As filed with the Securities and Exchange Commission on October 29, 1999
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. 49
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 50
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)
Johanne Castro, 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)
_____ on October 31, 1999 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)
__X__ on October 31, 1999 pursuant to Rule 485(a)(1)
-------------------------
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 THE POST-EFFECTIVE AMENDMENT
This Post-Effective Amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of the Post-Effective Amendment
Part A - Combined Prospectus for Class R shares of the Montgomery
Global Long-Short Fund and the Montgomery U.S. Asset
Allocation Fund and various series of another Registrant.
Part A - Combined Prospectus for Class P shares of the Montgomery
U.S. Asset Allocation Fund and various series of another
Registrant.
Part A - Prospectus for shares of the Montgomery Institutional
Series: Emerging Markets Portfolio.
Part B - Combined Statement of Additional Information for Class R and
Class P shares of the Montgomery Global Long-Short Fund and
the Montgomery U.S. Asset Allocation Fund and various series
of another Registrant.
Part B - Statement of Additional Information Montgomery Institutional
Series: Emerging Markets Portfolio
Part C - Other Information
Signature Page
Exhibits
<PAGE>
- --------------------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS R SHARES OF
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
AND
VARIOUS SERIES OF THE MONTGOMERY FUNDS
- --------------------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 1999
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
U.S. Emerging Growth Fund*
Small Cap 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
Multi-Strategy Funds
Global Long-Short Fund*
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 Money Market Fund
Federal Tax-Free Money Fund
California Tax-Free Intermediate Bond Fund
California Tax-Free Money Fund
* Closed to new investors.
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 or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
1
<PAGE>
- ---------------------------
How to Contact Us
- ---------------------------
[Sidebar]
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 6 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
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
U.S. Equity Funds
Montgomery Growth Fund...................................................
Montgomery U.S. Emerging Growth Fund*....................................
Montgomery Small Cap Fund................................................
Montgomery Equity Income Fund............................................
International and Global Equity Funds
Montgomery International Growth Fund.....................................
Montgomery International Small Cap Fund*.................................
Montgomery Global Opportunities Fund.....................................
Montgomery Global Communications Fund....................................
Montgomery Emerging Markets Fund.........................................
Montgomery Emerging Asia Fund............................................
Multi-Strategy Funds
Montgomery Global Long-Short Fund *......................................
Montgomery Select 50 Fund................................................
Montgomery U.S. Asset Allocation Fund....................................
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund........................................
Montgomery Short Duration Government Bond Fund...........................
Montgomery Government Money Market Fund..................................
Montgomery Federal Tax-Free Money Fund...................................
Montgomery California Tax-Free Intermediate Bond Fund....................
Montgomery California Tax-Free Money Fund................................
Portfolio Management..........................................................
* Closed to new investors.
2
<PAGE>
Additional Investment Strategies and Related Risks............................
Montgomery Global Long-Short Fund........................................
Montgomery Emerging Asia Fund ...........................................
The Euro: Single European Currency......................................
Defensive Investments....................................................
Portfolio Turnover.......................................................
The Year 2000............................................................
Additional Benchmark Information.........................................
Financial Highlights..........................................................
Account Information...........................................................
Becoming a Montgomery Shareholder........................................
How Fund Shares are Priced...............................................
Buying Additional Shares.................................................
Exchanging Shares........................................................
Selling Shares...........................................................
Other Policies...........................................................
Tax Information..........................................................
After You Invest.........................................................
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)
You should also know that 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 with different fees and expenses to eligible
investors.
3
<PAGE>
U.S. EQUITY FUNDS
Growth Fund | MNGFX
Objective
[ ] Seeks long-term capital appreciation by investing in growth-oriented
U.S. companies
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 undervalued relative to the firms' growth potential. The managers
rigorously analyze all prospective holdings by subjecting them to the following
three steps of their investment process:
[ ] Identify companies with improving business fundamentals
[ ] Conduct in-depth analysis of each company's current business and future
prospects
[ ] Analyze each company's price to determine whether its growth prospects
have been discovered by the market
When the Fund's portfolio managers think that market conditions are not
favorable or when they are unable to locate attractive investments, they may
(but are not required to) temporarily increase the Fund's cash position. Larger
cash positions can be a defensive measure in adverse market conditions. Should
the market advance, however, the Fund may not participate as much as it might
have if more of its assets were invested in stocks.
Principal 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 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 bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
20.91% 23.65% 20.20% 24.16% 2.10%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+16.95%) and the worst quarter was Q3 1998 (-19.30%).
Growth Fund 2.10% 17.90% 20.78%
S&P 500 Index 28.58% 17.90% 20.79%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 7.23% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.95%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.43%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.38%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
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
- -----------------------------------------------------
$140 $436 $753 $1,652
[clipart] [sidebar]
Portfolio Management
Roger Honour
Kathryn Peters
For more details see page __
For financial highlights
see page ___
5
<PAGE>
U.S. Emerging Growth Fund | MNMCX
The Montgomery U.S. Emerging Growth Fund is currently closed to new investors.
Objective
[ ] Seeks long-term capital appreciation by investing in growth-oriented U.S.
smaller-cap companies
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
The Fund invests, under normal conditions, 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 at the time of purchase.
The Fund's strategy is to identify well-managed small and micro cap U.S.
companies whose share prices appear to be undervalued relative to their growth
potential. The managers rigorously analyze all prospective holdings by
subjecting them to the following three steps of their investment process:
[ ] Identify companies with improving business fundamentals
[ ] Conduct in-depth analysis of each company's current business and future
prospects
[ ] Analyze each company's price to determine whether its growth prospects
have been discovered by the market
Principal 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 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. 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 bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1995 1996 1997 1998
- ------------------ ---------------- ----------------- ----------------
28.66% 19.12% 27.05% 7.94%
During the four-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+21.12%) and the worst quarter was Q3 1998 (-17.24%).
U.S. Emerging Growth Fund 7.94% 20.41%
Russell 2000 Index -2.55% 15.58%
- --------------------------------------------------------------------------------
1 Year Inception
(12/30/94)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -10.43% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.33%
- -------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.66%
Fee Reduction and/or Expense Reimbursement 0.16%
Net Expenses 1.50%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
[clipart][sidebar]
Portfolio Management
Roger Honour
Kathryn Peters
For more details see page ___
For financial highlights
see page ___
7
<PAGE>
Small Cap Fund | MNSCX
Objective
[ ] Seeks long-term capital appreciation by investing in rapidly growing U.S.
small-cap companies
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 at the time of purchase.
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.
Principal 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 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
98.75% 9.59% 24.31% -9.96% 35.12% 18.69% 23.86% -7.93%
During the eight-year period described above in the bar chart, the Fund's best
quarter was Q1 1991 (+39.57%) and the worst quarter was Q3 1998 (-32.37%).
Small Cap Fund -7.93% 10.49% 18.25%
Russell 2000 Index -2.55% 11.87% 13.12%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(7/13/90)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 5.77% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.32%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.32%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
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
- -----------------------------------------------------
$134 $417 $722 $1,585
[clipart][sidebar]
Portfolio Management
Stuart Roberts
Brad Kidwell
Cam Philpott
For more details see page ___.
For financial highlights
see page ___
9
<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
- --------------------------------------------------------------------------------
Principal 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, under normal
conditions.
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 portfolio 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. 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.
Principal 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.
10
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1995 1996 1997 1998
- ------------------ ---------------- ----------------- ----------------
35.17% 18.34% 26.10% 10.74%
During the four-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+12.78%) and the worst quarter was Q3 1998 (-5.54%).
Equity Income Fund 10.74% 20.55%
S&P 500 Index 28.58% 28.47%
- --------------------------------------------------------------------------------
1 Year Inception
(9/30/94)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -3.45% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.85%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.45%
Fee Reduction and/or Expense Reimbursement 0.60%
Net Expenses 0.85%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
- -----------------------------------------------------
$86 $271 $470 $1,046
[clipart] [sidebar]
Portfolio Management
William King
For more details see page ___
For financial highlights
see page ___
11
<PAGE>
INTERNATIONAL GLOBAL
EQUITY FUNDS
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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 purchase shares of companies that they consider
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.
Principal 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 securities in which the Fund invests are denominated in
foreign currencies, whose value may decline against the U.S. dollar.
12
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1996 1997 1998
- ------------------ ---------------- -----------------
20.96% 10.15% 28.69%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+23.03%) and the worst quarter was Q3 1998 (-17.17%).
International Growth Fund 28.69% 20.34%
MSCI EAFE Index+ 20.00% 10.18%*
- --------------------------------------------------------------------------------
*Calculated from 6/30/95 1 Year Inception
(7/3/95)
+ See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -2.38% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.64%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.74%
Fee Reduction and/or Expense Reimbursement 0.08%
Net Expenses 1.66%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 10-year
term.
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
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
13
<PAGE>
International Small Cap Fund | MNISX
The International Small Cap Fund is currently closed to new investors.
Objective
[ ] Seeks long-term capital appreciation by investing in small-cap companies
in developed stock markets outside the United States
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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) profile consistent with the Salomon Smith Barney
World Extended Market Index excluding the United States. (This index had a
weighted average market capitalization of $2.3 billion and a median market
capitalization of $404 million on March 31, 1999.) The Fund typically invests
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 generally no more than 40% of its assets in any one country.
The Fund's portfolio manager seeks well-managed, small-cap companies that he
believes will be able to increase 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 Funds 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.
Principal 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. Other risks of focusing on small foreign companies include limited or
inaccurate information; limited product lines, markets or financial resources;
and securities that 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. Most of the securities
in which the Fund invests are denominated in foreign currencies, whose value may
decline against the U.S. dollar.
14
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
-13.29% 11.72% 14.97% -0.78% 10.58%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q1 1998 (+19.64%) and the worst quarter was Q3 1998 (-16.45%).
International Small Cap Fund 10.58% 4.09% 6.41%
Salomon Smith Barney World Extended
(ex-U.S.) Market Index+ 12.15% 4.46% 3.68%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
+ See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 0.00% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 1.31%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.56%
Fee Reduction and/or Expense Reimbursement 0.65%
Net Expenses 1.91%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
[clipart][sidebar]
Portfolio Management
John Boich
For more details see page ___
For financial highlights
see page ___
15
<PAGE>
Global Opportunities Fund | MNGOX
Objective
[ ] Seeks long-term capital appreciation by investing in companies of any size
in the United States and abroad
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
The Fund invests at least 65% of its total assets in the stocks of companies of
any size throughout the world under normal conditions. 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 purchase the shares of companies they consider
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.
Principal 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 securities in which the Fund invests are
denominated in foreign currencies, whose value may decline against the U.S.
dollar.
16
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
-8.55% 17.26% 20.18% 11.05% 32.76%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+27.11%) and the worst quarter was Q3 1998 (-20.38%).
Global Opportunities Fund 32.76% 13.70% 16.72%
MSCI World Index+ 24.34% 15.68% 15.24%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
+ See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 12.15% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 1.15%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.40%
Fee Reduction and/or Expense Reimbursement 0.39%
Net Expenses 2.01%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
- -----------------------------------------------------
$203 $629 $1,080 $2,327
[clipart][sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
17
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 worldwide, 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. In addition, the portfolio manager purchases the shares of
companies that he considers 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.
Principal 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 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 securities in which the Fund invests are denominated in
foreign currencies, whose value may decline against the U.S. dollar.
18
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
-13.41% 16.88% 8.02% 15.83% 54.97%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q1 1998 (+38.66%) and the worst quarter was Q3 1998 (-20.19%).
54.97% 14.43% 19.04%
Global Communications Fund
MSCI Telecom Index+ 49.78% 17.30% 17.02%*
- --------------------------------------------------------------------------------
*Calculated from 5/31/93 1 Year 5 Years Inception
(6/1/93)
+ See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 25.60% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 1.22%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.47%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.69%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
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
- -----------------------------------------------------
$171 $531 $915 $1,990
[clipart][sidebar]
Portfolio Management
Oscar Castro
For more details see page ___
For financial highlights,
see page ___
19
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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
[ ] The 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. The Fund allocates its assets among emerging countries with stable or
improving macroeconomic environments and invests in companies within those
countries that the portfolio managers believe have high capital appreciation
potential without excessive risks. The portfolio managers strive to keep the
Fund well diversified across individual stocks, industries and countries to
reduce its overall risk.
Principal Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a decline in a holding's share price or an
overall decline in the 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 relative immaturity and occasional
instability. Some emerging markets restrict the flow of money into or out of
their stock markets and 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 based on only a few industries or on
revenue from particular commodities and international aid. Most of the
securities in which the Fund invests are denominated in foreign currencies,
whose value may decline against the U.S. dollar.
20
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
58.66% -7.72% -9.08% 12.32% -3.14% -38.28%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q4 1993 (+29.14%) and the worst quarter was Q3 1998 (-24.65%).
Emerging Markets Fund -38.28% -10.84% -1.59%
IFC Global Index+ -21.09% -8.70% -0.73%
MSCI Emerging Markets Free Index+ -25.34% -9.27% 0.40%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(3/1/92)
+ See page __ for a description of these indexes. The Fund was formerly compared
to the IFC Global Index. This change was effected since the MSCI Emerging
Markets Free Index better represents the types of foreign securities in which
the Fund may invest.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 20.05% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 1.16%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.99%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.15%
Fee Reduction and/or Expense Reimbursement 0.10%
Net Expenses 2.05%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
- -----------------------------------------------------
$207 $641 $1,100 $2,369
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
Frank Chiang
For more details see page ___.
For financial highlights
see page ___
21
<PAGE>
Emerging Asia Fund | MNEAX
Objective
[ ] Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies of Asia
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, the Fund's strategy is to identify potential
investments in the Asian markets by conducting in-depth financial reviews and
on-site analyses 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:
[ ] Bangladesh [ ] Indonesia [ ] South Korea
[ ] China/Hong Kong [ ] Malaysia [ ] Sri Lanka
China/Hong Kong is [ ] Pakistan [ ] Taiwan
considered to
be a single emerging Asia [ ] The Philippines [ ] Thailand
country.
[ ] India [ ] Singapore [ ] Vietnam
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 four
exceptions are China/Hong Kong, Malaysia, South Korea and Taiwan, where the Fund
may invest more than one-third and up to substantially all of its assets. The
portfolio manager may invest in Japan, Australia or New Zealand 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. The Fund allocates its assets among
countries with stable or improving macroeconomic environments and invests in
companies within those countries that the portfolio manager believes have high
capital appreciation potential without excessive risks. The portfolio manager
strives to keep the Fund diversified across individual stocks and industries to
reduce its overall risk.
Principal Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a 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, 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 and international aid. Some emerging Asia countries have restricted
the flow of money into or out of the country. Although some emerging Asia stock
markets have enjoyed partial recoveries in late 1998 and part of 1999, since
mid-1997 Asia has faced serious economic problems and disruptions causing the
devastating losses for some investors. Emerging markets, in general, tend to be
less liquid and offer less regulatory protection for investors. Most of the
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 bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------ ----------------
-28.30% -14.72%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+34.42%) and the worst quarter was Q4 1997 (-38.16%).
Emerging Asia Fund -14.72% -12.52%
MSCI All-Country
Asia Free (ex-Japan) Index+ -7.79% -22.50%
- --------------------------------------------------------------------------------
1 Year Inception
(9/30/96)
+ See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 25.73% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee* 2.00%
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets) ++
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.64%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.89%
Fee Reduction and/or Expense Reimbursement 0.70%
Net Expenses 2.19%
* Deducted from net proceeds of shares redeemed (or exchanged) within six
months after purchase, except for certain fee-based programs and 401(k)
plans, and for shares purchased before December 15, 1998. This fee is
retained by the Fund. $10 will be deducted from redemption proceeds sent by
wire or overnight courier.
++ 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 rolling
10-year term.
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
- -----------------------------------------------------
$221 $683 $1,171 $2,512
[clipart][sidebar]
Portfolio Management
Frank Chiang
For more details see page ___
For financial highlights
see page ___
23
<PAGE>
MULTI-STRATEGY FUNDS
Global Long-Short Fund
The Montgomery Global Long-Short Fund is currently closed to new investors.
Objective
[ ] Seeks capital appreciation by investing in long and short positions in
equity securities worldwide.
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
The Fund's strategy is to uncover stocks with the greatest potential for changes
in price, and to benefit whether overall stock markets move up or down. The
Fund's stock selection strategy combines in-depth financial review with on-site
analyses of companies, countries and regions to identify potential investments.
The portfolio managers buy stocks "long" that they believe will perform better
than their peers, and sell stocks "short" that they believe will underperform
their peers. They may also engage in margin borrowing or use options and
financial futures contracts in an effort to enhance returns.
Under normal conditions this Fund seeks to achieve its objective by investing at
least 65% of its total assets in long and short positions in equity securities
of publicly traded companies in the United States and in developed foreign and
emerging markets. A long position is where the Fund purchases a stock outright,
while a short position is when the Fund sells a security that it has borrowed.
Short positions may be used to partially hedge long positions or to garner
returns from insights made from the manager's company research. The Fund will
realize a profit or incur a loss from a short position depending on whether the
value of the underlying stock increases or decreases between the time it is sold
and when the Fund replaces the borrowed security.
Principal Risks [clipart]
This Fund uses sophisticated investment approaches that may present
substantially higher risks than most mutual funds. The Fund will seek to
increase return by investing in transactions using margin, leverage, short sales
and other forms of volatile financial derivatives such as options and futures.
As a result, an investment in this Fund may be more volatile than investments in
other mutual funds. This Fund is not appropriate for conservative investors.
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. Short sales are speculative
investments and will cause the Fund to lose money if the value of a security
does not go down as the managers expect. In addition, the use of borrowing and
short sales may cause the Fund to have higher expenses (especially interest and
dividend expenses) than those of other equity mutual funds.
By investing in foreign stocks the Fund carries additional risks such as
regulatory, political and currency risk. Moreover, the Fund may invest up to 30%
of its total assets in emerging markets, which are far more volatile than the
U.S. market. For a more detailed discussion of the risks mentioned above, see
"Additional Investment Strategies and Related Risks" on page ____.
24
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance After this Fund has been in operation for another year,
the bar chart on the left below will show the risks of investing in the Fund and
how the Fund's total return has varied from year-to-year. The table on the right
compares the Fund's performance with a commonly used index for its market
segment. Of course, past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1998
- ------------------
53.39%#
During the one-year period described above in the bar chart, the Fund's best
quarter was Q1 1998 (+27.20%) and the worst quarter was Q3 1998 (-3.99%).
Global Long-Short Fund# 53.39% 53.39%
MSCI All-Country World Free Index + 21.97% 21.97%
MSCI EAFE Index+ 20.00% 20.00%
S&P 500 Index 28.58% 28.58%
- --------------------------------------------------------------------------------
1 Year Inception
(12/31/97)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 46.62% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
# The returns shown do not reflect the initial sales charge that applied to
certain shares purchased during that period which, if reflected, would result in
lower returns than those shown.
+ See page __ for a description of these indices.
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.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee* 2.00%
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)++
Management Fee 1.50%
Distribution (12b-1) Fee 0.00%
Other Expenses 2.86%
Shareholder Service Fee 0.25%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 4.61%
Fee Reduction and/or Expense Reimbursement 0.43%
Net Expenses 4.18%
* Deducted from the net proceeds of shares redeemed (or exchanged) within one
year after purchase (1.00% for Class A shares purchased before January 29,
1999), except for certain fee-based programs and 401(k) plans. $10 will be
deducted from redemption proceeds sent by wire or overnight courier.
++ 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 2.35%. This contract has a rolling
10-year term.
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.
26
<PAGE>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------
$418 $1,266 $2,126 $4,328
[clipart][sidebar]
Portfolio Management
Portfolio managers from the
International and Global equity teams.
For more details see page __
For financial highlights
see page 55
26
<PAGE>
Select 50 Fund | MNSFX
Objective
[ ] Seeks long-term capital appreciation by investing in 10 companies from
each of five different investment disciplines, for a total of 50
securities
- --------------------------------------------------------------------------------
Principal 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. 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.
Principal 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 Fund may vary more than those of mutual funds investing in a
greater number of securities.
In addition, the Fund invests in companies in emerging and developed foreign
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, many of the 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.
27
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1996 1997 1998
- ------------------ ---------------- -----------------
20.46% 29.27% 9.40%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q2 1997 (+18.82%) and the worst quarter was Q3 1998 (-17.10%).
Select 50 Fund 9.40% 23.23%
S&P 500 Index 28.58% 28.08%*
MSCI World Index+ 24.34% 17.97%
- --------------------------------------------------------------------------------
*Calculated from 9/30/95 1 Year Inception
(10/2/95)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 11.34% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
+ See page 49 for a description of this index. The Fund was formerly compared to
the S&P 500 Index. This change was effected since the MSCI World Index better
represents the types of securities in which the Fund may invest.
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.
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 0.51%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.76%
** $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
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
- -----------------------------------------------------
$178 $553 $952 $2,065
[clipart][sidebar]
Portfolio Management
(Fund Oversight)
Portfolio managers from each
equity team
For more details see page ___
For financial highlights
see page ___
28
<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
- --------------------------------------------------------------------------------
Principal 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 Money Market Fund, for cash exposure
The Fund's strategy is to analyze various market factors, including relative
risk and return, using a proprietary computer program to help the portfolio
managers determine what they believe is an optimal asset allocation among
stocks, bonds and cash.
The Fund's total equity and bond exposure may each 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 managers regularly adjust the proportion of assets allotted
to the underlying portfolios in response to changing market conditions.
Principal 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
which the Montgomery Growth Fund invests. 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. In addition, if
the managers do not accurately predict changing market conditions and other
economic factors, the Fund's assets might be allocated in a manner that is
disadvantageous.
29
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1995 1996 1997 1998
- ------------------ ---------------- ----------------- ----------------
32.61% 12.85% 19.01% 6.18%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q2 1997 (+11.94%) and the worst quarter was Q3 1998 (-6.29%).
U.S. Asset Allocation Fund 6.18% 18.77%
S&P 500 Index 28.58% 26.50%
Lehman Brothers Aggregate Bond
Index 8.69% 8.33%
- --------------------------------------------------------------------------------
1 Year Inception
(3/31/94)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 4.91% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.46%
Underlying Fund Expenses 1.25%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.71%
Fee Reduction and/or Expense Reimbursement 0.41%
Net Expenses 1.30%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ In addition to the 0.46% 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, 1999, was 1.71%, calculated based on the Fund's total operating expense
ratio (0.46%) plus a weighted average of the expense ratios of its
underlying Funds (1.25%). Montgomery 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 rolling 10-year
term.
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
[clipart][sidebar]
Portfolio Management
Portfolio managers from
each underlying Fund
For more details see page ___
For financial highlights
see page __
30
<PAGE>
U.S. FIXED-INCOME & MONEY
MARKET FUNDS
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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 bonds.
The Fund may include bonds of any maturity, but generally the portfolio's
overall effective 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.
Principal 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. A fund, such as
this one, which 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 stability of principal. The Montgomery Total
Return Bond Fund is not a money market fund.
31
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance After this Fund has been in operation for another year,
the bar chart on the left below will show the risks of investing in the Fund and
how the Fund's total return has varied from year-to-year. The table on the right
compares the Fund's performance with a commonly used index for its market
segment. Of course, past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1998
- ------------------
8.72%
During the one-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+4.30%) and the worst quarter was Q4 1998 (+0.05%).
Total Return Bond Fund 8.72% 10.25%
Lehman Brothers Aggregate Bond Index 8.69% 10.15%
- --------------------------------------------------------------------------------
1 Year Inception
(6/30/97)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -0.35% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 0.75%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.25%
Fee Waiver and/or Expense Reimbursement 0.09%
Net Expenses 1.16%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
- -----------------------------------------------------
$118 $368 $637 $1,405
[clipart][sidebar]
Portfolio Management
William Stevens
Marie Chandoha
For more details see page ___
For financial highlights
see page ___
32
<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.
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 effective 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.
Principal 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. A fund such as this one, which 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 stability of principal.
The Montgomery Short Duration Government Bond Fund is not a money market fund.
33
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
8.09% 1.13% 11.51% 5.14% 6.97% 7.38%
During the six-year period described above in the bar chart, the Fund's best
quarter was Q1 1995 (+3.39%) and the worst quarter was Q1 1994 (-0.23%).
Short Duration Gov't Bond Fund 7.38% 6.37% 6.66%
Lehman Brothers Gov't.
Bond 1-3 Yr. Index 6.96% 5.96% 5.86%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(12/18/92)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 1.99% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 1.35%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.85%
Fee Reduction and/or Expense Reimbursement 0.42%
Net Expenses 1.43%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term. Net expenses (including interest and taxes) actually paid by
shareholders because of additional voluntary reductions by the Manager were
1.35%.
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
- -----------------------------------------------------
$145 $451 $780 $1,707
[clipart] [sidebar]
Portfolio Management
William Stevens
Marie Chandoha
For more details see page ___
For financial highlights
see page ___
34
<PAGE>
Government Money Market 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
- --------------------------------------------------------------------------------
Principal 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 or "Fannie Mae") and
Student Loan Marketing Association (SLMA or "Sallie Mae"), in repurchase
agreements for U.S. government securities and in 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.
The Fund invests in compliance with industry-standard requirements for money
market funds for the quality, maturity and diversification of investments.
Principal 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 Money Market Fund is
neither insured nor guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or any other government agency.
*Formerly named the Montgomery Government Reserve Fund.
35
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
2.83% 3.78% 5.54% 5.04% 5.16% 5.14%
During the six-year period described above in the bar chart, the Fund's best
quarter was Q2 1995 (+1.39%) and the worst quarters were Q3 & Q4 1993 (+0.68%).
Gov't Money Market Fund 5.14% 4.94% 4.52%
Lipper U.S. Gov't Money
Market Fund Average 4.89% 4.72% 4.29%
- --------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/14/92)
Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 3.51% Seven-Day Yield as of 9/30/99: 5.13%
- --------------------------------------------------------------------------------
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.
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 0.20%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.50%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
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
- -----------------------------------------------------
$51 $160 $279 $627
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
36
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, the Fund invests at least 80% of its net 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.
The Fund invests in compliance with industry-standard requirements for money
market funds for the quality, maturity and diversification of investments.
Principal 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.
37
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
3.18% 3.03%
During the one-year period described above in the bar chart, the Fund's best
quarter was Q2 1997 (+0.81%) and the worst quarter was Q1 1998 (+0.71%).
Federal Tax-Free Money Fund 3.03% 3.20%
Lipper Tax-Exempt Money
Market Funds Average 2.92% 3.01%
- --------------------------------------------------------------------------------
1 Year Inception
(7/15/96)
Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 2.02% Seven-Day Yield as of 9/30/99: 3.23%
- --------------------------------------------------------------------------------
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.
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 0.40%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.80%
Fee Reduction and/or Expense Reimbursement 0.20%
Net Expenses 0.60%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term.
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
[clipart] [sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
38
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, the Fund invests at least 80% of its net assets in
intermediate-term, investment-grade California municipal bonds, the interest
from which is exempt from federal and California personal income taxes and the
alternative minimum tax (AMT). 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 bonds.
The Fund may purchase bonds of any maturity, but generally the portfolio's
average dollar-weighted maturity ranges from five to 10 years. The Fund's
portfolio managers invest in California municipal bonds that offer attractive
yields and are considered to be 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. The portfolio
managers have historically invested more of the Fund's assets in better quality
investment-grade securities than lower quality investment-grade securities.
Principal 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. A fund such as this one, which 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.
39
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- ------------------------------------------------ ---------------- --------------
0.05% 11.41% 4.51% 7.50% 6.06%
<TABLE>
During the five-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+3.59%) and the worst quarter was Q1 1994 (-1.43%).
<CAPTION>
<S> <C> <C> <C>
CA Tax-Free Intermediate Bond Fund 6.06% 5.84% 5.74%
Merrill Lynch CA Municipal Intermediate Bond Index 6.31% 4.99% 5.02%*
- -------------------------------------------------------------------------------------------------------
*Calculated from 6/30/93 1 Year 5 Years Inception
(7/1/93)
</TABLE>
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -0.45% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
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.
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 Reduction and/or Expense Reimbursement 0.49%
Net Expenses 0.70%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term. The actual expenses for the Fund (after reimbursement
excluding interest and tax expenses) were 0.69%.
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
- -----------------------------------------------------
$72 $223 $389 $869
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
40
<PAGE>
California Tax-Free Money Fund | MCFXX
This Fund is intended for California residents only.
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 California municipal
bonds
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal circumstances, the Fund invests at least 80% of its net assets in
short-term, high-quality municipal bonds and notes, and in only those municipal
securities, the interest from which is expected to be exempt from California
personal income taxes and the alternative minimum tax (AMT). 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 focuses its investments 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. The Fund generally
concentrates its assets in California municipal bonds, however, its portfolio
manager strives to diversify the portfolio across sectors and issuers within
that market.
The Fund invests in compliance with industry-standard requirements for money
market funds for the quality, maturity and diversification of investments.
Principal 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.
41
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1995 1996 1997 1998
- ------------------ ---------------- ----------------- -----------------
3.36% 2.90% 3.03% 2.85%
During the four-year period described above in the bar chart, the Fund's best
quarter was Q1 1995 (+0.87%) and the worst quarter was Q4 1998 (+0.67%).
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund 2.85% 3.07%
Lipper California Tax-Exempt
Money Market Average 2.72% 2.97%
- --------------------------------------------------------------------------------
1 Year Inception
(9/14/92)
Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 1.83% Seven-Day Yield as of 9/30/99: 2.79%
- --------------------------------------------------------------------------------
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.
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 0.21%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.61%
Fee Reduction and/or Expense Reimbursement 0.01%
Net Expenses 0.60%
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ 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 rolling
10-year term. The actual expenses for the Fund (after reimbursement
including interest and tax expenses) were 0.58%.
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
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
42
<PAGE>
PORTFOLIO MANAGEMENT
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
September 30, 1999, Montgomery Asset Management managed approximately $3.9
billion on behalf of some 200,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, senior portfolio manager for the Montgomery Growth (since
1993) and U.S. Emerging Growth Funds (since 1995). Prior to joining Montgomery
in 1993, as a senior portfolio manager and managing director, 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.
[photo] BRADFORD KIDWELL, portfolio manager for the Montgomery Small Cap Fund
(since 1991). Prior to joining Montgomery in 1991, as a portfolio manager, Mr.
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 for the Montgomery Equity
Income Fund (since 1994). Before joining Montgomery in 1994, as a portfolio
manager, 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.
[photo] KATHRYN PETERS, portfolio manager for the Montgomery Growth (since 1995)
and U.S. Emerging Growth Funds (since 1995). Ms. Peters joined Montgomery in
1995 as a portfolio manager. 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 for the Montgomery Small
Cap Fund (since 1991). Before joining Montgomery in 1991, as a portfolio
manager, Mr. Philpott was a securities analyst with Boettcher & Company in
Denver. Prior to that he was a securities analyst at Berger Associates
Incorporated.
[photo] STUART ROBERTS, senior portfolio manager for the Montgomery Small Cap
Fund (since 1990). Mr. Roberts has specialized in small-cap investing since
1983. Prior to joining Montgomery in 1990 as a senior portfolio manager and
managing director, 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 for the Montgomery
International Growth (since 1995), International Small Cap (since 1993) and
Global Opportunities Funds (since 1993). Mr. Boich joined Montgomery in 1993 as
a senior portfolio manager and managing director. 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.
[photo] OSCAR CASTRO, CFA, senior portfolio manager for the Montgomery
International Growth (since 1995), Global Opportunities (since 1993) and Global
Communications Funds (since 1993). Mr. Castro joined Montgomery in 1993 as a
senior portfolio manager and managing director. From 1991 to 1993 he was a vice
president and portfolio manager at G.T. Capital Management, Inc. From 1989 to
1990, he was
43
<PAGE>
co-founder and co-manager of The Common Goal World Fund, a global equity
partnership.
[photo] FRANK CHIANG, portfolio manager for the Montgomery Emerging Asia (since
1996) and Emerging Markets Funds (since 1996). Before joining Montgomery in
1996, as a portfolio manager, Mr. Chiang 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] ANGELINE EE, portfolio manager with Montgomery's International/Global
team (since 1994). Prior to joining Montgomery as a portfolio manager, Ms. Ee
was a portfolio manager with AIGIC Investment Corp. in Singapore. From 1989
until 1990, She was a co-manager of a portfolio of Asian equities and bonds at
Chase Manhattan Bank in Singapore.
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager for the Montgomery
Emerging Markets Fund (since 1992). Before joining the Montgomery in 1991 as a
senior portfolio manager and managing director, Ms. Jimenez worked at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C., as a
senior analyst and portfolio manager. 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] NANCY KUKACKA, portfolio manager with Montgomery's International/Global
team (since 1995). Before joining Montgomery as a portfolio manager, Ms. Kukacka
worked at CS First Boston Investment from 1994 through 1995 where she was an
investment analyst covering consumer cyclical and non-durable sectors.
Previously, she was an investment analyst at RCM Capital Management from 1990
through 1994, providing fundamental-based analysis for more than $12 billion in
equity investments.
Multi-Strategy Funds
GLOBAL LONG-SHORT FUND. The portfolio managers listed previously for the
International and Global Equity Funds are the key members responsible for
managing the Global Long-Short Fund. (See information above about Mr. Boich, Mr.
Castro, Mr. Chiang, Ms. Ee, Ms. Jimenez and Ms. Kukacka.)
SELECT 50 FUND. The portfolio managers listed previously for the U.S. Equity
Funds and the International and Global Equity Funds are the key members of the
five portfolio management teams responsible for managing the Select 50 Fund.
(See information above about Mr. Honour, Mr. Kidwell, Mr. King, Ms. Peters, Mr.
Philpott, Mr. Roberts, Mr. Boich, Mr. Castro, Mr. Chiang, Ms. Ee, Ms. Jimenez
and Ms. Kukacka.)
U.S. ASSET ALLOCATION FUND. The portfolio managers listed previously for the
U.S. Equity Funds and below for the U.S. Fixed-Income and Money Market Funds
allocate assets among the underlying Funds for the U.S. Asset Allocation Fund.
Information about the portfolio managers for the underlying Funds, which
currently include the Growth, Total Return Bond and Government Money Market
Funds, is provided previously under U.S. Equity Funds and below under U.S.-Fixed
Income and Money Market Funds. (See information above and below about Mr.
Honour, Mr. Kidwell, Mr. King, Ms. Peters, Mr. Philpott, Mr. Roberts, Ms.
Chandoha and Mr. Stevens.)
U.S. Fixed-Income and Money Market Funds
[photo] MARIE CHANDOHA, portfolio manager for the Montgomery Total Return Bond
and Short Duration Government Bond Funds (since 1999). Prior to joining
Montgomery in 1999, as a portfolio manager, Ms. Chandoha worked at Goldman Sachs
& Co., where she advised institutional clients on optimal asset allocation
strategies in the U.S. bond market. From 1994 to 1996, she held positions as a
managing director of global fixed-income and economics research at Credit Suisse
First Boston. Prior to that she was a research analyst in mortgage securities at
Morgan Stanley; and an economist at the Federal Reserve Bank of New York.
44
<PAGE>
[photo] WILLIAM STEVENS, senior portfolio manager for the Montgomery
Fixed-Income Funds (since 1992). Prior to joining Montgomery in 1992 as a senior
portfolio manager and managing director, 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, he traded stripped
mortgage securities and mortgage-related interest rate swaps for the First
Boston Company.
Management Fees and Operating Expense Limits
<TABLE>
The table below shows the management fee rate actually paid to Montgomery Asset
Management over the past fiscal year and the contractual limits on total
operating expenses for each Fund. The management fee amounts may vary from year
to year, depending on actual expenses. Actual fee rates may be greater than
contractual rates to the extent Montgomery recouped previously deferred fees
during the fiscal year.
<CAPTION>
LOWER OF TOTAL
MANAGEMENT EXPENSE LIMIT OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Equity Funds
Montgomery Growth Fund 0.95% 1.38%
Montgomery U.S. Emerging Growth Fund* 1.33% 1.50%
Montgomery Small Cap Fund 1.00% 1.32%
Montgomery Equity Income Fund 0.24% 0.85%
International and Global Equity Funds
Montgomery International Growth Fund 1.12% 1.65%
Montgomery International Small Cap Fund* 1.21% 1.90%
Montgomery Global Opportunities Fund 1.21% 1.90%
Montgomery Global Communications Fund 1.22% 1.69%
Montgomery Emerging Markets Fund 1.06% 1.90%
Montgomery Emerging Asia Fund 1.03% 1.90%
Multi-Strategy Funds
Montgomery Global Long-Short Fund* 1.47% 2.35%
Montgomery Select 50 Fund 1.25% 1.76%
Montgomery U.S. Asset Allocation Fund 0.00% 1.30%
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund 0.48% 0.70%
Montgomery Short Duration Government Bond Fund 0.29% 0.70%
Montgomery Government Money Market Fund 0.30% 0.50%
Montgomery Federal Tax-Free Money Fund 0.41% 0.60%
Montgomery California Tax-Free Intermediate Bond Fund 0.38% 0.70%
Montgomery California Tax-Free Money Fund 0.44% 0.60%
<FN>
* Closed to new investors.
</FN>
</TABLE>
45
<PAGE>
Additional Investment Strategires and Related Risks
Montgomery Global Long-Short Fund
General. The Fund is considered to have invested at least 65% of its total
assets in long and short positions in equity securities when the value of long
positions in equity securities and the value of assets serving as collateral for
short positions together constitute at least 65% of the value of its total
assets. The value of long and short positions will not necessarily be equal.
Short Sales. When Montgomery believes that a security is overvalued, it may sell
the security short and borrow the same security from a broker or other
institution to complete the sale. If the price of the security decreases in
value the Fund may make a profit and, conversely, if the security increases in
value, the Fund will incur a loss because it will have to replace the borrowed
security by purchasing it at a higher price. There can be no assurance that the
Fund will be able to close out the short position at any particular time or at
an acceptable price. Although the Fund's gain is limited to the amount at which
it sold a security short, its potential loss is not limited. A lender may
request that the borrowed securities be returned on short notice, and if that
occurs at a time when other short sellers of the subject security are receiving
similar requests, a "short squeeze" can occur. This means that the Fund might be
compelled, at the most disadvantageous time, to replace borrowed securities
previously sold short, with purchases on the open market at prices significantly
greater than those the securities were sold short at. Short selling also may
produce higher than normal portfolio turnover and result in increased
transaction costs to the Fund.
The Fund also may make short sales "against-the-box," in which it sells short
securities it owns. The Fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining and closing short sales
against-the-box, which result in a "constructive sale" requiring the Fund to
recognize any taxable gain from the transaction.
Until the Fund replaces a borrowed security it will designate sufficient U.S.
government securities, and other liquid debt and equity securities to cover any
difference between the value of the security sold short and any collateral
deposited with a broker or other custodian. In addition, the value of the
designated securities must be at least equal to the original value of the
securities sold short. Depending on arrangements made with the broker or
custodian, the Fund may not receive any payments (including interest) on
collateral deposited with the broker or custodian. The Fund will not make a
short sale if, immediately before the transaction, the market value of all
securities sold exceeds 100% of the value of the Fund's net assets.
Borrowing/Leverage. The Fund may borrow money from banks and engage in reverse
repurchase transactions for temporary or emergency purposes. The Fund may borrow
from broker-dealers and other institutions in order to leverage a transaction.
Total bank borrowings may not exceed one-third of the value of the Fund's
assets.
The Fund also may leverage its portfolio through margin borrowing and other
techniques in an effort to increase total return. Although leverage creates an
opportunity for increased income and gain, it also creates special risks. For
example, leveraging may magnify changes in the net asset values of the Fund's
shares and in its portfolio yield. Although margin borrowing will be fully
collateralized, the Fund's assets may change in value while the borrowing is
outstanding. Leveraging creates interest expenses that can exceed the income
from the assets retained.
Foreign Securities. 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, 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
46
<PAGE>
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 predominately 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.
Furthermore, during the period following the January 1, 1999 introduction by the
European Union of a single European currency (the "euro"), market uncertainties
and even market disruptions could affect negatively the Fund's investments in
European companies.
Montgomery Emerging Asia Fund
By investing in emerging Asia markets, the Fund exposes shareholders to
additional risks. For example, the stock markets of China/Hong Kong and South
Korea tend to be much more volatile than the U.S. market due to their relative
immaturity and occasional instability. Malaysia, on the other hand, has
restricted the flow of money into or out of the country. Finally, investing in
the securities of South Korean and Taiwanese companies may involve risks of
political, economic and social uncertainty and instability, including the
potential for military action between South Korea and North Korea and between
mainland China and Taiwan. In the latter part of 1997, South Korea experienced a
national financial crisis, which has led to a recessionary environment and is
continuing with serious consequences for unemployment and domestic business
activity. The full impact of this recessionary environment cannot be predicted
but widespread restructuring and consolidation as well as a continued high rate
of bankruptcies can be expected.
The Euro: Single European Currency
Investors in the International and Global Equity Funds and in the Multi-Strategy
Funds should note the following: On January 1, 1999, the European Union (EU)
introduced a single European currency called the euro. Eleven of the fifteen EU
members have begun to convert their currencies to the euro including Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,
Portugal and Spain (leaving out Britain, Sweden, Denmark and Greece). For the
first three years, the euro will be a phantom currency (only an accounting
entry). Euro notes and coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
[ ] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably.
[ ] The applicable conversion rate for contracts stated in the national
currency of an EU member.
[ ] The ability of clearing and settlement systems to process transactions
reliably.
[ ] The effects of the euro on European financial and commercial markets.
[ ] The effect of new legislation and regulations to address euro-related
issues.
These and other factors could cause market disruptions and affect the value of
your shares in a Fund that invests in companies conducting business in Europe.
Montgomery and its key service providers have taken steps to address
euro-related issues, but there can be no assurance that these efforts will be
sufficient.
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. No Fund is
required or expected to take such a defensive posture. But if used, such an
unlikely 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.
47
<PAGE>
Portfolio Turnover
The Funds' 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 through a tax-exempt investor or you purchase shares through a
tax-deferred account, the distribution of capital gains may affect 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: International Growth, International Small Cap, Global Opportunities,
Emerging Asia, Global Long-Short, Select 50, U.S. Asset Allocation and Total
Return Bond Funds. See "Financial Highlights," beginning on page ___, for each
Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems may misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect a Fund's operations,
including pricing, securities trading, and the servicing of shareholder
accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during, and after 2000. We have completed
tests on our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers, to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Funds' operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
Despite Montgomery's efforts and contingency plans, however, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
prices of securities the Fund owns. Issuers in countries outside of the United
States, particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as required in the United States.
The Manager, of course, cannot audit any company and its major suppliers to
verify their year 2000 readiness. Montgomery understands that many foreign
countries and companies are well behind their U.S. counterparts in preparing for
2000.
Additional Benchmark Information
The International Finance Corporation (IFC) Global Composite Index comprises
more than 1,200 individual stocks from 33 developing countries in Asia, Latin
America, the Middle East, Africa and Europe.
The MSCI All-Country Asia Free (ex-Japan) Index comprises equities in 12
countries in the Asia Pacific region.
The Morgan Stanley Capital International All-Country World-Free Index is a
capitalization-weighted index composed of securities listed on the stock
exchanges of more than 45 developed and emerging countries, including the United
States.
48
<PAGE>
The MSCI Emerging Markets Free Index is an unmanaged, capitalization-weighted
composite index that covers individual securities within the equity markets of
approximately 25 emerging markets countries.
The Morgan Stanley Capital International (MSCI) Europe, Australasia and Far East
(EAFE) Index, a capitalization-weighted index, is composed of 21 developed
market countries in Europe, Australasia and the Far East. The returns are
presented net of dividend withholding taxes.
The MSCI Telecommunications Index is a capitalization-weighted index comprised
of equity securities of communications companies in developed countries
worldwide.
The MSCI World Index measures the performance of selected stocks in 22 developed
countries. The index is presented net of dividend withholding taxes.
The Salomon Smith Barney World Extended Market Index comprises the
small-capitalization equities of each country in the Salomon Smith Barney Broad
Market Index. The index contains approximately 3,000 issues in more than 20
countries, is calculated gross of withholding taxes and is capitalization
weighted.
49
<PAGE>
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Funds'
performance for the periods shown.
The following selected per-share data and ratios for the periods ended March 31,
1999, June 30, 1999 and June 30, 1998, were audited by PricewaterhouseCoopers
LLP.
Their June 11, 1999, August 18, 1999 and August 14, 1998 reports appear in the
1999 and 1998 Annual Reports of the Funds. Information for the periods ended
June 30, 1991 through June 30, 1997 was audited by other independent
accountants, whose report is not included here.
The total return figures in the tables represent the rate an investor would have
earned (or lost) on an investment in the relevant Fund (assuming reinvestment of
all dividends and distributions).
<TABLE>
[table]
<CAPTION>
U.S. Equity Funds
Growth Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999## 1998## 1997## 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $23.68 $23.07 $21.94 $19.16 $15.27
Net investment income/(loss) 0.09 0.17 0.15 0.17 0.12
Net realized and unrealized gain/(loss)
on investments 2.24 3.51 3.90 4.32 3.91
Net increase/(decrease) in net assets
resulting from investment operations 2.33 3.68 4.05 4.49 4.03
Distributions:
Dividends from net investment income (0.10) (0.15) (0.15) (0.17) (0.07)
Distribution from net realized capital gains (1.57) (2.92) (2.77) (1.54) (0.07)
Distribution in excess of net realized capital gains -- -- -- -- --
Total distributions (1.67) (3.07) (2.92) (1.71) (0.14)
Net asset value - end of year $24.34 $23.68 $23.07 $21.94 $19.16
================================================================================================================================
Total return** 11.41% 17.31% 20.44% 24.85% 26.53%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $669,789 $1,382,874 $1,137,343 $926,382 $878,776
Ratio of net investment income/(loss) to average 0.46% 0.71% 0.69% 0.78% 0.98%
net assets
Net investment income/(loss) before deferral $0.09 $0.17 -- -- --
of fees by Manager
Portfolio turnover rate 39% 54% 61% 118% 128%
Expense ratio before deferral of fees by 1.38% 1.20% -- -- --
Manager including interest and tax expenses
Expense ratio including interest and tax expenses 1.38% 1.20% 1.27% 1.35% 1.50%
Expense ratio excluding interest and tax expenses 1.35% 1.19% -- -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
## 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>
50
<PAGE>
<TABLE>
<CAPTION>
U.S. Equity Funds
U.S. Emerging Growth Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998## 1997 1996 1995(a)##
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $21.89 $19.00 $17.82 $13.75 $12.00
Net investment income/(loss) (0.16) (0.18) (0.13) (0.04) 0.09
Net realized and unrealized gain/(loss)
on investments (0.80) 4.21 2.54 4.26 1.66
Net increase/(decrease) in net assets
resulting from investment operations (0.96) 4.03 2.41 4.22 1.75
Distributions:
Dividends from net investment income -- -- -- (0.04) --
Distributions from net realized capital gains (1.13) (1.14) (1.23) (0.11) --
Total distributions (1.13) (1.14) (1.23) (0.15) --
Net asset value - end of year $19.80 $21.89 $19.00 $17.82 $13.75
=================================================================================================================================
Total return** (4.07)% 22.18% 14.77% 30.95% 14.58%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000s) $382,483 $391,973 $317,812 $306,217 $162,949
Ratio of net investment income/(loss) to average
net assets (0.83)% (0.84)% (0.75)% (0.11)% 1.40%+
Net investment income/(loss) before deferral
of fees by Manager $(0.16) $(0.18) -- $(0.05) $0.07
Portfolio turnover rate 76% 24% 79% 89% 37%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.66% 1.57% -- 1.79% 2.07%+
Expense ratio including interest and tax expenses 1.66% 1.57% 1.71% 1.75% 1.75%+
Expense ratio excluding interest and tax expenses 1.66% 1.56% -- -- --
<FN>
(a) The U.S. Emerging Growth (formerly Micro Cap) Fund's Class R shares
commenced operations on December 30, 1994.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
## 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
SELECTED PER-SHARE DATA FOR THE Small Cap Fund
YEAR OR PERIOD ENDED JUNE 30: 1999## 1998## 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $20.73 $19.52 $21.55 $17.11 $15.15
Net investment income/(loss) (0.17) (0.15) (0.18) (0.09) (0.10)
Net realized and unrealized
gain/(loss) on investments (1.21) 4.33 1.43 6.31 3.04
Net increase/(decrease) in net
assets resulting from investment
operations (1.38) 4.18 1.25 6.22 2.94
Distributions:
Dividends from net investment
income -- -- -- -- --
Distributions from net realized
capital gains (2.07) (2.97) (3.28) (1.78) (0.98)
Distributions in excess of net
realized capital gains (0.70) -- -- -- --
Total distributions (2.77) (2.97) (3.28) (1.78) (0.98)
Net asset value - end of year $16.58 $20.73 $19.52 $21.55 $17.11
==============================================================================================
Total return** (4.14)% 23.23% 6.81% 39.28% 20.12%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $113,323 $203,437 $198,298 $275,062 $202,399
Ratio of net investment
income/(loss) to average net
assets (1.09)% (0.70)% (0.78)% (0.47)% (0.57)%
Net investment income/(loss)
before deferral of fees by Manager $(0.17) $(0.15) -- -- --
Portfolio turnover rate 71% 69% 59% 80% 85%
Expense ratio before deferral of
fees by Manager, including
interest and tax expense 1.32% 1.24% -- -- --
Expense ratio including interest
and tax expenses 1.32% 1.24% 1.20% 1.24% 1.37%
Expense ratio excluding interest
and tax expenses 1.32% 1.24% -- -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
## 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>
52
<PAGE>
<TABLE>
<CAPTION>
U.S. Equity Funds
SELECTED PER-SHARE DATA FOR THE Equity Income Fund
YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997## 1996 1995(a)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $18.27 $17.91 $16.09 $13.38 $12.00
Net investment income/(loss) 0.32 0.44 0.49 0.43 0.31
Net realized and unrealized
gain/(loss) on investments 2.30 2.27 3.35 2.82 1.38
Net increase/(decrease) in net
assets resulting from investment
operations 2.62 2.71 3.84 3.25 1.69
Distributions:
Dividends from net investment
income (0.31) (0.44) (0.46) (0.42) (0.31)
Distributions from net realized
capital gains (1.54) (1.91) (1.56) (0.12) --
Distributions in excess of net
realized capital gains -- -- -- -- --
Total distributions (1.85) (2.35) (2.02) (0.54) (0.31)
Net asset value - end of year $19.04 $18.27 $17.91 $16.09 $13.38
=========================================================================================
Total return** 15.06% 15.83% 26.02% 24.56% 14.26%
Ratios to average net
assets/supplemental data
Net assets, end of year (in 000s) $26,750 $40,260 $38,595 $19,312 $6,383
Ratio of net investment
income/(loss) to average net
assets 1.71% 2.32% 2.93% 3.03% 4.06%+
Net investment income/(loss)
before deferral of fees by Manager $0.21 $0.34 $0.39 $0.34 $0.13
Portfolio turnover rate 57% 68% 62% 90% 29%
Expense ratio before deferral of
fees by Manager, including
interest and tax expense 1.45% 1.38% 1.46% 1.45% 3.16%+
Expense ratio including interest
and tax expenses 0.85% 0.86% -- -- --
Expense ratio excluding interest
and tax expenses 0.85% 0.85% 0.86% 0.85% 0.84%+
<FN>
(a) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994. ** Total return represents aggregate total return for the periods
indicated.
+ Annualized.
## 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
SELECTED PER-SHARE DATA FOR THE International Growth Fund International Small Cap Fund
YEAR OR PERIOD ENDED JUNE 30: 1999 1998## 1997## 1996(a) 1999## 1998## 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of year $18.67 $16.24 $15.31 $12.00 $15.14 $17.16 $14.86 $11.75 $12.02
Net investment income/(loss) 0.09 0.04 0.08 0.02 0.01 (0.01) (0.05) 0.03 0.12
Net realized and unrealized
gain/(loss) on investments 0.31 3.48 2.53 3.29 (0.65) 0.31 2.35 3.10 (0.39)
Net increase/(decrease) in net
assets resulting from investment
operations 0.40 3.52 2.61 3.31 (0.64) 0.30 2.30 3.13 (0.27)
Distributions:
Dividends from net investment
income -- (0.02) -- -- -- -- -- (0.02) (0.00)#
Distributions in excess of net
investment income -- (0.00)# -- -- (0.01) (0.13) -- -- --
Distributions from net realized
capital gains (0.10) (1.07) (1.68) -- -- (2.19) -- -- --
Distributions in excess of net
realized capital gains -- -- -- -- -- -- -- --
Total distributions (0.10) (1.09) (1.68) -- (0.01) (2.32) -- (0.02) (0.00)#
Net asset value-end of year $18.97 $18.67 $16.24 $15.31 $14.49 $15.14 $17.16 $14.86 $11.75
==============================================================================================================================
Total return** 2.34% 23.27% 19.20% 27.58% (3.82)% 4.46% 15.48% 26.68% (2.23)%
Ratios to average net
assets/supplemental data
Net assets, end of year (in 000s) $227,287 $64,820 $33,912 $18,303 $38,054 $50,491 $53,602 $41,640 $28,516
Ratio of net investment
income/(loss) to average net
assets 0.41% 0.22% 0.57% 0.26%+ 0.07% (0.03)% (0.34)% 0.20% 0.95%
Net investment income/(loss)
before deferral of fees by Manager $0.09 $(0.04) $(0.02) $(0.07) $0.01 $(0.10) $(0.14) $(0.08) $0.05
Portfolio turnover rate 150% 127% 95% 239% 117% 111% 85% 177% 156%
Expense ratio before deferral of
fees by Manager, including
interest and tax expense 1.74% 2.13% 2.37% 2.91%+ 2.56% 2.53% 2.60% 2.76% 2.50%
Expense ratio including interest
and tax expense 1.66% 1.66% -- -- 1.91% 1.92% -- 1.96% 1.91%
Expense ratio excluding interest
and tax expense 1.65% 1.65% 1.66% 1.65%+ 1.90% 1.90% 1.90% 1.90% 1.90%
<FN>
(a) The International Growth Fund's Class R shares commenced operations on July
3, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# 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>
54
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD Global Opportunities Fund
ENDED JUNE 30: 1999 1998## 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $19.19 $19.17 $16.96 $13.25 $12.92
Net investment income/(loss) (0.12) 0.00# (0.11) (0.06) 0.13
Net realized and unrealized gain/(loss)
on investments 2.56 3.87 3.14 3.84 0.70
Net increase/(decrease) in net assets
resulting from investment operations 2.44 3.87 3.03 3.78 0.83
Distributions:
Dividends from net investment income (0.22) -- -- (0.07) --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (2.20) (3.85) (0.82) -- (0.50)
Total distributions (2.42) (3.85) (0.82) (0.07) (0.50)
Net asset value-end of year $19.21 $19.19 $19.17 $16.96 $13.25
===========================================================================================================================
Total return** 15.68% 27.12% 18.71% 28.64% 6.43%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $57,146 $96,412 $32,371 $28,496 $13,677
Ratio of net investment income/(loss) to average
net assets (0.61)% (0.02)% (0.62)% (0.56)% 1.03%
Net investment income/(loss) before deferral
of fees by Manager $(0.14) $0.00# $(0.23) $(0.16) $(0.01)
Portfolio turnover rate 172% 135% 117% 164% 119%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.40% 2.37% 2.62% 3.10% 2.99%
Expense ratio including interest and tax expenses 2.01% 1.96% -- 2.05% 1.91%
Expense ratio excluding interest and tax expenses 1.90% 1.90% 1.90% 1.90% 1.90%
<FN>
** Total return represents aggregate total return for the periods indicated.
# 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
Global Communications Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998## 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of year $22.88 $19.61 $18.05 $15.42 $14.20
Net investment income/(loss) 0.01 (0.17) (0.25) (0.20) (0.03)
Net realized and unrealized gain/(loss)
on investments 6.35 7.19 2.72 2.83 1.28
Net increase/(decrease) in net assets
resulting from investment operations 6.36 7.02 2.47 2.63 1.25
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (2.51) (3.75) (0.91) -- --
Distributions in excess of net realized capital gains -- -- -- -- (0.03)
Total distributions (2.51) (3.75) (0.91) -- (0.03)
Net asset value-end of year $26.73 $22.88 $19.16 $18.05 $15.42
=========================================================================================================================
Total return** 31.66% 45.45% 14.43% 17.06% 8.83%
Ratios to average net assets/ supplemental data
Net assets, end of year (in 000s) $354,730 $267,113 $153,995 $206,671 $209,644
Ratio of net investment income/(loss) to average net assets 0.02% (0.85)% (1.05)% (1.01)% (0.10)%
Net investment income/(loss) before deferral of fees by
Manager $0.01 $(0.17) $(0.27) $(0.22) $(0.07)
Portfolio turnover rate 146% 80% 76% 104% 50%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.69% 1.93% 2.00% 2.11% 2.09%
Expense ratio including interest and tax expenses 1.69% 1.93% -- 2.01% 1.91%
Expense ratio excluding interest and tax expenses 1.68% 1.90% 1.91% 1.90% 1.90%
<FN>
** Total return represents aggregate total return for the periods indicated.
## 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>
56
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
Emerging Markets Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997 1996 1995##
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of year $9.86 $16.85 $14.19 $13.17 $13.68
Net investment income/(loss) 0.92 0.07 0.07 0.08 0.03
Net realized and unrealized gain/(loss)
on investments (0.54) (6.58) 2.66 0.94 0.25++
Net increase/(decrease) in net assets
resulting from investment operations 0.38 (6.51) 2.73 1.02 0.28
Distributions:
Dividends from net investment income -- (0.15) (0.07) -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.33) -- -- (0.42)
Distributions in excess of net realized capital gains -- -- -- -- (0.37)
Total distributions -- (0.48) (0.07) -- (0.79)
Net asset value-end of year $10.24 $9.86 $16.85 $14.19 $13.17
================================================================================================================================
Total return** 3.85% (39.20)% 19.34% 7.74% 1.40%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $344,907 $758,911 $1,259,457 $994,378 $998,083
Ratio of net investment income/(loss) to average
net assets 0.01% 0.55% 0.48% 0.58% 0.23%
Net investment income/(loss) before deferral
of fees by Manager $0.96 $0.07 -- -- --
Portfolio turnover rate 86% 97% 83% 110% 92%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.15% 1.65% -- -- --
Expense ratio including interest and tax expenses 2.05% 1.65% -- -- --
Expense ratio excluding interest and tax expenses 1.90% 1.60% 1.67% 1.72% 1.80%
<FN>
** Total return represents aggregate total return for the periods indicated.
++ 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 the purchases and
withdrawal of shares in relation 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,
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
Emerging Asia Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997(a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset-value beginning of year $6.18 $18.91 $12.00
Net investment income/(loss) (0.01) 0.13 (0.01)
Net realized and unrealized gain/(loss)
on investments 6.04 (11.74) 6.95
Net increase/(decrease) in net assets
resulting from investment operations 6.03 (11.61) 6.94
Distributions:
Dividends from net investment income (0.00)# (0.17) --
Distributions in excess of net investment income -- (0.00)# (0.03)
Distributions from net realized capital gains -- (0.95) --
Distributions in excess of net realized capital gains -- -- --
Total distributions -- (1.12) (0.03)
Net asset value-end of year $12.21 $6.18 $18.91
===============================================================================================================
Total return** 97.44% (63.45)% 57.80%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $63,196 $24,608 $68,095
Ratio of net investment income/(loss) to average
net assets (0.35%) 0.22% (0.42)%+
Net investment income/(loss) before deferral
of fees by Manager $(0.03) $(0.08) $(0.02)
Portfolio turnover rate 233% 154% 72%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.89% 2.27% 2.69%+
Expense ratio including interest and tax expenses 2.19% 1.91% 2.20%+
Expense ratio excluding interest and tax expenses 1.90% 1.90% 1.80%+
<FN>
(a) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Multi-Strategy Funds
Global Long-Short Fund Select 50 Fund
SELECTED PER-SHARE DATA FOR THE June 30, March 31, June 30,
YEAR OR PERIOD ENDED: 1999(b)(c) 1999## 1998(a)## 1999## 1998## 1997## 1996(d)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of year $16.47 $12.70 $10.00 $20.98 $20.01 $16.46 $12.00
Net investment income/(loss) (0.06) (0.05) 0.02 (0.09) 0.12 0.01 0.06
Net realized and unrealized
gain/(loss)
on investments 3.24 4.92 2.68 2.70 2.70 4.16 4.45
Net increase/(decrease) in net
assets resulting from investment
operations 3.18 4.87 2.70 2.61 2.82 4.17 4.51
Distributions:
Dividends from net investment
income -- -- -- (0.24) -- (0.10) (0.04)
Distributions in excess of net
investment income -- -- -- (0.10) -- -- --
Distributions from net realized
capital gains -- (1.10) -- (1.05) (1.85) (0.52) --
Distributions in excess of net
realized capital gains -- -- -- -- -- -- (0.01)
Distributions from capital -- -- -- -- -- -- --
Total distributions -- (1.10) -- (1.39) (1.85) (0.62) (0.05)
Net asset value-end of year $19.65 $16.47 $12.70 $22.20 $20.98 $20.01 $16.46
=========================================================================================================================
Total return** 19.61% 39.87% 27.20% 13.89% 15.44% 26.35% 37.75%
Ratios to average net
assets/supplemental data
Net assets, end of year (in 000s) $216,300 $83,638 $16,579 $136,792 $269,667 $172,509 $77,955
Ratio of net investment
income/(loss) to average
net assets (2.30)%+ (0.35)% 0.65%+ (0.47)% 0.58% 0.04% 0.42%+
Net investment income/(loss)
before deferral
of fees by Manager $(0.06) $(0.09)% $(0.05) $(0.09) $0.12 $(0.01) $0.02
Portfolio turnover rate 43% 226% 84% 115% 151% 158% 106%
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 4.61%+ 3.79% 5.19%+ 1.76% 1.81% 1.92% 2.11%+
Expense ratio including interest
and tax expenses 4.18%+ 3.40% 2.78%+ 1.76% 1.81% -- --
Expense ratio excluding interest
and tax expenses 2.35%+ 2.35% 2.35%+ 1.73% 1.80% 1.82% 1.80%+
<FN>
(a) The Global Long-Short Fund commended operations on December 31, 1997.
(b) On January 29, 1999, the Class R shares were issued in exchange for Class A
shares.
(c) The Fund changed its year end from March 31 to June 30.
(d) The Select 50 Fund's Class R shares commenced operations on October 2,
1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
## 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>
59
<PAGE>
<TABLE>
<CAPTION>
Multi-Strategy Funds
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD U.S. Asset Allocation Fund
ENDED JUNE 30: 1999## 1998(a) 1997## 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of year $19.08 $19.89 $19.33 $16.33 $12.24
Net investment income/(loss) 0.48 1.66 0.48 0.26 0.25
Net realized and unrealized gain/(loss) on
investments 1.23 0.99 2.13 3.54 4.11
Net increase/(decrease) in net assets resulting
from investment operations 1.71 2.65 2.61 3.80 4.36
Distributions:
Dividends from net investment income (0.93) (0.93) (0.39) (0.25) (0.17)
Distributions in excess of net investment income -- (0.70) -- -- --
Distributions from net realized capital gains (1.68) (1.83) (1.66) (0.55) (0.10)
Distributions in excess of net realized capital
gains (1.41) -- -- -- --
Total distributions (4.02) (3.46) (2.05) (0.80) (0.27)
Net asset value-end of year $16.77 $19.08 $19.89 $19.33 $16.33
====================================================================================================================
Total return** 11.93% 14.67% 14.65% 23.92% 35.99%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $81,133 $128,075 $127,214 $132,511 $60,234
Ratio of net investment income/(loss) to average
net assets 2.63% 3.10% 2.55% 1.85% 3.43%
Net investment income/(loss) before deferral
of fees by Manager $0.45 $1.63 $0.47 $0.24 $0.19
Portfolio turnover rate 36% 84% 169% 226% 96%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.46% 0.31% 1.49% 1.55% 2.07%
Expense ratio including interest and tax expenses 0.25% 0.26% 1.43% 1.42% 1.31%
Expense ratio excluding interest and tax expenses 0.25% 0.25% 1.31% 1.30% 1.30%
<FN>
(a) The Fund converted to a fund of funds structure effective July 1, 1998.
Expense ratios prior to that date do not reflect expenses borne indirectly.
** Total return represents aggregate total return for the periods indicated.
## 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>
60
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed-Income and Money Market Funds
Total Return Short Duration Government
SELECTED PER-SHARE DATA FOR THE YEAR OR Bond Fund Bond Fund
PERIOD ENDED JUNE 30: 1999 1998(a) 1999 1998 1997## 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of year $12.44 $12.00 $10.14 $9.99 $9.92 $9.95 $9.80
Net investment income/(loss) 0.73 0.72 0.53 0.57 0.59 0.60 0.62
Net realized and unrealized gain/(loss)
on investments (0.35) 0.56 (0.05) 0.16 0.07 (0.04) 0.16
Net increase/(decrease) in net assets
resulting from investment operations 0.38 1.28 0.48 0.73 0.66 0.56 0.78
Distributions:
Dividends from net investment income (0.73) (0.72) (0.51) (0.56) (0.59) (0.59) (0.62)
Distributions in excess of net
investment income (0.01) -- (0.02) -- (0.00)# (0.00)# --
Distributions from net realized capital
gains (0.42) (0.12) -- (0.02) -- -- --
Distributions in excess of net realized
capital gains -- (0.00)# (0.05) -- -- -- --
Distributions from capital -- -- -- -- -- -- (0.01)
Total distributions (1.16) (0.84) (0.58) (0.59) (0.59) (0.63)
Net asset value-end of year $11.66 $12.44 $10.04 $10.14 $9.99 $9.92 $9.95
============================================================================================================================
Total return** 3.20% 10.92% 4.82% 7.56% 6.79% 5.74% 8.28%
Ratios to average net assets/supplemental
data
Net assets, end of year (in 000s) $38,476 $77,694 $154,365 $66,357 $47,265 $22,681 $17,093
Ratio of net investment income/(loss) to
average net assets 5.88% 5.81% 5.21% 5.83% 5.87% 5.88% 6.41%
Net investment income/(loss) before
deferral of fees by Manager $0.72 $0.71 $0.48 $0.51 $0.54 $0.52 $0.54
Portfolio turnover rate 158% 390% 199% 502% 451% 350% 284%
Expense ratio before deferral of fees by
Manager, including interest and tax
expenses 1.25% 1.34% 1.85% 1.73% 2.05% 2.31% 2.23%
Expense ratio including interest and tax
expenses 1.16% 1.29% 1.35% 1.15% 1.55% 1.55% 1.38%
Expense ratio excluding interest and tax
expenses 0.70% 0.70% 0.62% 0.28% 0.60% 0.60% 0.47%
<FN>
(a) The Total Return Bond Fund's Class R shares commenced operations on June
30, 1997.
** Total return represents aggregate total return for the periods indicated.
# 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>
61
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed Income and Money Market Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED Government Money Market Fund
JUNE 30: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income/(loss) 0.047 0.052 0.049 0.052 0.049
Net realized and unrealized gain/(loss)
on investments 0.000ss 0.000ss 0.000ss 0.000ss 0.000ss
Net increase/(decrease) in net assets resulting
from investment operations 0.047 0.052 0.049 0.052 0.049
Distributions:
Dividends from net investment income (0.047) (0.052) (0.049) (0.052) (0.049)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Total distributions (0.047) (0.052) (0.049) (0.052) (0.049)
Net asset value-end of year $1.00 $1.00 $1.00 $1.00 $1.00
====================================================================================================================
Total return** 4.81% 5.27% 5.03% 5.28% 4.97%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $575,387 $724,619 $473,154 $439,423 $258,956
Ratio of net investment income/(loss) to average
net assets 4.71% 5.15% 4.93% 5.17% 4.92%
Net investment income/(loss) before deferral of
fees by Manager $0.047 $0.052 $0.049 $0.050 $0.047
Portfolio turnover rate -- -- -- -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.50% 0.48% 0.62% 0.74% 0.79%
Expense ratio including interest and tax expenses 0.50% 0.53% -- -- 0.63%
Expense ratio excluding interest and tax expenses 0.50% 0.53% 0.60% 0.60% 0.60%
<FN>
** Total return represents aggregate total return for the periods indicated.
ss Amount represents less than $0.001 per share.
</FN>
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed Income and Money Market Funds
Federal Tax-Free Money Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997(a)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value-beginning of year $1.00 $1.00 $1.00
Net investment income 0.028 0.031 0.032
Net realized and unrealized gain/(loss)
on investments 0.000ss 0.000ss 0.000ss
Net increase in net assets resulting
from investment operations 0.028 0.031 0.032
Distributions:
Dividends from net investment income (0.028) (0.031) (0.032)
Distributions in excess of net investment income (0.000)ss -- (0.000)ss
Distributions from net realized capital gains -- -- --
Total distributions (0.028) (0.31) (0.032)
Net asset value-end of period $1.00 $1.00 $1.00
==============================================================================================================
Total return** 2.82% 3.12% 3.26%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $116,341 $117,283 $114,197
Ratio of net investment income/(loss) to average net assets 2.80% 3.08% 3.24%+
Net investment income/(loss) before deferral of
fees by Manager $0.026 $0.031 $0.030
Portfolio turnover rate -- -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.80% 0.81% 0.69%+
Expense ratio including interest and tax expenses 0.60% 0.60% 0.33%+
Expense ratio excluding interest and tax expenses 0.60% 0.60% --
<FN>
(a) The Federal Tax-Free Money Fund's Class R shares commenced operations on
July 15, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
ss Amount represents less than $0.001 per share.
</FN>
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed Income and Money Market Funds
SELECTED PER-SHARE DATA FOR
THE YEAR OR PERIOD ENDED California Tax-Free Intermediate Bond Fund California Tax-Free Money Fund
JUNE 30: 1999 1998 1997 1996 1995(a) 1999 1998 1997 1996 1995(b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value-beginning
of year $12.86 $12.53 $12.23 $12.04 $11.79 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income 0.49 0.51 0.53 0.54 0.44 0.026 0.029 0.029 0.030 0.027
Net realized and
unrealized gain/(loss)
on investments (0.16) 0.33 0.30 0.19 0.25 0.000ss 0.000ss 0.000ss 0.000ss 0.000ss
Net increase/(decrease)
in net assets resulting
from investment operations 0.33 0.84 0.83 0.73 0.69 0.026 0.029 0.029 0.030 0.027
Distributions:
Dividends from net
investment income (0.46) (0.51) (0.53) (0.54) (0.44) (0.026) (0.029) (0.029) (0.030) (0.027)
Distributions in excess
of net investment income (0.03) -- -- -- (0.00)# -- -- -- -- (0.000)ss
Distributions from net
realized capital gains (0.03) -- -- -- -- -- -- -- -- --
Distributions in
excess of net realized
capital gains (0.00)#
Total Distributions (0.52) (0.51) (0.53) (0.54) (0.44) (0.026) (0.029) (0.029) (0.030) (0.027)
Net asset value-end of
year $12.67 $12.86 $12.53 $12.23 $12.04 $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================================================
Total return** 2.71% 6.85% 6.91% 6.11% 6.03% 2.59% 3.00% 2.95% 3.03% 2.68%
Ratios to average net
assets/supplemental data
Net assets, end of year
(in 000s) $41,017 $35,667 $21,681 $13,948 $5,153 $292,901 $187,216 $118,723 $98,134 $64,780
Ratio of net investment
income to average net
assets 3.93% 4.03% 4.27% 4.34% 3.71% 2.55% 2.96% 2.91% 2.99% 3.55%+
Net investment
income/(loss) before
deferral of fees by
Manager $0.48 $0.44 $0.47 $0.43 $0.34 $0.021 $0.029 $0.028 $0.028 $0.023
Portfolio turnover rate 184% 42% 26% 58% 38% -- -- -- -- --
Expense ratio before
deferral of fees by
Manager, including
interest and tax expenses 1.19% 1.19% 1.18% 1.43% 1.41% 0.61% 0.68% 0.73% 0.80% 0.86%+
Expense ratio including
interest and tax expenses 0.69% 0.69% 0.68% 0.61% 0.56% 0.58% 0.58% 0.58% 0.59% 0.33%+
Expense ratio excluding
interest and tax expenses 0.69% 0.68% -- -- -- 0.58% 0.58% -- -- --
<FN>
(a) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(b) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
ss Amount represents less than $0.001 per share.
</FN>
</TABLE>
64
<PAGE>
[table]
Investment Options
To open a new account, complete and mail the New Account application included
with this prospectus.
- --------------------------------------------------------------------------------
Trade requests received after 1:00 P.M. pacific time (4:00 P.M. eastern time)
will be executed at the following business day's closing price. Once a trade is
placed it may not be altered or canceled.
Checks should be made payable to: The Montgomery Funds
The minimum initial investment for each fund is $1,000 ($2,000 for the Global
Long-Short Fund). The minimum subsequent investment is $100. The Global
Long-Short, the U.S. Emerging Growth and the International Small Cap Funds are
closed to new investors.
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 219073
Kansas City, MO 64121-9073
[ ] By express or overnight service:
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1614
[ ] 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]
65
<PAGE>
ACCOUNT INFORMATION
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 ($2,000 for the Global Long-Short Fund). The
minimum subsequent investment is $100. 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, the Funds and the Distributor each reserve the right to
reject all or part of any purchase.
Some Montgomery Funds are closed to new investors. Shareholders who
owned shares of those Funds when they closed may continue to purchase shares in
their existing accounts. Employer-sponsored retirement plans, if they already
are invested in those Funds, may be able to open additional accounts for plan
participants. Montgomery may reopen and close any of its Funds to certain types
of new shareholders in the future. If you do not own shares of a closed Fund,
you may not exchange shares from other Montgomery Funds for shares of that Fund.
From time to time, Montgomery may close and reopen any of its Funds to
new investors at its discretion. Shareholders who maintain open accounts which
meet the minimum required balance in a Fund when it closes may make additional
investments in it. If a Fund is closed and you redeem your total investment in
the Fund, your account will be closed and you will not be able to make any
additional investments in the Fund. The Montgomery Funds reserve the right to
close or liquidate a Fund at their discretion.
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 (see column 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.
[ ] 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.
66
<PAGE>
[ ] 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 any of your accounts if we do not receive payment within
that time.
[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
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
Foreign Investors:
Foreign citizens and resident
aliens of the United States living
abroad may not invest in The
Montgomery Funds
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 net value of its assets by the number of outstanding shares.
We base the value of the Funds' 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 affecting the price of those securities may happen after the
foreign markets in which such securities trade have closed, but before the Fund
calculates its NAV. In this case, Montgomery, subject to the supervision of the
Fund's Board of Trustees or Pricing Committee, 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.
We calculate the net asset value (NAV) of each Montgomery Fund (other than
the Money Market Funds) 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
4:00 P.M. on weekdays, except for holidays. If your order is received after the
NYSE has closed, your shares will be priced at the next NAV we determine after
receipt of your order. More details about how we calculate the Funds' NAV are in
the Statement of Additional Information.
[ ] Money Market Funds. The price of the Money Market Funds is determined at
12 noon eastern time 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
67
<PAGE>
price we determine after receiving your order. Also, only those orders received
by 12 noon will be eligible to accrue any dividend paid for the day of
investment.
[ ] 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.
[sidebar]
TRADING TIMES
Whether buying, exchanging or selling shares,
transaction requests received after 1:00 P.M.
pacific time (4:00 P.M. eastern time) will be
executed at the next business day's closing
price.
68
<PAGE>
[Table]
www.montgomeryfunds.com
Manage your account(s) online. Our Account Access area offers free, secure
access to your Montgomery Fund account(s) around-the-clock.
At www.montgomeryfunds.com Montgomery shareholders can:
o Check current account balances o Order duplicate statements and
tax forms
o Buy, exchange or sell shares
o View tax summaries
o View the most recent account
activity and up to 80 records o Change address of record
of account history within the
past two years o Reorder checkbooks
Access your account(s) online today. Simply click on the Account Access tab and
follow the simple steps to create a secure Personal Identification Number (PIN).
It takes only a minute.
Please note that for your protection, this secure area of our site requires the
use of browsers with 128-bit encryption. If you are not sure what level of
security your browser supports, click on our convenient browser check.
[clipart]
- --------------------------------------------------------------------------------
69
<PAGE>
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.
[ ] 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.
Telephone purchases can be made for up to five times your account value as of
the previous day.
We must receive payment for your purchase within three business days of
your request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account).
o Send us a check by overnight or second-day courier service.
o Instruct your bank to wire money to our affiliated bank using the
information in "Becoming A Montgomery Shareholder" (page ___).
[ ] Online. To buy shares online, you must first set up an Electronic Link
(described in the note at above left). 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. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page ___).
Exchanging Shares
You may exchange Class R shares in one Fund for Class R shares in another, in
accounts with the same registration, Taxpayer Identification number and address.
There is a $100 minimum to exchange into a fund you currently own and a $1,000
($2,000 for the Global Long-Short Fund) minimum for investing in a new Fund.
Note that an exchange is treated as a sale and 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 Account Access area at www.montgomeryfunds.com.
Other Exchange Policies
[ ] 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
Fixed-Income and Money Market Funds are exempt from this restriction.
70
<PAGE>
[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.
[ ] 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.
[ ] Any redemption fees will apply to exchanges or redemptions out of a Fund.
Selling Shares
You may sell some or all of your fund shares on days that the NYSE is open for
trading (except bank holidays for the Fixed-Income and Money Market Funds). Note
that a redemption is treated as a sale and may result in a realized gain or loss
for tax purposes.
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. Shares
purchased by check will be priced upon receipt of your order but proceeds may
not be paid until your check clears, which may take up to 15 days after the
purchase date. Within this 15-day period, you may choose to exchange into a
Montgomery Money Market fund.
Aside from any applicable redemption fees, we generally will not charge you
any fees when you sell your shares, although there are some minor exceptions:
o For sharers sold by wire pay a $10 wire transfer fee that will be deducted
directly from their proceeds.
o For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the 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 National Association of Securities Dealers member firms.
If you want to wire your redemption proceeds but do not have a
predesignated bank account, include a preprinted, voided check or deposit slip.
If you do not have a preprinted check, please send a signature-guaranteed letter
along with your bank instructions. 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
71
<PAGE>
discretion. Call (800) 572-FUND [3863] for more details.
[sidebar]
Shareholder service is available
Monday through Friday from 6:00 a.m.
to 5:00 P.M. pacific time.
Shareholders can get information or
perform transactions around-the-clock
through the Montgomery Star System or
www.montgomeryfunds.com.
[ ] By Check. If you have checkwriting 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. A balance must be available for the Fund
upon which the check is drafted. Shares purchased by check will be priced upon
receipt of your order but proceeds may not be paid until your check clears,
which may take up to 15 days after the purchase date. Checkwriting 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 or
sell 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" below.
[ ] Online. You can sell up to $50,000 in shares in a regular account online
at www.montgomeryfunds.com.
[ ] Redemption Fee. The redemption fees for the Emerging Asia Fund and Global
Long-Short Fund are intended to compensate the Funds for the increased expenses
to longer-term shareholders and the disruptive effect on the portfolios caused
by short-term investments. The redemption fee will be assessed on the net asset
value of the shares redeemed or exchanged and will be deducted from the
redemption proceeds otherwise payable to the shareholder. Each Fund will retain
the fee charged.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $1,000 ($2,000 for the Global Long-Short Fund). If your account
balance falls below that amount for any reason, 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.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Fund below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Fund remains within
the applicable expense limitation. Montgomery generally seeks to recoup the
oldest amounts before seeking payment of fees and expenses for the current year.
72
<PAGE>
Shareholder Servicing Plan
The Global Long-Short Fund has adopted a Shareholder Servicing Plan, under which
the Fund pays Montgomery or its Distributor a shareholder service fee at an
annual rate of up to 0.25% of the Fund's average daily net assets. The fee is
intended to reimburse the recipient for providing or arranging for services to
shareholders. The fee may also be used to pay certain brokers, transfer agents
and other financial intermediaries for providing shareholder services.
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 proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify the Funds
of such errors within 30 days following mailing of that confirmation. The Funds
will not be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on your confirmation after this 30-day period.
[sidebar]
BUYING AND SELLING SHARES THROUGH SECURITIES
BROKERS AND BENEFIT PLAN ADMINISTRATORS
You may purchase and sell shares through
securities brokers and benefit plan
administrators or their subagents. You should
contact them directly for information
regarding how to invest or redeem through
them. They may also charge you service or
transaction fees. If you purchase or redeem
shares through them, you will receive the NAV
calculated after receipt of the order by them
(generally, 4:00 p.m. Eastern time) on any
day the NYSE is open. If your order is
received by them after that time, it will be
purchased or redeemed at the next-calculated
NAV. Brokers and benefit plan administrators
who perform shareholder servicing for the
Fund may receive fees from the Funds or
Montgomery for providing these services.
Telephone Transactions
By buying or selling 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 privileges.
The shares you purchase by phone will be priced at the first net asset
value we determine after receiving your purchase. You will not actually own the
shares, however, 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 the 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 the following
safeguards to ensure that the instructions we receive are accurate and
authentic:
o Recording certain calls
73
<PAGE>
o Requiring an authorization number or other personal information not
likely to be known by others
o 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 transaction privileges of
any shareholder at any time if he or she has used abusive language or misused
the phone privileges 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 transmit your redemption request:
o Using the automated Star System
o Online
o By overnight courier
o By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
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 Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain 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.
[sidebar]
INVESTMENT MINIMUMS
For regular accounts and IRAs, the
minimum initial investment is
$1,000 ($2,000 for the Global
Long-Short Fund). The minimum
subsequent investment is $100.
After You Invest
Taxes
IRS rules require that the Funds distribute all of their net investment income
and capital gains, if any, to shareholders. Capital gains may be taxable at
different rates depending on the length of time a Fund holds its assets. We will
inform you about the source of any dividends and capital gains upon payment.
After
74
<PAGE>
the close of each calendar year, we will advise you of their tax status. The
Funds' distributions, whether received in cash or reinvested, may be taxable.
Any redemption of a Fund's shares or any exchange of a Fund's shares for another
Fund will be treated as a sale, and any gain on the transaction may be taxable.
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.
A Note on the Montgomery Tax-Free Funds
The Montgomery Federal Tax-Free Money, California Tax-Free Money and California
Tax-Free 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. Capital gains, however, are taxable. You also should
consult your adviser about state and local taxes.
Dividends and Distributions
As a shareholder in The Montgomery Funds, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as an IRA or a 401(k) plan). Income
dividends and capital-gain distributions are paid to all shareholders who
maintain accounts with each Fund as of its "record date."
If you would like to receive dividends and 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:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter
o Annual and semiannual reports, mailed approximately 60 days after June 30
and December 31
o 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.
75
<PAGE>
[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, Inc. also located in Kansas
City, Missouri, assists Investors Fiduciary
Trust with certain record keeping and
accounting functions for the Funds.
<TABLE>
[table]
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
<S> <C> <C>
Equity Funds and U.S. Declared and paid in the last Declared and paid in the last
Asset Allocation Fund quarter of each calendar year* quarter of each additional year*
(except the Equity Income
Funds)
Equity Income Fund Declared and paid on or about Declared and paid in the last
the last business day of each quarter of each calendar year*
quarter
Multi-Strategy Funds Declared and paid in the last Declared and paid in the last
(except the U.S. Asset quarter of each calendar quarter of each calendar year*
Allocation Fund) year*
U.S. Fixed-Income and Declared daily and paid monthly Declared and paid in the last
Money Market Funds on or about the last business quarter of each calendar year*
day of 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]
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.
76
<PAGE>
[Outside back cover: The Montgomery Funds; Address; Contact Info; Logo]
You can find more information about The Montgomery Funds' investment policies in
the Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about The Montgomery Funds, including the
SAI, at the Securities and Exchange Commission's (SEC's) Public Reference Room
in Washington, D.C. Call 800.SEC.0330 to obtain information about the operation
of the Public Reference Room. Reports and other information about The Montgomery
Funds are available at the SEC's Web site at www.sec.gov. You can also obtain
copies of this information, upon payment of a duplicating fee, by writing the
Public Reference Section of the SEC, Washington, D.C., 20549-6009
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
the previous fiscal period. To request a copy of the most recent annual or
semiannual report, please call us at (800) 572-FUND [3863], option 3.
Corporate Headquarters:
The Montgomery Funds
101 California Street
- ---------------------------
(800) 572-FUND [3863]
www.montgomeryfunds.com
- ---------------------------
San Francisco, CA 94111-9361
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/99
77
<PAGE>
-------------------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY U.S. ASSET ALLOCATION FUND
AND
VARIOUS SERIES OF THE MONTGOMERY FUNDS
-------------------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 1999
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
Small Cap Fund
Equity Income Fund
International & Global Equity Funds
International Growth Fund
International Small Cap Fund*
Emerging Markets Fund
Multi-Strategy Funds
Select 50 Fund
U.S. Asset Allocation Fund
U.S. Fixed-Income & Money Market Funds
Short Duration Government Bond Fund
Government Money Market Fund
California Tax-Free Intermediate Bond 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 or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
* closed to new investors
<PAGE>
- --------------------
How to Contact Us
- --------------------
[Sidebar]
Montgomery Shareholder
Service Representatives
(800) 572-FUND [3863]
Available 6 A.M. to 5 P.M.
pacific time
Montgomery Web Site
www.montgomeryasset.com
Address General
Correspondence to:
The Montgomery Funds
101 California Street
San Francisco, CA
94111-9361
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
]
U.S. Equity Funds
Montgomery Growth Fund..................................................
Montgomery Small Cap Fund...............................................
Montgomery Equity Income Fund...........................................
International and Global Equity Funds
Montgomery International Growth Fund....................................
Montgomery International Small Cap Fund (closed to new investors).......
Montgomery Emerging Markets Fund........................................
Multi-Strategy Funds
Montgomery Select 50 Fund...............................................
Montgomery U.S. Asset Allocation Fund...................................
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund..........................
Montgomery Government Money Market Fund.................................
Montgomery California Tax-Free Intermediate Bond Fund...................
Portfolio Management.........................................................
Additional Investment Strategies and Related Risks...........................
The Euro: Single European Currency......................................
Defensive Investments...................................................
Portfolio Turnover......................................................
The Year 2000...........................................................
Additional Benchmark Information........................................
Financial Highlights.........................................................
Account Information..........................................................
Becoming a Montgomery Shareholder.......................................
How Fund Shares Are Priced..............................................
2
<PAGE>
Buying Additional Shares................................................
Exchanging Shares.......................................................
Selling Shares..........................................................
Other Policies..........................................................
Tax Information.........................................................
After You Invest........................................................
This prospectus contains important information about the investment objectives,
strategies and risks of 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)
You should also know that you could lose money by investing in the Funds.
This prospectus describes only the Funds' Class P shares, which are sold only
through financial intermediaries and financial professionals. The Montgomery
Funds offer other classes of shares with different fees and expenses to eligible
investors.
3
<PAGE>
U.S. EQUITY FUNDS
Growth Fund | MNGFX
Objective
[ ] Seeks long-term capital appreciation by investing in growth-oriented U.S.
companies
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 all prospective holdings by subjecting them to the
following three steps of their investment process:
> Identify companies with improving business fundamentals
> Conduct in-depth analysis of each company's current business and future
prospects
> Analyze each company's price to determine whether its growth prospects have
been discovered by the market
When the Fund's portfolio managers think that market conditions are not
favorable or when they are unable to locate attractive investments, they may
(but are not required to) temporarily increase the Fund's cash position. Larger
cash positions can be a defensive measure in adverse market conditions. Should
the market advance, however, the Fund may not participate as much as it might
have if more of its assets were invested in stocks.
Principal 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 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 bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------ ------------
23.16% 2.02%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (16.97%) and the worst quarter was Q3 1998 (-19.32%).
Growth Fund 2.02% 15.11%
S&P 500 Index 28.58% 28.23%+
- ----------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/12/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 7.18% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.95%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.43%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.63%
<FN>
*$10 will be deducted from redemption proceeds sent by wire or overnight
courier.
</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
- ------------------------------------------------------
$165 $513 $884 $1,925
[clipart] [sidebar]
Portfolio Management
Roger Honour
Kathryn Peters
For more details see page __
For financial highlights
see page ___
5
<PAGE>
Small Cap Fund | MNSCX
Objective
[ ] Seeks long-term capital appreciation by investing in rapidly growing U.S.
small-cap companies
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 at the time of purchase.
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
Principal 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 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 bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- -------------- -----------
23.27% -8.19%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (28.94%) and the worst quarter was Q3 1998 (-32.44%).
Small Cap Fund -8.19% 4.93%
Russell 2000 Index -2.55% 9.64%+
- -------------------------------------------------------------------------------
+ Calculated from 6/30/96 1 Year Inception
(7/1/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 5.77% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.25%
Other Expenses 0.32%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.57%
<FN>
*$10 will be deducted from redemption proceeds sent by wire or overnight
courier.
</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
- -----------------------------------------------------
$159 $495 $853 $1,860
[clipart][sidebar]
Portfolio Management
Stuart Roberts
Brad Kidwell
Cam Philpott
For more details see page ___
For financial highlights
see page ___
7
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 portfolio 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. 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.
Principal 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
25.94% 10.11%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (12.60%) and the worst quarter was Q3 1998 (-5.60%).
Equity Income Fund 10.11% 18.42%
S&P 500 Index 28.58% 28.17%+
- --------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -3.53% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.60%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.85%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.70%
Fee Reduction and/or Expense Reimbursement 0.60%
Net Expenses 1.10%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 0.85%. This contract has a rolling
10-year term.
</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
- -------------------------------------------------------
$112 $349 $605 $1,336
[clipart] [sidebar]
Portfolio Management
William King
For more details see page ___
For financial highlights
see page ___
9
<PAGE>
INTERNATIONAL &
GLOBAL EQUITY FUNDS
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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 purchase shares of companies that they consider
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.
Principal 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 securities in which the Fund invests are denominated in
foreign currencies, whose value may decline against the U.S. dollar.
10
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
9.84% 28.65%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (23.14%) and the worst quarter was Q3 1998 (-17.24%).
International Growth Fund 28.65% 20.14%
MSCI EAFE Index+ 20.00% 9.27%+
- ------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
+See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -2.44% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 1.10%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.64%
- ---------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.99%
Fee Reduction and/or Expense Reimbursement 0.08%
Net Expenses 1.91%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 1.65%. This contract has a 10-year
term.
</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
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
11
<PAGE>
International Small Cap Fund | MNISX
The Montgomery International Small Cap Fund is currently closed to new
investors.
Objective
[ ] Seeks long-term capital appreciation by investing in small-cap companies in
developed stock markets outside the United States
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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) profile consistent with the Salomon Smith Barney
World Extended Market Index excluding the United States. (This index had a
weighted average market capitalization of $2.3 billion and a median market
capitalization of $404 million on March 31, 1999.) The Fund typically invests
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.
The Fund's portfolio manager seeks well-managed, small-cap companies that he
believes will be able to increase 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 Funds 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.
Principal 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. Other risks of focusing on small foreign companies include limited or
inaccurate information; limited product lines, markets or financial resources;
and securities that 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. Most of the securities
in which the Fund invests are denominated in foreign currencies, whose value may
decline against the U.S. dollar.
12
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on the left below can give some indication
of the risks of investing in the Fund by allowing a comparison to market
performance. The table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1998
- -------------------
10.33%
During the one-year period described above in the bar chart, the Fund's best
quarter was Q1 1998 (19.64%) and the worst quarter was Q3 1998 (-16.52%).
International Small Cap Fund 10.33% -1.66%
Salomon Smith Barney World Extended
(ex-U.S.) Market Index++ 12.15% -0.79%+
- --------------------------------------------------------------------------------
+ Calculated from 5/31/97 1 Year Inception
(6/9/97)
++ This index contains approximately 3,000 small-capitalization equities in more
than 20 countries. See page __ for a description of this index.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -0.29% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 1.25%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 1.31%
- ----------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.81%
Fee Reduction and/or Expense Reimbursement 0.65%
Net Expenses 2.16%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 1.90%. This contract has a rolling
10-year term.
</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
- --------------------------------------------------------
$218 $674 $1,156 $2,481
[clipart][sidebar]
Portfolio Management
John Boich
For more details see page ___
For financial highlights
see page ___
13
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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. 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
> The 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. The Fund allocates its assets among emerging countries with stable or
improving macroeconomic environments and invests in companies within those
countries that the portfolio managers believe have high capital appreciation
potential without excessive risks. The portfolio managers strive to keep the
Fund well diversified across individual stocks, industries and countries to
reduce its overall risk.
Principal Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a decline in a holding's share price or an
overall decline in the 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 relative immaturity and occasional
instability. Some emerging markets restrict the flow of money into or out of
their stock markets and 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 based on only a few industries or on
revenue from particular commodities and international aid. Most of the
securities in which the Fund invests are denominated in foreign currencies,
whose value may decline against the U.S. dollar.
14
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
-3.83% -38.89%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q2 1997 (11.81%) and the worst quarter was Q3 1998 (-25.15%).
Emerging Markets Fund -38.89% -14.37%
IFC Global Index+ -21.09% -12.00%+
MSCI Emerging Markets Free Index++ -25.34% -13.46%+
- --------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
++The Fund was formerly compared to the IFC Global index, which comprises more
than 1,200 individual stocks from 33 developing countries. This change was
effected since the MSCI Emerging Markets Free Index, which is an unmanaged,
capitalization-weighted composite index covering the equity markets of 25
emerging markets countries, better represents the types of securities in which
the Fund may invest. See page __ for a more detailed description of these
indices.
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -19.77% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 1.16%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.99%
- ---------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.40%
Fee Reduction and/or Expense Reimbursement 0.10%
Net Expenses 2.30%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 1.90%. This contract has a rolling
10-year term.
</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
- -------------------------------------------------------
$232 $717 $1,227 $2,623
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
Frank Chiang
For more details see page ___
For financial highlights
see page ___
15
<PAGE>
MULTI-STRATEGY FUNDS
Select 50 Fund | MNSFX
Objective
[ ] Seeks long-term capital appreciation by investing in 10 companies from each
of five different investment disciplines, for a total of 50 securities
- --------------------------------------------------------------------------------
Principal 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. The strategy of each is as follows:
> The growth team invests in U.S. companies of any size, but usually invests
in those undervalued, growth-oriented companies whose shares have a market
capitalization of at least $1 billion
> The U.S. emerging growth team seeks to invest in well-managed small and
micro cap U.S. companies whose share prices appear to be undervalued
relative to their growth potential
> The equity income team seeks to provide a greater yield than the average
yield of Standard & Poor's 500 Composite Price Index stocks by investing in
dividend-paying stocks of large U.S. companies
> The international growth team seeks to invest in the common stocks of
growth-oriented, well-managed companies outside the United States whose
shares have a market capitalization of more than $1 billion
> The emerging markets team seeks to invest in the stocks of companies that
have high capital appreciation potential without excessive risks and are
based in the world's developing economies
For more 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.
Principal 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 Fund may vary more than those of mutual funds investing in a
greater number of securities.
In addition, the Fund invests in companies in emerging and developed foreign
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, many of the 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
16
<PAGE>
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.
17
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
27.53% 9.16%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (19.43%) and the worst quarter was Q3 1998 (-17.40%).
Select 50 Fund 9.16% 18.00%
S&P 500 Index 28.58% 28.31%+
- --------------------------------------------------------------------------------
+ Calculated from 11/30/96 1 Year Inception
(12/12/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 10.27% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 1.25%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.51%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.01%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
</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
- -------------------------------------------------------
$203 $629 $1,080 $2,327
[clipart][sidebar]
Portfolio Management
(Fund Oversight)
Portfolio managers from each equity team
For more details see page ___
For financial highlights
see page ___
18
<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
- --------------------------------------------------------------------------------
Principal 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. This Fund invests in U.S.
companies of any size, but usually invests in those undervalued,
growth-oriented companies whose shares have a market capitalization of at
least $1 billion
> Montgomery Total Return Bond Fund, for U.S. bond exposure. This Fund
invests in a broad range of investment-grade bonds, including U.S.
government securities, corporate bonds, mortgage-related securities,
asset-backed securities and money market securities
> Montgomery Government Money Market Fund, for cash exposure. This Fund
invests exclusively in short-term U.S. government securities
The Fund's strategy is to analyze various market factors, including relative
risk and return, using a proprietary computer program to help the portfolio
managers determine what they believe is an optimal asset allocation among
stocks, bonds and cash.
The Fund's total equity and bond exposure may each 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.
For details about the strategies of the Montgomery Growth Fund and the
Montgomery Government Money Market Fund, please see the respective sections in
this prospectus. The Total Return Bond Fund seeks maximum total return
consisting of both income and capital appreciation, by investing at least 65% of
its total assets in investment-grade bonds and money market securities.
The Fund's portfolio managers regularly adjust the proportion of assets allotted
to the underlying portfolios in response to changing market conditions.
Principal 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
which the Montgomery Growth Fund invests. 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. In addition, if
the managers do not accurately predict changing market conditions and other
economic factors, the Fund's assets might be allocated in a manner that is
disadvantageous.
19
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
18.68% 6.03%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q2 1997 (11.37%) and the worst quarter was Q3 1998 (-6.38%).
U.S. Asset Allocation Fund 6.03% 12.38%
S&P 500 Index 28.58% 28.23%+
Lehman Brothers Aggregate Bond Index 8.69% 7.29%+
- --------------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/2/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -4.37% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.00%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses
Top Fund Expenses 0.46%
Underlying Fund Expenses 1.25%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.96%
Fee Reduction and/or Expense Reimbursement 0.41%
Net Expenses 1.55%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++In addition to the 0.71% 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, 1999, was 1.96%,
calculated based on the Fund's total operating expense ratio (0.46%) plus a
weighted average of the expense ratios of its underlying Funds (1.25%) plus a
12b-1 fee of 0.25%. Montgomery 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 and 12b-1 fee) to 1.30% (including the
expenses of the underlying Funds). This contract has a rolling 10-year term.
</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
- -------------------------------------------------------
$157 $488 $843 $1,839
[clipart][sidebar]
Portfolio Management
Portfolio managers from
each underlying Fund
For more details see page ___
For financial highlights
see page __
20
<PAGE>
U.S. FIXED-INCOME &
MONEY MARKET FUNDS
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.
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, 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 effective 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.
Principal 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. A fund such as this one, which 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
stability of principal. The Montgomery Short Duration Government Bond Fund is
not a money market fund.
The Fund is also subject to prepayment risk. Prepayment risk is the risk that
debt will be prepaid in periods of declining interest rates, and the Fund will
not realize its expected income stream.
21
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
6.18% 7.48%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (1.38%) and the worst quarter was Q3 1997 (-0.33%).
Short Duration Gov't Bond Fund 7.48% 6.69%
Lehman Brothers Gov't Bond 1-3 Year Index 6.96% 6.44%+
- --------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: 1.81% Average Annual Returns Through 12/31/98
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.50%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 1.35%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.10%
Fee Reduction and/or Expense Reimbursement 0.50%
Net Expenses 1.60%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 0.70%. This contract has a rolling
10-year term. Total expenses including interest and taxes were 1.60%, however,
net expenses, excluding interest and taxes, actually paid by shareholders
because of additional voluntary reductions by the Manager were 0.87%.
</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
- -------------------------------------------------------
$162 $504 $869 $1,893
[clipart] [sidebar]
Portfolio Management
William Stevens
Marie Chandoha
For more details see page ___
For financial highlights
see page ___
22
<PAGE>
Government Money Market 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
- --------------------------------------------------------------------------------
Principal 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 or "Fannie Mae") and
Student Loan Marketing Association (SLMA or "Sallie Mae"), in repurchase
agreements for U.S. government securities and in 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.
The Fund invests in compliance with industry-standard requirements for money
market funds for the quality, maturity and diversification of investments.
Principal 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 Money Market Fund is
neither insured nor guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or any other government agency.
*Formerly named the Montgomery Government Reserve Fund.
23
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1997 1998
- ------------------- -----------------
4.89% 4.87%
During two-year period described above in the bar chart, the Fund's best quarter
was Q4 1997 (1.24%) and the worst quarters were Q4 1998 (1.12%).
Gov't Money Market Fund 4.87% 4.87%
Lipper U.S. Gov't Money Market Funds Average 4.89% 4.29%+
- --------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
Average Annual Returns Through 12/31/98
1999 Return Through 9/30/99: 3.29% Seven-Day Yield as of 9/30/99: 5.13%
Call (800) 572-FUND [3863] between 6 A.M. and 5 P.M.
pacific time for the current yield.
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.30%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.20%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.75%
<FN>
*$10 will be deducted from redemption proceeds sent by wire or overnight
courier.
</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
- -------------------------------------------------------
$76 $239 $416 $928
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
24
<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
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, the Fund invests at least 80% of its net assets in
intermediate-term, high-quality California municipal bonds, the interest from
which is exempt from federal and California personal income taxes and the
alternative minimum tax (AMT). 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 bonds.
The Fund may purchase bonds of any maturity, but generally the portfolio's
average dollar-weighted maturity ranges from five to 10 years. The Fund's
portfolio manager invests in 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, the portfolio manager strives to diversify the
portfolio across sectors and issuers within that market. The portfolio managers
have historically invested more of the Fund's assets in better quality
investment-grade securities than lower quality investment-grade securities.
Principal 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 market price usually increases. A
fund such as this one, which invests most of its assets in bonds, will behave in
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.
25
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on the left below shows the risks of
investing in another class of shares of the Fund, which included the same
portfolio but was not subject to the Class P Rule 12b-1 fee and how the total
return of that class of shares of the Fund has varied from year to year. The
table on the right compares the performance of that class of shares of the Fund
with a commonly used index for its market segment. Of course, past performance
is no guarantee of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
0.05% 11.41% 4.51% 7.50% 6.06%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+3.59%) and the worst quarter was Q1 1994 (-1.43%).
<TABLE>
<S> <C> <C> <C>
CA Tax-Free Intermediate Bond Fund (Class R Shares) 6.06% 5.84% 5.74%
Merrill Lynch CA Municipal Intermediate Municipal Bond Index 6.31% 4.99% 5.02%+
- ------------------------------------------------------------------------------------------------------------------------
+Calculated from 6/30/93 1 Year 5 Years Inception
(7/1/93++)
</TABLE>
- --------------------------------------------------------------------------------
1999 Return Through 9/30/99: -0.45% Average Annual Returns Through 12/31/98
++Represents the inception date of another class of shares of the Fund not
subject to the Class P Rule 12b-1 fee.
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<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 0.50%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses# 0.44%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.19%
Fee Reduction and/or Expense Reimbursement 0.24%
Net Expenses 0.95%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++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 and 12b-1 fee) to 0.70%. This contract has a rolling
10-year term.
# Based on actual other expenses of another class of shares of the Fund not
subject to the Class P Rule 12b-1 fee.
</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
- -------------------------------------------------------
$97 $302 $524 $1,163
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
26
<PAGE>
PORTFOLIO MANAGEMENT
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
September 30, 1999, Montgomery Asset Management managed approximately $3.9
billion on behalf of some 200,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, senior portfolio manager for the Montgomery Growth Fund
(since 1993). Prior to joining Montgomery in 1993 as a senior portfolio manager
and managing director, 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.
[photo] BRADFORD KIDWELL, portfolio manager for the Montgomery Small Cap Fund
(since 1991). Prior to joining Montgomery in 1991 as a portfolio manager, Mr.
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 for the Montgomery Equity
Income Fund (since 1994). Before joining Montgomery in 1994 as a portfolio
manager, 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.
[photo] KATHRYN PETERS, portfolio manager for the Montgomery Growth Fund (since
1995). Ms. Peters joined Montgomery in 1995 as a portfolio manager. 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 for the Montgomery Small
Cap Fund (since 1991). Before joining Montgomery in 1991 as a portfolio manager,
Mr. Philpott was a securities analyst with Boettcher & Company in Denver. Prior
to that he was a securities analyst at Berger Associates Incorporated.
[photo] STUART ROBERTS, senior portfolio manager for the Montgomery Small Cap
Fund (since 1990). Mr. Roberts has specialized in small-cap investing since
1983. Prior to joining Montgomery in 1990 as a senior portfolio manager and
managing director, 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 for the Montgomery
International Growth (since 1995) and International Small Cap Funds (since
1993). Mr. Boich joined Montgomery in 1993 as a senior portfolio manager and
managing director. 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.
[photo] OSCAR CASTRO, CFA, senior portfolio manager for the Montgomery
International Growth Fund (since 1995). Mr. Castro joined Montgomery in 1993 as
a senior portfolio manager and managing director. 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.
27
<PAGE>
[photo] FRANK CHIANG, portfolio manager for the Montgomery Emerging Markets Fund
(since 1996). Before joining Montgomery in 1996 as a portfolio manager, Mr.
Chiang 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] ANGELINE EE, portfolio manager with Montgomery's International/Global
team (since 1994). Prior to joining Montgomery as a portfolio manager, Ms. Ee
was a portfolio manager with AIGIC Investment Corp. in Singapore. From 1989
until 1990, she was a co-manager of a portfolio of Asian equities and bonds at
Chase Manhattan Bank in Singapore.
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager for the Montgomery
Emerging Markets Fund (since 1992). Before joining Montgomery in 1991 as a
senior portfolio manager and managing director, Ms. Jimenez worked at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C., as a
senior analyst and portfolio manager. 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] NANCY KUKACKA, portfolio manager with Montgomery's International/Global
team (since 1995). Before joining Montgomery as a portfolio manager, Ms. Kukacka
worked at CS First Boston Investment from 1994 through 1995, where she was an
investment analyst covering consumer cyclical and non-durable sectors.
Previously, she was an investment analyst at RCM Capital Management from 1990
through 1994, providing fundamental-based analysis for more than $12 billion in
equity investments.
Multi-Strategy Funds
SELECT 50 FUND. The portfolio managers listed previously for the U.S. Equity
Funds and the International and Global Equity Funds are the key members of the
five portfolio management teams responsible for managing the Select 50 Fund.
(See information above about Mr. Honour, Mr. Kidwell, Mr. King, Mr. Philpott,
Mr. Roberts, Mr. Boich, Mr. Castro, Mr. Chiang, Ms. Ee, Ms. Jimenez, and Ms.
Kukacka.)
U.S. ASSET ALLOCATION FUND. The portfolio managers listed previously for the
U.S. Equity Funds and below for the U.S. Fixed-Income and Money Market Funds
allocate assets among the underlying Funds for the U.S. Asset Allocation Fund.
Information about the portfolio managers for the underlying Funds, which
currently include the Growth, Total Return Bond and Government Money Market
Funds, is provided previously under U.S. Equity Funds and below under U.S.
Fixed-Income and Money Market Funds. (See information above and below Mr.
Honour, Mr. Kidwell, Mr. King. Ms. Peters, Mr. Philpott, Mr. Roberts, Ms.
Chandoha, and Mr. Stevens.)
U.S. Fixed-Income and Money Market Funds
[photo] MARIE CHANDOHA, portfolio manager for the Montgomery Total Return Bond
and Short Duration Government Bond Funds (since 1999). Prior to joining
Montgomery in 1999 as a portfolio manager, Ms. Chandoha worked at Goldman Sachs
& Co., where she advised institutional clients on optimal asset allocation
strategies in the U.S. bond market. From 1994 to 1996, she held positions as a
managing director of global fixed-income and economics research at Credit Suisse
First Boston. Prior to that she was a research analyst in mortgage securities at
Morgan Stanley, and an economist at the Federal Reserve Bank of New York.
[photo] WILLIAM STEVENS, senior portfolio manager for the Montgomery
Fixed-Income Funds (since 1992). Prior to joining Montgomery in 1992 as a senior
portfolio manager and managing director, 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, he traded stripped
mortgage securities and mortgage-related interest rate swaps for the First
Boston Company.
28
<PAGE>
Management Fees and Operating Expense Limits
<TABLE>
The table below shows the management fee rate actually paid to Montgomery Asset
Management over the past fiscal year and the contractual limits on total
operating expenses for each Fund. The management fee amounts may vary from year
to year, depending on actual expenses. Actual fee rates may be greater than
contractual rates to the extent Montgomery recouped previously deferred fees
during the fiscal year.
<CAPTION>
MANAGEMENT LOWER OF TOTAL OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
<S> <C> <C>
U.S. Equity Funds
Montgomery Growth Fund 0.95% 1.60%
Montgomery Small Cap Fund 1.00% 1.57%
Montgomery Equity Income Fund 0.24% 1.10%
International and Global Equity Funds
Montgomery International Growth Fund 1.12% 1.90%
Montgomery International Small Cap Fund* 1.21% 2.15%
Montgomery Emerging Markets Fund 1.06% 2.15%
Multi-Strategy Funds
Montgomery Select 50 Fund 1.25% 1.98%
Montgomery U.S. Asset Allocation Fund 0.00% 1.55%
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund 0.29% 0.87%
Montgomery Government Money Market Fund 0.30% 0.75%
Montgomery California Tax-Free Intermediate Bond Fund 0.38% 0.70%
<FN>
* closed to new investors
</FN>
</TABLE>
29
<PAGE>
Additional Investment Strategies and Related Risks
The Euro: Single European Currency
Investors in the International and Global Equity Funds and in the Multi-Strategy
Funds should note the following: On January 1, 1999, the European Union (EU)
introduced a single European currency called the euro. Eleven of the fifteen EU
members have begun to convert their currencies to the euro: Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal
and Spain (leaving out Britain, Denmark, Greece and Sweden). For the first three
years, the euro will be a phantom currency (only an accounting entry). Euro
notes and coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
> Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
> The applicable conversion rate for contracts stated in the national
currency of an EU member
> The ability of clearing and settlement systems to process transactions
reliably
> The effects of the euro on European financial and commercial markets
> The effect of new legislation and regulations to address euro-related
issues
These and other factors could cause market disruptions and affect the value of
your shares in a Fund that invests in companies conducting business in Europe.
Montgomery and its key service providers have taken steps to address
euro-related issues, but there can be no assurance that these efforts will be
sufficient.
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. No Fund is
required or expected to take such a defensive posture. But if used, such an
unlikely 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.
Portfolio Turnover
The Funds' 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 through a tax-deferred account, the distribution of capital gains may
affect 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: International Growth, International Small Cap,
Select 50, and U.S. Asset Allocation. See "Financial Highlights," beginning on
page ___, for each Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many
30
<PAGE>
computer applications and systems may misinterpret dates occurring after
December 31, 1999, leading to errors or failure. This failure could adversely
affect a Fund's operations, including pricing, securities trading and the
servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We have completed tests
on our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Funds' operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
Despite Montgomery's efforts and contingency plans, however, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
prices of securities the Fund owns. Issuers in countries outside of the United
States, particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as required in the United States.
The Manager, of course, cannot audit any company and its major suppliers to
verify their Year 2000 readiness. Montgomery understands that many foreign
countries and companies are well behind their U.S.
counterparts in preparing for 2000.
Additional Benchmark Information
The International Finance Corporation (IFC) Global Composite Index comprises
more than 1,200 individual stocks from 33 developing countries in Asia, Latin
America, the Middle East, Africa and Europe.
The MSCI Emerging Markets Free Index is an unmanaged, capitalization-weighted
composite index that covers individual securities within the equity markets of
approximately 25 emerging markets countries.
The Morgan Stanley Capital International (MSCI) Europe, Australasia and Far East
(EAFE) Index, a capitalization-weighted index, is composed of 21 developed
market countries in Europe, Australasia and the Far East. The returns are
presented net of dividend withholding taxes.
The Salomon Smith Barney World Extended Market Index comprises the
small-capitalization equities of each country in the Salomon Smith Barney Broad
Market Index. The index contains approximately 3,000 issues in more than 20
countries, is calculated gross of withholding taxes and is capitalization
weighted.
31
<PAGE>
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Funds'
performance for the periods shown.
The following selected per-share data and ratios for the periods ended June 30,
1999 and June 30, 1998 were audited by PricewaterhouseCoopers LLP.
Their August 18, 1999 and August 14, 1998 reports appear in the 1999 and 1998
Annual Reports of the Funds. Information for the periods ended June 30, 1991
through June 30, 1997 was audited by other independent accountants, whose report
is not included here.
The financial information for periods indicated with the note "R" relates to
another class of shares of the California Tax-Free Intermediate Bond Fund not
subject to the Class P Rule 12b-1 fees.
<TABLE>
The total return figures in the tables represent the rate an investor would have
earned (or lost) on an investment in the relevant Fund (assuming reinvestment of
all dividends and distributions).
<CAPTION>
[table]
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
Growth Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999## 1998## 1997## 1996(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of year $ 23.77 $ 23.12 $ 21.94 $ 19.22
Net investment income/(loss) 0.04 0.11 0.09 0.03
Net realized and unrealized gain/(loss)
on investments 2.31 3.55 3.96 2.69
Net increase/(decrease) in net assets
resulting from investment operations 2.35 3.66 4.05 2.72
Distributions:
Dividends from net investment income (0.04) (0.09) (0.10) --
Distribution from net realized capital gains (1.57) (2.92) (2.77) --
Distribution in excess of net realized capital gains -- -- -- --
Total distributions (1.61) (3.01) (2.87) --
Net asset value--end of year $ 24.51 $ 23.77 $ 23.12 $ 21.94
====================================================================================================================================
Total return** 11.62% 17.09% 20.41% 14.15%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 219 $ 198 $ 212 $ 82
Ratio of net investment income/(loss) to average net assets 0.21% 0.46% 0.44% 0.53%+
Net investment income/(loss) before deferral of fees by Manager $ 0.04 $ 0.11 -- --
Portfolio turnover rate 39% 54% 61% 118%
Expense ratio before deferral of fees by
Manager including interest and tax expenses 1.63% 1.45% -- --
Expense ratio including interest and tax expenses 1.63% 1.45% 1.52% 1.60%+
Expense ratio excluding interest and tax expenses 1.60% 1.44% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class P shares commenced operations on January 12, 1996.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
Small Cap Fund Equity Income Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED JUNE 30: 1999## 1998## 1997(b) 1999 1998 1997## 1996(c)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 20.53 $ 19.48 $ 21.73 $ 18.25 $ 17.90 $ 16.09 $ 15.66
Net investment income/(loss) (0.21) (0.20) (0.10) 0.26 0.38 0.44 0.08
Net realized and unrealized gain/(loss)
on investments (1.20) 4.22 1.13 2.31 2.27 3.35 0.35
Net increase/(decrease) in net assets
resulting from investment operations (1.41) 4.02 1.03 2.57 2.65 3.79 0.43
Distributions:
Dividends from net investment income -- -- -- (0.27) (0.39) (0.42) --
Distributions from net realized capital gains (2.07) (2.97) (3.28) (1.54) (1.91) (1.56) --
Distributions in excess of net realized
capital gains (0.70) -- -- -- -- -- --
Total distributions (2.77) (2.97) (3.28) (1.81) (2.30) (1.98) --
Net asset value--end of year $ 16.35 $ 20.53 $ 19.48 $ 19.01 $ 18.25 $ 17.90 $ 16.09
====================================================================================================================================
Total return** (4.39)% 22.44% 5.74% 14.74% 15.49% 25.64% 2.75%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 20,606 $ 21,548 $ 6,656 $ 3,212 $ 2,719 $ 868 $ 2
Ratio of net investment income/(loss) to
average net assets (1.35)% (0.95)% (1.03)%+ 1.46% 2.07% 2.68% 2.78+
Net investment income/(loss) before deferral
of fees by Manager $ (0.21) $ (0.20) -- $ 0.15 $ 0.28 $ 0.34 $ 0.06
Portfolio turnover rate 71% 69% 59% 57% 68% 62% 90%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.57% 1.49% 1.45+ 1.70% 1.63% 1.71% 1.70%+
Expense ratio including interest and tax
expenses 1.57% 1.49% -- 1.10% 1.11% -- --
Expense ratio excluding interest and tax
expenses 1.57% 1.49% -- 1.10% 1.10% 1.11% 1.10%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(b) The Small Cap Fund's Class P shares commenced operations on July 1, 1996.
(c) The Equity Income Fund's Class P shares commenced operations on March 12,
1996.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
International and Global Equity Fund
International Growth Fund International Small Cap Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED JUNE 30: 1999 1998## 1997## 1996 (d) 1999## 1998## 1997 (e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 18.64 $ 16.22 $ 15.31 $ 13.66 $ 15.13 $ 17.16 $ 16.96
Net investment income/(loss) 0.12 (0.01) 0.05 0.00# (0.02)++ (0.05) 0.00#
Net realized and unrealized gain/(loss) on
investments 0.26 3.50 2.54 1.65 (0.69) 0.30 0.20
Net increase/(decrease) in net assets resulting
from investment operations 0.38 3.49 2.59 1.65 (0.71) 0.25 0.20
Distributions:
Dividends from net investment income -- -- -- -- -- -- --
Distributions in excess of net investment
income -- 0.00# -- -- -- (0.09) --
Distributions from net realized capital gains (0.10) (1.07) (1.68) -- -- (2.19) --
Distributions in excess of net realized
capital gains -- -- -- -- -- -- --
Total distributions (0.10) (1.07) (1.68) -- -- (2.28) --
Net asset value--end of year $ 18.92 $ 18.64 $ 16.22 $ 15.31 $ 14.42 $ 15.13 $ 17.16
====================================================================================================================================
Total return** 2.18% 23.03% 19.13% 12.08% (4.03)% 4.13% 1.18%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 2,352 $ 5 $ 5 $ 1 $ 3 $ 5 $ 15
Ratio of net investment income/(loss) to
average net assets 0.16% (0.03)% 0.32% 0.01%+ (0.18)% (0.28)% (0.59)%+
Net investment income/(loss) before deferral of
fees by Manager $ 0.12 $ (0.08) $ (0.06) $ (0.05) $ (0.03) $ (0.16) $ (0.01)
Portfolio turnover rate 150% 127% 95% 239% 117% 111% 85%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.99% 2.38% 2.62% 3.16%+ 2.81% 2.78% 2.85%+
Expense ratio including interest and tax expense 1.91% 1.91% -- -- 2.16% 2.17% --
Expense ratio excluding interest and tax expense 1.90% 1.90% 1.91% 1.90%+ 2.15% 2.15% 2.15%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(d) The International Growth Fund's Class P shares commenced operations on
March 11, 1996.
(e) The International Small Cap Fund's Class P shares commenced operations on
June 9, 1997.
** 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
results of operations.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
Emerging Markets Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997 1996(f)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of year $ 9.74 $ 16.77 $ 14.19 $ 12.62
Net investment income/(loss) 0.00# 0.03 0.06 0.01
Net realized and unrealized gain/(loss) on investments 0.31 (6.61) 2.58 1.56
Net increase/(decrease) in net assets
resulting from investment operations 0.31 (6.58) 2.64 1.57
Distributions:
Dividends from net investment income -- (0.12) (0.06) --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- (0.33) -- --
Distributions in excess of net realized capital gains -- -- -- --
Total distributions -- (0.45) (0.06) --
Net asset value--end of year $ 10.05 $ 9.74 $ 16.77 $ 14.19
====================================================================================================================================
Total return** 3.08 % (39.75)% 18.62% 12.44%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 520 $ 413 $ 607 $ 2
Ratio of net investment income/(loss) to average net assets (0.24)% 0.30% 0.23% 0.33%+
Net investment income/(loss) before deferral of fees by Manager $ 0.01 $ 0.03 -- --
Portfolio turnover rate 86% 97% 83% 110%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.40% 1.90% -- --
Expense ratio including interest and tax expenses 2.30% 1.90% -- --
Expense ratio excluding interest and tax expenses 2.15% 1.85% 1.92% 1.97%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(f) The Emerging Markets Fund's Class P shares commenced operations on March
12, 1996.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
Select 50 Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999## 1998## 1997(g)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value--beginning of year $ 20.68 $ 19.98 $ 15.89
Net investment income/(loss) (0.14) 0.09 (0.02)
Net realized and unrealized gain/(loss) on investments 2.64 2.46 4.11
Net increase/(decrease) in net assets
resulting from investment operations 2.50 2.55 4.09
Distributions:
Dividends from net investment income (0.21) -- --
Distributions in excess of net investment income (0.09) -- --
Distributions from net realized capital gains (1.05) (1.85) --
Distributions in excess of net realized capital gains -- -- --
Distributions from capital -- -- --
Total distributions (1.35) (1.85) --
Net asset value--end of year $ 21.83 $ 20.68 $ 19.98
====================================================================================================================================
Total return** 13.46% 14.12% 25.74%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 55 $ 52 $ 9
Ratio of net investment income/(loss) to average net assets (0.72)% 0.34% (0.21)%+
Net investment income/(loss) before deferral of fees by Manager $ (0.14) $ 0.09 $ (0.03)
Portfolio turnover rate 115% 151% 158%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.01% 2.06% 2.17%+
Expense ratio including interest and tax expenses 2.01% 2.06% --
Expense ratio excluding interest and tax expenses 1.98% 2.05% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(g) The Select 50 Fund's Class P shares commenced operations on December 12,
1996.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
U.S. Asset Allocation Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999## 1998++ 1997## 1995(h)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of year $ 19.11 $ 19.89 $ 19.33 $ 17.86
Net investment income/(loss) 0.44 1.62 0.43 0.09
Net realized and unrealized gain/(loss) on investments 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets resulting from
investment operations 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income (0.89) (0.84) (0.34) --
Distributions in excess of net investment income -- (0.74) -- --
Distributions from net realized capital gains (1.68) (1.83) (1.66) --
Distributions in excess of net realized capital gains (1.41) -- -- --
Total distributions (3.98) (3.41) (2.00) --
Net asset value--end of year $ 16.74 $ 19.11 $ 19.89 $ 19.33
====================================================================================================================================
Total return** 11.15% 14.53% 14.35% 8.23%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 56 $ 71 $ 74 $ 43
Ratio of net investment income/(loss) to average
net assets 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before deferral
of fees by Manager $ 0.41 $ 1.59 $ 0.42 $ 0.08
Portfolio turnover rate 36% 84% 169% 226%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.71% 0.56% 1.74% 1.80%+
Expense ratio including interest and tax expenses 0.50% 0.51% 1.68% 1.67%+
Expense ratio excluding interest and tax expenses 0.50% 0.50% 1.56% 1.55%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(f) The U.S. Asset Allocation Fund's Class P shares commenced operations on
January 3, 1996.
++ The Fund converted to a fund of funds structure effective July 1, 1998.
Expense ratios prior to that date do not reflect expenses borne indirectly.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
Short Duration Government
Bond Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997## 1996(i)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of year $ 10.15 $ 9.99 $ 9.92 $ 9.98
Net investment income/(loss) 0.41 0.61 0.59 0.16
Net realized and unrealized gain/(loss)
on investments (0.06) 0.12 0.06 (0.05)
Net increase/(decrease) in net assets
resulting from investment operations 0.35 0.73 0.65 0.11
Distributions:
Dividends from net investment income (0.41) (0.57) (0.58) (0.17)
Distributions in excess of net investment income (0.01) -- (0.00)# --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital
gains (0.05) -- -- --
Distributions from capital -- -- -- --
Total distributions (0.47) (0.57) (0.58) (0.17)
Net asset value--end of year $ 10.03 $ 10.15 $ 9.99 $ 9.92
====================================================================================================================================
Total return** 4.47% 7.34% 6.69% 1.12%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 3,887 $ 3 $ 0 $ 1
Ratio of net investment income/(loss) to average
net assets 4.96% 5.58% 5.62% 5.63%+
Net investment income/(loss) before deferral of fees by Manager $ 0.37 $ 0.55 $ 0.54 $ 0.14
Portfolio turnover rate 199% 502% 451% 350%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.10% 1.98% 2.30% 2.56%+
Expense ratio including interest and tax expenses 1.60% 1.40% 1.80% 1.80%+
Expense ratio excluding interest and tax expenses 0.87% 0.53% 0.85% 0.85%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(f) The Short Duration Government Bond Fund's Class P shares commenced
operations on March 11, 1996.
# Amount represents less than $0.01 per share.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
Government Money Market Fund
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997 1995(j)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income/(loss) 0.045 0.049 0.048 0.014
Net realized and unrealized gain/(loss)
on investments 0.000ss. 0.000ss. 0.000ss. 0.000ss.
Net increase/(decrease) in net assets resulting
from investment operations 0.045 0.049 0.048 0.014
Distributions:
Dividends from net investment income (0.045) (0.049) (0.048) (0.014)
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
Total distributions $ (0.045) (0.049) (0.048) (0.014)
Net asset value--end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================================
Total return** 4.54% 5.00% 4.88% 1.38%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 1 -- -- $ 1
Ratio of net investment income/(loss) to average net assets 4.52% 4.90% 4.68% 4.91%+
Net investment income/(loss) before deferral of fees by Manager $ 0.045 $ 0.049 $ 0.048 $ 0.013
Portfolio turnover rate -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.75% 0.73% 0.87% 0.99%+
Expense ratio including interest and tax expenses 0.75% 0.78% -- --
Expense ratio excluding interest and tax expenses 0.75% 0.78% 0.85% 0.85%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(f) The Government Money Bond Fund's Class P shares commenced operations on
March 11, 1996.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
ss. Amount represents less than $0.001 per share.
</FN>
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
SELECTED PER-SHARE DATA FOR THE YEAR California Tax-Free Intermediate Bond Fund
OR PERIOD ENDED JUNE 30: 1999(R) 1998(R) 1997(R) 1996(R) 1995(R)(k)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 12.86 $ 12.53 $ 12.23 $ 12.04 $ 11.79
Net investment income 0.49 0.51 0.53 0.54 0.44
Net realized and unrealized gain/(loss)
on investments (0.16) 0.33 0.30 0.19 0.25
Net increase/(decrease) in net
assets resulting from investment
operations 0.33 0.84 0.83 0.73 0.69
Distributions:
Dividends from net investment income (0.46) (0.51) (0.53) (0.54) (0.44)
Distributions in excess of net investment income (0.03) -- -- -- (0.00)#
Distributions from net realized capital gains (0.03) -- -- -- --
Dividends in excess of net realized capital gains (0.00)#
Total distributions (0.52) (0.51) (0.53) (0.54) (0.44)
Net asset value--end of year $ 12.67 $ 12.86 $ 12.53 $ 12.23 $ 12.04
====================================================================================================================================
Total return** 2.71% 6.85% 6.91% 6.11% 6.03%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $ 41,017 $ 35,667 $ 21,681 $ 13,948 $ 5,153
Ratio of net investment income to average net assets 3.93% 4.03% 4.27% 4.34% 3.71%
Net investment income/(loss) before deferral
of fees by Manager $ 0.48 $ 0.44 $ 0.47 $ 0.43 $ 0.34
Portfolio turnover rate 184% 42% 26% 58% 38%
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 1.19% 1.19% 1.18% 1.43% 1.41%
Expense ratio including interest and tax expenses 0.69% 0.69% 0.68% 0.61% 0.56%
Expense ratio excluding interest and tax expenses 0.69% 0.68% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(k) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
** Total return represents aggregate total for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
40
<PAGE>
<TABLE>
[table]
Investment Options
The Funds' shares are offered only through financial intermediaries and financial professionals. To open a new account, complete and
mail the New Account application included with this prospectus.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Trade requests received after 1:00 P.M. pacific time (4:00 P.M. Once an account is established, you can:
eastern time) will be executed at the following business day's
closing price. Once a trade is placed it may not be altered or [ ] Buy, sell or exchange shares by phone.
canceled. Contact The Montgomery Funds at 800.572.FUND
[3863]. Press (1) for a shareholder service
Checks should be made payable to: The Montgomery Funds. representative. Press (2) for the automated
Montgomery Star System.
The minimum initial investment for each fund is $1,000. The
minimum subsequent investment is $100. The Montgomery [ ] Buy or sell shares by mail
International Small Cap Fund is closed to new investors. Mail buy/sell order(s) with your check:
By regular mail:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
By express or overnight service:
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1614
[ ] 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]
</TABLE>
41
<PAGE>
ACCOUNT INFORMATION
What You Need to Know About Your Montgomery Account
The Funds' shares are offered for sale only by Funds Distributor, Inc.
(Distributor) and through selected securities brokers and dealers. You pay no
sales charges to invest in The Montgomery Funds. The minimum initial investment
for each Fund is $1,000. The minimum subsequent investment is $100. Under
certain conditions we or the Distributor may waive these minimums. If you buy
shares through a broker or investment advisor instead of directly from the
Distributor, 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, the Funds and the Distributor each reserve the right to
reject all or part of 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 (see right column). 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.
[ ] 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 that 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 any of your accounts if we do not receive payment within
that time.
[sidebar]
Getting Started
42
<PAGE>
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
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
Foreign Investors:
Foreign citizens and resident aliens of the
United States living abroad may not invest
in The Montgomery Funds
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 net value of its assets by the number of outstanding shares.
We base the value of the Funds' 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 affecting the price of those securities may happen after the
foreign markets in which such securities trade have closed, but before the Fund
calculates its NAV. In this case, Montgomery, subject to the supervision of the
Fund's Board of Trustees or Pricing Committee, 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.
We calculate the NAV of each Montgomery Fund (other than the Money market
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 4:00 P.M. on weekdays,
except for holidays. If your order is received after the NYSE has closed, your
shares will be priced at the next NAV we determine after receipt of your order.
More details about how we calculate the Funds' NAV are in the Statement of
Additional Information.
[ ] Money Market Fund. The price of the Government Money Market Fund is
determined at 12 noon eastern time 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. Also, only those orders
received by 12 noon will be eligible to accrue any dividend paid for the day of
investment.
[ ] 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.
43
<PAGE>
[ ] 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.
[sidebar]
TRADING TIMES
Whether buying, exchanging or selling shares, transaction
requests received after 1:00 P.M. pacific time (4:00 P.M.
eastern time) will be executed at the next business day's
closing price.
44
<PAGE>
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.
[ ] 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.
Telephone purchases can be made for up to five times your account value as of
the previous day.
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" on page ___.
[ ] By Wire There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" on page ___.
Exchanging Shares
You may exchange Class P shares in one Fund for Class P shares in another, in
accounts with the same registration, Taxpayer Identification number and address.
There is a $100 minimum to exchange into a Fund you currently own and a $1,000
minimum for investing in a new Fund. Note that an exchange is treated as a sale
and may result in a realized gain or loss for tax purposes. You may exchange
shares by phone at (800) 572-FUND [3863].
Other Exchange Policies
[ ] 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
Fixed-Income and Money Market Funds are exempt from this restriction.
[ ] 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.
[ ] Any redemption fees will apply to exchanges or redemptions out of a Fund.
45
<PAGE>
Selling Shares
You may sell some or all of your fund shares on days that the NYSE is open for
trading (except bank holidays for the Fixed-Income and Money Market Funds). Note
that a redemption is treated as a sale and may result in a realized gain or loss
for tax purposes.
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. Shares
purchased by check will be priced upon receipt of your order but proceeds may
not be paid until your checks clears, which may take up to 15 days after the
purchase date. Within this 15-day period, you may choose to exchange into the
Government Money Market Fund.
Aside from any applicable redemption fees, we generally will not charge you
any fees when you sell your shares, although there are some minor exceptions:
> For sharers sold by wire, a $10 wire transfer fee will be deducted directly
from their proceeds.
> For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the 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
name of 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 in 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 National Association of Securities Dealers (NASD) member firms.
If you want to wire your redemption proceeds but do not have a
predesignated bank account, include a preprinted, voided check or deposit slip.
If you do not have a preprinted check, please send a signature-guaranteed letter
along with your bank instructions. 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.
[sidebar]
Shareholder service is available Monday
through Friday from 6:00 A.M. to 5:00 P.M.
pacific time.
Shareholders can get information around-
the-clock through the Montgomery Star
System or www.montgomeryasset.com.
[ ] By Check If you have checkwriting 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. A balance must be available for the Fund
upon which the check is drafted. Shares purchased by check will be priced upon
receipt of your order but proceeds may not be paid until your check clears,
which may take up to 15 days after the purchase date. Checkwriting 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
46
<PAGE>
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 or sell shares
in an IRA 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" below.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $1,000. If your account balance falls below that amount for any
reason, 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.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Fund below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Fund remains within
the applicable expense limitation. Montgomery generally seeks to recoup the
oldest amounts before seeking payment of fees and expenses for the current year.
Share Marketing Plan ("Rule 12b-1 Plan")
The Funds have adopted a Rule 12b-1 Plan for the Class P shares. Under the Rule
12b-1 Plan, the Funds will pay distribution fees to the Distributor at an annual
rate of twenty-five one-hundredths of one percent (0.25%) of each Fund's
aggregate average daily net assets attributable to its Class P shares to
reimburse the Distributor for its distribution costs with respect to such class.
Because the Rule 12b-1 fees are paid out of each Fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
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 not 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 proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify the Funds
of such errors within 30 days following mailing of such confirmation. The Funds
will not be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on your confirmation after this 30 day period.
47
<PAGE>
[sidebar]
BUYING AND SELLING SHARES THROUGH SECURITIES
BROKERS AND BENEFIT PLAN ADMINISTRATORS
You may purchase and sell shares through securities brokers
and benefit plan administrators or their subagents. You
should contact them directly for information regarding how to
invest or redeem through them. They may also charge you
service or transaction fees. If you purchase or redeem shares
through them, you will receive the NAV calculated after
receipt of the order by them (generally, 4:00 p.m. eastern
time) on any day the NYSE is open. If your order is received
by them after that time, it will be purchased or redeemed at
the next-calculated NAV. Brokers and benefit plan
administrators who perform shareholder servicing for the
Fund may receive fees from the Funds or Montgomery for
providing those services.
Telephone Transactions
By buying or selling 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 privileges.
The shares you purchase by phone will be priced at the first net asset
value we determine after receiving your purchase. You will not actually own the
shares, however, 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 the 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 the following
safeguards to ensure that the instructions we receive are accurate and
authentic:
> Recording certain calls
> Requiring an authorization number or other personal information not likely
to be known by others
> 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 transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges 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 transmit your redemption request:
> Using the automated Star System
> By overnight courier
> By telegram
You may discontinue telephone privileges at any time.
48
<PAGE>
Tax Withholding Information
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 Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain 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.
[sidebar]
INVESTMENT MINIMUMS
For regular accounts and IRAs, the
minimum initial investment is $1,000. The
minimum subsequent investment is $100.
After You Invest
Taxes
IRS rules require that the Funds distribute all of their net investment income
and capital gains, if any, to shareholders. Capital gains may be taxable at
different rates depending on the length of time a Fund holds its assets. 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.
The Funds' distributions, whether received in cash or reinvested, may be
taxable. Any redemption of a Fund's shares or any exchange of a Fund's shares
for another Fund will be treated as a sale, and any gain on the transaction may
be taxable.
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.
A Note on the Montgomery Tax-Free Fund
The Montgomery California Tax-Free Intermediate Bond Fund intends to continue
paying what the IRS calls "exempt-interest dividends" to shareholders by
maintaining, as of the close of each quarter of its taxable year, at least 50%
of the value of its assets in municipal bonds. If the Fund satisfies this
requirement, any distributions paid to shareholders from its net investment
income will be exempt from federal income to the extent that they derive its 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. Capital gains,
however, are taxable. You also should consult your adviser about state and local
taxes.
Dividends and Distributions
As a shareholder in The Montgomery Funds, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as an IRA or a 401(k) plan). Income
dividends and capital-gain distributions are paid to all shareholders who
maintain accounts with each Fund as of its "record date."
If you would like to receive dividends and distributions in cash, indicate
that choice on your New
49
<PAGE>
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.
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]
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 recordkeeping and accounting functions for
the Funds.
DST Systems, Inc. also located in Kansas City, Missouri,
assists Investors Fiduciary Trust with certain recordkeeping
and accounting functions for the Funds.
<TABLE>
[table]
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
<S> <C> <C>
Equity Funds and U.S. Declared and paid in the last quarter Declared and paid in the last
Asset Allocation Fund of each calendar year* quarter of each calendar year*
(except the Equity Income
Fund)
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 quarter Declared and paid in the last
(except the U.S. Asset of each calendar year* quarter of each calendar year*
Allocation Fund)
U.S. Fixed-Income and Declared daily and paid monthly on Declared and paid in the last
Money 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>
50
<PAGE>
[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.
51
<PAGE>
[Outside back cover: The Montgomery Funds; Address; Contact Info; Logo]
You can find more information about The Montgomery Funds' investment policies in
the Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
To request a free copy of the SAI, call us at (800) 572-FUND [3863]. You can
review and copy further information about The Montgomery Funds, including the
SAI, at the Securities and Exchange Commission's (SEC's) Public Reference Room
in Washington, D.C. Call (800) SEC-0330 to obtain information about the
operation of the Public Reference Room. Reports and other information about The
Montgomery Funds are available at the SEC's Web site at www.sec.gov. You can
also obtain copies of this information, upon payment of a duplicating fee, by
writing the Public Reference Section of the SEC, Washington, D.C., 20549-6009.
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
the previous fiscal period. To request a copy of the most recent annual or
semiannual report, call us at (800) 572- FUND [3863], option 3.
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
- ---------------------------
(800) 572-FUND [3863]
www.montgomeryasset.com
- ---------------------------
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/99
52
<PAGE>
-------------------------------------------------------------------------------
PART A
PROSPECTUS FOR SHARES OF
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
-------------------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 1999
The Montgomery Funds IISM
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio
The Montgomery Funds II has registered the 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 Fund.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
[Sidebar]
- -------------------------
How to Contact Us
- -------------------------
Montgomery Institutional
Advisory Services
(800) 627-7933
Montgomery Web Site
www.montgomeryasset.com
Address General
Correspondence to:
The Montgomery Funds II
101 California Street
San Francisco, CA 94111-9361
-2-
<PAGE>
[Table of Contents]
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio
TABLE OF CONTENTS
Objective.....................................................................5
Strategy......................................................................5
Risks.........................................................................5
Portfolio Management..........................................................8
Management Fees..........................................................8
Additional Investment Strategies and Related Risks............................8
The Euro: Single European Currency.......................................8
Defensive Investments....................................................9
Portfolio Turnover.......................................................9
The Year 2000............................................................9
Additional Benchmark Information........................................10
Financial Highlights.........................................................11
What You Need to Know About Your Montgomery Account..........................12
How Fund Shares Are Priced..............................................13
Foreign Investors.......................................................13
Investing in the Fund Through Financial Intermediaries.......................13
Buying and Selling Shares Through Securities Brokers and
Benefit Plan Administrators.............................................14
Investing in the Fund Directly with Montgomery...............................14
Opening a New Account.................................................14
Buying Additional Shares..............................................15
Exchanging Shares.....................................................15
Selling Shares........................................................16
Other Policies...............................................................17
Minimum Account Balances................................................17
Uncashed Redemption Checks..............................................17
In-kind Redemptions.....................................................17
Telephone Transactions..................................................17
Tax Withholding Information.............................................18
After You Invest........................................................18
Our Partners.................................................................19
How to Avoid "Buying a Dividend".............................................20
-3-
<PAGE>
This prospectus contains important information about the investment objective,
strategy and risks of the Montgomery Institutional Series: Emerging Markets
Portfolio (the "Fund") that you should know before you invest in the Fund.
Please read it carefully and keep it on hand for future reference.
Please be aware that the Fund:
* Is not a bank deposit
* Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Fund.
-4-
<PAGE>
Emerging Markets Portfolio
Objective
[] Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies throughout the world
Principal Strategy [clipart]
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. These may include:
LatinAmerica: 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
The 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. The Fund allocates its assets among emerging countries with stable or
improving macroeconomic environments and invests in companies within those
countries that the portfolio managers believe have high capital appreciation
potential without excessive risks (using both bottom-up and top-down analysis).
The portfolio managers strive to keep the Fund well diversified across
individual stocks, industries and countries to reduce its overall risk.
Principal Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a decline in a holding's share price or an
overall decline in the 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 their relative immaturity and occasional
political instability. Some emerging markets restrict the flow of money into or
out of their stock markets and 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 based on only a few
industries or on revenue from particular commodities and international aid. Most
of the securities in which the Fund invests are denominated in foreign
currencies, whose value may decline against the U.S. dollar, making the value of
an investment in the Fund very sensitive in exchange rates.
-5-
<PAGE>
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart on 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 table on the right compares the Fund's performance with a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
- --------------------------------------------------------------------------------
[bar chart]
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------
x.xx% x.xx% 13.00% -2.00% -35.00%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q_ 199_ (x.xx%) and the worst quarter was Q_ 199_ (x.xx%).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Emerging Markets Portfolio -35.00% -9.50% -9.50%
IFC Global Index+ -21.09% -8.70%
MSCI Emerging Markets Free Index++ -25.34% -9.27%
- ---------------------------------------------------------------------------------------------------------
1 Year 5 Years Inception
(12/17/93)
<FN>
++ The Fund was formerly compared to the IFC Global Index, which comprises more than 1,200 individual
stocks from 33 developing countries. This change was effected since the MSCI Emerging Markets Free Index,
which is an unmanaged, capitalization-weighted composite index covering the equity markets of 25 emerging
markets countries, better represents the types of foreign securities in which the Fund may invest. See
page 10 for a description of these indices
</FN>
</TABLE>
1999 Return Through 9/30/99: 23.41%% Average Annual Returns Through 12/31/98
<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.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Investment Expense Reimbursement Fee 0.75%+
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee# 1.05%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.37%
--------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.42%
Fee Reduction and/or Expense Reimbursement 0.97%
--------------------------------------------------------------------------------------------------
Net Expenses 1.45%
<FN>
+ The investment expense reimbursement fee is paid to the Fund to offset
certain costs, such as brokers' commissions, incurred by the Fund in
investing cash received from shareholders. This fee is 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. Shares
purchased by the Manager on behalf of advisory clients for which it has
investment discretion will not be subject to this fee. $10 will be deducted
from redemption proceeds sent by wire or overnight courier.
++ 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 expense) to 1.25%.
This contract has a rolling 10-year term.
# The management fee of 1.25% will be reduced to 1.00% for those assets over
$50 million and to 0.90% for those assets over $100 million.
</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
- --------------------------------------------------------
$147 $458 $790 $1,729
-6-
<PAGE>
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
Frank Chiang
For more details see page 8
For financial highlights
see page 11
-7-
<PAGE>
PORTFOLIO MANAGEMENT
The investment manager of the Fund is Montgomery Asset Management, LLC, 101
California Street, San Francisco, California 94111. Founded in 1990, Montgomery
Asset Management is a subsidiary of Commerzbank AG, one of the largest publicly
held commercial banks in Germany. As of September 30, 1999, Montgomery Asset
Management managed approximately $3.9 billion on behalf of some 200,000
investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Fund.
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager of the Montgomery
Emerging Markets Portfolio (since 1992). Before joining Montgomery in 1991 as a
senior portfolio manager and managing director, Ms. Jimenez worked at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C., as a
senior analyst and portfolio manager. 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] FRANK CHIANG, portfolio manager for the Montgomery Emerging Markets
Portfolio (since 1996). Before joining Montgomery in 1996 as a portfolio
manager, Mr. Chiang 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.
Management Fees
The management fee rate paid to Montgomery Asset Management over the past fiscal
year was 1.05%.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. Eleven of the fifteen EU members that have begun to
convert their currencies to the euro are Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain
(leaving out Britain, Sweden, Denmark and Greece). For the first three years,
the euro will be a phantom currency (only an accounting entry). Euro notes and
coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
* Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
* The applicable conversion rate for contracts stated in the national
currency of an EU member
* The ability of clearing and settlement systems to process transactions
reliably
* The effects of the euro on European financial and commercial markets
* The effect of new legislation and regulations to address euro-related
issues These and other factors could cause market disruptions and affect
the value of your shares if the Fund invests in companies conducting
business in Europe. Montgomery and its key service providers have taken
steps to address euro-related issues, but there can be no assurance that
these efforts will be sufficient.
-8-
<PAGE>
Defensive Investments
At the discretion of its portfolio manager(s), the Fund may invest up to 100% of
its assets in cash and cash equivalents for temporary defensive purposes. Such a
stance may help the Fund minimize or avoid losses during adverse market,
economic or political conditions. During such a period, the Fund may not achieve
its investment objective. For example, should the market advance during this
period, the Fund may not participate as much as it would have if it had been
more fully invested.
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the 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 the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-deferred account, the distribution
of capital gains may affect your after-tax return. Annual portfolio turnover of
100% or more is considered high. See "Financial Highlights" on page 11 for the
Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems may misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the Fund's operations,
including pricing, securities trading and the servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We have completed tests
on our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Fund's operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
Despite Montgomery's efforts and contingency plans, noncompliant computer
systems could have a material adverse effect on the Fund's business, operations
or financial condition. Additionally, the Fund's performance could be hurt if a
computer system failure at a company or governmental unit affects the prices of
securities the Fund owns. Issuers in countries outside of the United States,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as required in the United States.
Montgomery, of course, cannot audit any company and its major suppliers to
verify their Year 2000 readiness. Montgomery understands that many foreign
countries and companies are well behind their U.S. counterparts in preparing for
2000.
Additional Benchmark Information
The International Finance Corporation (IFC) Global Composite Index comprises
more than 1,200 individual stocks from 33 developing countries in Asia, Latin
America, the Middle East, Africa and Europe.
-9-
<PAGE>
The MSCI World Index measures the performance of selected stocks in 22 developed
countries. The index is presented net of dividend withholding taxes.
-10-
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
performance for the periods shown. The following financial information for the
periods ended June 30, 1999, and June 30, 1998, was audited by
PricewaterhouseCoopers, LLP.
Their August 18, 1999, and August 14, 1998, reports appear in the 1999 and 1998
Annual Reports of the Fund. The information for the periods ended June 30, 1995,
through June 30, 1997, was audited by other independent accountants, whose
report is not included here.
The total return figures in the table represent the rate that an investor would
have earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions).
<TABLE>
[table]
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio(a)
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997 1996 1995##
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $ 35.61 $ 58.52 $ 49.09 $ 44.61 $ 43.71
Net investment income/(loss) 0.38 0.32 0.43 0.50 0.13
Net realized and unrealized gain/(loss) on investments 3.06 (22.44) 9.46 3.93 0.67
Net increase/(decrease) in net assets
resulting from investment operations 3.44 (22.12) 9.89 4.43 0.80
Effect of redemption expense reimbursement fee -- -- 0.02 0.09 0.11
Distributions:
Dividends from net investment income -- (0.64) (0.48) (0.04) (0.01)
Distributions in excess of net investment income 0.00# -- -- -- --
Distributions from net realized capital gains -- (0.15) -- -- --
Distributions in excess of net realized capital gains -- -- -- -- --
Total distributions -- (0.79) (0.48) (0.04) (0.01)
Net asset value--end of year $ 39.05 $ 35.61 $ 58.52 $ 49.09 $ 44.61
=================================================================================================================================
Total return** 9.75% (38.05)% 20.45% 10.14% 2.09%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $103,661 $197,578 $334,181 $270,878 $186,666
Ratio of net investment income/(loss) to average net assets 0.79% 0.96% 0.86% 1.16% 0.29%
Net investment income/(loss) before deferral of fees by
Manager $ (0.11) $ 0.03 $ 0.26 $ 0.33 $ (0.05)
Portfolio turnover rate 115% 104% 85% 88% 101%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.42% 1.66% 1.61% 1.70% 1.79%
Expense ratio including interest and tax expenses 1.45% 1.25% 1.26% 1.29% 1.40%
Expense ratio excluding interest and tax expenses 1.25% 1.25% 1.26% 1.29% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with results of
operations.
</FN>
</TABLE>
-11-
<PAGE>
WHAT YOU NEED TO KNOW ABOUT YOUR MONTGOMERY ACCOUNT
You pay no sales charge to invest in the Fund. Trade requests received after the
close of trading on the New York Stock Exchange (NYSE), normally 1:00 P.M.
Pacific time (4:00 P.M. eastern time) will be executed at the following business
day's closing price. The minimum initial investment in the Fund is $2,000,0000.
Subsequent investments in the Fund must be at least $100,000.
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. Purchases may also be made in certain
circumstances by payment of securities. See "In-kind Purchases" below and the
Statement of Additional Information for further details.
We must receive payment from you within three business days of your purchase. In
addition, the Fund and the Distributor each reserve the right to reject any
purchase.
How Fund Shares Are Priced
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the 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 than in the United States. Major developments
affecting the prices of those securities may occur after the foreign markets in
which such securities trade have closed, but before the Fund calculates its NAV.
In this case, Montgomery, under the supervision of the Fund's Board of Trustees
or Pricing Committee, will make a good-faith estimate of the security's "fair
value," which may be higher or lower than the security's closing price in its
relevant market.
We calculate the NAV of the Fund after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate the NAVs on the days that the
NYSE is closed for trading. An exception applies 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 4:00 P.M.
eastern time on weekdays, except for holidays. If your order is received after
the NYSE has closed, your shares will be priced at the next NAV we determine
after the receipt of your order. More details about how we calculate the Fund's
NAVs are in the Statement of Additional Information.
[] The Fund invests 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, the Fund's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Fund.
Foreign Investors
Foreign citizens and resident aliens of the United States living abroad may not
invest in the Fund.
INVESTING IN THE FUND THROUGH FINANCIAL INTERMEDIARIES
The Fund is available to institutional investors and investment advisors through
select programs.
-12-
<PAGE>
[sidebar]
Buying and Selling Shares Through Securities Brokers and Benefit Plan
Administrators
You may purchase and sell shares through securities brokers and benefit plan
administrators or their subagents. You should contact them directly for
information regarding how to invest or redeem through them. They may also charge
you service or transaction fees. If you purchase or redeem shares through them,
you will receive the NAV calculated after receipt of the order by them
(generally, 4:00 P.M. eastern time) on any day the NYSE is open. If your order
is received by them after that time, it will be purchased or redeemed at the
next calculated NAV. Brokers and benefit plan administrators who perform
shareholder servicing for the Fund may receive fees from the Fund or Montgomery
for providing those services.
INVESTING IN THE FUND DIRECTLY WITH MONTGOMERY
Opening a New Account
[] By Mail Send your completed application, with a check payable to Montgomery
Institutional Series: Emerging Markets Portfolio, 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.
[] By Wire Call us at (800) 627-7933, option (2), to let us know that you
intend to make your initial investment by wire. Tell us your name and the amount
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 II
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Fund: Montgomery Institutional Series: Emerging Markets Portfolio
Please note that 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. Your purchase of the 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.
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 objectives and policies, and the tendered securities are
otherwise acceptable to the Fund's portfolio managers. For purposes of in-kind
purchases, a security will be
-13-
<PAGE>
considered "readily marketable" if it is in the process of undergoing customary
settlement and/or registration in its primary market. For purposes of sales of
shares of the Fund of 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.
Buying Additional Shares
[] By Mail Complete the form at the bottom of any Montgomery statement and mail
it with your check payable to Montgomery Institutional Series: Emerging Markets
Portfolio. Or mail the check with a signed letter noting the name of the Fund,
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]
Regular Mail
The Montgomery Funds II
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds II
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
[] 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) 627-7933, option (2). There are restrictions on the dollar amount
of shares you may buy by phone.
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 provided on this page
[] By Wire There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information on the previous page.
Exchanging Shares
You may exchange shares in the Fund for shares in another, in accounts with the
same registration, Taxpayer Identification Number and address. Applicable
minimums apply to exchanges as well as purchases. Note that an exchange is
treated as a sale and may result in a realized gain or loss for tax purposes.
You may exchange shares by phone at (800) 627-7933, option (2).
Other Exchange Policies
* We will process your exchange order at the "next-calculated" NAV. This means
that if your exchange order is received after 4:00 P.M. eastern time on a
particular day, it will be processed at the NAV calculated on the next trading
day.
* You may exchange shares only if the Fund is qualified for sale in your
state. Call (800) 627-7933 for information on availability in your state. You
may not exchange shares in one Fund for shares of another
-14-
<PAGE>
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).
Selling Shares
You may sell some or all of your Fund shares on days that the NYSE is open for
trading. Note that a redemption is treated as a sale and may result in a
realized gain or loss for tax purposes.
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, less any
redemption charges, 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. Shares purchased by check will be priced upon
receipt of your order but proceeds may not be paid until your check clears,
which may take up to 15 days after the purchase date. Within this 15-day period,
you may choose to exchange your investment into a Montgomery Money Market Fund
if you have a prospectus for one of those Funds.
Shares can be sold in several ways:
[] By Mail Send us a letter including your name, Montgomery account number, the
name of the Fund and the dollar amount or number of shares you want to sell. You
must sign the letter in the same way your account is registered.
If you have a joint account, all account holders 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 National Association of Securities Dealers 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.
[] 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 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" below.
[] Investment Expense Reimbursement Fee and Redemption Fee The investment
expense reimbursement fee is intended to defray costs associated with investing
the proceeds received by the Fund and to offset the dilutive effect those costs
would otherwise have on the net asset value of shares held by existing
shareholders. Likewise, the redemption fee is intended to compensate the Fund
for the increased expenses to longer-term shareholders and the disruptive effect
on the portfolios caused by short-term investments. The redemption fee will be
assessed on the net asset value of the shares redeemed or exchanged and will be
deducted from the redemption proceeds otherwise payable to the shareholder and
will be paid to the Fund.
-15-
<PAGE>
Additionally, the following fees may also be charged when you sell your shares:
[] For shares sold by wire, a $10 wire transfer fee will be deducted directly
from the proceeds.
[] For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC), we
reserve the right to suspend redemptions under extraordinary circumstances.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $10,000. If your account balance falls below that amount for any
reason, 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.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Fund below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Fund remains within
the applicable expense limitation. Montgomery generally seeks to recoup the
oldest amounts before seeking payment of fees and expenses for the current year.
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) 627-7933, option (2). Please note that we are responsible only for
mailing redemption or distribution checks and not 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 proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
In-kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Fund, an investor may redeem shares of the Fund and receive securities from
the Fund's portfolio selected by the Manager at its sole discretion, provided
that such redemption is not expected to affect the Fund's ability to attain its
investment objective or otherwise materially affect its operations. For the
purposes of redemptions in kind, the redeemed securities shall be valued at the
identical time and in the identical manner that the other portfolio securities
are valued for purposes of calculating the net asset value of the Fund's shares.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify the Funds
of such errors within 30 days following mailing of that confirmation. The Funds
will not be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on your confirmation after this 30-day period.
Telephone Transactions
By buying, selling or exchanging shares over the phone, you agree to reimburse
the Fund 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
-16-
<PAGE>
may cancel the purchase and immediately terminate your telephone transaction
privileges. In addition, we may discontinue these privileges at any time upon
prior written notice. You may discontinue phone privileges at any time.
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, 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 the 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 the following safeguards to
ensure that the instructions we receive are accurate and authentic, such as:
* Recording certain calls
* Requiring an authorization number or other personal information not likely
to be known by others
* Sending a transaction confirmation to the investor
Montgomery and its 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 transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges 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 transmit your redemption request:
* By overnight courier
* By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
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 a local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. 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 Fund pays to them may be subject to up to 30% withholding instead
of backup withholding.
-17-
<PAGE>
After You Invest
Taxes
IRS rules require that the Fund distribute all of its net investment income and
capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time the Fund holds its assets. 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. The Fund's distributions, whether received in cash or reinvested, may be
taxable. Any redemption of the Fund's shares or any exchange of the Fund's
shares for those of another Fund will be treated as a sale, and any gain on the
transaction may be taxable.
Additional information about tax issues relating to the Fund can be found in our
Statement of Additional Information, available free by calling (800) 627-7933,
option (2). Consult your tax advisor about the potential tax consequences of
investing in the Fund.
Dividends and Distributions
As a shareholder in the Fund, you may receive income dividends and capital-gain
distributions for which you will owe taxes (unless you invest solely through a
tax-advantaged account such as a 401(k) plan). Dividends and distributions are
paid to all shareholders who maintain accounts with the Fund as of its "record
date."
If you would like to receive distributions in cash, indicate that choice on your
New Account application. Otherwise, the distributions will be reinvested in
additional Fund shares.
Referral Arrangements
The Distributor for the Fund compensates selected solicitors for bringing new
accounts or investments to the Fund. The Fund will not pay this compensation out
of its assets unless it has adopted a Rule 12b-1 plan. You may request the
Statement of Additional Information through the telephone number given on the
last page for specific information about these arrangements.
[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.
DST Systems, located in Kansas City, Missouri, provides transfer agent services
and performs certain recordkeeping and accounting functions for the Fund.
-18-
<PAGE>
<TABLE>
[table]
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
INCOME Dividends CAPITAL GAINS
Emerging Markets Portfolio Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
- ------------------------------------------------------------------------------------------------------
<FN>
* Following its fiscal year end (June 30), the Fund may make additional distributions to avoid
the imposition of a tax.
</FN>
</TABLE>
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 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 the Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of the 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.
-19-
<PAGE>
[Outside back cover: The Montgomery Funds II; Address; Contact Info; Logo]
You can find more information about the Montgomery Institutional Series'
investment policies in the Statement of Additional Information (SAI),
incorporated by reference in this prospectus, which is available free of charge.
You can also find further information about the Montgomery Institutional Series
in our annual and semiannual shareholder reports, which discuss the market
conditions and investment strategies that significantly affected the Fund's
performance during the previous fiscal period. To request a copy of the most
recent annual or semiannual report, call us at (800) 627-7933.
To request a free copy of the SAI, call us at (800) 627-7933. You can review and
copy further information about The Montgomery Funds II, including the SAI, at
the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. Call (800) SEC-0330 to obtain information about the operation
of the Public Reference Room. Reports and other information about The Montgomery
Funds II are available through the SEC's Web site at www.sec.gov. You can also
obtain copies of this information, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C., 20549-6009.
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
(800) 627-7933
www.montgomeryasset.com
SEC File Nos.: The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/99
-20-
<PAGE>
- --------------------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
FOR CLASS R SHARES OF
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
AND
VARIOUS SERIES OF THE MONTGOMERY FUNDS
AND
CLASS P SHARES OF CERTAIN FUNDS
- --------------------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
MONTGOMERY GROWTH FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT MONEY MARKET FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1999
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 Global Long-Short
Fund and Montgomery U.S. Asset Allocation Fund, which are 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, 1999, and that set forth in the combined prospectuses for the Class
P shares of certain Funds dated October 31, 1999, 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, 1999 is
incorporated by reference to this Statement of Additional Information and also
may be obtained without charge as noted above.
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TABLE OF CONTENTS
Page
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STATEMENT OF ADDITIONAL INFORMATION ....................................... 1
THE TRUSTS ................................................................ 3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS ........................... 4
RISK FACTORS .............................................................. 27
INVESTMENT RESTRICTIONS ................................................... 30
DISTRIBUTIONS AND TAX INFORMATION ......................................... 36
TRUSTEES AND OFFICERS ..................................................... 41
INVESTMENT MANAGEMENT AND OTHER SERVICES .................................. 45
EXECUTION OF PORTFOLIO TRANSACTIONS ....................................... 55
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ............................ 58
DETERMINATION OF NET ASSET VALUE .......................................... 59
PRINCIPAL UNDERWRITER ..................................................... 62
PERFORMANCE INFORMATION ................................................... 62
GENERAL INFORMATION ....................................................... 67
FINANCIAL STATEMENTS ...................................................... 79
APPENDIX .................................................................. 80
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THE TRUSTS
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and The Montgomery
Funds II is an open-end management investment company organized as a Delaware
business trust on September 10, 1993. Both are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trusts
currently offer shares of beneficial interest, $0.01 par value per share, in
various series. Each series offers three classes of shares (Class R, Class P and
Class L, except for the Global Long-Short Fund which offers Classes R, B and C).
This Statement of Additional Information pertains to the following series of The
Montgomery Funds:
> Montgomery Growth Fund (the "Growth Fund");
> Montgomery U.S. Emerging Growth Fund (the "U.S. Emerging Growth Fund,"
prior to 6/98, called "Montgomery Micro Cap Fund");
> Montgomery Small Cap Fund (the "Small 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 Global Opportunities Fund (the "Opportunities Fund");
> Montgomery Global Communications Fund (the "Communications Fund");
> Montgomery Emerging Markets Fund (the "Emerging Markets Fund");
> Montgomery Emerging Asia Fund (the "Emerging Asia 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 Money Market Fund (the "Government Money Fund," prior
to 7/99 called the "Government Reserve Fund");
> Montgomery Federal Tax-Free Money Fund (the "Federal Money 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" and, prior to 12/94, called "Montgomery
California Tax-Free Bond Fund");
> Montgomery California Tax-Free Money Fund (the "California Money Fund"); as
well as two series of The Montgomery Funds II:
> Montgomery Global Long-Short Fund (the "Global Long-Short Fund");
> 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, U.S. Emerging
Growth, Small Cap and Equity Income Funds as the "U.S. Equity Funds"; the
International Growth, International Small Cap, Opportunities, Communications,
Emerging Markets and Emerging Asia, as the "International and Global Equity
Funds"; the Global Long-Short, 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 Intermediate
Bond, California Money and Federal Money Funds as the "Tax-Free Funds"; the
Government Money, California Money and
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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. (References in this Statement of Additional
Information to investments by the Multi-Strategy Funds, which includes the U.S.
Asset Allocation Fund, refers to the investments made indirectly by that Fund
through the Underlying Funds.)
Alternative Structures
Each Fund has reserved the right, if approved by the Board of Trustees,
to convert to a "master/feeder" structure. In this structure the assets of
mutual funds with common investment objectives and similar parameters are
combined in a pool, rather than being managed separately. The individual Funds
are known as "feeder" funds and the pool as the "master" fund. Although
combining assets in this way allows for economies of scale and other advantages,
this change will not affect the investment objectives, philosophies or
disciplines currently employed by the Funds and the Manager. A Fund proposing to
convert to this structure would notify its shareholders before it took any such
action. As of the date of this Statement of Additional Information, no Fund has
proposed instituting this alternative structure.
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
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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 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 Asia 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 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
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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 Global Long-Short Fund. This Fund uses sophisticated
investment approaches that may present substantially higher risks than most
mutual funds. It may invest a larger percentage of its assets in transactions
using margin, leverage, short sales and other forms of volatile financial
derivatives such as options and futures. As a result, the value of an investment
in this Fund may be more volatile than investments in other mutual funds. This
Fund may not be an appropriate investment for conservative investors.
The Global Long-Short Fund's investment objective is to seek capital
appreciation. Under normal conditions, this Fund seeks to achieve its objective
by investing at least 65% of its total assets in long and short positions in
equity securities of publicly traded companies of any size worldwide. This Fund
measures short sale exposure by the current market value of the collateral used
to secure the short sale positions. Any income derived from dividends and
interest will be incidental to this Fund's investment objective. Investors
should note that this Fund uses an approach different from the traditional
long-term investment approach of most other mutual funds. The use of borrowing
and short sales may cause the Fund to have higher expenses (especially interest
expenses and dividend expenses) than those of other equity mutual funds. Like
all mutual funds, there can be no assurance that the Fund's investment objective
will be attained.
This Fund may employ margin leverage and engage in short sales of
securities it does not own. This Fund also may use options and financial indices
for hedging purposes and/or to establish or increase its long or short
positions. This Fund invests primarily in common stocks (including depositary
receipts) 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. This Fund
may also 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. This Fund deems securities that are convertible to equity
investments to be equity-derivative securities.
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
objective by investing at least 80% of its net assets in California municipal
securities. The California Money
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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 International and Global Equity Funds, the Multi-Strategy Funds 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 of that Fund not own together more
than 3% of the total outstanding shares of any one investment company at
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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 International and Global Equity and Multi-Strategy 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 and Multi-Strategy 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 International and Global Equity Funds, the
Multi-Strategy Funds and the 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, resulting in an additional
layer of management fees and expenses for shareholders. This duplication of
expenses would occur regardless of the type of investment company, i.e.,
open-end (mutual fund) or closed-end.
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 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, each 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.
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, the International and Global Equity
Funds and Multi-Strategy 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. The securities issued by these agencies are
discussed in more detail later.
Mortgage-Related Securities and Derivative Securities. The 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 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 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.
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The 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.
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) 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.
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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. Each Fixed-Income 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 CMOs collateralized by mortgage-related securities issued by GNMA,
FNMA, FHLMC or by pools of conventional mortgages, multifamily or commercial
mortgage loans.
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.
Each Fixed-Income 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.
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.
Adjustable-Rate Mortgage-Related Securities. Because the interest rates
on the mortgages underlying adjustable-rate mortgage-related securities ("ARMS")
reset periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally decline in value during periods of rising interest rates, ARMS
allow 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
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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.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including mortgage dollar rolls, CMO residuals or stripped
mortgage-backed securities ("SMBS"). Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies
or instrumentalities of the U.S. government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may, or pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. SMBS are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
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SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IOs, POs and other mortgage securities that
are purchased at a substantial premium or discount generally are extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such securities' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may fail to
fully recoup its initial investment in these securities even if the securities
have received the highest rating by a nationally recognized statistical rating
organization.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, established
trading markets have not developed and, accordingly, these securities may be
deemed "illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
The Money Market Funds do not invest in SMBS, however, and the Total
Return and Short Bond Funds limit their SMBS investments to 10% of total assets.
The Total Return Bond and Short 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.
Asset-Backed Securities. Each Fixed-Income Fund may invest up to 25%
(5% for the other Funds) 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.
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.
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<PAGE>
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.
Structured Notes and Indexed Securities. The Funds may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
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.
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<PAGE>
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 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,
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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 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
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option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. The Fixed-Income 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 Fixed-Income and Money Market Funds as the income
accrues even though payment has not been received. These Funds nevertheless
intend to distribute an amount of cash equal to the currently accrued original
issue discount, and this may require liquidating securities at times they might
not otherwise do so and may result in capital loss.
Privatizations. The International and Global Equity Funds and
Multi-Strategy 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 International and Global Equity Funds and
Multi-Strategy 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.
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Risk Factors/Special Considerations Relating to Debt Securities
The International and Global Equity Funds and Multi-Strategy 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% 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.
Hedging and Risk Management Practices
The Equity Income Fund, International and Global Equity Funds,
Multi-Strategy Funds and Total Return Fund typically will not hedge against the
foreign currency exchange risks associated with their investments in foreign
securities. Consequently, these Funds will be very sensitive to any changes in
exchange
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<PAGE>
rates for the currencies in which their foreign investments are denominated or
linked. These 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, in
connection with making an investment or, on rare occasions, to hedge against
expected adverse currency exchange rate changes. Despite their very limited use,
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 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 write covered options.
Forward Contracts. 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. Except to the
extent used by the Global Long-Short Fund, the Funds typically will not hedge
against movements in interest rates, securities prices or currency exchange
rates. The Funds (except the Money Market Funds) may still occasionally purchase
and sell various kinds of futures contracts and options on futures contracts.
These Funds also may enter into closing purchase and sale transactions with
respect to any such contracts and options. Futures contracts may be based on
various securities (such as U.S. government securities), securities indices,
foreign currencies and other financial instruments and indices.
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The Trusts 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. Pursuant to
Section 4.5 of the regulations under the Commodity Exchange Act, the notice of
eligibility included the representation that these Funds will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that a Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of that Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
The Funds (other than the Money Market 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. When used,
these Funds' futures transactions (except for the Global Long-Short Fund's
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
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value of the futures position. However, any unanticipated appreciation in the
value of a Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by 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
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outstanding options on that exchange that had been issued by the Options
Clearing Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Although the Funds do not (with the exception of the Global Long-Short
Fund) 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.
The Global Long-Short Fund may write options that are not covered by
portfolio securities. This is regarded as a speculative investment technique
that could expose the Fund to substantial losses. The Global Long-Short Fund
will designate liquid securities in the amount of its potential obligation under
uncovered options, and increase or decrease the amount of designated assets
daily based on the amount of the then-current obligation under the option. This
designation of liquid assets will not eliminate the risk of loss from writing
the option but it will ensure that the Global Long-Short Fund can satisfy its
obligations under the option.
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 baskets of
Country Securities ("OPALS"). Each of these instruments are derivative
securities whose value follows a well-known securities index or 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.
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OPALS track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
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 holders will receive the physical securities comprising the
underlying baskets. 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 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
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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 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 U.S. Equity, International and
Global Equity, Multi-Strategy, Short, Government Money and Tax- Free Funds may
enter into reverse repurchase agreements. 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
Money 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.
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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
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
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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 ("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.
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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 in addition to those described in the prospectus or elsewhere in this
Statement of Additional Information. 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."
Foreign Securities
The U.S. Equity Funds, International and Global Equity and
Multi-Strategy Funds 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 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.
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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 Select 50, Global Long-Short, International and Global Funds,
particularly the 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 Total Return Bond, Multi-Strategy, 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
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transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Manager considers 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 Manager also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
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 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 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.
Traditionally, a debt security's "term to maturity"
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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%.
Equity Swaps
The U.S. Equity, Global Long-Short, International 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
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securities offerings of the State of California that have come to the attention
of the Trusts and were available prior to the date of this Statement of
Additional Information. Such information has not been independently verified by
the California Intermediate Bond and California Money Funds.
Because the California Intermediate Bond and California Money Funds
expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by these Funds to pay interest
on, or principal of, such securities. The creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and there is no responsibility on
the part of the State of California to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within California, and it is
possible these Funds will invest in obligations of particular issuers as to
which such specific factors are applicable.
From mid-1990 to late 1993, California suffered the most severe
recession in the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, were
severely affected. Since 1994, however, California's economy has been performing
strongly. The unemployment rate, while still higher than the national average,
fell to an average of 5.9% in 1998, compared to over 10 percent at the worst of
the recession. The State added nearly 450,000 non-farm jobs in 1998, the largest
employment gain for the State during any year this decade. About half of these
job gains occurred in the services sector. Construction, retail and government
also showed strong gains. The unsettled financial situation occurring in certain
Asian economies and its spillover effects elsewhere have affected the State's
export-related industries and, therefore, may affect the State's future 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. The large budget deficits depleted the
State's available cash resources and it had to use a series of external
borrowings to meet its cash needs. With the end of the recession, the State's
financial condition improved in the 1995-96 through 1998-99 fiscal years, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint. The accumulated budget
deficit from the recession years was eliminated. No deficit borrowing has
occurred at the end of the last four fiscal years and the State's cash flow
borrowing was limited to $1.7 billion in 1998-99.
The Governor signed the 1999-00 Budget Act on June 29, 1999. The
1999-00 Budget Act is based on projected General Fund revenues and transfers of
$62.9 billion. The Budget Act provides authority for expenditures of $63.7
billion from the General Fund, $16.0 billion from Special Funds, and $1.5
billion from bond funds. Spending in the budget focuses on education, public
works projects, natural resources protection, and public safety. The budget also
provides greater revenues for local governments and tax cuts. The Budget Act
projects a budget reserve (SFEU) at June 30, 2000 of $881 million.
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
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2000 problems in their essential systems and protect those systems from
corruption by non-compliant systems, in accordance with the Department of
Information Technology's California 2000 Program. The State reports that,
although substantial progress has been made toward the goal of Y2K compliance,
the task is still very large and will likely encounter unexpected difficulties.
The State cannot predict whether all mission critical systems will be ready and
tested by late 1999 or what impact the failure of any particular information
technology systems or of outside interfaces with technology information systems
might have. The State Treasurer's Office reports that as of December 31, 1998,
its systems for bond payments were fully Y2K compliant. 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.
After the State's budget and cash situation deteriorated as a result of
the recession, all three major nationally recognized statistical rating
organizations lowered their ratings for the State's general obligation bonds.
However, in 1996, citing California's improving economy and budget situation,
both Fitch and S&P raised their ratings from A to A+. In October 1997, Fitch
raised its rating from A+ to AA- referring to California's fundamental
strengths, the extent of economic recovery and the return of financial
stability. In October 1998, Moody's raised its rating from A1 to Aa3 citing the
State's continuing economic recovery and a number of actions taken to improve
the State's credit condition, including the rebuilding of cash and budget
reserves. In August 1999, S&P raised its rating from A+ to AA- citing the
State's strong economic performance and its return to structural fiscal balance.
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.
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Article XIII B of the California Constitution generally limits the
amount of appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been 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.
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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:
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, 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 or from
engaging in transactions that are fully collateralized in a
manner that does not involve
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the prohibited issuance of a senior security within the
meaning of Section 18(f) of the Investment Company Act.)
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 this Statement of Additional
Information.
7. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed in 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 that may be changed without shareholder
approval, consistent with the Investment Company Act and
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 that
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 and this
Statement of Additional Information, 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 this Statement of Additional
Information, acquire or dispose of put, call, straddle or
spread options (for other than the Total Return Bond, Short
Bond, California Intermediate Bond and Global Long-Short
Funds) unless:
(a) such options are written by other persons or are put
options written with respect to securities
representing 25% or less of the Fund's total assets,
and
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(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of that Fund's
total assets.
(This is an operating policy that 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 that 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 that may
be changed without shareholder approval.)
15. Invest in commodities, except for futures contracts or options
on futures contracts if the investments are either (a) for
bona fide hedging purposes within the meaning of CFTC
regulations or (b) for other than bona fide hedging purposes
if, as a result thereof, no 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
that 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.
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
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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.
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.
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Government securities or securities of other regulated investment companies). As
such, and by complying with the applicable provisions of the Code, a Fund will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Code. If a Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required 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
B-38
<PAGE>
share of the foreign income taxes paid by that Fund. In this case, these taxes
will be taken as a deduction by that Fund
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that these Funds derive from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, a Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. A Fund will endeavor to limit its exposure to
the PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, a Fund may incur the PFIC tax in
some instances.
The Tax-Free Funds. Provided that, as anticipated, each Tax-Free Fund
qualifies as a regulated investment company under the Code, and, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of each of the California 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
B-39
<PAGE>
paying dividends exempt from California personal income tax, as well as the
allowance of losses realized upon a sale or redemption of shares, in
substantially the same manner as federal tax law. Further, these Funds may not
be appropriate investments for persons who are "substantial users" of facilities
financed by industrial revenue bonds or are "related persons" to such users.
Such persons should consult their own tax advisers before investing in these
Funds.
Up to 85% of social security or railroad retirement benefits may be
included in federal (but not California) taxable income for benefit recipients
whose adjusted gross income (including income from tax-exempt sources such as
tax-exempt bonds and these Funds) plus 50% of their benefits exceeding certain
base amounts. Income from these Funds, and other funds like them, is included in
the calculation of whether a recipient's income exceeds these base amounts, but
is not taxable directly.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It can be expected that similar proposals may
be introduced in the future. Proposals by members of state legislatures may also
be introduced which could affect the 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
B-40
<PAGE>
from any actual sales of Section 1256 Contracts will be treated as long-term
capital gain or loss, and the balance will be treated as short-term capital gain
or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's 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:
B-41
<PAGE>
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. ("FDI")
(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 FDI (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.
B-42
<PAGE>
John P. Covino, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Covino is a Vice
President and Treasury Group Manager of Treasury Servicing and Administration of
FDI. From February 1995 to November 1998, Mr. Covino was employed by Fidelity
Investments where he held multiple positions in their Institutional Brokerage
Group. Prior to joining Fidelity, Mr. Covino was employed by SunGard Brokerage
Systems where he was responsible for the technology and development of the
accounting product group.
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.
B-43
<PAGE>
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 Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also 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.
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, 1999, and to be paid during the fiscal year ending June 30, 2000,
and the aggregate compensation paid to each of the Trustees during the fiscal
year ended June 30, 1999, and to be paid during the fiscal year ending June 30,
2000, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below.
- ---------------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-44
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Fiscal Year
Ended June 30, 1999
-----------------------------------------------------------------------------------------------
Aggregate Aggregate Pension or TotalCompensation
Compensation from Compensation from Retirement Benefits From the Trust and
The Montgomery The Montgomery Accrued as Part of Fund Complex
Name of Trustee Funds Funds II Fund Expenses* (1 additional Trust)
- --------------- ----- -------- -------------- --------------------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
John A. Farnsworth $35,000 $15,000 -- $55,000
Andrew Cox $35,000 $15,000 -- $55,000
Cecilia H. Herbert $35,000 $15,000 -- $55,000
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
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.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in each Prospectus,
investment management services are provided to the Funds (except the Global
Long-Short and U.S. Asset Allocation Funds) 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 Global
Long-Short and U.S. Asset Allocation Funds 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.
<TABLE>
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:
B-45
<PAGE>
<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 0.85%
Montgomery U.S. Emerging Growth Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
International and Global Equity Funds
First $500 million
Montgomery International Growth Fund Next $500 million 1.10%
Over $1 billion 1.00%
0.90%
First $250 million
Montgomery International Small Cap Fund Over $250 million 1.25%
1.00%
First $500 million
Montgomery Global Opportunities Fund Next $500 million 1.25%
Over $1 billion 1.10%
1.00%
First $250 million
Montgomery Global Communications Fund Over $250 million 1.25%
1.00%
First $250 million
Montgomery Emerging Markets Fund Over $250 million 1.25%
1.00%
B-46
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
- ---- ------------------------ -----------
First $500 million
Montgomery Emerging Asia Fund Next $500 million 1.25%
Over $1 billion 1.10%
1.00%
Multi-Strategy Funds
First $250 million
Montgomery Global Long-Short Fund Over $250 million 1.50%
1.25%
First $250 million
Montgomery Select 50 Fund Next $250 million 1.25%
Over $500 million 1.00%
0.90%
Montgomery U.S. Asset Allocation Fund All Amounts NONE*
Fixed-Income and Money Market Funds
First $500 million
Montgomery Total Return Bond Fund Over $500 million 0.50%
0.40%
First $500 million
Montgomery Short Duration Government Bond Fund Over $500 million 0.50%
0.40%
First $250 million
Montgomery Government Money Market Fund Next $250 million 0.40%
Over $500 million 0.30%
0.20%
First $500 million
Montgomery Federal Tax-Free Money Fund Over $500 million 0.40%
0.30%
First $500 million
Montgomery California Tax-Free Intermediate Bond Fund Over $500 million 0.50%
0.40%
First $500 million
Montgomery California Tax-Free Money Fund Over $500 million 0.40%
0.30%
B-47
<PAGE>
<FN>
* This amount represents only the management fee of the U.S. Asset Allocation.
</FN>
</TABLE>
As noted in the Prospectus, the Manager has agreed in an Operating
Expense Agreement with each Trust to reduce some or all of its management fee
(and to reimburse other Fund expenses) 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 interest, taxes,
dividend expenses and Rule 12b-1 Plan fees):
TOTAL EXPENSE LIMITATION
FUND (ANNUAL RATE)
U.S. Equity Funds
Montgomery Growth Fund 1.50%
- --------------------------------------------------------------------------------
Montgomery U.S. Emerging Growth Fund 1.50%
- --------------------------------------------------------------------------------
Montgomery Small Cap Fund 1.40%
- --------------------------------------------------------------------------------
Montgomery Equity Income Fund 0.85%
International and Global Equity Funds
Montgomery International Growth Fund 1.65%
- --------------------------------------------------------------------------------
Montgomery International Small Cap Fund 1.90%
- --------------------------------------------------------------------------------
Montgomery Global Opportunities Fund 1.90%
- --------------------------------------------------------------------------------
Montgomery Global Communications Fund 1.90%
- --------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 1.90%
- --------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 1.90%
Multi-Strategy Funds
Montgomery Global Long-Short Fund 2.35%
- --------------------------------------------------------------------------------
Montgomery Select 50 Fund 1.80%
- --------------------------------------------------------------------------------
Montgomery U.S. Asset Allocation Fund 1.30%, including
expenses
of underlying
Funds
Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund 0.70%
- --------------------------------------------------------------------------------
Montgomery Short Duration Government Bond Fund 0.70%
- --------------------------------------------------------------------------------
Montgomery Government Money Market Fund 0.60%
- --------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund 0.60%
- --------------------------------------------------------------------------------
B-48
<PAGE>
Montgomery California Tax-Free Intermediate Bond Fund 0.70%
- --------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0.60%
- --------------------------------------------------------------------------------
The Operating Expense Agreements have a 10-year rolling term. The
Manager also may voluntarily reduce additional amounts to increase the return to
a Fund's investors. Any reductions made by the Manager in its fees are subject
to reimbursement by that Fund within the following three years provided the Fund
is able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Funds for fees and expenses for the
current year.
Operating expenses for purposes of the Agreements include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
Rule 12b-1 fees, 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 that 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 in a footnote to each Fund's financial
statements. At such time as it appears probable that a Fund is able to effect
such reimbursement, that the Manager intends to seek such reimbursement and that
the Board of Trustees has or is likely to approve the payment of such
reimbursement, the amount of the reimbursement will be accrued as an expense of
that Fund for that current period.
<TABLE>
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
FUND YEAR OR PERIOD ENDED JUNE 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Equity Funds
Montgomery Growth Fund $ 8,698,673 $12,414,444 $ 9,429,758
Montgomery U.S. Emerging Growth Fund $ 4,867,019 $ 4,997,558 $ 4,042,815
Montgomery Small Cap Fund $ 1,529,933 $ 2,244,080 $ 2,290,187
Montgomery Equity Income Fund $ 303,646 $ 427,314 $ 244,249
International and Global Equity Funds
B-49
<PAGE>
FUND YEAR OR PERIOD ENDED JUNE 30,
1999 1998 1997
----------- ----------- -----------
Montgomery International Growth Fund $ 2,215,164 $ 626,903 $ 378,515
Montgomery International Small Cap Fund $ 855,638 $ 893,323 $ 823,594
Montgomery Global Opportunities Fund $ 923,286 $ 833,421 $ 562,210
Montgomery Global Communications Fund $ 3,513,626 $ 2,423,093 $ 2,298,528
Montgomery Emerging Markets Fund $ 4,630,828 $11,315,548 $10,621,310
Montgomery Emerging Asia Fund $ 562,967 $ 643,231 $ 257,092
Multi-Strategy Funds
Montgomery Global Long-Short Fund $ 885,497++ $ 863,717* N/A
Montgomery Select 50 Fund $ 2,118,848 $ 3,130,440 $ 1,366,989
Montgomery U.S. Asset Allocation Fund $ 0+ $ 0+ $ 1,211,759
Fixed Income and Money Market Funds
Montgomery Total Return Bond Fund $ 340,724 $ 386,758 N/A
Montgomery Short Duration Government Bond Fund $ 1,019,539 $ 296,242 $ 231,870
Montgomery Government Money Market Fund $ 2,230,429 $ 2,147,103 $ 2,175,561
Montgomery Federal Tax-Free Money Fund $ 763,874 $ 783,661 $ 319,348
Montgomery California Tax-Free Intermediate Bond Fund $ 357,085 $ 235,081 $ 103,992
Montgomery California Tax-Free Money Fund $ 1,135,573 $ 640,819 $ 538,030
<FN>
* For the fiscal year ended March 31, 1999
++ For the period of April 1, 1999 through June 30, 1999. The Global
Long-Short Fund changed its fiscal year from March 31 to June 30.
+ Does not include investment advisory fees paid to the underlying Funds.
</FN>
</TABLE>
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trusts and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trusts and by the Funds is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share Marketing Plan
(or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds pursuant to
Rule 12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Funds pursuant to the 12b-1 Plan.
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 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. Class R shares are not covered by the
12b-1 Plan. The 12b-1 Plan applies to the Class B and Class C shares of the
Global Long-Short Fund.
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<PAGE>
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 (or
Class B and Class C shares), respectively, to reimburse the Distributor for its
expenses in connection with the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor may use the distribution
fees received from the Class of the Fund covered by the 12b-1 Plan only to pay
for the distribution expenses of that Class. The 12b-1 Plan reimburses the
Distributor only for expenses incurred.
<TABLE>
For the fiscal year ended June 30, 1999, the 12b-1 Plan incurred the
following expenses:
<CAPTION>
FUND COMPENSATION TO BROKER-DEALERS
- ---- ------------------------------
<S> <C>
Montgomery Growth Fund $ 432
Montgomery Small Cap Fund $ 45,321
Montgomery Equity Income Fund $ 7,493
Montgomery International Growth Fund $ 2,122
Montgomery International Small Cap Fund $ 109
Montgomery Emerging Markets Fund $ 925
Montgomery Global Long-Short Fund (period ended 6/30/99 including non-Rule
12b-1 servicing fees) $390,552
Montgomery Select 50 Fund $ 116
Montgomery U.S. Asset Allocation Fund $ 165
Montgomery Short Duration Government Bond Fund $ 4,785
</TABLE>
All 12b-1 Plan expenses were used to compensate broker-dealers who sold
the Funds. Except as described in this Statement of Additional Information, 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 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.
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
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<PAGE>
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 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. 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 Regulation, Inc. 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 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 other than the
Class R shares of the Global Long-Short Fund.
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 Class P and Class L shares of each Fund. The Plan was later amended to cover
Class R shares of the Global Long-Short Fund.
Under the Services Plan, the covered shares 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 the covered shares of each Fund.
Such amounts are compensation for providing certain services to clients owning
those shares 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.
Referral Arrangements. The Distributor from time to time compensates
other parties for the solicitation of additional investments by existing
shareholders or new shareholder accounts. No Fund will pay this
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<PAGE>
compensation out of its assets unless it has adopted a Rule 12b-1 plan. The
Distributor pays compensation only to those who have a written agreement with
the Distributor or the Manager. The only agreement currently in place is with
Round Hill Securities, Inc. ("Round Hill") and relates to a very limited number
of its registered representatives. The Distributor currently pays Round Hill at
the annual rate of 0.25% of average daily assets introduced and maintained in
customer accounts of these representatives. The Distributor also may reimburse
certain solicitation expenses.
The Custodian. The Chase Manhattan Bank serves as principal Custodian
of the Funds' assets, which are maintained at the Custodian's office at 4 Chase
MetroTech Center, Brooklyn, New York, 11245, and at the offices of its branches
and agencies throughout the world. The Board has delegated various foreign
custody responsibilities to the Custodian, as the "Foreign Custody Manager" for
the Funds to the extent permitted by Rule 17f-5. 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.
Administrative and Other Services. Montgomery Asset Management, LLC
("MAM") serves as the Administrator to the Funds pursuant to an Administrative
Services Agreement among the Trusts and MAM (the "Agreement"). In approving the
Agreement, the Board of each Trust, including a majority of the independent
Trustees, recognizes that the Agreement involves an affiliate of the Trusts;
however, it has made separate determinations that, among other things, the
nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trusts and the supervision of
the Board of each Trust, the Administrator performs the following types of
services for the Funds: (i) furnish performance, statistical and research data;
(ii) prepare and file various reports required by federal, state and other
applicable laws and regulations; (iii) prepare and print of all documents,
prospectuses and reports to shareholders; (iv) prepare financial statements; (v)
prepare agendas, notices and minutes for each meeting of the Boards; (vi)
develop and monitor compliance procedures; (vii) monitor Blue Sky filings and
(viii) manage legal services. For its services performed under the Agreement,
each Fund, with the exception of the U.S. Asset Allocation Fund, pays the
Administrator an administrative fee based upon a percentage of the average daily
net assets of each Fund. The fee per Fund varies from an annual rate of 0.07% to
0.04% depending on the Fund and level of assets.
Chase Global Funds Services Company ("Chase"), 73 Fremont Street,
Boston, Massachusetts 02108, serves as the Sub-Administrator to the Funds
pursuant to a Mutual Funds Service Agreement (the "Sub-Agreement") between Chase
and MAM. Subject to the control, direction and supervision of MAM and the
Trusts, Chase assists MAM in providing administrative services to the Funds. As
compensation for the services rendered pursuant to the Sub-Agreement, MAM pays
Chase an annual sub-administrative fee based upon a percentage of the average
net assets in the aggregate of the Trusts and The Montgomery Funds III. The
sub-administrative fee is paid monthly for the month or portion of the month
Chase assists MAM in providing administrative services to the Funds. This fee is
based on all assets of the Trusts and related trusts or funds and is equal to an
annual rate of 0.01625% of the first $3 billion, plus 0.0125% of the next $2
billion and 0.0075% of amounts over $5 billion. The sub-administrative fee paid
to Chase is paid from the administrative fees paid to MAM by the Funds. Chase
succeeded First Data Corporation as sub-administrator.
B-53
<PAGE>
Chase also serves as Fund Accountant to the Trusts pursuant to Mutual
Funds Service Agreements ("Fund Accounting Agreement") entered into between each
Trust and Chase on May 3, 1999. By entering into the Fund Accounting Agreement,
Chase also succeeds First Data Corporation as Fund Accountant to the Trusts. As
Fund Accountant, Chase provides the Trusts with various services, including, but
are not limited to: (i) maintaining the books and records for the Funds' assets,
(ii) calculating net asset values of the Funds, (iii) accounting for dividends
and distributions made by the Funds, and (iv) assisting the Funds' independent
auditors with respect to the annual audit. This fee is based on all assets of
the Trusts and related trusts or funds and is equal to an annual rate of
0.04875% of the first $3 billion, plus 0.0375% of the next $2 billion and
0.0225% of amounts over $5 billion.
<TABLE>
The table below provides information on the administrative and
accounting fees paid over the past three fiscal years (or shorter period of
operations).
<CAPTION>
Administrative Fees Paid Fund Accounting Fees Paid
for year ended June 30, for period ended June 30,
------------------------------ ------------------------------
FUND 1999 1998 1997 1999 1998 1997
- ------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Equity Funds
Montgomery Growth Fund $596,578 $868,583 $638,777 $343,900 $375,344 $389,724
Montgomery U.S. Emerging Growth Fund* $244,217 $250,482 $199,769 $123,298 $112,317 $112,944
Montgomery Small Cap Fund $107,095 $157,086 $172,324 $ 56,198 $ 67,348 $ 88,976
Montgomery Equity Income Fund $ 25,341 $ 32,314 $ 21,235 $ 11,543 $ 13,204 $ 14,461
International and Global Equity Funds
Montgomery International Growth Fund $128,893 $ 29,195 $ 17,056 $110,827 $ 26,492 $ 21,242
Montgomery International Small Cap Fund $ 32,122 $ 33,023 $ 30,724 $ 24,362 $ 33,900 $ 37,441
Montgomery Global Opportunities Fund $ 40,303 $ 34,872 $ 20,336 $ 34,332 $ 34,601 $ 23,797
Montgomery Global Communications Fund $198,318 $127,310 $117,299 $169,391 $118,147 $141,555
Montgomery Emerging Markets Fund $265,350 $666,433 $614,941 $269,638 $640,146 $848,397
Montgomery Emerging Asia Fund** $ 22,722 $ 30,353 $ 14,405 $ 21,080 $ 26,355 $ 15,789
Multi-Strategy Funds
Montgomery Global Long-Short Fund*** $ 31,290 $ 38,828 -- $ 27,883 -- --
Montgomery Select 50 Fund $118,656 $169,530 $ 71,610 $ 98,812 $161,222 $ 82,884
Montgomery U.S. Asset Allocation Fund# -- -- $ 93,812 $ 14,323 $ 10,235 $ 52,839
Fixed Income and Money Market Funds
Montgomery Total Return Bond Fund** $ 30,298 $ 38,676 -- $ 27,733 $ 21,399 --
Montgomery Short Duration Government Bond Fund $ 64,534 $ 26,924 $ 19,451 $ 47,513 $ 17,363 $ 15,151
Montgomery Government Money Market Fund $321,086 $283,260 $220,705 $341,653 $209,006 $191,293
Montgomery Federal Tax-Free Money Fund*** $ 62,270 $ 62,064 $ 39,920 $ 44,264 $ 37,807 $ 31,496
Montgomery California Tax-Free Intermediate Bond Fund $ 20,231 $ 14,557 $ 9,036 $ 17,029 $ 8,698 $ 7,511
Montgomery California Tax-Free Money Fund $122,096 $ 88,361 $ 58,217 $ 89,625 $ 52,914 $ 43,736
<FN>
* Formerly Montgomery Micro Cap Fund.
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<PAGE>
** Montgomery Emerging Asia Fund commenced operations on September 30, 1996,
Montgomery Total Return Bond Fund commenced operations on June 30, 1997
and Montgomery Federal Tax-Free Money Fund commenced operations on July
15, 1996.
*** Montgomery Global Long-Short Fund commenced operations on December 31,
1997. The fees noted in the table are as of fiscal year end March 31,
1999. The Montgomery Global Long-Short Fund has changed its fiscal year
end from March 31 to June 30.
# Formerly Montgomery Asset Allocation Fund.
</FN>
</TABLE>
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. 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 International 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
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 NASD Regulation, 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
B-55
<PAGE>
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 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 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, 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 Global Long-Short Fund and the 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
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<PAGE>
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.
<TABLE>
For the year ended June 30, 1999, the Funds total securities
transactions generated commissions of $21,087,806, of which $138,717 was paid to
Bank of America Securities (formerly Nationsbanc Montgomery Securities). For the
year ended June 30, 1998, the Funds total securities transactions generated
commissions of $21,467,826, none of which $27,015 was paid to Bank of America
Securities. 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
Bank of America 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, 1999, The Funds' securities
transactions generated commissions of:
<CAPTION>
Commissions for fiscal year ended:
---------------------------------------------------------
Fund June 30, 1997 June 30, 1998 June 30, 1999
- ---- ------------- ------------- -------------
<S> <C> <C> <C>
Montgomery Growth Fund $2,419,136 $2,798,653 $3,466,343
Montgomery U.S. Emerging Growth Fund $1,358,276 $1,209,313 $1,488,439
Montgomery Small Cap Fund $ 788,684 $1,416,883 $1,204,127
Montgomery Equity Income Fund $ 72,299 $ 81,709 $ 76,526
Montgomery International Growth Fund $ 243,582 $ 332,532 $2,028,321
Montgomery International Small Cap Fund $ 337,216 $ 413,896 $ 379,870
Montgomery Global Opportunities Fund $ 297,275 $ 532,520 $ 822,932
Montgomery Global Communications Fund $1,334,931 $1,370,035 $2,343,249
Montgomery Emerging Markets Fund $8,753,182 $9,442,852 $4,321,947
Montgomery Emerging Asia Fund $ 539,472 $ 675,563 $ 931,870
Montgomery Global Long-Short Fund N/A N/A* $2,145,574
Montgomery Select 50 Fund $1,181,215 $2,040,486 $1,878,608
Montgomery U.S. Asset Allocation Fund $ 289,657 $ 0+ $ 0+
Montgomery Short Duration Government Bond Fund N/A N/A N/A
<FN>
* For the period ended March 31, 1998
+ Does not include commissions paid to the Underlying Funds.
</FN>
</TABLE>
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
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<PAGE>
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.
As noted in the Prospectus, the deadline for receipt of purchase orders
for the Money Market Funds is 12 noon Eastern time on days the Money Market
Funds calculate their net asset value. Orders received by that deadline will be
eligible to accrue any dividend paid for the day of investment. The Money Market
Funds reserve the right to extend that daily purchase order deadline (such as to
4:00 P.M. Eastern time like the other Funds). A later deadline would mean that
it could not be possible for purchase orders to accrue any dividend for the day
on which an investment is made.
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
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<PAGE>
anticipate that they will make any part of a redemption payment in securities,
if such payment were made, an investor may incur brokerage costs in converting
such securities to cash. The Trusts have elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Funds pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Trust's net assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available for
purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable Funds
through an IRA, there is available through these Funds a prototype individual
retirement account and custody agreement. The custody agreement provides that
DST Systems, Inc. will act as custodian under the plan, and will furnish
custodial services for an annual maintenance fee per participating account of
$10. (These fees are in addition to the normal custodian charges paid by these
Funds and will be deducted automatically from each Participant's account.) For
further details, including the right to appoint a successor custodian, see the
plan and custody agreements and the IRA Disclosure Statement as provided by
these Funds. An IRA that invests in shares of these Funds may also be used by
employers who have adopted a Simplified Employee Pension 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. Information about Roth IRAs is also available from those materials.
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 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 also include: Columbus Day and Veterans'
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
B-59
<PAGE>
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' equity 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. Equity 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, U.S. government securities, mortgage-related
securities and asset-backed fixed-income securities held by the Funds are valued
on the basis of valuations provided by dealers in those instruments, by an
independent pricing service, or at fair value as determined in good faith by
procedures approved by the Boards. Any such pricing service, in determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable securities,
analyses and evaluations of various relationships between securities and
yield-to-maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures 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
B-60
<PAGE>
approved by the Boards. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally determined
as the amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the Boards
in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at amortized
cost, which means that securities are valued at their acquisition cost, as
adjusted for amortization of premium or discount, rather than at current market
value. Calculations are made at least weekly to compare the value of these
Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were 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.
B-61
<PAGE>
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 different classes of shares.
The Money Market Funds. Current yield reflects the interest income per
share earned by these Funds' investments. Current yield is computed by
determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
The Total Return Bond Fund, the Short Bond Fund and the 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).
B-62
<PAGE>
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for one of the
Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30, 1999, were
as follows:
<CAPTION>
TAX-EQUIV. TAX-EQUIV.
EFFECTIVE CURRENT EFFECTIVE CURRENT TAX-EQUIV.
YIELD YIELD YIELD* YIELD* YIELD YIELD*
FUND (7-DAY) (7-DAY) (7-DAY) (7-DAY) (30-DAY) (30-DAY)
---- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Montgomery Total Return Bond Fund N/A N/A N/A N/A [5.76%] N/A
Montgomery Short Duration Government N/A N/A N/A N/A [5.80%] N/A
Bond Fund
Montgomery Government Money Market Fund 4.89% [5.35%] N/A N/A N/A N/A
Montgomery Federal Tax-Free Money Fund 3.10% [3.33%] [5.43%] [5.52%] N/A N/A
Montgomery California Tax-Free N/A N/A N/A N/A [3.70%] [6.13%]
Intermediate Bond Fund
Montgomery California Tax-Free Money Fund 2.70% [3.01%] [5.42%] [5.50%] N/A N/A
B-63
<PAGE>
<FN>
* 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.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
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.
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.
<TABLE>
The average annual total return for each Fund for the periods indicated
was as follows:
B-64
<PAGE>
<CAPTION>
YEAR 5-YEARS INCEPTION*
ENDED ENDED THROUGH
FUND JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
- ---- ------------- ------------- -------------
<S> <C> <C> <C>
Montgomery Growth Fund 11.41% 19.98% 22.30%
Montgomery U.S. Emerging Growth Fund -4.10% N/A 16.80%
Montgomery Small Cap Fund -4.14% 16.12% 17.72%
Montgomery Equity Income Fund 15.06% N/A 20.13%
Montgomery International Growth Fund 2.34% N/A 17.72%
Montgomery International Small Cap Fund -3.82% 7.50% 6.54%
Montgomery Global Opportunities Fund 15.68% 19.02% 17.86%
Montgomery Global Communications Fund 31.66% 22.79% [21.71%]
Montgomery Emerging Markets Fund -3.85% -3.82% [1.93%]
Montgomery Emerging Asia Fund 97.44%) N/A 4.84%)
Montgomery Global Long-Short Fund [51.78%]+ N/A [65.67%]+
Montgomery Select 50 Fund 13.89% N/A 24.73%
Montgomery U.S. Asset Allocation Fund 11.93% 19.92% 19.33%
Montgomery Total Return Bond Fund 3.20% N/A 6.99%
Montgomery Short Duration Government Bond Fund [4.82%] [6.63%] [6.32%]
Montgomery California Tax-Free Intermediate Bond Fund 2.71% 5.71% [5.03%]
<FN>
- ----------------
* Total return for periods of less than one year are aggregate, not annualized,
return figures. The dates of inception for the Funds were:
</FN>
</TABLE>
Growth Fund, September 30, 1993; U.S. Emerging Growth Fund, December
30, 1994; Small Cap Fund, July 13, 1990; Equity Income Fund, September
30, 1994; International Growth Fund, June 30, 1995; International Small
Cap Fund, September 30, 1993; Global Opportunities Fund, September 30,
1993; Global Communications Fund, June 1, 1993; Emerging Markets Fund,
March 1, 1992; Emerging Asia Fund, September 30, 1996; Global
Long-Short Fund, December 31, 1997; 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 Money 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.
+ For the fiscal year ended March 31, 1999, computed without a sale charge or
redemption fee.
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-65
<PAGE>
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Funds to calculate
their figures.
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
B-66
<PAGE>
Funds may suggest that certain countries or areas may be particularly appealing
to investors because of interest rate movements, increasing exports and/or
economic growth. The Funds may, by way of further example, present a region as
possessing the fastest growing economies and may also present projected gross
domestic product (GDP) for selected economies. In using this information, the
Montgomery Emerging Asia Fund also may claim that certain Asian countries are
regarded as having high rates of growth for their economies (GDP), international
trade and corporate earnings; thus producing what the Manager believes to be a
favorable investment climate.
Research. The Manager has developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
the Montgomery Funds style.
The portfolio managers for Montgomery's International 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, 1999
approximately $4.5 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Funds (as of June 30,
1999, around 250,000).
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 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
B-67
<PAGE>
their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, The Chase Manhattan Bank (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.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105,
Funds' Master Transfer Agent and Paying Agent.
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, 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.
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.
<TABLE>
As of September 30, 1999, 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-68
<PAGE>
<CAPTION>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
<S> <C> <C>
Growth Fund - Class R
Charles Schwab & Co., Inc. 8,140,306 32.03%
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery U.S. Asset Allocation Fund 2,027,031 7.98%
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
National Financial Services Corp. 1,810,534 7.12%
For The Exclusive Benefit of Our Customers
ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
U.S. Emerging Growth Fund - Class R
Charles Schwab & Co., Inc. 4,641,045 32.22%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 864,468 6.00%
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 - Class R
Charles Schwab & Co., Inc. 764,745 12.57%
101 Montgomery Street
San Francisco, CA 94104-4122
Wendel & Co. 311,958 5.13%
P.O. Box 1066
Wall Street Station
New York, New York 10268-1066
B-69
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
Equity Income Fund - Class R
Charles Schwab & Co., Inc. 434,539 41.09%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 59,666 5.64%
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, New York
International Growth Fund - Class R
Charles Schwab & Co., Inc. 4,891,116 45.81%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 719,657 6.74%
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
International Small Cap Fund - Class R
Charles Schwab & Co., Inc. 822,748 34.02%
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson Lufkin & Jenrette Securities Corporation 238,604 9.87%
Mutual Funds 7th Floor
PO Box 2052
Jersey City, NJ 07303-2052
National Financial Services Corp. 250,252 10.35%
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
B-70
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
The Hillman Foundation Inc. 149,045 6.16%
Attention: Harry Harrison
2000 Grant Building
Pittsburgh, PA 15219
The Henry L. Hillman Foundation Inc. 149,045 6.16%
Attention: Harry Harrision
2000 Grant Building
Pittsburgh, PA 15219
Global Opportunities Fund - Class R
Charles Schwab & Co., Inc. 1,065,517 34.29%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 290,538 9.35%
For The Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global Communications Fund - Class R
Charles Schwab & Co., Inc. 4,591,774 35.66%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 741,933 5.76%
For The Exclusive Benefit Our Customers
PO Box 3730
Church Street Station
New York, NY 10008-3730
Global Long-Short Fund - Class R
Charles Schwab & Co., Inc. 4,638,596 37.13%
101 Montgomery Street
San Francisco, CA 94104
FTC & Co. 1,222,258 9.78%
Datalynx House Acct
PO Box 173736
Denver, CO 82017-3736
B-71
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
Merrill Lynch Pierce Fenner & Smith 861,053 6.89%
FBO Its Customers
Attn Fund Administration 97TN7
4800 Deer Lake Dr E Fl 2
Jacksonville, FL 32246-6484
Emerging Markets Fund - Class R
Charles Schwab & Co., Inc. 11,540,200 38.36%
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 3,639,852 12.10%
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Asia Fund - Class R
Charles Schwab & Co., Inc. 1,501,694 35.74%
101 Montgomery Street
San Francisco, CA 94104-4122
National Investor Services Corp. 324,318 7.72%
For the Exclusive Benefit of
Our Customers
55 Water Street, 32nd Floor
New York, NY 10041-3299
Select 50 Fund - Class R
Charles Schwab & Co., Inc. 1,574,958 27.81%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 379,214 6.70%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-72
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
U.S. Asset Allocation Fund - Class R
Charles Schwab & Co., Inc. 1,383,661 30.56%
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 459,393 10.15%
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 - Class R
Asset Allocation Fund 2,298,415 73.45%
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
Charles Schwab & Co., Inc. 610,824 19.52%
101 Montgomery Street
San Francisco, CA 94104-4122
Short Duration Government Bond Fund - Class R
Charles Schwab & Co., Inc. 10,184,084 60.12%
101 Montgomery Street
San Francisco, CA 94104-4122
Prudential Securities Inc. 1,700,799 10.04%
Special Custody Account for The Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
National Financial Services Corp. 1,119,872 6.61%
For the Exclusive Benefit of Our
Customers - Attention: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-73
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
Donaldson, Lufkin & Jenrette 1,093,320 6.45%
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
Government Money Market Fund - Class R
Banc of America Securities 513,796,837 91.42%
Sweep Account FBO Clients
Attn: Mutual Funds
San Francisco, CA 94115-2011
Federal Tax-Free Money Fund - Class R
Banc of America Securities 94,492,777 97.34%
Sweep Account FBO Clients
Attn: Mutual Funds
San Francisco, CA 94115-2011
California Tax-Free Intermediate Bond Fund - Class R
Charles Schwab & Co., Inc. 2,472,194 79.31%
101 Montgomery Street
San Francisco, CA 94104-4122
California Tax-Free Money Market - Class R
Republic Bank California NA 107,374,744 61.65%
Investment Department
445 North Bedford Drive
Beverly Hills, CA 90210-4302
Banc of America Securities 107,374,628 37.06%
Sweep Account FBO Clients
Attn: Mutual Funds
San Francisco, CA 94115-2011
</TABLE>
<TABLE>
As of September 30, 1999, to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class P Shares
of the respective Funds indicated:
<CAPTION>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
<S> <C> <C>
B-74
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
Growth Fund - Class P
Inv. Fiduciary Trust Co. 2,260 33.89%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
Inv. Fiduciary Trust Co. 346 5.19%
IRA Carol A. Grant
2008 Cutwater Court
Reston, VA 20191-3604
Dreyfus Investment Services Corp. 1,250 18.75%
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburgh, PA 15259-0001
Walter J. Klein Company, LTD 504 7.55%
Profit Sharing Trust
PO Box 472087
Charlotte, NC 28247-2087
Small Cap Fund - Class P
Saxon & Co. 559,346 44.17%
FBO T/A Leaseway Transport
A/C #20-35-002-1037303
PO Box 7780-1888
Philadelphia, PA 19182-0001
State Street Bank & Trust Co. Tr. 276,028 21.80%
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. 106,764 8.43%
U/A January 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
B-75
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
State Street Bank & Trust Co. 78,474 6.20%
The Bardon Group, Inc.
401K Retirement & P.S.P.
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 67,929 5.36%
Retirement Savings Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank Trust 72,281 5.71%
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 02266-8705
Equity-Income Fund - Class P
State Street Bank & Trust Co. Tr. 178,419 99.85%
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 - Class P
Merrill Lynch, Pierce, Fenner & 138,742 92.58%
Smith Inc.
For the Sole Benefit of its Clients
4800 Deer Lake Dr., E Bldg
Jacksonville, FL 32246-6484
Emerging Markets Fund - Class P
State Street Bank & Trust Co. 42,907 68.70%
V/A Jan. 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
B-76
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
Discover Brokerage Direct 6,066 9.71%
780-16649-18
333 Market Street
San Francisco, CA 94105-2102
Canada Life Insurance Company of America 6,066 9.71%
Attn: Mukesh Sharma
330 University Avenue
Toronto, Ontario MSG 1R8
Canada
Select 50 Fund - Class P
E*Trade Securities Inc. 243 20.66%
A/C 1090-6929
Peter R. Daboll &
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
E*TRADE Securities, Inc. 106 9.06%
A/C 1961-0863
Mary Campbell
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
Discover Brokerage Direct 77 6.55%
720-21739-15
333 Market Street
San Francisco, California 94105-2102
Discover Brokerage Direct 107 9.13%
780-16541-17
333 Market Street
San Francisco, California 94105-2102
BA Investment Services 107 9.14%
FBO 427463391
185 Berry Street, 3rd Floor, #2640
San Francisco, CA 94107-1729
B-77
<PAGE>
NUMBER OF PERCENT
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
- --------------------------------------------- ------------ ---------
National Investor Services Corp. 212 18.06%
For The Exclusive Benefit of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
BA Investment Services 157 13.36%
FBO 211129251
185 Berry Street, 3rd Floor, #2640 San Francisco, CA 94107-1729
Inv. Fiduciary Trust Co. 151 12.87%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
U.S. Asset Allocation Fund - Class P
Inv. Fiduciary Trust Co. 2,577 75.04%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
National Investor Services Corp. 570 16.59%
For The Exclusive Benefit of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
Carl N. Grant 179 5.20%
2008 Cutwater Court
Reston, VA 20191-3604
Short Government Bond Fund - Class P
Merrill Lynch, Pierce, 388,864 98.64%
Fenner & Smith Inc.
For the Sole Benefit of its Clients
4800 Deer Lake Drive E Building One
Jacksonville, FL 32246-6484
Government Money Market Fund - Class P
Aurum Capital Management Corp 940 99.81%
120 Montgomery Street, Suite 1575
San Francisco, CA 94104-4318
</TABLE>
B-78
<PAGE>
As of September 30, 1999, 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 3% 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,
1999 for each Fund as contained in the Annual Report to Shareholders of those
Funds for the fiscal year ended June 30, 1999, are incorporated herein by
reference. Also incorporated by reference are the audited financial statements
for the fiscal year ended March 31, 1999 for the Global Long-Short Fund, as
contained in the Annual Report to Shareholders of that Fund for the fiscal year
ended March 31, 1999.
B-79
<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-80
<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.
B-81
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have 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
B-82
<PAGE>
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.
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
B-83
<PAGE>
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 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.
B-84
<PAGE>
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.
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.
B-85
<PAGE>
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.
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.
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PART B
STATEMENT OF ADDITIONAL INFROMATION FOR SHARES OF
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS II
- --------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
October 31, 1999
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, 1999, 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.
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TABLE OF CONTENTS
THE TRUST......................................................................3
Investment Objective and Policies of he Fund...................................3
Risk Factors..................................................................14
INVESTMENT RESTRICTIONS.......................................................17
Distributions and Tax Information.............................................19
TRUSTEES AND OFFICERS.........................................................23
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................26
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................27
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................31
DETERMINATION OF NET ASSET VALUE..............................................33
PRINCIPAL UNDERWRITER.........................................................35
PERFORMANCE INFORMATION.......................................................35
GENERAL INFORMATION...........................................................38
FINANCIAL STATEMENTS..........................................................39
APPENDIX......................................................................40
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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 sponsored and
unsponsored 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. Unsponsored ADR and EDR
programs are organized 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 ADRs and EDRs, and the prices of unsponsored ADRs
and EDRs may be more volatile. For purposes of the Fund's investment policies,
its investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. The Fund may invest 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.
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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 Fund 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.
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, the Fund bears its ratable
share of that investment company's expenses, including advisory and
administration fees.
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 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
B-4
<PAGE>
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 its 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 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. The net asset value of the Fund will reflect these
changes in market value.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities remaining in the Fund's portfolio. Mortgage prepayments are affected
by the level of interest rates and other factors, including general economic
conditions of 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 tends to increase, shortening the average life of
such a pool. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, affecting the Fund's yield.
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."
B-5
<PAGE>
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 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
The Fund typically will not hedge against the foreign currency exchange
risks associated with its investments in foreign securities. Consequently, the
Fund will be very sensitive to any changes in exchange rates for the currencies
in which its foreign investments are denominated or linked. 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, in connection with making an investment
or, on rare occasions, to hedge against expected adverse currency exchange rate
changes. Despite their very limited use, 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 Fund might not enter
into such transactions. Such inopportune timing or utilization of hedging
practices could result in substantial losses to the Fund.
Forward Contracts. 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 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
B-6
<PAGE>
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. The Fund typically
will not hedge against movements in interest rates, securities prices or
currency exchange rates. The Fund may still occasionally purchase and sell
various kinds of futures contracts and options on futures contracts. The Fund
also may enter into closing purchase and sale transactions with respect to any
such contracts and options. Futures contracts may be based on various securities
(such as U.S. government securities), securities indices, foreign currencies and
other financial instruments and indices.
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Fund will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that the Fund may hold
positions in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of the Fund's
net assets (after taking into account unrealized profits and unrealized losses
on any such positions) and that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. The Fund's futures transactions generally will be
entered into only for traditional hedging purposes--i.e., futures contracts will
be sold to protect against a decline in the price of securities or currencies
and will be purchased to protect the Fund against an increase in the price of
securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may 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.
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<PAGE>
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 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.
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<PAGE>
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 (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.
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Indexed-Equity Derivatives--SPDRs, WEBS and DIAMONDS and OPALS. The
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
baskets of Country Securities ("OPALS"). Each of these instruments are
derivative securities whose value follows a well-known securities index or
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 (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
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 receive the physical securities comprising the underlying
baskets. 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. The Fund may enter into repurchase agreements.
The Fund's repurchase agreements will generally involve a short-term investment
in a U.S. government security or other high-grade liquid debt security, with the
seller of the underlying security agreeing to repurchase it at a mutually
agreed-upon time and price. The repurchase price is generally higher than the
purchase price, the difference being interest income to the Fund. Alternatively,
the purchase and repurchase prices may be the same, with interest at a stated
rate due to 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.
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.
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<PAGE>
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 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. The Fund may lend securities to
brokers, dealers and other financial organizations. 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.
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<PAGE>
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.
Such loans of securities are collateralized with collateral assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. There is a risk of delay in receiving collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower failed financially.
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
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
B-12
<PAGE>
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. Also, 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 requirement of Rule 144A under the 1933 Act (see below) and that,
subject to review by the Board and guidelines adopted by the Board, the Manager
has determined to be liquid.
Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
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 has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including but not limited to (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board.
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<PAGE>
Risk Factors
The following describes certain risks involved with investing in the
Fund.
Small Companies
Since the Fund may invest in smaller companies, investors should
consider carefully the special risks involved. Smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Also, 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. 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 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, the Fund 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 Fund 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 the Fund
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,
B-14
<PAGE>
involve certain transaction costs and investment risks, including dependence
upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund 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 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.
Emerging Market Countries
The Fund may invest in securities of companies domiciled in, and in
markets of, so-called "emerging market countries." The Fund may also 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.
The Fund considers a company to be an emerging markets company if its
securities are principally traded in the capital market of an emerging markets
country; it derives 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 that is or would be considered by the World Bank or the
United Nations to be emerging or developing.
Investments in companies and markets of emerging market countries 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.
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
B-15
<PAGE>
of securities in foreign countries. Also, some countries may adopt policies
which would prevent the Fund from repatriating invested capital and dividends,
withhold portions of interest and dividends at the source, or impose other
taxes, with respect to the Fund's investments in securities of issuers of that
country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Manager considers 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 Manager 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 financial loss. Furthermore,
the Fund 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 Fund might not enter into such transactions. Such inopportune
timing of utilization of hedging practices could result in substantial losses to
the Fund.
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
B-16
<PAGE>
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, 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.)
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 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 this 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.)
B-17
<PAGE>
7. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in 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), and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without
shareholder approval.)
13. Except as and unless described in 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.
B-18
<PAGE>
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.
In the future, the Fund has reserved the right, if approved by its
Board of Trustees, 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 known as "feeder" funds and the pool as the "master" fund.
Although combining assets in this manner allows for economies of scale and other
advantages, this change will not affect the investment objectives, philosophies
or disciplines currently employed by the Fund. You would receive prior notice
before we took any action. As of the date of this Statement of Additional
Information, we have not proposed instituting alternative structures for the
Fund.
Distributions and Tax Information
Distributions. The Fund receives 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 Fund is
dependent upon the amount of net investment income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Fund's Board. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its 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.
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
B-19
<PAGE>
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 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
B-20
<PAGE>
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 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.
The Trust and the Fund intend to comply with the requirements of
Section 817(h) of the Internal Revenue Code and related regulations, including
certain diversification requirements that are addition to the diversification
requirements of Subchapter M and the Investment Company Act.
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
B-21
<PAGE>
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.
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
B-22
<PAGE>
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 Trust are responsible for the overall management of
the Fund, including establishing the Fund's policies, general supervision and
review of its investment activities. The officers (the Trust, as well as the two
affiliated Trusts, The Montgomery Funds and The Montgomery Funds III, have the
same officers), who administer the Fund's daily operations, are appointed by the
Boards of Trustees. The current Trustees and officers of the Trust performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
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. ("FDI")
(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-23
<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 FDI (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.
John P. Covino, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Covino is a Vice
President and Treasury Group Manager of Treasury Servicing and Administration of
FDI. From February 1995 to November 1998, Mr. Covino was employed by Fidelity
Investments where he held multiple positions in their Institutional Brokerage
Group. Prior to joining Fidelity, Mr. Covino was employed by SunGard Brokerage
Systems where he was responsible for the technology and development of the
accounting product group.
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.
B-24
<PAGE>
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 Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also 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
- --------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-25
<PAGE>
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 Fund and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Fund. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 1999, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended 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, 1999
- -----------------------------------------------------------------------------------------------------------
Total Compensation From
Aggregate Compensation Pension or Retirement the Trust and Fund
from The Montgomery Benefits Accrued as Part Complex
Name of Trustee Funds II of Fund Expenses* (2 additional Trusts)
- ------------------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- ------------------------------ ----------------------------------------------------------------------------
John A. Farnsworth $15,000 -- $55,000
- ------------------------------ ----------------------------------------------------------------------------
Andrew Cox $15,000 -- $55,000
- ------------------------------ ----------------------------------------------------------------------------
Cecilia H. Herbert $15,000 -- $55,000
- ------------------------------ ----------------------------------------------------------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the 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
B-26
<PAGE>
average net assets. The Manager also may voluntarily reduce additional amounts
to increase the return to the Fund's investors. Any reductions made by the
Manager in its fees are subject to reimbursement by the Fund within the
following three years provided the Fund is able to effect such reimbursement and
remain in compliance with the foregoing expense limitations. The Manager
generally seeks reimbursement for the oldest reductions and waivers before
payment by the Fund for fees and expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board of
Trustees of the Trust at a duly called meeting. In considering the Agreement,
the Trustees specifically considered and approved the provision which permits
the Manager to seek reimbursement of any reduction made to its management fee
within the three-year period following such reduction subject to the Fund's
ability to effect such reimbursement and remain in compliance with applicable
expense limitations. The Trustees also considered that any such management fee
reimbursement will be accounted for on the financial statements of the Fund as a
contingent liability of the Fund and will appear as a 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,
1999 1998 1997
Emerging Markets Portfolio $2,664,737 $3,536,299 $3,614,992
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.
The Distributor. The Distributor may provide certain administrative
services to the Fund on behalf of the Manager. The Distributor will also perform
investment banking, investment advisory and brokerage services for persons other
than the Fund, including issuers of securities in which the Fund may invest.
These activities from time to time may result in a conflict of interests of the
Distributor with those of the Fund, and may restrict the ability of the
Distributor to provide services to the Fund.
The Distributor from time to time compensates other parties for the
solicitation of additional investments by existing shareholders or new
shareholder accounts. The Distributor pays compensation only to those who
B-27
<PAGE>
have a written agreement with the Distributor or the Manager. The only agreement
currently in place is with Bear, Stearns Securities Corp. ("Bear Stearns") and
relates to a very limited number of its registered representatives. The
Distributor currently pays Bear, Stearns at the annual rate of 0.25% of average
daily assets introduced and maintained in customer accounts of these
representatives. The Distributor also may reimburse certain solicitation
expenses.
The Custodian. The Chase Manhattan Bank (the "Custodian"), as the
successor to the custody business of Morgan Stanley Trust Company, serves as
principal custodian of the Fund's assets, which are maintained at the
Custodian's principal office, 270 Park Avenue, New York, New York 10017-2070,
and at the offices of its branches and agencies throughout the world. The Board
has delegated various foreign custody responsibilities to the Custodian, as the
"Foreign Custody Manager" for the Fund to the extent permitted by Rule 17f-5
under the Investment Company Act. The Custodian has entered into agreements with
foreign sub-custodians in accordance with delegation instructions approved by
the Board pursuant to Rule 17f-5. 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.
Administrative and Other Services. Montgomery Asset Management, LLC
("MAM") serves as the Administrator to the Fund pursuant to an Administrative
Services Agreement among the Trust and MAM (the "Agreement"). In approving the
Agreement, the Board of the Trust, including a majority of the independent
Trustees, recognizes that the Agreement involves an affiliate of the Trust;
however, it has made separate determinations that, among other things, the
nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trust and the supervision of
the Board of the Trust, the Administrator performs the following types of
services for the Fund: (i) furnish performance, statistical and research data;
(ii) prepare and file various reports required by federal, state and other
applicable laws and regulations; (iii) prepare and print of all documents,
prospectuses and reports to shareholders; (iv) prepare financial statements; (v)
prepare agendas, notices and minutes for each meeting of the Board; (vi) develop
and monitor compliance procedures; (vii) monitor Blue Sky filings and (viii)
manage legal services. For its services performed under the Agreement, the Fund
pays the Administrator an administrative fee based upon a percentage of the
average daily net assets of the Fund. The fee varies from an annual rate of
0.07% to 0.04% depending on the level of assets.
Chase Global Funds Services Company ("Chase"), 73 Fremont Street,
Boston, Massachusetts 02108, serves as the Sub-Administrator to the Fund
pursuant to a Mutual Funds Service Agreement (the "Sub-Agreement") between Chase
and MAM. Subject to the control, direction and supervision of MAM and the
Trusts, Chase assists MAM in providing administrative services to the Fund. As
compensation for the services rendered pursuant to the Sub-Agreement, MAM pays
Chase an annual sub-administrative fee based upon a percentage of the average
net assets in the aggregate of the Trust and The Montgomery Funds II and The
Montgomery Funds III. The sub-administrative fee is paid monthly for the month
or portion of the month Chase assists MAM in providing administrative services
to the Fund. This fee is based on all assets of the Trust and related trusts or
funds and is equal to an annual rate of 0.01625% of the first $3 billion, plus
0.0125% of the next $2 billion and 0.0075% of amounts over $5 billion. The
sub-administrative fee paid to Chase is paid from the administrative fees paid
to MAM by the Fund. Chase succeeded First Data Corporation as sub-administrator.
Chase also serves as Fund Accountant to the Trust pursuant to Mutual
Funds Service Agreement ("Fund Accounting Agreement") entered into between the
Trust and Chase on May 3, 1999. By entering into the Fund
B-28
<PAGE>
Accounting Agreement, Chase also succeeds First Data Corporation as Fund
Accountant to the Trust. As Fund Accountant, Chase provides the Trust with
various services, including, but are not limited to: (i) maintaining the books
and records for the Fund's assets, (ii) calculating net asset values of the
Fund, (iii) accounting for dividends and distributions made by the Fund, and
(iv) assisting the Fund's independent auditors with respect to the annual audit.
This fee is based on all assets of the Trust and related trusts or funds and is
equal to an annual rate of 0.04875% of the first $3 billion, plus 0.0375% of the
next $2 billion and 0.0225% of amounts over $5 billion.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreement, the Manager determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund's portfolio transactions, subject to the instructions of, and review
by, the Fund and the Trust's Board of Trustees. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager or
the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. The Fund may purchase ADRs and EDRs listed on stock
exchanges, or traded in the over-the-counter markets in the U.S. or Europe, as
the case may be. ADRs, like other securities traded in the U.S., will be subject
to negotiated commission rates. The foreign and domestic debt securities and
money market instruments in which the Fund may invest may be traded in the
over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by the Fund, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
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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 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,
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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, 1999, the Fund's total securities
transactions generated commissions of $1,828,505, none of which was paid to Bank
of America Securities (formerly Nationsbanc Montgomery Securities). For the year
ended June 30, 1998, 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, 1997, the Fund's total securities transactions generated
commissions of $2,251,340, none of which was paid to Montgomery Securities.
Between the period of January 1, 1997 through July 31, 1997, Bank of America
Securities, also formerly Montgomery Securities, was affiliated with the Fund
through its ownership of Montgomery Asset Management L.P., the former Manager of
the Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such brokers solely for selling shares of the Fund. Brokers who execute
brokerage transactions as described above may from time to time effect purchases
of shares of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund may or
may not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. The Fund may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Board 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
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<PAGE>
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.
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
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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 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
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the day the securities are being valued or, lacking any reported sales, at the
mean between the last available bid and asked price. Securities that are traded
on more than one exchange, are valued on the exchange determined by the Manager
to be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board 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
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converting a foreign currency into U.S. dollars, the Board in good faith will
establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board 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
Fund's shares. The Principal Underwriter has not been paid any underwriting
commissions for underwriting securities of the Fund during the Fund's 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
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period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions and complete redemption of
the hypothetical investment at the end of
the measuring period.
Aggregate Total Return. The Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of a l-, 5- or 10-year period at the end
of a l-, 5- or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions and complete redemption of
the hypothetical investment at the end of
the measuring period.
The Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
The total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectus. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for the Fund for the periods indicated
was as follows:
YEAR 5-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
Emerging Markets Portfolio 9.75% -1.64% -3.85%
* The Emerging markets Portfolio commenced operations on December 17, 1993.
Comparisons. To help investors better evaluate how an investment in the
Fund might satisfy their investment objectives, advertisements and other
materials regarding the Fund may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. The following
publications, indices and averages may be used:
(a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
(b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
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<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) 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.
The Fund may also publish its relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.,
VARDS and Morningstar, Inc.
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 Funds may publish
or distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Bloomberg, Morningstar,
Barings, WEFA, consensus estimates, Datastream, Micropal, I/B/E/S Consensus
Forecast, Worldscope, and Reuters as well as both local and international
brokerage firms. For example, the Funds may suggest that certain countries or
areas may be particularly appealing to investors because of interest rate
movements, increasing exports, and/or economic growth. The Funds may, by way of
further example, present a region as possessing the fastest growing economies
and may also present projected gross domestic product (GDP) for selected
economies.
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.
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<PAGE>
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market.
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 in mutual funds (as of
June 30, 1999, over $3.9 billion for retail and institutional investors) and
total shareholders invested in the Funds (as of June 30, 1999, around 200,000).
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; expenses incurred in
connection with the establishment and registration of shares of any other funds
constituting a separate series of the Trust will be assumed by each respective
series. The expenses incurred in connection with the establishment and
registration of shares of the Fund as a separate series of the Trust have been
assumed by the Fund and are being amortized over a period of five years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses after commencement of the Fund's
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, The Chase Manhattan Bank (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.
DST Systems, Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073,
serves as the Fund's Transfer and Dividend Disbursing Agent.
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the independent auditor for the Fund.
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.
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As of September 30, 1999 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 50.71%
Merged Endowment Pool
Attn: Robert Blagden
2770 Sand Hill Road
Menlo park, California 94205-7020
ASEA Brown Boveri Master Trust 571,182 21.97%
c/o Eric W. Wood
P.O. Box 120071
Stamford, Connecticut 06912-0071
Middlesex County Retirement System 224,516 8.64%
Attn: Nancy B. O'Neil
40 Thorndike Street
New Superior Courthouse, 3rd Level
Cambridge, Massachusetts 02141-1755
As of September 30, 1999 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,
1999 for the Fund, as contained in the Annual Report to Shareholders of the Fund
for the fiscal period ended June 30, 1999 (the "Report"), are incorporated
herein by reference to the Report.
B-39
<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.
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.
B-40
<PAGE>
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 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
B-41
<PAGE>
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.
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.
B-42
<PAGE>
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 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.
B-43
<PAGE>
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.
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.
B-44
<PAGE>
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.
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-45
<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 - Filed with..
(j) Other Opinions: Independent Auditors' Consent - Filed herewith.
(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-1Plan) is
incorporated by reference to Post-Effective Amendment No. 22.
(n) Financial Data Schedule. Not applicable.
(o) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan is
incorporated by reference to Post-Effective Amendment No. 37.
<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.
<TABLE>
<CAPTION>
<S> <C>
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
F. Scott Tuck Executive Vice President of MAM, LLC
David E. Demarest Secretary, Treasurer and Executive Vice President of MAM, LLC
</TABLE>
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 Registrant, 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.
C-2
<PAGE>
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
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.
The 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.
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Margaret W. Chambers
Compliance Officer, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Treasurer and Joseph F. Tower, III
Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
</TABLE>
(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.
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.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to its 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 28th day of October 1999.
THE MONTGOMERY FUNDS II
By: George A. Rio*
---------------------
George A. Rio
President and Principal Executive Officer;
Treasurer and Principal Financial and
Accounting Officer
<TABLE>
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.
<CAPTION>
<S> <C> <C>
George A. Rio* President and October 28, 1999
- -------------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle* Chairman of the October 28, 1999
- -------------------- Board of Trustees
R. Stephen Doyle
Andrew Cox* Trustee October 28, 1999
- --------------------
Andrew Cox
Cecilia H. Herbert* Trustee October 28, 1999
- --------------------
Cecilia H. Herbert
John A. Farnsworth* Trustee October 28, 1999
- --------------------
John A. Farnsworth
</TABLE>
*By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact pursuant to Powers of Attorney
previously filed.
C-5
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 23 (i)
Consent and Opinion of Counsel as to Legality of Shares
- --------------------------------------------------------------------------------
<PAGE>
Law Offices of
Paul, Hastings, Janofsky & Walker LLP
A Limited Liability Partnership Including Professional Corporations
345 California Street
San Francisco, California 94104-2635
Telephone (415) 835-1600
Facsimile (415) 217-5333
Internet www.phjw.com
October 28, 1999
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
Attn: Ms. Kate Murphy
Re: The Montgomery Funds II (the "Registrant")
Ladies and Gentlemen:
We hereby consent to the continued use in the Registrant's
Registration Statement, until its withdrawal, of our opinion given on October
26, 1998 (the "Prior Opinion") respecting the legality of the shares of
beneficial interest for the following series of The Montgomery Funds II:
Montgomery Global-Long Short Fund, Montgomery U.S. Asset Allocation Fund and
Montgomery Institutional Series: Emerging Markets Portfolio.
The Prior Opinion was filed as an exhibit to Post-Effective
Amendment No. 37 filed with the Commission on October 29, 1998.
Very truly yours,
Paul, Hastings, Janofsky & Walker LLP
C-6
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 23 (j)
Independent Auditors' Consent
- --------------------------------------------------------------------------------
C-7
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 49 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated August 18, 1999, relating to the financial
statements and financial highlights appearing in the June 30, 1999 Annual Report
to Shareholders of the Montgomery Institutional Series: Emerging Markets
Portfolio (one of the portfolios constituting The Montgomery Funds II), which is
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "General Information" in the Statement of
Additional Information.
PricewaterhouseCoopers LLP
San Francisco, CA
October 29, 1999
