Agent. The Master Transfer Agent
has delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Funds' Transfer and Dividend
Disbursing Agent.
PricewaterhouseCoopers LLP is the independent auditor for the Funds.
The validity of shares offered hereby have been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The Montgomery Funds
II) as shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust ("Declaration of Trust")
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust. The Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Declaration of
Trust provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Funds or
Trust and satisfy any judgment thereon. All such rights are limited to the
assets of the Funds. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort and other
liabilities. Furthermore, the activities of the Trust as an investment company
as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
Among the Boards' powers enumerated in the Agreements and Declaration
of Trust is the authority to terminate the Trusts or any of their series, or to
merge or consolidate the Trusts or one or more of their series with another
trust or company without the need to seek shareholder approval of any such
action.
As of September 30, 1998, to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class R Shares
of the respective Funds indicated:
B-67
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
GROWTH FUND
Charles Schwab & Co., Inc. 17,752,539 34.53%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 3,553,354 6.91%
For The Exclusive Benefit of Our Customers
ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
SMALL CAP OPPORTUNITIES FUND
Charles Schwab & Co., Inc. 2,139,255 34.18%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 531,499 8.49%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
SMALL CAP FUND
The Trust Company of Knoxville 1,138,749 12.96%
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,088,392 12.39%
101 Montgomery Street
San Francisco, CA 94104-4122
U.S. EMERGING GROWTH FUND
Charles Schwab & Co., Inc. 6,749,944 36.05%
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
B-68
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
National Financial Services Corp. 1,082,366 5.78%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
EQUITY INCOME FUND
Charles Schwab & Co., Inc. 874,423 44.84%
101 Montgomery Street
San Francisco, CA 94104-4122
NationsBanc Montgomery Securities 125,403 6.43%
600 Montgomery Street
San Francisco, CA 94111-2702
INTERNATIONAL GROWTH FUND
Charles Schwab & Co., Inc. 3,811,228 44.83%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 566,757 6.67%
PO Box 3730
Church Street Station
New York, NY 10008-3730
INTERNATIONAL SMALL CAP FUND
Charles Schwab & Co., Inc. 1,246,672 34.65%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 306,404 8.52%
For the Exclusive Use of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Donaldson Lufkin & Jenrette Securities Corporation 669,857 18.62%
Mutual Funds 7th Floor
PO Box 2052
Jersey City, NJ 07303-2052
</TABLE>
B-69
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
EMERGING MARKETS FUND
Charles Schwab & Co., Inc. 20,080,940 34.19%
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 5,472,042 9.32%
For the Exclusive Benefit of Our Cstomers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Smith Barney, Inc. 4,726,114 8.05%
333 Greenwich Street, 11th Floor
New York, NY 10013-3318
Merrill Lynch Pierce Fenner & Smith 9,344,466 15.91%
4800 Deer Lake Drive, East Fl. 2
Jacksonville, FL 32246-6484
EMERGING ASIA FUND
Charles Schwab & Co., Inc. 1,076,970 29.35%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 459,272 12.52%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Westheim Schroeder & Co., Inc. 752,027 20.49%
Mutual Fund Control A/C
c/o Lewco Sec Attn: Tony Mnoio/Robt
34 Exchange Pl, FL4
Jersey City, NJ 07302-3901
Donaldson Lufkin & Jenrette 268,508 7.32%
Securities Corporation
PO Box 2052
Jersey City, NJ 07303-2052
</TABLE>
B-70
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
LATIN AMERICA FUND
Charles Schwab & Co., Inc. 72,473 14.97%
101 Montgomery Street
San Francisco, CA 94104-9122
National Financial Services Corp. 82,225 16.98%
For the Exclusive Benefit of Our
Customers - Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
GLOBAL OPPORTUNITIES FUND
Charles Schwab & Co., Inc. 773,598 29.40%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 278,881 10.60%
For The Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 169,450 6.44%
155 East Broad, No. 23
Columbus, OH 43215-3609
GLOBAL COMMUNICATIONS FUND
Charles Schwab & Co., Inc. 4,674,770 39.46%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 946,024 7.99%
For The Exclusive Benefit Our Customers
PO Box 3730
Church Street Station
New York, NY 10008-3730
</TABLE>
B-71
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
SELECT 50 FUND
Charles Schwab & Co., Inc. 2,792,043 28.27%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 733,891 7.43%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Resources Trust Co. Cust. 495,205 5.01%
For The Exclusive Benefit of Ian
PO Box 3865
Englewood, CO 80155-3865
U.S. ASSET ALLOCATION FUND
Charles Schwab & Co., Inc. 2,012,474 33.22%
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 713,260 11.77%
For the Exclusive Benefit of Our Customers Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
TOTAL RETURN BOND FUND
Asset Allocation Fund 4,726,283 80.18%
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
Charles Schwab & Co., Inc.
101 Montgomery Street 844,333 14.32%
San Francisco, CA 94104-4122
SHORT DURATION GOVERNMENT BOND FUND
Charles Schwab & Co., Inc. 5,926,471 49.88%
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
B-72
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
Donaldson, Lufkin & Jenrette 990,231 8.33%
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
Prudential Securities Inc. 1,554,352 13.08%
Special Custody Account for The Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
GOVERNMENT RESERVE FUND
Mary Miner, Trustee for Robert Miner and Mary Miner Trust 88,333,427 11.80%
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Charles Schwab & Co., Inc. 2,238,411 75.91%
101 Montgomery Street
San Francisco, CA 94104-4122
FEDERAL TAX--FREE MONEY FUND
John & Peter Sperling TTEES 13,357,707 11.53%
FBO John Sperling
1994 Irrevocable Trust U/A DTD 4/7/98
4835 E. Exeter
Phoenix, AZ 85018-2940
William Thompson 5,822,455 5.03%
301 Haines Drive
N. Wales, PA 19454-2702
CALIFORNIA TAX FREE MONEY MARKET
John D. Murphy 9,486,319 5.03%
FBO: The Murphy Revocable Trust
Dated 2/26/93
2520 Pacific St.
San Francisco, CA 94115-1126
</TABLE>
B-73
<PAGE>
As of September 30, 1998, to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class P Shares
of the respective Funds indicated:
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
GROWTH FUND
Dreyfus Investment Services Corp. 1,156 14.75%
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburgh, PA 15259-0001
Dreyfus Investment Services Corp. 853 10.87%
FBO 632636441
2 Mellon Bank Center, Room 177
Pittsburgh, PA 15259-0001
Inv. Fiduciary Trust Co. 2,031 25.90%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
Inv. Fiduciary Trust Co. 533 6.67%
IRA R/O Jeanne M. Grant
11865 Dunlop Court
Reston, VA 20191-2709
Walter J. Klein Company, LTD 466 5.94%
Profit Sharing Trust
PO Box 472087
Charlotte, NC 28247-2087
National Investor Services Corp. 733 9.35%
For The Exclusive Benefit Of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
SMALL CAP OPPORTUNITIES FUND
Sharon G. Roberts 35 38.05%
341 Bobwhite Drive
Pensacola, FL 32514-2705
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
Southwest Securities Inc. 56 61.95%
FBO: Jamil S. Jones & Thad Jones JTWROS
Acct: 47689580
PO Box 509002
Dallas, TX 75250-9002
SMALL CAP FUND
Saxon & Co. 465,063 43.62%
FBO T/A Leaseway Transport
A/C #20-35-002-1037303
PO Box 7780-1888
Philadelphia, PA 19182-0001
State Street Bank & Trust Co. 99,006 9.29%
U/A January 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 64,277 6.03%
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 0226-8705
State Street Bank & Trust Co. Tr. 219,601 20.60%
U/A December 1, 1993
Ameridata Tech. Employee Svgs. Plan
Attn: Steven Shipman - Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
State Street Bank & Trust Co. 81,591 7.65%
The Bardon Group, Inc.
401K Retirement & P.S.P.
P.O. Box 1992
Boston, MA 02105-1992
</TABLE>
B-75
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
State Street 74,708 7.01%
Retirement Savings Plan
P.O. Box 1992
Boston, MA 02105-1992
EQUITY-INCOME FUND
State Street Bank & Trust Co. Tr. 153,907 99.87%
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
INTERNATIONAL GROWTH FUND
National Investor Services Corp. 272 5.64%
For The Exclusive Benefit Of Our Customers
55 Water Street, 32nd Floor
New York, NY 10041-3299
E*Trade Securities Inc. 522 10.81%
A/C 6892-1702
Linda H. Quasney
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
E*Trade Securities, Inc. 522 10.81%
A/C 6892-1821
James S. Quasney
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
E*Trade Securities, Inc. 1,198 24.82%
A/C 4331-3198
Charles R. House
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
</TABLE>
B-76
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
US Clearing Corp. 1,000 20.71%
FBO 780-34028-20
26 Broadway
New York, NY 10004-1703
US Clearing Corp. 545 11.28%
FBO 780-40227-18
26 Broadway
New York, NY 10004-1703
EMERGING MARKETS FUND
State Street Bank & Trust Co. 27,521 65.65%
V/A Jan. 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
Dreyfus Investment Services Corp. 2,609 6.22%
FB0 636931621
2 Mellon Bank Center, Room 177
Pittsburgh, PA 15259-0001
US Clearing Corp. 6,066 14.47%
FBO 780-16649-18
26 Broadway
New York, NY 10004-1798
SELECT 50 FUND
National Investor Services Corp. 197 8.15%
For The Exclusive Benefit of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
BA Investment Services 146 6.02%
FBO 211129251
185 Berry Street, 3rd Floor
San Francisco, CA 94107-1729
</TABLE>
B-77
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
Post & Co. 1,376 56.82%
A/C 223523
C/O The Bank of New York
Mutual Fund/Reorg Dept.
PO Box 1066 Wall Street Station
New York, NY 10286
US Clearing Corp. 123 5.08%
FBO 780-95473-13
26 Broadway
New York, NY 10004-1798
U.S. ASSET ALLOCATION FUND
Inv. Fiduciary Trust Co. 2,035 55.05%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
Inv. Fiduciary Trust Co. 742 20.08%
IRA R/O Jeanne M. Grant
11865 Dunlop Court
Reston, VA 20191-2709
National Investor Services Corp. 401 10.84%
For The Exclusive Benefit of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
Charles E. Carson 266 7.20%
115 Beechwood Lane
Chambersburg, PA 17201-1489
GOVERNMENT RESERVE FUND
Painewebber 2.0 100.00%
For the Benefit of Painewebber, Inc.
Non-Proprietary M/F
1000 Harbor Blvd., 8th Floor
Attn: Department Manager
Weehawken, NJ 07087-6727
</TABLE>
B-78
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
<S> <C> <C>
SHORT GOVERNMENT BOND FUND
E*Trade Securities, Inc. 300 43.07%
A/C 7928-0709
Advanced Communications
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
E*Trade Securities, Inc. 99 14.22%
A/C 6552-5759
Donald C. Pack III
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
E*Trade Securities, Inc. 98 14.12%
A/C Eric Henneke
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
US Clearing Corp. 199 28.59%
FBO 780-42531-15
26 Broadway
New York, NY 10004-1703
</TABLE>
As of September 30, 1998, officers and directors of the Montgomery
Funds owned, in aggregate, of record more than 1% of the outstanding shares in:
Montgomery California Tax-Free Intermediate Bond Fund Class R Shares, holding a
combined 11.4% of shares outstanding.
The Trusts are registered with the Securities and Exchange Commission
as non-diversified management investment companies, although each Fund, except
for the Tax-Free Funds, is a diversified series of the Trust. Such a
registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending June 30,
1998, for the Growth, Small Cap Opportunities, Small Cap, U.S. Emerging Growth,
Equity Income, International Growth, International Small Cap, Global
Opportunities, Global Communications, Emerging Markets, Emerging Asia, Latin
America,
B-79
<PAGE>
Select 50, U.S. Asset Allocation, Total Return Bond, Short Duration Government
Bond, Government Reserve, Federal Tax-Free Money, California Tax-Free
Intermediate Bond and California Tax-Free Money Funds, as contained in the
Annual Report to Shareholders of such Funds for the fiscal year ended June 30,
1998 (the "Report"), are incorporated herein by reference to the Report.
B-80
<PAGE>
APPENDIX
Description ratings for Standard & Poor's Ratings Group ("S&P");
Moody's Investors Service, Inc., ("MOODY's"), Fitch Investors Service, L.P.
("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
STANDARD & POOR'S RATING GROUP
BOND RATINGS
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
B-81
<PAGE>
S&P's letter ratings may be modified by the addition of a plus
(+) or a minus (-) sign designation, which is used to show relative
standing within the major rating categories, except in the AAA (Prime
Grade) category.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC.
BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are
B-82
<PAGE>
considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, I.E., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
COMMERCIAL PAPER RATINGS
The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Issuers of P-1 paper must have a superior
capacity for repayment of short-term promissory obligations, and
ordinarily will be evidenced by leading market positions in well
established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
B-83
<PAGE>
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
FITCH INVESTORS SERVICE, L.P.
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest
B-84
<PAGE>
reflects the obligor's limited margin of safety and the need
for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD AND D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
B-85
<PAGE>
D Default. Issues assigned this rating are in actual or imminent
payment default.
DUFF & PHELPS CREDIT RATING CO.
BOND RATINGS
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
COMMERCIAL PAPER RATINGS
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
B-86
<PAGE>
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payments.
B-87
<PAGE>
- --------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION FOR SHARES OF
MONTGOMERY INSTITUTIONAL EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1998
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust with different series
of shares of beneficial interest. Montgomery Institutional Series: Emerging
Markets Portfolio (the "Fund") is a series of the Trust. The Fund is managed by
Montgomery Asset Management LLC (the "Manager") and its shares are distributed
by Funds Distributor, Inc. (the "Distributor"). This Statement of Additional
Information contains information in addition to that set forth in the Prospectus
for the Fund (the "Prospectus"), dated October 31, 1998, as may be revised from
time to time. The Prospectus provides the basic information a prospective
investor should know before purchasing shares of the Fund and may be obtained
without charge at the address or telephone number provided above. This Statement
of Additional Information is not a prospectus and should be read in conjunction
with the Prospectus.
TABLE OF CONTENTS
THE TRUST.....................................................................2
Investment Objective and Policies of he Fund..................................2
Risk Factors.................................................................13
INVESTMENT RESTRICTIONS......................................................16
Distributions and Tax Information............................................18
TRUSTEES AND OFFICERS........................................................22
INVESTMENT MANAGEMENT AND OTHER SERVICES.....................................26
EXECUTION OF PORTFOLIO TRANSACTIONS..........................................29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................32
DETERMINATION OF NET ASSET VALUE.............................................33
PRINCIPAL UNDERWRITER........................................................35
PERFORMANCE INFORMATION......................................................35
GENERAL INFORMATION..........................................................37
FINANCIAL STATEMENTS.........................................................39
APPENDIX.....................................................................40
B-1
<PAGE>
THE TRUST
The Trust is an open-end management investment company organized as a
Delaware business trust on September 10, 1993, and registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trust currently offers shares of beneficial interest, $0.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L). This Statement of Additional Information pertains to Montgomery
Institutional Series: Emerging Markets Portfolio.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund is managed by Montgomery Asset Management, LLC (the "Manager")
and its shares are distributed by Funds Distributor, Inc. (the "Distributor").
The investment objective and policies of the Fund are described in detail in the
Prospectus. The following discussion supplements the discussion in the
Prospectus.
The Fund is a diversified series of the Trust, an open-end management
investment company offering redeemable shares of beneficial interest. The
achievement of the Fund's investment objective will depend on market conditions
generally and on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depository Receipts, Convertible Securities and Securities Warrants.
The Fund may hold securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") and other similar global instruments available in
emerging markets, or other securities convertible into securities of eligible
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and EDRs and
other similar global instruments in bearer form are designed for use in European
securities markets. For purposes of the Fund's investment policies, the Fund's
investments in ADRs, EDRs, and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. To the extent allowed by its prospectus,
the Fund may invest in securities issued by other investment companies. Those
investment companies must invest in securities in which the Fund can invest in a
manner consistent with the Fund's investment objective and policies. Applicable
provisions of the Investment Company Act require that the Fund limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% of the value of the Fund's total assets will be
invested in the aggregate in securities of investment companies as a group; and
(b) either the Fund and affiliated persons of the Fund not own together more
than 3% of the total outstanding shares of any one investment company at the
time of purchase (and that all shares of the investment company held by the Fund
in excess of 1% of the company's total outstanding shares be deemed illiquid);
or the Fund not invest more than 5% of its total assets in any one investment
company and the investment not represent more than 3% of the total outstanding
voting stock of the investment company at the time of purchase.
B-2
<PAGE>
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the Fund to invest in certain markets. Such investments may involve
the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act. The Foreign and Global Equity Funds also may incur
tax liability to the extent that they invest in the stock of a foreign issuer
that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Funds.
The Fund does not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, these Funds bear their ratable
share of that investment company's expenses, including advisory and
administration fees. The Manager has agreed to waive its own management fee with
respect to the portion of these Funds' assets invested in other open-end (but
not closed-end) investment companies.
Debt Securities. The Fund may purchase debt securities that complement
its objective of capital appreciation through anticipated favorable changes in
relative foreign exchange rates, in relative interest rate levels or in the
creditworthiness of issuers. Debt securities may constitute up to 35% of the
Fund's total assets. In selecting debt securities, the Manager seeks out good
credits and analyzes interest rate trends and specific developments that may
affect individual issuers. As an operating policy, which may be changed by the
Board, the Fund may invest up to 5% of their total assets in debt securities
rated lower than investment grade. Subject to this limitation, the Fund may
invest in any debt security, including securities in default. After its purchase
by the Fund, a debt security may cease to be rated or its rating may be reduced
below that required for purchase by the Fund. A security downgraded below the
minimum level may be retained if determined by the Manager and the Board to be
in the best interests of the Fund.
Debt securities may also consist of participation certificates in large
loans made by financial institutions to various borrowers, typically in the form
of large unsecured corporate loans. These certificates must otherwise comply
with the maturity and credit-quality standards of each Fund and will be limited
to 5% of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries. The percentage distribution between equity and debt
will vary from country to country, based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities. The Fund may invest a substantial portion,
if not all, of its net assets in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, including repurchase agreements
backed by such securities ("U.S. Government securities"). The Fund generally
will have a lower yield than if it purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other
B-3
<PAGE>
securities issued by U.S. government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, such as those issued by the
Federal Home Loan Bank, whereas others, such as those issued by the FNMA, Farm
Credit System and Student Loan Marketing Association, have an additional line of
credit with the U.S. Treasury. Short-term U.S. government securities generally
are considered to be among the safest short-term investments. The U.S.
government does not guarantee the net asset value of the Fund's shares, however.
With respect to U.S. government securities supported only by the credit of the
issuing agency or instrumentality or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities. Accordingly, such U.S. government
securities may involve risk of loss of principal and interest.
Privatizations. The Fund may invest in privatizations. Foreign
governmental programs of selling interests in government-owned or -controlled
enterprises ("privatizations") may represent opportunities for significant
capital appreciation and the Fund may invest in privatizations. The ability of
U.S. entities, such as the Fund, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations. The Fund may invest in special situations. The Fund
believes that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities and similar vehicles
(collectively, "special situations") could enhance their capital appreciation
potential. The Fund also may invest in certain types of vehicles or derivative
securities that represent indirect investments in foreign markets or securities
in which it is impracticable for the Fund to invest directly. Investments in
special situations may be illiquid, as determined by the Manager based on
criteria reviewed by the Board. The Fund does not invest more than 15% of its
net assets in illiquid investments, including special situations.
Risk Factors/Special Considerations Relating to Debt Securities
The Fund may invest in debt securities which are rated below Baa by
Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") or Fitch Investor Services ("Fitch"), or, if unrated, are
deemed to be of equivalent investment quality by the Manager. As an operating
policy, which may be changed by the Board of Trustees (the "Board") without
shareholder approval, the Fund will invest no more than 5% of its assets in debt
securities rated below Baa by Moody's or BBB by S&P or Fitch, or, if unrated, of
equivalent investment quality as determined by the Manager. The market value of
debt securities generally varies in response to changes in interest rates and
the financial condition of each issuer. During periods of declining interest
rates, the value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. The net asset value of the Fund will reflect these changes in market
value.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P or Fitch are
obligations on which no interest is being paid. Bonds rated below BBB or Baa are
often referred to as "junk bonds."
Although such bonds may offer higher yields than higher rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher
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rated securities. The existence of limited markets for particular securities may
diminish the ability of the Fund to sell the securities at fair value either to
meet redemption requests or to respond to changes in the economy or in the
financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent it invests in low-rated debt
securities, be more dependent upon such credit analysis than would be the case
if the Fund invested in higher rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher rated debt securities, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, the Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the
Fund may enter into forward foreign currency exchange contracts ("forward
contracts") and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The Funds may enter into
hedging transactions when, in fact, it is inopportune to do so and, conversely,
when it is more opportune to enter into hedging transactions the Funds might not
enter into such transactions. Such inopportune timing of utilization of hedging
practices could result in substantial losses to the Funds.
The Fund also may conduct its foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market at the time of the transaction.
The Fund also may purchase other types of options and futures and may,
in the future, write covered options, as described below and in the Prospectus.
Forward Contracts. The Fund may enter into forward contracts to attempt
to minimize the risk to the Fund from adverse changes in the relationship
between the U.S. dollar and foreign currencies. A forward contract which is
individually negotiated and privately traded by currency traders and their
customers involves an obligation to purchase or sell a specific currency for an
agreed-upon price at a future date.
The Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or
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interest payment in order to "lock in" the U.S. dollar price of a security,
dividend or interest payment. When the Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell an amount of that foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
currency, or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
contract to buy that currency for a fixed dollar amount.
In connection with the Fund's forward contract transactions, an amount
of the Fund's assets equal to the amount of the Fund's commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, the Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them and the ability of
the Fund to utilize forward contracts may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates, the
Fund may purchase and sell various kinds of futures contracts and options on
futures contracts. The Fund also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Fund will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that the Fund may hold
positions in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of the Fund's
net assets (after taking into account unrealized profits and unrealized losses
on any such positions) and that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. The Fund's futures transactions generally will be
entered into only for traditional hedging purposes--i.e., futures contracts will
be sold to protect against a decline in the price of securities or currencies
and will be purchased to protect the Fund against an increase in the price of
securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
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Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge its positions, the Fund seeks to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, the
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, the Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The Fund
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that the Fund has acquired or
expects to acquire.
As part of its hedging strategy, the Fund also may enter into other
types of financial futures contracts if, in the opinion of the Fund's Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of the
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of
the Fund's portfolio securities could be offset substantially by a decline in
the value of the futures position.
The acquisition of put and call options on futures contracts gives the
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives the Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of
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1986, as amended, for maintaining its qualification as a regulated investment
company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. The Fund may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolio and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options it has purchased.
The Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the foreign currency in which such securities are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified securities or a specified amount of a
foreign currency at a specified price during the option period.
The Fund may purchase and sell options that are traded on U.S. and
foreign exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Trading in OTC options is also subject to the risk that the
other party will be unable or unwilling to close out options purchased by the
Fund.
Although the Fund will generally purchase only those options for which
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, the Fund may, in
the future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which the Fund may invest. A covered call
option involves the Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against a price decline of the underlying security. However, by
writing a covered call option, the Fund gives up the opportunity, while the
option is in effect, to realize gain from any price increase
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(above the option exercise price) in the underlying security. In addition, the
Fund's ability to sell the underlying security will be limited while the option
is in effect unless the Fund effects a closing purchase transaction.
The Fund also may write covered put options which give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option but
will be obligated for as long as the option is outstanding to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise. In order to "cover" put options it has
written, the Fund will cause its custodian to segregate cash, cash equivalents,
U.S. Government securities or other liquid equity or debt securities with at
least the value of the exercise price of the put options. The Fund will not
write put options if the aggregate value of the obligations underlying the put
options shall exceed 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of the Fund's orders.
EQUITY LINKED DERIVATIVES--SPDRS, WEBS, DIAMONDS and OPALs. Each Fund
may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs") and S&P's
MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity Benchmark Series
("WEBS") Dow Jones Industrial Average instruments ("DIAMONDS") and assets of
Country Securities ("OPALs"). Each of these instruments are derivative
securities whose value follows a well-known securities index as baskets of
securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P
500 Index and the S&P MidCap 400 Index, respectively. WEBS are currently
available in 17 varieties, each designed to follow the performance of a
different Morgan Stanley Capital International country index. DIAMONDS are
designed to follow the performance of the Dow Jones Industrial Average which
tracks the composite stock performance of 30 major U.S. companies in a diverse
range of industries.
OPALs track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxenberg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALs will receive semi-annual distribution
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALs, the holder will reveive the physical securities comprising the underlying
basket. OPALs, like many of these types of instruments, represent an unsecured
obligation and therefore carry with them the risk that the Counterparty will
default.
Because the prices of SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALs are
correlated to diversified portfolios, they are subject to the risk that the
general level of stock prices may decline or that the underlying indices
decline. In addition, because SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALs will
continue to be traded even when trading is halted in component stocks of the
underlying indices, price quotations for these securities may, at times, be
based upon non-current price information with respect to some of even all of the
stocks in the underlying indices. In addition to the risks disclosed in "Foreign
Securities" below, because WEBS mirror the performance of a single country
index, a economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
Other Investment Practices
Repurchase Agreements. To the extent permitted in the prospectus, the
Fund may enter into repurchase agreements. The Fund's repurchase agreements
generally will involve a short-term investment in a U.S. Government security or
other high grade liquid debt security, with the seller of the underlying
security agreeing to repurchase it from the Fund at a mutually agreed-upon time
and price. The repurchase price generally is higher than the purchase price, the
difference being interest income to the Fund. Alternatively, the purchase and
repurchase prices
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may be the same, with interest at a stated rate due to the Fund together with
the repurchase price on the date of repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the underlying security itself.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Fund enters into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
The Fund generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Fund regards repurchase agreements with
maturities in excess of seven days as illiquid. The Fund may not invest more
than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from the Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by the Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase under a repurchase agreement,
the Fund may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or a decline in price of the
security. If a court characterizes such a transaction as a loan and the Fund has
not perfected a security interest in the security, the Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund
also runs the risk that the seller may fail to repurchase the security. However,
the Fund always requires collateral for any repurchase agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and the Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
The Fund may participate in one or more joint accounts with other funds
of the Trust that may invest in repurchase agreements collateralized, subject to
their investment policies, either by (i) obligations issued or guaranteed as to
principal and interest by the U.S. Government or by one of its agencies or
instrumentalities, or (ii) privately issued mortgage-related securities that are
in turn collateralized by securities issued by GNMA, FNMA or FHLMC, and are
rated in the highest rating category by a nationally recognized statistical
rating organization, or, if unrated, are deemed by the Manager to be of
comparable quality using objective criteria. Any such
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repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event will have a
duration of more than seven days.
Lending of Portfolio Securities. Although the Fund currently does not
intend to do so, the Fund may lend its portfolio securities in order to generate
additional income. Such loans may be made to broker-dealers or other financial
institutions whose creditworthiness is acceptable to the Manager. These loans
would be required to be secured continuously by collateral, including cash, cash
equivalents, irrevocable letters of credit, U.S. Government securities, or other
high grade liquid debt securities, maintained on a current basis (i.e., marked
to market daily) at an amount at least equal to 100% of the market value of the
securities loaned plus accrued interest. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Loans are subject to termination at the option of the Fund or the
borrower at any time. Upon such termination, the Fund is entitled to obtain the
return of the securities loaned within five business days.
For the duration of the loan, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Fund does not believe that its net asset value
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund causes its custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
The Fund may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
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deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
security increases between the date the Fund enters into the forward commitment
and the date on which it must purchase the security it is committed to deliver.
The Fund will realize a gain from this type of forward commitment if the
security declines in price between those dates. The amount of any gain will be
reduced, and the amount of any loss increased, by the amount of the interest or
other transaction expenses the Fund may be required to pay in connection with
this type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by the Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-
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eligible restricted securities, however, could adversely affect the
marketability of such portfolio securities and result in a Fund's inability to
dispose of such securities promptly or at favorable prices.
The Board have delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including but not limited to (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board.
RISK FACTORS
The following describes certain risks involved with investing in the
Funds.
Small Companies
Investors in Funds that invests in smaller companies should consider
carefully the special risks involved. Such smaller companies may present greater
opportunities for capital appreciation but may involve greater risk than larger,
more mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than those of larger
issuers.
Foreign Securities
The Fund may purchase securities in foreign countries. According,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation; taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, these Funds may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Funds in other countries are generally greater
than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive
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investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined, or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries there is less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. The
securities markets of many of the countries in which these Funds may invest may
also be smaller, less liquid and subject to greater price volatility than those
in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest may also have
fixed or managed currencies that are not freely convertible at market rates into
the U.S. dollar. Certain currencies may not be internationally traded. A number
of these currencies have experienced steady devaluation relative to the U.S.
dollar, and such devaluations in the currencies may have a detrimental impact on
the Fund. Many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuation in inflation rates may have negative
effects on certain economies and securities markets. Moreover, the economies of
some countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Emerging Market Countries
The Fund may invest in securities of companies domiciled in, and in
markets of, so-called "emerging market countries." These investments may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict the Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain emerging market countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in certain emerging
market countries may be slowed or reversed by unanticipated political or social
events in such countries.
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Exchange Rates and Policies
The Fund endeavors to buy and sell foreign currencies on favorable
terms. Some price spreads on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another or when proceeds from the sale of shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Fund from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source, or impose
other taxes, with respect to these Funds' investments in securities of issuers
of that country. There also is the possibility of expropriation,
nationalization, confiscatory or other taxation, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the Fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
Investors in the Fund should consider carefully the substantial risks
involved in securities of companies located or doing business in, and
governments of, foreign nations, which are in addition to the usual risks
inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. Many foreign markets have substantially less volume than either
the established domestic securities exchanges or the OTC markets. Securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commission rates in foreign countries, which may be
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. and capital requirements for brokerage firms are generally lower.
Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
Hedging Transactions
While transactions in forward contracts, options, futures contracts and
options on futures (i.e., "hedging positions") may reduce certain risks, such
transactions themselves entail certain other risks. Thus, while the Fund may
benefit from the use of hedging positions, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer
overall performance for the Fund than if it had not entered into any hedging
positions. If the correlation between a hedging position and portfolio position
which is intended to be protected is imperfect, the desired protection may not
be obtained, and the Fund may be exposed to risk of
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financial loss. Furthermore, the Funds may enter into hedging transactions when,
in fact, it is inopportune to do so and, conversely, when it is more opportune
to enter into hedging transactions the Funds might not enter into such
transactions. Such inopportune timing of utilization of hedging practices could
result in substantial losses to the Funds.
Perfect correlation between the Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such
investment more than 5% of the total assets of the Fund would be
invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) through the lending of up to 10% of its portfolio securities as
described above and in its Prospectus, or (c) to the extent the entry
into a repurchase agreement is deemed to be a loan.
3.
(a) Borrow money, except for temporary or emergency purposes from
a bank, and then not in excess of 10% of the value of its
total assets (including the proceeds of such borrowings, at
the lower of cost or fair market value). Any such borrowing
will be made only if immediately thereafter there is an asset
coverage of at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in
excess of 5% of total assets. Transactions that are fully
collateralized in a manner that does not involve the
prohibited issuance of a "senior security" within the meaning
of Section 18(f) of the Investment Company Act shall not be
regarded as borrowings for the purposes of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other
hedging transactions.
4. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
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5. Buy or sell real estate (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts;
however, the Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including
real estate investment trusts, and may purchase or sell currencies
(including forward currency exchange contracts), futures contracts and
related options generally as described in the Prospectus and Statement
of Additional Information.
6. Buy or sell interests in oil, gas or mineral exploration or development
leases and programs. (This does not preclude permissible investments in
marketable securities of issuers engaged in such activities.)
7. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or
acquisition of assets.
8. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and OTC options (and
securities underlying such options) purchased by a Fund. (This is an
operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations).
9. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
10. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit the Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
12. Acquire or dispose of put, call, straddle or spread options except as
described herein and in the Prospectus and subject to the following
conditions:
(a) such options are written by other persons (except as described
herein or in the Prospectus), and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder
approval.)
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13. Except as and unless described in the Prospectus and this Statement of
Additional Information, engage in short sales of securities. (This is
an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
14. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
15. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
16. Invest in commodities, except for futures contracts or options on
futures contracts, if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open
futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Fund will receive income in the form of dividends
and interest earned on its investments in securities. This income, less the
expenses incurred in its operations, is the Fund's net investment income,
substantially all of which will be declared as dividends to the Fund's
shareholders.
The amount of ordinary income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders.
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The maximum long-term federal capital gains rate for individuals is 20%
with respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by the Fund reduces the
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.
Dividends and other distributions will be reinvested in additional
shares of the Fund. Investors have the right to change their elections with
respect to the reinvestment of dividends and distributions by notifying the
Transfer Agent in writing, but any such change will be effective only as to
dividends and other distributions for which the record date is seven or more
business days after the Transfer Agent has received the written request.
Tax Information. The Fund has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year by complying with all applicable requirements regarding the source of its
income, the diversification of its assets, and the timing of its distributions.
The Fund's policy is to distribute to its shareholders all of its investment
company taxable income and any net realized capital gains for each fiscal year
in a manner that complies with the distribution requirements of the Code, so
that the Fund will not be subject to any federal income or excise taxes based on
net income. However, the Board of Trustees may elect to pay such excise taxes if
it determines that payment is, under the circumstances, in the best interests of
the Fund.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of that Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
be applied against capital gains. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so
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received equal to the net asset value of a share of the Fund on the reinvestment
date. Fund distributions also will be included in individual and corporate
shareholders' income on which the alternative minimum tax may be imposed.
The Fund or any securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the Account Application Form or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of
its fiscal year is invested in stock or securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of all
foreign income taxes paid by the Fund. If this election is made, shareholders
will be (i) required to include in their gross income their pro rata share of
any foreign income taxes paid by the Fund, and (ii) entitled either to deduct
their share of such foreign taxes in computing their taxable income or to claim
a credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code, including certain holding period requirements. In
this case, shareholders will be informed in writing by the Fund at the end of
each calendar year regarding the availability of any credits on and the amount
of foreign source income (including or excluding foreign income taxes paid by
the Fund) to be included in their income tax returns. If 50% or less in value of
the Fund's total assets at the end of its fiscal year are invested in stock or
other securities of foreign corporations, the Fund will not be entitled under
the Code to pass through to its shareholders their pro rata share of the foreign
income taxes paid by the Fund. In this case, these taxes will be taken as a
deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. The Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, the Fund may be
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able to avoid this tax by electing to be taxed currently on its share of the
PFIC's income, whether or not such income is actually distributed by the PFIC.
The Fund will endeavor to limit its exposure to the PFIC tax by investing in
PFICs only where the election to be taxed currently will be made. Because it is
not always possible to identify a foreign issuer as a PFIC in advance of making
the investment, the Fund may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as a capital gain or loss.
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A shareholder who purchases shares of the Fund by tendering payment for
the shares in the form of other securities may be required to recognize gain or
loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the fund and the purchase price of the
Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. Any loss realized upon the redemption or exchange of shares
may be disallowed to the extent shares are purchased (including shares acquired
by means of reinvested dividends) within 30 days before or after such
redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same members on
their Boards), are responsible for the overall management of the Funds,
including establishing the Funds' policies, general supervision and review of
their investment activities. The officers (the two Trusts, as well as an
affiliated Trust, The Montgomery Funds III, have the same officers), who
administer the Funds' daily operations, are appointed by the Boards of Trustees.
The current Trustees and officers of the Trusts performing a policy-making
function and their affiliations and principal occupations for the past five
years are set forth below:
George A. Rio, President and Treasurer (born 1955)
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60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (since
April 1998). From June 1995 to March 1998, he was Senior Vice President, Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of business development for First Data Corporation. From September 1993
to May 1994, he was Senior Vice President and Manager of Client Services; and
Director of Internal Audit at the Boston Company.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (born 1966)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
(TBCA)
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (born 1964)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
Gary S. MacDonald, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
B-23
<PAGE>
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (born 1969)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (born 1962)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (born 1941)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
an executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (born 1944)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
B-24
<PAGE>
Cecilia H. Herbert, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (born 1939).+
101 California Street, San Francisco, California 94111.R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
<TABLE>
The officers of the Trusts, and the Trustees who are considered
"interested persons" of the Trusts, receive no compensation directly from the
Trusts for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Funds. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 1998, and to be paid during the fiscal year ending June 30, 1999,
and the aggregate compensation paid to each of the Trustees during the fiscal
year ended June 30, 1998, and to be paid during the fiscal year ending June 30,
1999, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below.
<CAPTION>
-------------------------------------------------------------------
Fiscal Year
Ended June 30, 1998
- --------------------------------------------------------------------------------------------------
Aggregate Pension or Total Compensation
Compensation from Retirement Benefits From the Trust and
The Montgomery Accrued as Part Fund Complex
Name of Trustee Funds II of Fund Expenses* (2 additional Trusts)
- ------------------------------ -------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- ------------------------------ -------------------------------------------------------------------
John A. Farnsworth** $5,000 -- $35,000
- ------------------------------ -------------------------------------------------------------------
Andrew Cox** $5,000 -- $35,000
- ------------------------------ -------------------------------------------------------------------
Cecilia H. Herbert** $5,000 -- $35,000
- ------------------------------ -------------------------------------------------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
** For the fiscal year ending June 30, 1999, the aggregate compensation from The
Montgomery Funds and the total compensation from the Trust and Fund complex
(including two additional Trusts) is expected to be $15,000 and $55,000,
respectively.
- --------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
</FN>
</TABLE>
B-25
<PAGE>
The Class R, Class P and Class L shares of the Fund are all sold
without a sales load. Therefore, there is no existing arrangement to reduce or
eliminate any sales loads for Trustees and other affiliated persons of the
Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Fund by Montgomery Asset Management LLC,
the Manager, pursuant to an Investment Management Agreement between the Manager
and The Montgomery Funds II dated July 31, 1997 (the "Agreement").
The Agreement is in effect with respect to the Fund for two years after
the Fund's inclusion in its Trust's Agreement (on or around its beginning of
public operations) and then continues for periods not exceeding one year so long
as such continuation is approved at least annually by (1) the Board or the vote
of a majority of the outstanding shares of the Fund, and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case by a vote cast in person at a meeting called for the purpose of voting on
such approval. The Agreement may be terminated at any time, without penalty, by
the Fund or the Manager upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act.
For services performed under the Agreement, the Fund pays the Manager a
monthly management fee (accrued daily but paid when requested by the Manager)
based upon the average daily net assets of the Fund, at the annual rate of 1.25%
of the first $50 million in average daily net assets, 1.00% of the next $50
million in average daily net assets and 0.90% of amounts over $100 million in
average daily net assets.
As noted in the Prospectus, the Manager has agreed to reduce some or
all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below 1.25% of the Fund's average net
assets. The Manager also may voluntarily reduce additional amounts to increase
the return to the Fund's investors. Any reductions made by the Manager in its
fees are subject to reimbursement by the Fund within the following three years
provided the Fund is able to effect such reimbursement and remain in compliance
with the foregoing expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the Fund
for fees and expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board of
Trustees of the Trust at a duly called meeting. In considering the Agreement,
the Trustees specifically considered and approved the provision which permits
the Manager to seek reimbursement of any reduction made to its management fee
within the three-year period following such reduction subject to the Fund's
ability to effect such reimbursement and remain in compliance with
B-26
<PAGE>
applicable expense limitations. The Trustees also considered that any such
management fee reimbursement will be accounted for on the financial statements
of the Fund as a contingent liability of the Fund and will appear as a footnote
to the Fund's financial statements until such time as it appears that the Fund
will be able to effect such reimbursement. At such time as it appears probable
that the Fund is able to effect such reimbursement, the amount of reimbursement
that the Fund is able to effect will be accrued as an expense of the Fund for
that current period.
As compensation for its investment management services the Fund paid
the Manager investment advisory fees in the amounts specified below. Additional
investment advisory fees payable under the Agreement may have instead been
waived by the Manager, but may be subject to reimbursement by the Fund as
discussed previously.
YEAR OR PERIOD ENDED JUNE 30,
1998 1997 1996
Emerging Markets Portfolio $3,536,299 $3,614,992 $2,827,007
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trust and by the Fund is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or
Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant to Rule
12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Fund pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Fund offered only one class of shares. On
that date, the Board of Trustees of the Trust, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the 12b-1 Plan or in any
agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of the Fund approved the 12b-1 Plan covering each Class.
The single class of shares existing before that date was redesignated the Class
R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the
Distributor at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor may use the distribution
fees received from the Class of the Fund covered by the 12b-1 Plan only to pay
for the distribution expenses of that
B-27
<PAGE>
Class. Distribution fees are accrued daily and paid monthly, and are charged as
expenses of the Class P and Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1 Plan to
pay any distribution expense in excess of the distribution fee. Thus, if the
12b-1 Plan were terminated or otherwise not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by the Class to the
Distributor.
The 12b-1 Plan provides that it shall continue in effect from year to
year provided that a majority of the Board of Trustees of the Trust, including a
majority of the Independent Trustees, vote annually to continue the 12b-1 Plan.
The 12b-1 Plan (and any distribution agreement between the Fund, the Distributor
or the Manager and a selling agent with respect to the Class P or Class L
shares) may be terminated without penalty upon at least 60-days' notice by the
Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Fund under the 12b-1 Plan will be
paid in accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may
change from time to time. Pursuant to the 12b-1 Plan, the Board of Trustees will
review at least quarterly a written report of the distribution expenses incurred
by the Manager on behalf of the Class P and Class L shares of the Fund. In
addition, as long as the 12b-1 Plan remains in effect, the selection and
nomination of Trustees who are not interested persons (as defined in the
Investment Company Act) of the Trust shall be made by the Trustees then in
office who are not interested persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder Services
Plan (the "Services Plan") with respect to the Fund. The Manager (or its
affiliate) serves as the service provider under the Services Plan and, as such,
receives any fees paid by the Fund pursuant to the Services Plan. The Trust has
not yet implemented the Services Plan for the Fund and has not set a date for
implementation. Affected shareholders will be notified at least 60 days before
implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Services
Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of the Fund. The initial
shareholder of the Class P and Class L shares, if any, of the Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L of the
Fund will pay a continuing service fee to the Manager, the Distributor or other
service providers, in an amount, computed and prorated on a daily basis, equal
to 0.25% per annum of the average daily net assets of Class P and Class L shares
of the Fund. Such amounts are compensation for providing certain services to
clients owning shares of Class P or Class L of the Fund, including personal
services such as processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and providing
other information and assistance with respect to the Fund, including responding
to shareholder inquiries.
B-28
<PAGE>
The Distributor. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Fund on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Funds, including issuers of
securities in which the Fund may invest. These activities from time to time may
result in a conflict of interests of the Distributor with those of the Fund, and
may restrict the ability of the Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as principal
Custodian of the Funds' assets, which are maintained at the Custodian's
principal office, One Pierrepont Plaza, Brooklyn, NY 11201, and at the offices
of its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians in accordance with delegation
instructions approved by the Board pursuant to Rule 17f-5 under the Investment
Company Act. The Custodian, its branches and sub-custodians generally hold
certificates for the securities in their custody, but may, in certain cases,
have book records with domestic and foreign securities depositories, which in
turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
The Independent Accountants. PricewaterhouseCoopers LLP, 333 Market
Street, San Francisco, CA 94105, serves as the independent public accountant to
the Fund. PricewaterhouseCoopers is responsible for auditing the financial
statements of the Fund and has audited the financial statements of the Fund for
the fiscal year ended June 30, 1998, included in the 1998 Annual Report,
incorporated herein by reference. The financial statements referred to above are
incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers given on the authority of that firm as experts in
accounting and auditing.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreement, the Manager determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund's portfolio transactions, subject to the instructions of, and review
by, the Fund and the Trust's Board of Trustees. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager or
the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. The Fund may purchase ADRs and EDRs listed on stock
exchanges, or traded in the over-the-counter markets in the U.S. or Europe, as
the case may be. ADRs, like other securities traded in the U.S., will be subject
to negotiated commission rates. The foreign and domestic debt securities and
money market instruments in which the Fund may invest may be traded in the
over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by
B-29
<PAGE>
the issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by the Fund, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Fund is receiving
the most favorable price and execution available, the Manager may also consider
the sale of the Fund's shares as a factor in the selection of broker-dealers to
execute its portfolio transactions. The placement of portfolio transactions with
broker-dealers who sell shares of the Fund is subject to rules adopted by the
National Association of Securities Dealers, Inc.
("NASD").
While the Fund's general policy is to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Fund or to the Manager, even if the specific services were not imputed just to
the Fund and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to the Fund or
assist the Manager in carrying out its responsibilities to the Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Fund. The Board reviews all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Fund.
Investment decisions for the Fund are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for the Fund and for one or more of such
client accounts. The Manager and its personnel may have interests in one or more
of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Fund and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in
B-30
<PAGE>
client transactions, and they provide portfolio managers with reasonable
flexibility to use allocation methodologies that are appropriate to their
investment discipline on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to
acquire the same security at the same general time (especially if the security
is thinly traded or is a small cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security the Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between the Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Fund's transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as the Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
The Manager's sell discipline for the Fund's investment in issuers is
based on the premise of a long-term investment horizon; however, sudden changes
in valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon. The
Fund will limit investments in illiquid securities to 15% of net assets.
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
For the year ended June 30, 1997, the Fund's total securities
transactions generated commissions of $2,250,280, none of which was paid to
Montgomery Securities. For the year ended June 30, 1996, the Fund's total
securities transactions generated commissions of $2,251,340, none of which was
paid to Montgomery Securities. Throughout the fiscal years ended June 30, 1996,
and June 30, 1997, Montgomery Securities was affiliated with the Funds through
its ownership of Montgomery Asset Management L.P., the former Manager of the
Funds.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such brokers solely for selling shares of the Fund. Brokers who execute
brokerage transactions as described above may from time to time effect purchases
of shares of the Fund for their customers.
B-31
<PAGE>
Depending on the Manager's view of market conditions, the Fund may or
may not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. The Fund may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of the Fund's shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the
Fund, an investor may purchase shares of the Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Fund will not acquire restricted securities),
their acquisition is consistent with the Fund's investment objective and
policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. Such securities are acquired by the Fund only for the purpose of
investment and not for resale. For the purposes of sales of shares of the Fund
for such securities, the tendered securities shall be valued at the identical
time and in the identical manner that the portfolio securities of the Fund are
valued for the purpose of calculating the net asset value of the Fund's shares.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than three days after
receipt by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC (upon application by
the Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, as described below or under abnormal conditions that make payment in cash
unwise, the Fund may make payment partly in its portfolio securities with a
current amortized cost or market value, as appropriate, equal to the redemption
price. Although the Fund does not anticipate that it will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any shareholder of record limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.
When in the judgment of the Manager it is in the best interests of the
Fund, an investor may redeem shares of the Fund and receive securities from the
Fund's portfolio selected by the Manager in its sole discretion, provided that
such redemption is not expected to affect the Fund's
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ability to attain its investment objective or otherwise materially affect its
operations. For the purposes of redemptions in kind, the redeemed securities
shall be valued at the identical time and in the identical manner that the other
portfolio securities are valued for purposes of calculating the net asset value
of the Fund's shares.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectus, the net asset value of shares of the Fund
generally will be determined at least once daily as of 4:00 P.M., eastern time,
(or earlier when trading closes earlier) on each day the NYSE is open for
trading. It is expected that the NYSE will be closed on Saturdays and Sundays
and for New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
Fund may, but does not expect to, determine the net asset value of its shares on
any day when the NYSE is not open for trading if there is sufficient trading in
its portfolio securities on such days to materially affect the per-share net
asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE that will not be
reflected in the computation of the Fund's net asset value unless the Board or
their delegates deem that such events would materially affect the net asset
value, in which case an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Boards.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are
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<PAGE>
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Trust's Board of Trustees.
If any securities held by the Fund are restricted as to resale or do
not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
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<PAGE>
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109, also acts as the Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board or the vote of a majority of the outstanding securities of that Fund (as
defined in the Investment Company Act), and (ii) a majority of the Trustees who
are not interested persons of any such party, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement with respect to each Fund may be terminated without
penalty by the parties thereto upon 60 days' written notice and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Funds' shares. The Principal Underwriter has not been paid any underwriting
commissions for underwriting securities of the Funds during each of the Funds'
last three fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may, from time to time, quote
various performance figures in advertisements and investor communications to
illustrate its past performance. Performance figures will be calculated
separately for Class R, Class P and Class L shares.
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for the Fund will be accompanied by information on
the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
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<PAGE>
Aggregate Total Return. The Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
The Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
The total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectus. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
YEAR 3-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998
Montgomery Growth Fund -38.06% -6.34% -6.62%
Comparisons. To help investors better evaluate how an investment in the
Fund might satisfy their investment objectives, advertisements and other
materials regarding the Fund may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. The following
publications, indices and averages may be used:
(a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
(b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
(c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
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<PAGE>
(d) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Fund to calculate its
figures.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time, the Fund may publish
or distribute information and reasons supporting the Manager's belief that the
Fund may be appropriate for investors at a particular time. The information will
generally be based on internally generated estimates resulting from the
Manager's research activities and projections from independent sources. These
sources may include, but are not limited to, I/B/E/S Consensus Forecast,
Worldscope and Reuters as well as both local and international brokerage firms.
For example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth.
Research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for the Fund work extensively on developing an
in-depth understanding of particular foreign markets and particular companies.
And they very often discover that they are the first analysts from the United
States to meet with representatives of foreign companies, especially those in
emerging markets nations.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that may be used for the Fund.
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the
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<PAGE>
Trust's organization and the registration of shares of the Fund as one of the
three initial series of the Trust have been assumed pro rata by each series;
expenses incurred in connection with the establishment and registration of
shares of any other funds constituting a separate series of the Trust will be
assumed by each respective series. The expenses incurred in connection with the
establishment and registration of shares of the Fund as a separate series of the
Trust have been assumed by the Fund and are being amortized over a period of
five years commencing with the date of the Fund's inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by the Fund and will be reimbursed for such expenses after commencement of the
Fund's operations. Investors purchasing shares of the Fund bear such expenses
only as they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the "Custodian") acts
as custodian of the securities and other assets of the Fund. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Fund.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, is the Fund's Master Transfer Agent. The Master Transfer Agent
has delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and Dividend
Disbursing Agent.
PricewaterhouseCoopers LLP is the independent auditor for the Funds.
The validity of shares offered hereby has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Among the Trustees' powers enumerated in the Declaration of Trust is
the authority to terminate the Trust or any series of the Trust, or to merge or
consolidate the Trust or one or more of its series with another trust or company
without the need to seek shareholder approval of any such action.
As of September 30, 1998, to the knowledge of the Fund, the following
shareholders owned of record 5% or more of the outstanding shares of the Fund:
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
Leland Stanford Junior University 1,318,160 26.36%
Merged Endowment Pool
Attn Robert Blagdon
2770 Sand Hill Road
Menlo Park, CA 94025-7020
Pacific Gas & Electric Company Retirement Plan 1,071,160 21.41%
Attn: Peter Corippo
77 Beale Street, 24th Floor, Room 2461
San Francisco, CA 94105-1828
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<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
ASEA Brown Boveri Master Trust 623,842 12.47%
c/o Eric W. Wood
P.O. Box 120071
Stanford, CT 06912-0071
General Electric Pension Trust 535,632 10.71%
Attn Ed Mehlick
3003 Summer Street
Stamford, CT 06905-4316
Chase Manhattan Bank Tr. 531,339 10.62%
Reynolds Metals Retirement Trust
P.O. Box 27003
Richmond, VA 23261-7003
As of September 30, 1998, the Trustees and Officers of the Fund, as a
group, owned less than 1% of the outstanding shares of the Fund.
The Trust is registered with the Securities and Exchange Commission as
a non-diversified management investment company, although the Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant period ended June 30,
1998, for the Fund as contained in the Annual Report to Shareholders of the Fund
for the fiscal period ended June 30, 1998 (the "Report"), are incorporated
herein by reference to the Report.
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<PAGE>
APPENDIX
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
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<PAGE>
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to
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<PAGE>
principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
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<PAGE>
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B-43
<PAGE>
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
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<PAGE>
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
B-45
<PAGE>
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payments.
B-46
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 37
to the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 37").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 37.
(c) Instruments Defining Rights of Security Holder--Not
applicable.
(d) Investment Advisory Contracts--Form of Investment Management
Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective Amendment No.
22").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 22.
(f) Bonus or Profit Sharing Contracts--Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 37.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 22.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 37.
(i) Opinion of Counsel as to legality of shares is incorporated by
reference to Post-Effective Amendment No. 37.
(j) Other Opinions: Independent Auditors' Consent.
(k) Omitted Financial Statements--Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re:
Initial Shares is incorporated by reference to Post-Effective
Amendment No. 37.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1
Plan) is incorporated by reference to Post-Effective Amendment
No. 22.
(n) Financial Data Schedule. Financial Data Schedules are
incorporated by reference to Form NSAR-B filed on August 28,
1998.
(o) 18f-3 Plan--Form of Amended and Restated Multiple Class Plan
is incorporated by reference to Post-Effective Amendment No.
37.
C-1
<PAGE>
Item 24. Persons Controlled by or Under Common Control with the Fund
Montgomery Asset Management, LLC, a Delaware limited liability
company, is the manager of each series of the Registrant, of The Montgomery
Funds , a Massachusetts business trust, and of The Montgomery Funds III, a
Delaware business trust. Montgomery Asset Management, LLC is a subsidiary of
Commerzbank AG based in Frankfurt, Germany. The Registrant, The Montgomery Funds
and The Montgomery Funds III are deemed to be under the common control of each
of those two entities.
Item 25. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to the
Trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable in the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Effective July 31, 1997, Montgomery Asset Management, L.P. completed
the sale of substantially all of its assets to the current investment manager,
Montgomery Asset Management, LLC ("MAM, LLC"), a subsidiary of Commerzbank A.G.
Information about the officers and directors of MAM, LLC is provided below. The
address for the following persons is 101 California Street, San Francisco,
California 94111.
C-2
<PAGE>
R. Stephen Doyle Chairman of the Board of Directors
and Chief Executive Officer of
MAM, LLC
Mark B. Geist President and Director of MAM, LLC
John T. Story Executive Vice President of MAM, LLC
David E. Demarest Chief Administrative Officer and
Managing Director of MAM, LLC
The following directors of MAM, LLC also are officers of Commerzbank
AG. The address for the following persons is Neue Mainzer Strasse 32-36,
Frankfurt am Main, Germany.
Heinz Josef Hockmann Director of MAM, LLC
Dietrich-Kurt Frowein Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
Before July 31, 1997, Montgomery Securities, which is a broker-dealer
and the prior principal underwriter of The Montgomery Funds II, was the sole
limited partner of the prior investment manager, Montgomery Asset Management,
L.P. ("MAM, L.P."). The general partner of MAM, L.P. was a corporation,
Montgomery Asset Management, Inc. ("MAM, Inc."), certain of the officers and
directors of which now serve in similar capacities for MAM, LLC.
Item 27. Principal Underwriter
(a) Funds Distributor, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies.
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Kobrick-Cendant Investment Trust
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds I
C-3
<PAGE>
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Orbitex Group of Funds
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
Funds Distributor is registered with the Securities and
Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers. Funds Distributor
is located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Funds Distributor is an indirect
wholly-owned subsidiary of Boston Institutional Group, Inc., a
holding company all of whose outstanding shares are owned by
key employees.
(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.
Director, President and
Chief Executive Officer Marie E. Connolly
Executive Vice President George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President,
General Counsel, Chief
Compliance Officer, Secretary
and Clerk Margaret W. Chambers
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President,
Treasurer and
Chief Financial Officer Joseph F. Tower, III
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
(c) Not Applicable.
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and Trust
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
C-4
<PAGE>
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to Shareholders, upon request and without
charge.
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act which requires the prompt convening of
a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event
that less than a majority of the trustees have been elected
to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the
purpose of voting upon the question of removal of any Trustee
or Trustees when requested in writing to do so by the record
holders of not less than 10 percent of the Registrant's
outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and that the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Francisco, the
State of California, on this 26th day of October, 1998.
THE MONTGOMERY FUNDS
By: Margaret W. Chambers*
-----------------------------
Margaret W. Chambers
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
R. Stephen Doyle * Trustee October 26, 1998
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee October 26, 1998
- ------------------
Andrew Cox
Cecilia H. Herbert * Trustee October 26, 1998
- ------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee October 26, 1998
- ------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
C-6
<PAGE>
- --------------------------------------------------------------------------------
Item 23 (j)
Independent Auditors Consent
- --------------------------------------------------------------------------------
C-7
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 38 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated August 14, 1998, relating to the financial
statements and financial highlights appearing in the June 30, 1998 Annual
Reports to Shareholders of Montgomery U.S. Asset Allocation Fund and Montgomery
Institutional Series: Emerging Markets Portfolio (two portfolios of the
Montgomery Funds II), which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the heading
"Investment Management and Other Services" in the Statements of Additional
Information.
/s/ PricewaterhouseCoopers LLP
San Francisco, CA
October 28, 1998
