As filed with the Securities and Exchange Commission on June 2, 2000
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. 51
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 52
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:
_X_ immediately upon filing pursuant to Rule 485(b)
___ on ______________ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on ______________ pursuant to Rule 485(a)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of Post-Effective Amendment
Part A - Combined Prospectus for Class R shares of Montgomery Growth
Fund, Montgomery U.S. Emerging Growth Fund, Montgomery Small
Cap Fund, Montgomery International Growth Fund, Montgomery
Global Opportunities Fund, Montgomery Global 20 Fund,
Montgomery Global Communications Fund, Montgomery Emerging
Markets Fund, Montgomery Emerging Asia Fund, Montgomery Total
Return Bond Fund, Montgomery Short Duration Government Bond
Fund, Montgomery Government Money Market Fund, Montgomery
California Tax-Free Intermediate Bond Fund, Montgomery
California Tax-Free Money Fund and Montgomery Federal Tax-Free
Money Fund.
Part A - Combined Prospectus for Class P shares of Montgomery Growth
Fund, Montgomery Small Cap Fund, Montgomery International
Growth Fund, Montgomery Global 20 Fund, Montgomery Emerging
Markets Fund, Montgomery Short Duration Government Bond Fund,
Montgomery Government Money Market Fund, and Montgomery
California Tax-Free Intermediate Bond Fund.
Part A - Combined Prospectus for Class P Shares of Montgomery Small Cap
Fund, Montgomery Balanced Fund and Montgomery Emerging Markets
Fund.
Part B - Combined Statement of Additional Information for Class R
shares of Montgomery Growth Fund, Montgomery U.S. Emerging
Growth Fund, Montgomery Small Cap Fund, Montgomery
International Growth Fund, Montgomery Global Opportunities
Fund, Montgomery Global 20 Fund, Montgomery Global
Communications Fund, Montgomery Emerging Markets Fund,
Montgomery Emerging Asia Fund, Montgomery Total Return Bond
Fund, Montgomery Short Duration Government Bond Fund,
Montgomery Government Money Market Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery California
Tax-Free Money Fund and Montgomery Federal Tax-Free Money
Fund, and Class P shares of certain Funds.
Part C - Other Information
Signature Page
Exhibits
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS R SHARES OF
MONTGOMERY GROWTH FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL 20 FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT MONEY MARKET FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
---------------------------------------------------------------------
<PAGE>
Prospectus
June __, 2000
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
U.S. Emerging Growth Fund
Small Cap Fund
Balanced Fund (formerly named U.S. Asset Allocation Fund)
International & Global Equity Funds
International Growth Fund
Global Opportunities Fund
Global 20 Fund (formerly named Select 50 Fund)
Global Long-Short Fund
Global Communications Fund
Emerging Markets Fund
Emerging Market Focus Fund
Emerging Asia Fund
U.S. Fixed-Income & Money Market Funds
Total Return Bond Fund
Short Duration Government Bond Fund
Government Money Market Fund
California Tax-Free Intermediate Bond Fund
California Tax-Free Money Fund
Federal Tax-Free Money Fund
The Montgomery Funds have registered each mutual fund offered in this prospectus
with the U.S. Securities and Exchange Commission (SEC). That registration does
not imply, however, that the SEC endorses the Funds.
The SEC has not approved 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
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 6:00 A.M. to 5:00 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
Email
[email protected]
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 U.S. Emerging Growth Fund....................................
Montgomery Small Cap Fund...............................................
Montgomery Balanced Fund (formerly named U.S. Asset Allocation Fund)....
International and Global Equity Funds
Montgomery International Growth Fund....................................
Montgomery Global Opportunities Fund....................................
Montgomery Global 20 Fund (formerly named Select 50 Fund)...............
Montgomery Global Long-Short Fund.......................................
Montgomery Global Communications Fund...................................
Montgomery Emerging Markets Fund........................................
Montgomery Emerging Markets Focus Fund..................................
Montgomery Emerging Asia 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 California Tax-Free Intermediate Bond Fund...................
Montgomery California Tax-Free Money Fund
Montgomery Federal Tax-Free Money Fund..................................
Portfolio Management.........................................................
Management Fees..............................................................
Additional Investment Strategies and Related Risks...........................
Montgomery Global 20 Fund...............................................
2
<PAGE>
Montgomery Global Long-Short Fund.......................................
Montgomery Emerging Markets Focus Fund..................................
Montgomery Emerging Asia Fund...........................................
The Euro: Single European Currency......................................
Defensive Investments...................................................
Portfolio Turnover......................................................
Additional Benchmark Information........................................
Financial Highlights.........................................................
Account Information..........................................................
Becoming a Montgomery Shareholder.......................................
How Fund Shares are Priced..............................................
Montgomery Online.......................................................
Buying Additional Shares................................................
Exchanging Shares.......................................................
Selling Shares..........................................................
Other Policies..........................................................
Tax Withholding 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>
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.
Call toll-free 800.572.FUND [3863]
[on every even number page from this point on]
4
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
94 95 96 97 98 99
--------------------------------------------------------------------------------
20.91% 23.65% 20.20% 24.16% 2.10% 20.56%
During the six-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 20.56% 17.83% 20.74%
S&P 500 Index 21.04% 28.56% 22.96%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
2000 Return Through 3/31/00: 3.54% Average Annual Returns Through 12/31/99
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* 2.00%
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%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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 pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNGFX.
www.montgomeryfund.com [on every odd number page from this point on]
5
<PAGE>
U.S. Emerging Growth Fund - MNMCX
Objective
* Seeks long-term capital appreciation by investing in growth-oriented U.S.
smaller-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 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.
Call toll-free 800.572.FUND [3863]
6
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
95 96 97 98 99
--------------------------------------------------------------------------------
28.66% 19.12% 27.05% 7.94% 18.83%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+32.68%) and the worst quarter was Q3 1998 (-17.24%).
U.S. Emerging Growth Fund 18.83% 20.09% 20.07%
Russell 2000 Index 21.26% 16.69% 16.69%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(12/30/94)
2000 Return Through 3/31/00: 12.70% Average Annual Returns Through 12/31/99
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 * 2.00%
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%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. 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 1.50%. 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 pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNMCX.
www.montgomeryfund.com
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.
Call toll-free 800.572.FUND [3863]
8
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
91 92 93 94 95 96 97 98 99
--------------------------------------------------------------------------------
98.75% 9.59% 24.31% -9.96% 35.12% 18.69% 23.86% -7.93% 55.81%
During the nine-year period described above in the bar chart, the Fund's best
quarter was Q4 1998 (+47.31%) and the worst quarter was Q3 1998 (-32.37%).
Small Cap Fund 55.81% 23.30% 21.09%
Russell 2000 Index 21.26% 16.69% 13.98%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(7/13/90)
2000 Return Through 3/31/00: 7.96% Average Annual Returns Through 12/31/99
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 1.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.32%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.32%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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
Paul LaRocco
For more details see pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNSCX.
www.montgomeryfund.com
9
<PAGE>
Balanced Fund - MNAAX
Formerly named Montgomery U.S. Asset Allocation Fund.
Objective
* Seeks high total return (consisting of both capital appreciation and
income) while also seeking to reduce risk by allocating its assets among
stocks, bonds and money market securities
Principal Strategy [clipart]
As a "fund-of-funds," the Montgomery Balanced Fund currently invests its assets
in four underlying Montgomery Funds:
* For U.S. Equity Exposure, Montgomery Growth Fund and Montgomery Equity
Income Fund
* For U.S. bond exposure, Montgomery Total Return Bond Fund
* For cash exposure, Montgomery Money Market Fund
The Fund's strategy is to analyze various market factors, including relative
risk and return, to help determine what we believe is an optimal allocation
among stocks, bonds and cash. The Fund's total equity exposure may range from 50
to 80% and its bond exposure may range from 20 to 50% of its assets. It may
invest up to 20% of its assets in a Montgomery Money Market Fund. At times, the
Fund may also invest a small portion of its assets in other Montgomery Funds to
gain exposure to additional areas, such as the international markets.
For details about the strategies of the Montgomery Growth Fund, the Montgomery
Total Return Bond Fund and the Montgomery Money Market Fund, please see the
respective sections of this prospectus. The Montgomery Equity Income Fund seeks
current income and long-term capital appreciation, while striving to minimize
portfolio volatility by investing in large, dividend-paying U.S. companies.
The Fund's portfolio managers may adjust the proportion of assets allotted to
the underlying portfolios in response to changing market conditions, when
appropriate.
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 and the Montgomery
Equity Income 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 those Funds invest. 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.
Call toll-free 800.572.FUND [3863]
10
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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 commonly used
indices for its market segment. Of course, past performance is no guarantee of
future results.
--------------------------------------------------------------------------------
[bar chart]
95 96 97 98 99
--------------------------------------------------------------------------------
32.61% 12.85% 19.01% 6.18% 12.85%
During the five-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%).
Balanced Fund 12.85% 16.37% 17.71%
S&P 500 Index 21.04% 28.56% 25.54%
Lehman Brothers Aggregate Bond
Index -0.82% 7.73% 6.68%
--------------------------------------------------------------------------------
Inception
1 Year 5 Years (3/31/94)
2000 Return Through 3/31/00: 3.45% Average Annual Returns Through 12/31/99
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 * 2.00%
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%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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.
11
<PAGE>
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 pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNAAX.
www.montgomeryfund.com
12
<PAGE>
International Growth Fund - MNIGX
Objective
* Seeks long-term capital appreciation by investing in medium- and large-cap
companies in developed stock markets outside the United States
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 France, Germany, Italy, the Netherlands and the United Kingdom, 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 values may decline against the U.S. dollar.
Call toll-free 800.572.FUND [3863]
13
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
96 97 98 99
------------------------------------------------------------------------
20.96% 10.15% 28.69% 26.25%
During the four-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+29.34%) and the worst quarter was Q3 1998 (-17.17%).
International Growth Fund 26.25% 21.62%
MSCI EAFE Index+ 27.30% 14.02%*
--------------------------------------------------------------------------------
* Calculated from 6/30/95 1 Year Inception
(7/3/95)
+ See page __ for a description of this index.
2000 Return Through 3/31/00: 0.55% Average Annual Returns Through 12/31/99
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 1.10%
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%
** Deducted from net proceeds of shares redeemed (or exchanged) within three
months after purchase. 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 1.65%. 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
-----------------------------------------------------
$168 $522 $900 $1,958
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNIGX.
www.montgomeryfund.com
14
<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 France,
Germany, Italy, Japan, the Netherlands and the United Kingdom. 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.
Call toll-free 800.572.FUND [3863]
15
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
94 95 96 97 98 99
--------------------------------------------------------------------------------
-8.55% 17.26% 20.18% 11.05% 32.76% 57.53%
During the six-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+40.46%) and the worst quarter was Q3 1998 (-20.38%).
Global Opportunities Fund 57.53% 26.76% 22.43%
MSCI World Index+ 24.93% 19.76% 16.74%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
+ See page ___ for a description of this index.
2000 Return Through 3/31/00: 8.07% Average Annual Returns Through 12/31/99
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 * 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 1.15%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.40%
Fee Reduction and/or Expense Reimbursement 0.39%
Net Expenses 2.01%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. 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
-----------------------------------------------------
$203 $629 $1,080 $2,327
[clipart][sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNGOX.
www.montgomeryfund.com
16
<PAGE>
Global 20 Fund - MNSFX
Formerly named the Montgomery Select 50 Fund
Objective
* Seeks long-term capital appreciation by investing in a concentrated
portfolio of companies located throughout the world
Principal Strategy [clipart]
Under normal conditions, the Fund invests in a limited number of companies
worldwide, typically between 20 and 30, but generally not fewer than 20. The
Fund will limit its investment in any one country to no more than 40% of its
assets, or no more than two times the country's percentage weighting in the
benchmark MSCI World Index-whichever is greater. The MSCI World Index is
described on page __. The Fund's investments in U.S. companies are not subject
to these limits, however.
The Fund's portfolio managers seek well-managed companies of any size that they
believe will be able to increase their corporate sales and earnings on a
sustained basis. From these prospective investments, the managers favor
companies that they consider undervalued or reasonably valued relative to the
issuer's long-term prospects. The managers also favor companies that they
believe have a competitive advantage, offer innovative products or services and
may profit from such trends as deregulation and privatization. The Fund's
portfolio managers and analysts frequently travel to the countries where the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends affecting investments in those countries.
Because the Fund may concentrate up to 35% of its assets in the global
communications industry, its share value may be more volatile than that of more
diversified funds and may reflect trends in the global communications industry,
which may be subject to greater changes in governmental policies and regulation
than any other industries.
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. Because the Fund is a
non-diversified mutual fund that typically invests in the securities of only 20
to 30 companies, the value of an investment in the Fund will vary more in
response to developments or changes in the market value affecting particular
stocks than will an investment in a diversified mutual fund investing in a
greater number of securities.
To the extent that the Fund may invest 40% or more of its assets in any one
country, the Fund's share value may be more volatile than that of mutual funds
not sharing this geographic concentration. In addition, the Fund may invest up
to 30% of the Fund's assets in any one emerging markets country, which may
expose it to additional risks. Foreign and emerging 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
and 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. For a more detailed
discussion of the risks mentioned above, see "Additional Investment Strategies
and Related Risks" on page 46.
Call toll-free 800.572.FUND [3863]
17
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
96 97 98 99
------------------- ----------------- ---------------- -----------------
20.46% 24.93% 9.40% 19.57%
During the four-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+30.49%) and the worst quarter was Q3 1998 (-17.10%).
Global 20 Fund 45.29% 28.10%
MSCI World Index+ 24.93% 19.57%*
--------------------------------------------------------------------------------
* Calculated from 9/30/95 1 Year Inception
(10/2/95)
2000 Return Through 3/31/00: 5.13% Average Annual Returns Through 12/31/99
+ See page 49 for a description of this index. The Fund was formerly compared
with the S&P 500 Index. This change was effected becuase 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 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 * 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 0.51%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.76%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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
Portfolio managers from each equity team
For more details see pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNSFX.
www.montgomeryfund.com
18
<PAGE>
Global Long-Short Fund - MNGLX
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 when 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 46.
Call toll-free 800.572.FUND [3863]
19
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
98 99
---------------------------------
53.39%# 135.07%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+60.33%)# and the worst quarter was Q3 1998 (-3.99%)#.
Global Long-Short Fund# 135.07% 89.89%
MSCI All-Country World Free Index + 26.82% 24.37%
--------------------------------------------------------------------------------
1 Year Inception
(12/31/97)
2000 Return Through 3/31/00: 11.37% Average Annual Returns Through 12/31/99
# 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 this index.
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* 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 Servicing 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
three months after purchase. 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 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.
20
<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 pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNGLX.
www.montgomeryfund.com
21
<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 managers
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 that they consider to be under- or reasonably valued relative to their
long-term prospects and 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 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.
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.
Call toll-free 800.572.FUND [3863]
22
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
94 95 96 97 98 99
--------------------------------------------------------------------------------
-13.41% 16.88% 8.02% 15.83% 54.97% 104.02%
During the six-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+62.44%) and the worst quarter was Q3 1998 (-20.19%).
Global Communications Fund 104.02% 35.83% 29.18%
MSCI Telecommunications Index+ 42.75% 27.52% 20.60%*
--------------------------------------------------------------------------------
* Calculated from 5/31/93 1 Year 5 Years Inception
(6/1/93)
+ See page __ for a description of this index.
2000 Return Through 3/31/00: 14.27% Average Annual Returns Through 12/31/99
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 1.22%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.47%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.69%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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
Stephen Parlett
For more details see page ___
For financial highlights,
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNGCX.
www.montgomeryfund.com
23
<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 in-depth financial review with 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 values may decline against the U.S. dollar.
Call toll-free 800.572.FUND [3863]
24
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
93 94 95 96 97 98 99
--------------------------------------------------------------------------------
58.66% -7.72% -9.08% 12.32% -3.14% -38.28% 63.16%
During the seven-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+35.91%) and the worst quarter was Q3 1998 (-24.65%).
Emerging Markets Fund 63.16% -0.08% 4.97%
MSCI Emerging Markets Free Index+ 66.41% 2.00% 7.09%*
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(3/1/92)
* Calculated from 2/28/92.
+ See page __ for a description of this index. The Fund was formerly compared
with only the IFC Global Composite Index. This change was effected because
the MSCI Emerging Markets Free Index better represents the types of foreign
securities in which the Fund may invest.
2000 Return Through 3/31/00: 2.61% Average Annual Returns Through 12/31/99
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 1.16%
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%
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. 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
-----------------------------------------------------
$207 $641 $1,100 $2,369
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
Frank Chiang
For more details see pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNEMX.
www.montgomeryfund.com
25
<PAGE>
Emerging Markets Focus Fund
Objective
* Seeks long-term capital appreciation by investing in a concentrated
portfolio of companies based or operating primarily in developing economies
throughout the world
Principal Strategy [clipart]
The Fund normally invests at least 65% of its total assets in equity securities
of not fewer than three but no more than 10 developing countries. The Fund may
invest up to 50% of its total assets in a single emerging market. The portfolio
manager currently regards the following to be developing countries/economies:
Latin America, Asia, Europe, the Middle East and Africa.
The Fund's strategy combines in-depth financial review with on-site analysis of
companies, countries and regions to identify potential investments. The Fund's
portfolio manager and analysts frequently travel to the emerging markets to gain
firsthand insight into the economic, political and social trends that affect
investments in those countries. These techniques help determine in which stocks
and countries the Fund will invest. The Fund allocates its assets among emerging
countries with stable or improving macroeconomics environments and invests in
companies within those countries that the portfolio manager believes have high
capital appreciation potential without excessive risks. The portfolio manager
may sell stocks "short" (sell a security the Fund does not own) in an effort to
partially hedge the Fund's other investments or to garner returns from insights
made from research.
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. In the past many emerging markets restricted the flow of money into
or out of their stock markets, and some continue to impose restrictions on
foreign investors. The economies of emerging countries may be predominantly
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 values may decline against the U.S.
dollar. Because the Fund will invest a larger percentage of its assets in fewer
countries, the value of an investment in the Fund may be more volatile and
subject to higher risks than investments in other general emerging markets
mutual funds or foreign stock mutual funds. Also, 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 portfolio manager expects. For a more detailed
discussion of the risks mentioned above, see "Additional Investment Strategies
and Related Risks" on page 46.
Call toll-free 800.572.FUND [3863]
26
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
98 99
------------------------------------
-20.76% 122.38%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+44.29%) and the worst quarter was Q2 1998 (-18.36%).
Emerging Markets Focus Fund 122.38% 32.75%
MSCI Emerging Markets Free Index+ 66.41% 11.46%
--------------------------------------------------------------------------------
1 Year Inception
(12/31/97)
+ See page __ for a description of this index.
2000 Return Through 3/31/00: 2.30% Average Annual Returns Through 12/31/99
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 * 2.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets) ++
Management Fee 1.10%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 7.72%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 8.82%
Fee Reduction and/or Expense Reimbursement 7.22%
Net Expenses 1.60%
* Deducted from net proceeds of shares redeemed (or exchanged) within three
months after purchase. 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 1.60%. 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
-----------------------------------------------------
$162 $504 $869 $1,893
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/_____.
www.montgomeryfund.com
27
<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 analysis of companies and countries in that region. The Fund invests at
least 65% of its total assets in the stocks of companies that are based or
operate mainly in developing Asian countries:
* Bangladesh * India * The Philippines * Taiwan
* China/Hong Kong * Indonesia * Singapore * Thailand
China/Hong Kong is * Malaysia * South Korea * Vietnam
considered to be a * Pakistan * Sri Lanka
single emerging Asia
country.
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 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
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. For a more detailed discussion
of the risks mentioned above, see "Additional Investment Strategies and Related
Risks" on page 46.
Call toll-free 800.572.FUND [3863]
28
<PAGE>
INTERNTATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------------------------------------------
-28.30% -14.72% 56.00%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q2 1999 (+61.16%) and the worst quarter was Q4 1997 (-38.16%).
Emerging Asia Fund 56.00% 4.52%
MSCI All-Country
Asia Free (ex-Japan) Index+ 64.67% -2.27%
--------------------------------------------------------------------------------
1 Year Inception
(9/30/96)
+ See page ___ for a description of this index.
2000 Return Through 3/31/00: -3.51% Average Annual Returns Through 12/31/99
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* 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 the net proceeds of shares redeemed (or exchanged) within
three months after purchase. 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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNEAX.
www.montgomeryfund.com
29
<PAGE>
Total Return Bond Fund - MNTRX
Objective
* Seeks maximum total return consisting of both income and capital
appreciation, while striving to preserve shareholders' initial investment
(principal) by investing in investment-grade bonds
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 managers believe
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
managers believe 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.
Call toll-free 800.572.FUND [3863]
30
<PAGE>
U.S. FIXED-INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
98 99
----------------------------------
8.72% -0.59%
During the two-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+4.30%) and the worst quarter was Q2 1999 (-0.86%).
Total Return Bond Fund -0.59% 5.76%
Lehman Brothers Aggregate Bond Index -0.82% 5.62%
--------------------------------------------------------------------------------
1 Year Inception
(6/30/97)
2000 Return Through 3/31/00: 2.57% Average Annual Returns Through 12/31/99
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 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.
** Montgomery Asset Management enters into special transactions that are
expected to increase the net income yield of the Fund (such as reverse
repurchase agreement transactions). These transactions, however, may also
generate interest charges, however, which are reflected in the expense
ratio above. The interest charges generated for the period presented were
0.46%. The operating expense ratio excluding these interest charges was
0.70%.
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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNTRX.
www.montgomeryfund.com
31
<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.
Call toll-free 800.572.FUND [3863]
32
<PAGE>
U.S. FIXED-INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
93 94 95 96 97 98 99
--------------------------------------------------------------------------------
8.09% 1.13% 11.51% 5.14% 6.97% 7.38% 2.56%
During the seven-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 2.56% 6.67% 6.09%
Lehman Brothers Gov't.
Bond 1-3 Year Index 2.98% 6.47% 5.44%*
--------------------------------------------------------------------------------
* Calculated from 11/30/92 1 Year 5 Years Inception
(12/18/92)
2000 Return Through 3/31/00: 1.17% Average Annual Returns Through 12/31/99
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 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%.
*** Montgomery Asset Management enters into special transactions that are
expected to increase the net income yield of the Fund (such as reverse
repurchase agreement transactions). These transactions also generate
interest charges, however, which are reflected in the expense ratio above.
The interest charges generated for the period presented were 0.73%. The
operating expense ratio excluding these interest charges is 0.62%.
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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNSGX.
www.montgomeryfund.com
33
<PAGE>
Government Money Market Fund - MNGXX
Formerly named Montgomery Government Reserve Fund.
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.
Call toll-free 800.572.FUND [3863]
34
<PAGE>
U.S. FIXED INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
93 94 95 96 97 98 99
--------------------------------------------------------------------------------
2.83% 3.78% 5.54% 5.04% 5.16% 5.14% 4.87%
During the seven-year period described above in the bar chart, the Fund's best
quarter was Q2 1995 (+1.39%) and the worst quarter was Q2 1993 (+0.65%).
Gov't Money Market Fund 4.87% 5.15% 4.56%
Lipper U.S. Gov't Money
Market Fund Average 4.46% 4.92% 4.33%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/14/92)
2000 Return Through 3/31/00: 1.36% Average Annual Returns Through 12/31/99
Seven-Day Yield as of 12/31/99: 5.28%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 5:00 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 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 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 pages ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNGXX.
www.montgomeryfund.com
35
<PAGE>
California Tax-Free Intermediate Bond Fund - MNCTX
This fund is intended for California residents only.
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. 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 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. 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.
Call toll-free 800.572.FUND [3863]
36
<PAGE>
U.S. FIXED-INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
94 95 96 97 98 99
--------------------------------------------------------------------------------
0.05% 11.41% 4.51% 7.50% 6.06% -1.24%
During the six-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+3.59%) and the worst quarter was Q2 1999 (-2.02%).
CA Tax-Free Int. Bond Fund -1.24% 5.57% 4.63%
Merrill Lynch CA Intermediate
Municipal Bond Index 0.27% 5.77% 4.27%*
--------------------------------------------------------------------------------
* Calculated from 6/30/93 1 Year 5 Years Inception
(7/1/93)
2000 Return Through 3/31/00: 2.35% Average Annual Returns Through 12/31/99
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 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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MNCTX.
www.montgomeryfund.com
37
<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. 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.
Call toll-free 800.572.FUND [3863]
38
<PAGE>
U.S. FIXED-INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
95 96 97 98 99
--------------------------------------------------------------------------------
3.36% 2.90% 3.03% 2.85% 2.52%
During the five-year period described above in the bar chart, the Fund's best
quarter was Q4 1994 (+0.91%) and the worst quarter was Q3 1999 (+0.59%).
CA Tax-Free Money Fund 2.52% 2.93% 2.96%
Lipper California Tax-Exempt
Money Market Funds Average 2.48% 2.89% 2.89%
--------------------------------------------------------------------------------
1 Year 5 Year Inception
(9/30/94)
2000 Return Through 3/31/00: 0.61% Average Annual Returns Through 12/31/99
Seven-Day Yield as of 12/31/99: 3.25%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. AND 5:00 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 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 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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MCFXX.
www.montgomeryfund.com
39
<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.
Call toll-free 800.572.FUND [3863]
40
<PAGE>
U.S. FIXED-INCOME & MONEY MARKET FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------------------------------------------
3.18% 3.03% 2.80%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1996 (+0.89%) and the worst quarter was Q1 1999 (+0.62%).
Federal Tax-Free Money Fund 2.80% 3.08%
Lipper Tax-Exempt Money
Market Funds Average 2.67% 2.93%
--------------------------------------------------------------------------------
1 Year Inception
(7/15/96)
2000 Return Through 3/31/00: 0.77% Average Annual Returns Through 12/31/99
Seven-Day Yield as of 12/31/99: 4.12%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 5:00 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 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 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 ___
For daily performance and manager commentaries,
visit www.montgomery funds.com/Funds/MFFXX.
www.montgomeryfund.com
41
<PAGE>
PORTFOLIO MANAGEMENT
The investment manager of The Montgomery Funds is Montgomery Asset Management,
LLC. Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank
AG, one of the largest publicly held commercial banks in Germany. As of December
31, 1999, Montgomery Asset Management managed approximately $5 billion on behalf
of some 200,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, Senior Portfolio Manager and Principal
* Montgomery Growth Fund (since 1993)
* Montgomery Balanced Fund (since 1994)
* Montgomery U.S. Emerging Growth Fund (since 1995)
* Montgomery Global 20 Fund (since 1995)
Mr. Honour joined Montgomery in 1993 from Twentieth Century Investors in Kansas
City, Missouri, where he was a vice president and portfolio manager. There, he
helped manage several growth mutual funds. Before joining Twentieth Century, he
was vice president and portfolio manager at Alliance Capital Management in San
Francisco. Mr. Honour has a bachelor of science degree and obtained highest
honors in finance from the University of Louisville, Kentucky.
[photo] BRADFORD KIDWELL, Portfolio Manager and Principal
* Montgomery Small Cap Fund (since 1991)
Mr. Kidwell joined Montgomery from Oasis Financial Partners, a Montgomery
Securities-affiliated fund investing in savings and loans, where he was a
general partner and portfolio manager. Prior to that he was vice president of
equity research at Dean Witter Reynolds, with responsibility for covering the
savings and loan industry. Mr. Kidwell received a bachelor of arts degree in
economics from the University of California, Los Angeles and has done graduate
work in Finance at the University of San Francisco.
[photo] PAUL LAROCCO, Portfolio, Manager and Principal
* Montgomery Small Cap Fund (since 2000)
Before joining Montgomery Mr. LaRocco was a senior portfolio manager at Founders
Asset Management from 1998 to 1999, with responsibility for several large- and
mid-cap growth funds. From 1993 to 1998 he was a portfolio manager for a number
of small- and mid-cap funds at Oppenheimer Funds. Mr. LaRocco holds a master of
business administration degree in finance from the University of Chicago
Graduate School of Business and has a bachelor of science degree in
physiological psychology and a bachelor of arts in biological sciences from the
University of California, Santa Barbara.
[photo] KATHRYN PETERS, Portfolio Manager and Principal
* Montgomery Growth Fund (since 1995)
* Montgomery U.S. Emerging Growth Fund (since 1995)
* Montgomery Global 20 Fund (since 1995)
Before joining Montgomery Ms. Peters worked for the investment banking division
of Donaldson, Lufkin & Jenrette in New York, evaluating prospective equity
investments for the merchant banking fund, including equity and high-yield
offerings. Prior to that she analyzed mezzanine investments for Barclays de
Zoete Wedd in New York and worked in the leveraged buyout group of Marine
Midland Bank. Ms. Peters has a master of business of administration degree from
Harvard Graduate School of Business Administration and a bachelor of arts degree
with high honors in psychology with a concentration in business from Boston
College.
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
* Montgomery Small Cap Fund (since 1991)
Before joining Montgomery in 1991, Mr. Philpott served as a securities analyst
with Boettcher & Company, where he focused on the consumer and
telecommunications industries. Prior to that he worked with Berger Associates,
Inc., an investment management firm, as a general securities analyst. Mr.
Philpott holds a master of business administration degree from the Darden School
at the University of Virginia
Call toll-free 800.572.FUND [3863]
42
<PAGE>
and a bachelor of arts degree in economics from Washington and Lee University.
Mr. Philpott is a Chartered Financial Analyst.
[photo] CHARLES I. REED, Portfolio Manager
* Montgomery Small Cap Fund (since 2000)
Before joining Montgomery in 1997, Mr. Reed was an equity analyst for Berger
Associates from 1995 to 1997 where he conducted research on publicly traded
companies, performed fundamental analysis of data networking companies, and
developed and maintained financial models on companies within the financial
telecommunications and temporary staffing industries. Mr. Reed received a
bachelor of science degree in finance from Colorado State University and he is
currently completing his master of science degree in finance with an emphasis in
financial analysis from the University of Colorado. He is a Chartered Financial
Analyst.
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
* Montgomery Small Cap Fund (since 1990)
Mr. Roberts has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery in 1990, he was vice president and portfolio manager at
Founders Asset Management, where he was responsible for the management of three
separate growth-oriented small cap mutual funds. Before joining Founders, Mr.
Roberts managed a health care sector mutual fund as portfolio manager at
Financial Programs, Inc. He holds a master of business administration degree
from the University of Colorado and a bachelor of arts degree in economics and
history from Bowdoin College.
International and Global Equity Funds
[photo] JOHN BOICH, CFA, Senior Portfolio Manager and Principal
* Montgomery Global Opportunities Fund (since 1993)
* Montgomery International Growth Fund (since 1995)
* Montgomery Global 20 Fund (since 2000)
* Montgomery Global Long-Short Fund (since 2000)
Prior to joining Montgomery, Mr. Boich was vice president and portfolio manager
at The Boston Company Institutional Investors, Inc., with responsibility for the
development and subsequent management of their flagship international equity
product. Before joining The Boston Company, he was a founder and co-manager of
The Common Goal World Fund, a global equity partnership. Mr. Boich holds a
bachelor of arts degree in economics from the University of Colorado, and is a
Chartered Financial Analyst.
[photo] OSCAR CASTRO, CFA, Senior Portfolio Manager and Principal
* Montgomery Global Opportunities Fund (since 1993)
* Montgomery Global Communications Fund (since 1993)
* Montgomery International Growth Fund (since 1995)
* Montgomery Global 20 Fund (since 2000)
* Montgomery Global Long-Short Fund (since 2000)
Prior to joining Montgomery, Mr. Castro was vice president and portfolio manager
at G.T. Capital Management, where he helped launch and manage mutual funds
specializing in global telecommunications and Latin America. Preceding this he
was a founder and co-manager of The Common Goal World Fund, a global equity
partnership. Mr. Castro holds a master of business administration degree in
finance from Drexel University, Pennsylvania and a bachelor of science degree in
chemical engineering from Simon Bolivar University in Venezuela, and is a
Chartered Financial Analyst.
[photo] FRANK CHIANG, Portfolio Manager and Principal
* Montgomery Emerging Markets Fund (since 1996)
* Montgomery Emerging Asia Fund (since 1996)
Mr. Chiang was formerly with TCW Asia Ltd., Hong Kong, where he was a managing
director and portfolio manager responsible for TCW's Asian Equity strategy.
Prior to TCW Asia, he was associate director and portfolio manager for Wardley
Investment Services, Hong Kong, where he created and managed three dedicated
China funds. Mr. Chiang has a bachelor of science degree in physics and
www.montgomeryfund.com
43
<PAGE>
mathematics from McGill University in Montreal, Canada and a master of business
administration and finance from New York University. Mr. Chiang is fluent in
three Chinese dialects: Mandarin, Shanghainese and Cantonese.
[photo] JOESPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
* Montgomery Emerging Markets Fund (since 1992)
* Montgomery Emerging Markets Focus Fund (since 1997)
* Montgomery Global Long-Short Fund (since 1999)
Prior to joining Montgomery, Ms. Jimenez was a portfolio manager at Emerging
Markets Investors Corporation. From 1981 through 1988, she analyzed U.S. equity
securities, first at Massachusetts Mutual Life Insurance Company, then at
Shawmut Corporation. She received a master of science degree from the
Massachusetts Institute of Technology in 1981; a bachelor of science degree from
New York University in 1979 and is a Chartered Financial Analyst. Ms. Jimenez
serves on the Board of Trustees of M.I.T. and is a member of the Investment
Committee overseeing M.I.T.'s endowment fund.
[photo] CHETAN JOGLEKAR, Portfolio Manager
* Montgomery Global Long-Short Fund (since 2000)
Mr. Joglekar joined Montgomery in 1997 as a senior trader responsible for the
Asian and European markets and has been involved in executing long and short
trades for the Global long-Short Fund since its inception. From 1995 to 1997 he
was the chief trader at Janhavi Securities PVT Ltd., a brokerage house based in
India. Mr. Joglekar holds a bachelor of engineering degree with a concentration
in mechanical engineering from the University of Pune, India.
[photo] DANIEL S. KERN, CFA, Portfolio Manager & Principal
* Montgomery Global Long-Short Fund (since 2000)
Mr. Kern joined Montgomery in 1995 is responsible for investment implementation
in Montgomery's International Equity product area. Mr. Kern began his investment
management career in 1987. He was formerly at Coopers & Lybrand as a Senior
Associate in Financial Advisory Services, where he provided merger and
acquisition services to Fortune 500 companies. Prior to that, he was with Wells
Fargo Bank as Vice President of their Capital Asset Management Department. He
has a bachelor of arts degree in economics from Brandeis University and a master
of business administration from the Walter A. Haas School of Business at the
University of California at Berkeley. Mr. Kern is a Certified Financial Planner
and Chartered Financial Analyst.
[photo] NANCY KUKACKA, Portfolio Manager and Principal
* Montgomery Global Long-Short Fund (since 1997)
Prior to the launch of the Global Long-Short Fund, Ms. Kukacka's
responsibilities included global equity research in the consumer non-durables,
consumer services and healthcare-related sectors. Before joining Montgomery in
1995 she worked as an equity research analyst at CS First Boston Investments,
covering the consumer cyclical and non-durable sectors and at RCM Capital
Management. Ms. Kukacka holds a bachelor of arts degree in economics with minors
in chemistry and biology from Bucknell University.
[photo] STEPHEN PARLETT, CFA, Portfolio Manager
* Montgomery Global Communications Fund (since 2000)
Mr. Parlett has been responsible for global communications sector analysis and
the country analysis of Sweden and Norway since joining the Montgomery Global
Equities team in 1995. Prior to that he was the firm's portfolio accounting
manager, helping implement a new international portfolio accounting system.
Before joining Montgomery in 1993, he was an international portfolio accountant
at G.T. Capital Management. Mr. Parlett holds a bachelor of science degree in
finance from California State University, Sacramento, and is a Chartered
Financial Analyst.
[photo] S. BOB REZAEE, Portfolio Manager
* Montgomery Global Long-Short Fund (since 2000)
Mr. Razee is the sector team leader responsible for leading research in the
global technology sector. In addition, he is responsible for the country
analysis of France. Mr. Rezaee began his investments career in 1987. Prior to
joining Montgomery in 1998, he spent five years at Dresner RDM Global Investors
as an analyst specializing in the areas of networking, telecommunications
equipment and enterprise software.
Call toll-free 800.572.FUND [3863]
44
<PAGE>
Prior to that he worked as a financial analyst at the corporate sector for both
The Gap and Chevron. Mr. Rezaee holds a bachelor of business administration
degree in both accounting and finance from Texas Tech University. He us a level
III Chartered Financial Analyst candidate.
U.S. Fixed Income and Money Market Funds
[photo] MARIE CHANDOHA, Portfolio Manager
* Montgomery Total Return Bond Fund (since 1999)
* Montgomery Short Duration Government Bond Fund (since 1999)
Ms. Chandoha began her investment career in 1983. Before joining Montgomery, she
was chief bond strategist at Goldman Sachs from 1996 to 1999, where she advised
institutional clients on optimal asset allocation strategies I the U.S. bond
market. Prior to that she was managing director of global fixed-income and
economics research at Credit Suisse First Boston from 1994 to 1996, where she
managed the global bond and economics research department. Ms. Chandoha is a Phi
Beta Kappa graduate of Harvard University with a bachelor of arts degree in
economics.
[photo] WILLIAMS STEVENS, Senior Portfolio Manager and Principal
* Montgomery Fixed-Income Funds (since 1992)
* Montgomery Balanced Fund (since 1994)
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income Division team joining the company in 1992. Before that, he was
responsible for starting the collateralized mortgage obligation and asset-backed
securities trading department at Barclays de Zoete Wedd Securities. Prior to
that he headed the Structured Product Department at Drexel Burnham Lambert,
which included both origination and trading. Mr. Stevens has a master of
business administration degree from the Harvard Business School and is a Phi
Beta Kappa graduate of Wesleyan University.
Montgomery Equity Income Fund
[photo] WILLIAM KING, CFA, Portfolio Manager
o Montgomery Equity Income Fund (since 1994)
Before joining Montgomery in 1994, Mr. King gained analytical and portfolio
management experience at Merus Capital Management. Previously, he was a
financial analyst/manager for SEI and a division controller and financial
analyst for Kaiser Aluminum and Kaiser Industries.
Management Fees and Operating Expense Limits
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 shown 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.
<TABLE>
<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 Balanced Fund 0.00% 1.30%
International and Global Equity Funds
Montgomery International Growth Fund 1.12% 1.65%
Montgomery Global Opportunities Fund 1.21% 1.90%
Montgomery Global 20 Fund 1.25% 1.76%
Montgomery Global Long-Short Fund 1.47% 2.35%
Montgomery Global Communications Fund 1.22% 1.69%
Montgomery Emerging Markets Fund 1.06% 1.90%
Montgomery Emerging Markets Focus Fund 1.10% 1.60%
Montgomery Emerging Asia Fund 1.03% 1.90%
www.montgomeryfund.com
45
<PAGE>
LOWER OF TOTAL
MANAGEMENT EXPENSE LIMIT OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
----------------------------------------------------------------------------------------
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 California Tax-Free Int. Bond Fund 0.38% 0.70%
Montgomery California Tax-Free Money Fund 0.44% 0.60%
Montgomery Federal Tax-Free Money Fund 0.41% 0.60%
</TABLE>
Call toll-free 800.572.FUND [3863]
46
<PAGE>
Additional Investment Strategies and Related Risks
Montgomery Global 20 Fund
The portfolio management team responsible managing this fund allocates its
assets among their investment country selections through a consensus approach,
rather than a fixed equal weighting. The Fund may invest a portion of its assets
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.
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; 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 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 certain 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.
www.montgomeryfund.com
47
<PAGE>
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
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.
Emerging Markets Focus Fund
The Manager may sell stocks "short" that it believes will go down. A short
position is when the Fund sells a security that it has borrowed. 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. 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.
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; 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 at which the
securities were sold short. 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 when opening,
maintaining and closing short sales against-the-box, that 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.
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 has restricted the flow of money
into and 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 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 activities. 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.
Call toll-free 800.572.FUND [3863]
48
<PAGE>
The Euro: Single European Currency
Investors in the International and Global Equity Funds should note the
following: On January 1, 1999, the European Union (EU) introduced a single
European currency called the euro. Eleven of the 15 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, 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.
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
styles: International Growth, Global Opportunities, Emerging Asia, Global
Long-Short, Global 20, Balanced and Total Return Bond Funds. See "Financial
Highlights," beginning on page __, for each Fund's historical portfolio
turnover.
www.montgomeryfund.com
49
<PAGE>
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 Morgan Stanley Capital International (MSCI) All-Country Asia-Free
(ex-Japan) Index comprises equities in 12 countries in the Asia Pacific
region.
> The MSCI 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.
> 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 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.
Call toll-free 800.572.FUND [3863]
50
<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 August 18, 1999, June 11, 1999, and August 14, 1998, reports appear in the
1999 and 1998 Annual Reports of the Funds. 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 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
-------------------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99## 1999## 1998## 1997## 1996 1995
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 24.34 $ 23.68 $ 23.07 $ 21.94 $ 19.16 $ 15.27
Net investment income/(loss) 0.00# 0.09 0.17 0.15 0.17 0.12
Net realized and unrealized gain/(loss)
on investments 0.30 2.24 3.51 3.90 4.32 3.91
Net increase/(decrease) in net assets
resulting from investment operations 0.30 2.33 3.68 4.05 4.49 4.03
Distributions:
Dividends from net investment income (0.17) (0.10) (0.15) (0.15) (0.17) (0.07)
Distribution in excess of net investment income -- -- -- -- -- --
Distributions from net realized capital gains (3.01) (1.57) (2.92) (2.77) (1.54) (0.07)
Distributions in excess of net realized
capital gains -- -- -- -- -- --
Distributions from capital -- -- -- -- -- --
Total distributions (3.18) (1.67) (3.07) (2.92) (1.71) (0.14)
Net asset value - end of period $ 21.46 $ 24.34 $ 23.68 $ 23.07 $ 21.94 $ 19.16
===================================================================================================================================
Total return** 2.14% 11.41% 17.31% 20.44% 24.85% 26.53%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $571,850 $669,789 $1,382,874 $1,137,343 $926,382 $878,776
Ratio of net investment income/(loss) to average
net assets 0.16%+ 0.46% 0.71% 0.69% 0.78% 0.98%
Net investment income/(loss) before deferral
of fees by Manager $ 0.02 $ 0.09 $ 0.17 -- -- --
Portfolio turnover rate 23% 39% 54% 61% 118% 128%
Expense ratio before deferral of fees by
Manager including interest and tax expenses 1.45%+ 1.38% 1.20% -- -- --
Expense ratio including interest and tax expenses 1.45%+ 1.38% 1.20% 1.27% 1.35% 1.50%
Expense ratio excluding interest and tax expenses 1.45%+ 1.35% 1.19% -- -- --
<FN>
## 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.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
www.montgomeryfund.com
51
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
U.S. Equity Funds
--------------------------------------------------------------------------
U.S. Emerging Growth Fund
--------------------------------------------------------------------------
Fiscal Year Ended June 30
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999 1998## 1997 1996 1995(a)##
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 19.80 $ 21.89 $ 19.00 $ 17.82 $ 13.75 $ 12.00
Net investment income/(loss) (0.12) (0.16) (0.18) (0.13) (0.04) 0.09
Net realized and unrealized gain/(loss)
on investments 4.65 (0.80) 4.21 2.54 4.26 1.66
Net increase/(decrease) in net assets
resulting from investment operations 4.53 (0.96) 4.03 2.41 4.22 1.75
Distributions:
Dividends from net investment income -- -- -- -- (0.04) --
Distributions in excess of net investment income -- -- -- -- -- --
Distributions from net realized capital gains (2.67) (1.13) (1.14) (1.23) (0.11) --
Distributions in excess of net realized
capital gains -- -- -- -- -- --
Distributions from capital -- -- -- -- -- --
Total distributions (2.67) (1.13) (1.14) (1.23) (0.15) --
Net asset value - end of period $ 21.66 $ 19.80 $ 21.89 $ 19.00 $ 17.82 $ 13.75
==================================================================================================================================
Total return** 24.17% (4.07)% 22.18% 14.77% 30.95% 14.58%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000s) $300,888 $382,483 $391,973 $317,812 $306,217 $162,949
Ratio of net investment income/(loss) to average
net assets (1.12)%+ (0.83)% (0.84)% (0.75)% (0.11)% 1.40%+
Net investment income/(loss) before deferral
of fees by Manager $ (0.16) $ (0.16) $ (0.18) -- $ (0.05) $ 0.07
Portfolio turnover rate 59% 76% 24% 79% 89% 37%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.88+ 1.66% 1.57% -- 1.79% 2.07%+
Expense ratio including interest and tax expenses 1.51+ 1.66% 1.57% 1.71% 1.75% 1.75%+
Expense ratio excluding interest and tax expenses 1.50+ 1.66% 1.56% -- -- --
<FN>
(a) The U.S. Emerging Growth Fund's Class R shares commenced operations on
December 30, 1994.
## 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.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
Call toll-free 800.572.FUND [3863]
52
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
U.S. Equity Funds
-------------------------------------------------------------------------
Small Cap Fund
-------------------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999## 1998## 1997 1996 1995
(Unaudited)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 16.58 20.73 $ 19.52 $ 21.55 $ 17.11 $ 15.15
Net investment income/(loss) (0.10) (0.17) (0.15) (0.18) (0.09) (0.10)
Net realized and unrealized gain/(loss)
on investments 7.00 (1.21) 4.33 1.43 6.31 3.04
Net increase/(decrease) in net assets
resulting from investment operations 6.90 (1.38) 4.18 1.25 6.22 2.94
Distributions:
Dividends from net investment income -- -- -- -- -- --
Distributions in excess of net investment income -- -- -- -- -- --
Distributions from net realized capital gains (0.00)# (2.07) (2.97) (3.28) (1.78) (0.98)
Distributions in excess of net realized capital
gains -- (0.70) -- -- -- --
Distributions from capital -- -- -- -- -- --
Total distributions (0.00)# (2.77) (2.97) (3.28) (1.78) (0.98)
Net asset value - end of period $ 23.48 $ 16.58 $ 20.73 $ 19.52 $ 21.55 $ 17.11
==================================================================================================================================
Total return** 41.79% (4.14)% 23.23% 6.81% 39.28% 20.12%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $136,876 $113,323 $203,437 $198,298 $275,062 $202,399
Ratio of net investment income/(loss) to average
net assets (1.08)%+ (1.09)% (0.70)% (0.78)% (0.47)% (0.57)%
Net investment income/(loss) before deferral of
fees by Manager $ (0.10) $ (0.17) $ (0.15) -- -- --
Portfolio turnover rate 79% 71% 69% 59% 80% 85%
Expense ratio before deferral of fees by Manager,
including interest and tax expense 1.31%+ 1.32% 1.24% -- -- --
Expense ratio including interest and tax expenses 1.31%+ 1.32% 1.24% 1.20% 1.24% 1.37%
Expense ratio excluding interest and tax expenses 1.31%+ 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.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
www.montgomeryfund.com
53
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
U.S. Equity Funds
-------------------------------------------------------------------------
Balanced Fund
-------------------------------------------------------------------------
Fiscal Year Ended June 30,
12/31/99
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999## 1998(a) 1997## 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 16.77 $ 19.08 $ 19.89 $ 19.33 $ 16.33 $ 12.24
Net investment income/(loss) 1.70 0.48 1.66 0.48 0.26 0.25
Net realized and unrealized gain/(loss) on investments (1.46) 1.23 0.99 2.13 3.54 4.11
Net increase/(decrease) in net assets resulting from
investment operations 0.24 1.71 2.65 2.61 3.80 4.36
Distributions:
Dividends from net investment income (0.30) (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 (0.44) (1.68) (1.83) (1.66) (0.55) (0.10)
Distributions in excess of net realized capital gains -- (1.41) -- -- -- --
Total distributions (0.74) (4.02) (3.46) (2.05) (0.80) (0.27)
Net asset value-end of period $ 16.27 $ 16.77 $ 19.08 $ 19.89 $ 19.33 $ 16.33
===================================================================================================================================
Total return** 1.04% 11.93% 14.67% 14.65% 23.92% 35.99%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $69,178 $81,133 $128,075 $127,214 $132,511 $60,234
Ratio of net investment income/(loss) to average
net assets 19.24%+ 2.63% 3.10% 2.55% 1.85% 3.43%
Net investment income/(loss) before deferral
of fees by Manager $ 1.63 $ 0.45 $ 1.63 $ 0.47 $ 0.24 $ 0.19
Portfolio turnover rate 22% 36% 84% 169% 226% 96%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.61%+ 0.46%ss. 0.31%ss. 1.49% 1.55% 2.07%
Expense ratio including interest and tax expenses 0.09%+ 0.25%ss. 0.26%ss. 1.43% 1.42% 1.31%
Expense ratio excluding interest and tax expenses 0.09%+ 0.25%ss. 0.25%ss. 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.
+ 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.
ss. The expense ratios reflect only the direct expenses of the Balanced Fund
and do not include the expenses of the underlying funds.
</FN>
</TABLE>
Call toll-free 800.572.FUND [3863]
54
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------
International and Global Equity Funds
--------------------------------------------------
International Growth Fund
--------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED: 12/31/99 1999 1998## 1997## 1996(a) 5
(Unaudited)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 18.97 $ 18.67 $ 16.24 $ 15.31 $ 12.00
Net investment income/(loss) (0.08) 0.09 0.04 0.08 0.02
Net realized and unrealized gain/(loss)
on investments 4.93 0.31 3.48 2.53 3.29
Net increase/(decrease) in net assets
resulting from investment operations 4.85 0.40 3.52 2.61 3.31
Distributions:
Dividends from net investment income -- -- (0.02) -- --
Distributions in excess of net
investment income -- -- (0.00)# -- --
Distributions from net realized capital
gains (0.39) (0.10) (1.07) (1.68) --
Distributions in excess of net
realized capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions (0.39) (0.10) (1.09) (1.68) --
Net asset value-end of period $ 23.43 $ 18.97 $ 18.67 $ 16.24 $ 15.31
==============================================================================================
Total return** 25.72% 2.34% 23.27% 19.20% 27.58
Ratios to average net assets/supplemental
data
Net assets, end of period (in 000s) $255,733 $227,287 $64,820 $33,912 $18,303
Ratio of net investment income/(loss) to
average net assets (0.70)%+ 0.41% 0.22% 0.57% 0.26
Net investment income/(loss) before
deferral of fees by Manager $ (0.08) $ 0.09 $ (0.04) $ (0.02) $ (0.07
Portfolio turnover rate 199% 150% 127% 95% 239
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 1.86%+ 1.74% 2.13% 2.37% 2.91
Expense ratio including interest and tax
expense 1.72%+ 1.66% 1.66% -- --
Expense ratio excluding interest and tax
expense 1.65%+ 1.65% 1.65% 1.66% 1.65
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
International and Global Equity Funds
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
Global Opportunities Fund
-----------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED: 12/31/99 1999 1998## 1997 1996 199
(Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 19.21 $ 19.19 $ 19.17 $ 16.96 $ 13.25 $ 12.92
Net investment income/(loss) (0.11) (0.12) 0.00# (0.11) (0.06) 0.13
Net realized and unrealized gain/(loss)
on investments 7.23 2.56 3.87 3.14 3.84 0.70
Net increase/(decrease) in net assets
resulting from investment operations 7.12 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 (1.66) (2.20) (3.85) (0.82) -- (0.50)
Distributions in excess of net
realized capital gains -- -- -- -- -- --
Distributions from capital -- -- -- -- -- --
Total distributions (1.66) (2.42) (3.85) (0.82) (0.07) (0.50)
Net asset value-end of period $ 24.67 $ 19.21 $ 19.19 $ 19.17 $ 16.96 $ 13.25
=======================================================================================================
Total return** 37.83% 15.68% 27.12% 18.71% 28.64% 6.43%
Ratios to average net assets/supplemental
data
Net assets, end of period (in 000s) $ 90,301 $ 7,146 $96,412 $32,371 $28,496 $13,677
Ratio of net investment income/(loss) to
average net assets (1.20)%+ (0.61)% (0.02)% (0.62)% (0.56)% 1.03%
Net investment income/(loss) before
deferral of fees by Manager $ (0.11) (0.14) $ 0.00# $ (0.23) $ (0.16) $ (0.01)
Portfolio turnover rate 175% 172% 135% 117% 164% 119%
Expense ratio before deferral of fees by
Manager, including interest and tax
expense 2.62% 2.40% 2.37% 2.62% 3.10% 2.99%
Expense ratio including interest and tax
expense 1.96% 2.01% 1.96% -- 2.05% 1.91%
Expense ratio excluding interest and tax
expense 1.90% 1.90% 1.90% 1.90% 1.90% 1.90%
<FN>
(a) The International Growth Fund's Class 2 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>
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55
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------
International and Global Equity Funds
-------------------------------------------------------
Global 20 Fund(b)
----------------------------------------------------- -
June 30, March 31,
SELECTED PER-SHARE DATA FOR THE YEAR OR 12/31/99## -------- ---------
PERIOD ENDED: (Unaudited) 1999## 1998## 1997## 1996(b)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 22.20 $ 20.98 $ 20.01 $ 16.46 $ 12.00
Net investment income/(loss) (0.26) (0.09) 0.12 0.01 0.06
Net realized and unrealized gain/(loss)
on investments 5.56 2.70 2.70 4.16 4.45
Net increase/(decrease) in net assets
resulting from investment operations 5.30 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 (3.11) (1.05) (1.85) (0.52) --
Distributions in excess of net realized
capital gains -- -- -- -- (0.01)
Distributions from capital -- -- -- -- --
Total distributions (3.11) (1.39) (1.85) (0.62) (0.05)
Net asset value-end of period $ 24.39 $ 22.20 $ 20.98 $ 20.01 $ 16.46
====================================================================================================
Total return** 25.20% 13.89% 15.44% 26.35% 37.75%
Ratios to average net assets/supplemental
data
Net assets, end of period (in 000s) $ 141,146 $ 136,792 $269,667 $172,509 $77,955
Ratio of net investment income/(loss) to
average net assets (2.34)%+ (0.47)% 0.58% 0.04% 0.42%+
Net investment income/(loss) before
deferral of fees by Manager $ (0.27) $ (0.09) $ 0.12 $ (0.01) $ 0.02
Portfolio turnover rate 122% 115% 151% 158% 106%
Expense ratio before deferral of fees by
Manager, including interest and tax
expenses 3.37%+ 1.76% 1.81% 1.92% 2.11%+
Expense ratio including interest and tax
expenses 3.26%+ 1.76% 1.81% -- --
Expense ratio excluding interest and tax
expenses 1.80%+ 1.73% 1.80% 1.82% 1.80%+
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
International and Global Equity Funds
-------------------------------------------------
Global Long-Short Fund
-------------------------------------------------
June 30, March 31,
SELECTED PER-SHARE DATA FOR THE YEAR OR 12/31/99 -------- ---------
PERIOD ENDED: (Unaudited) 1999(a)(c) 1999## 1998(a)##(d)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-beginning of period $ 19.65 $ 16.97 $ 12.70 $ 10.00
Net investment income/(loss) (0.19) (0.06) (0.05) 0.02
Net realized and unrealized gain/(loss)
on investments 13.66 3.24 4.92 2.68
Net increase/(decrease) in net assets
resulting from investment operations 13.47 3.18 4.87 2.70
Distributions:
Dividends from net investment income -- -- -- --
Distributions in excess of net
investment income -- -- -- --
Distributions from net realized capital
gains (1.99) -- (1.10) --
Distributions in excess of net realized
capital gains -- -- -- --
Distributions from capital -- -- -- --
Total distributions (1.99) -- (1.10) --
Net asset value-end of period $ 31.13 $ 19.65 $ 16.47 $ 12.70
============================================================================================
Total return** 69.44% 19.61% 39.87% 27.20%
Ratios to average net assets/supplemental
data
Net assets, end of period (in 000s) $455,370 $216,300 $83,638 $16,579
Ratio of net investment income/(loss) to
average net assets (1.90)%+ (2.30)%+ (0.35)% 0.65%+
Net investment income/(loss) before
deferral of fees by Manager $ (0.19) $ (0.06) $ (0.09) $ (0.05)
Portfolio turnover rate 277% 43% 226% 84%
Expense ratio before deferral of fees by
Manager, including interest and tax
expenses 3.46%+ 4.61%+ 3.79% 5.19%+
Expense ratio including interest and tax
expenses 3.46%+ 4.18%+ 3.40% 2.78%+
Expense ratio excluding interest and tax
expenses 2.25%+ 2.35%V 2.35% 2.35%+
<FN>
(a) The Fund changed its year end from March 31 to June 30.
(b) The Global 20 (formerly Select 50) Fund's Class R shares commenced
operations on October 2, 1995.
(c) On January 29, 1999, the Global Long-Short Fund's Class R shares were
issued in exchange for Class A shares.
(d) The Global Long-Short Fund commenced operations on December 31, 1997.
** 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>
Call toll-free 800.572.FUND [3863]
56
<PAGE>
<TABLE>
<CAPTION> --------------------------------------------------------------------
International and Global Equity Funds
--------------------------------------------------------------------
Global Communications Fund
--------------------------------------------------------------------
Fiscal year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999 1998## 1997 1996 1995
(Unaudited)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 26.73 $ 22.88 $ 19.61 $ 18.05 $ 15.42 $ 14.20
Net investment income/(loss) (0.12) 0.01 (0.17) (0.25) (0.20) (0.03)
Net realized and unrealized gain/(loss)
on investments 16.49 6.35 7.19 2.72 2.83 1.28
Net increase/(decrease) in net assets
resulting from investment operations 16.37 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 (6.25) (2.51) (3.75) (0.91) -- --
Distributions in excess of net realized capital gains -- -- -- -- -- (0.03)
Total distributions (6.25) (2.51) (3.75) (0.91) -- (0.03)
Net asset value-end of period $ 36.85 $ 26.73 $ 22.88 $ 19.61 $ 18.05 $ 15.42
==================================================================================================================================
Total return** 63.42% 31.66% 45.45% 14.43% 17.06% 8.83%
Ratios to average net assets/ supplemental data
Net assets, end of period (in 000s) $598,671 $354,730 $267,113 $153,995 $206,671 $209,644
Ratio of net investment income/(loss) to average
net assets (1.00)%+ 0.02% (0.85)% (1.05)% (1.01)% (0.10)%
Net investment income/(loss) before deferral of
fees by Manager $ (0.12) $ 0.01 $ (0.17) $ (0.27) $ (0.22) $ (0.07)
Portfolio turnover rate 163% 146% 80% 76% 104% 50%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.51%+ 1.69% 1.93% 2.00% 2.11% 2.09%
Expense ratio including interest and tax expenses 1.51%+ 1.69% 1.93% -- 2.01% 1.91%
Expense ratio excluding interest and tax expenses 1.51%+ 1.68% 1.90% 1.91% 1.90% 1.90%
<FN>
** 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>
www.montgomeryfund.com
57
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
International and Global Equity Funds
---------------------------------------------------------------------
Emerging Markets Fund
---------------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999 1998 1997 1996 1995##
(Unaudited)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 10.24 $ 9.86 $ 16.85 $ 14.19 $ 13.17 $ 13.68
Net investment income/(loss) (0.04) 0.92 0.07 0.07 0.08 0.03
Net realized and unrealized gain/(loss)
on investments 2.82 (0.54) (6.58) 2.66 0.94 0.25++
Net increase/(decrease) in net assets
resulting from investment operations 2.78 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 period $ 13.02 $ 10.24 $ 9.86 $ 16.85 $ 14.19 $ 13.17
==================================================================================================================================
Total return** 27.15% 3.85% (39.20)% 19.34% 7.74% 1.40%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $368,135 $344,907 $758,911 $1,259,457 $994,378 $998,083
Ratio of net investment income/(loss) to average
net assets (0.74)%+ 0.01% 0.55% 0.48% 0.58% 0.23%
Net investment income/(loss) before deferral
of fees by Manager $ (0.92) $ 0.96 $ 0.07 -- -- --
Portfolio turnover rate 112% 86% 97% 83% 110% 92%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.47%+ 2.15% 1.65% -- -- --
Expense ratio including interest and tax expenses 2.04%+ 2.05% 1.65% -- -- --
Expense ratio excluding interest and tax expenses 1.90%+ 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.
+ 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>
Call toll-free 800.572.FUND [3863]
58
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
International and Global Equity Funds
-----------------------------------------------------------------------------
Emerging Markets Focus Fund
-----------------------------------------------------------------------------
12/31/99 Three Months Ended Fiscal Year Ended
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) June 30, 1999(a)(b) March 31, 1999++ March 31, 1998++(c
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-beginning of period $ 13.15 $ 9.63 $ 11.43 $ 10.00
Net investment income/(loss) 0.14 0.04 0.12 0.27
Net realized and unrealized gain/(loss)
on investments 3.95 3.48 (1.76) 1.15
Net increase/(decrease) in net assets
resulting from investment operations 4.09 3.52 (1.64) 1.43
Distributions:
Dividends from net investment income (0.24) -- (0.16) --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital
gains -- -- -- --
Distributions from capital -- -- -- --
Total distributions (0.24) -- (0.16) --
Net asset value-end of period $ 17.00 $ 13.15 $ 9.63 $ 11.43
====================================================================================================================================
Total return** 31.23% 36.55% (14.04)% 14.40%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 2,566 $ 2,551 $ 1,655 $ 1,789
Ratio of net investment income/(loss) to average
net assets 1.84%+ 0.05%+ 1.24% 10.46%+
Net investment income/(loss) before deferral
of fees by Manager $ (0.52) $ (0.10) $ (0.52) (0.07)%+
Portfolio turnover rate 343% 200% 437% 71%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 12.18%+ 8.82%+ 8.68% 15.34%+
Expense ratio including interest and tax expenses 1.66%+ 1.73%+ 2.10% 2.10%+
Expense ratio excluding interest and tax expenses 1.60%+ 1.73%+ 2.10% 2.10%+
<FN>
(a) On December 31, 1999, the Emerging Markets Focus Fund's Class R shares were
issued in exchange for Class A shares.
(b) For the period April 1, 1999, to June 30, 1999.
(c) The Emerging Markets Focus Portfolio commenced operations on December 31,
1997.
(d) 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.
++ 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>
www.montgomeryfund.com
59
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------
International and Global Equity Funds
-------------------------------------------------------
Emerging Asia Fund
-------------------------------------------------------
Fiscal year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999 1998 1997(a)
(Unaudited)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset-value beginning of period $ 12.21 $ 6.18 $ 18.91 $ 12.00
Net investment income/(loss) (0.05) (0.01) 0.13 (0.01)
Net realized and unrealized gain/(loss)
on investments 0.17++ 6.04 (11.74) 6.95
Net increase/(decrease) in net assets
resulting from investment operations 0.12 6.03 (11.61) 6.94
Distributions:
Dividends from net investment income (0.64)# (0.00)# (0.17) --
Distributions from net realized capital gains -- -- (0.00) # (0.03)
Distributions in excess of net realized capital gains -- -- (0.95) --
Distributions from capital -- -- -- --
Total distributions (0.64) -- (1.12) (0.03)
Net asset value-end of period $ 11.69 $ 12.21 $ 6.18 $ 18.91
======================================================================================================================
Total return** 1.40% 97.44% (63.45)% 57.80%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 42,481 $ 63,196 $ 24,608 $ 68,095
Ratio of net investment income/(loss) to average
net assets (0.96%)+ (0.35%) 0.22% (0.42)%+
Net investment income/(loss) before deferral
of fees by Manager $ (0.08) $ (0.03) $ (0.08) $ (0.02)
Portfolio turnover rate 82% 233% 154% 72%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 3.05% 2.89% 2.27% 2.69%+
Expense ratio including interest and tax expenses 1.93% 2.19% 1.91% 2.20%+
Expense ratio excluding interest and tax expenses 1.90% 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.
++ 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 sales 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 period did not accord with
results of operations.
</FN>
</TABLE>
Call toll-free 800.572.FUND [3863]
60
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------
U.S. Fixed-Income and Money Market Funds
----------------------------------------
Total Return Bond Fund
---------------------------
Fiscal Year
Ended June 30,
-----------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDE: 12/31/99 1999 1998(a)
(Unaudited)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value-beginning of period $ 11.66 $ 12.44 $ 12.00
Net investment income/(loss) 0.39 0.73 0.72
Net realized and unrealized gain/(loss)
on investments (0.31) (0.35) 0.56
Net increase/(decrease) in net assets
resulting from investment operations 0.08 0.38 1.28
Distributions:
Dividends from net investment income (0.37) (0.73) (0.72)
Distributions in excess of net investment income -- (0.01) --
Distributions from net realized capital gains (0.15) (0.42) (0.12)
Distributions in excess of net realized capital gains -- -- (0.00)#
Distributions from capital -- -- --
Total distributions (0.52) (1.16) (0.84)
Net asset value-end of period $ 11.22 $ 11.66 $ 12.44
========================================================================================
Total return** 0.52% 3.20% 10.92%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $31,301 $38,476 $77,694
Ratio of net investment income/(loss) to average
net assets 6.75%+ 5.88% 5.81%
Net investment income/(loss) before deferral
of fees by Manager $ 0.38 $ 0.72 $ 0.71
Portfolio turnover rate 140% 158% 390%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.14%+ 1.25% 1.34%
Expense ratio including interest and tax expenses 0.70%+ 1.16% 1.29%
Expense ratio excluding interest and tax expenses 0.70%+ 0.70% 0.70%
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
----------------------------------------------------------------
Short Duration Government Bond Fund
---------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDE: 12/31/99 1999 1998 1997## 1996 1995
(Unaudited)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 10.04 $ 10.14 $ 9.99 $ 9.92 $ 9.95 $ 9.80
Net investment income/(loss) 0.29 0.53 0.57 0.59 0.60 0.62
Net realized and unrealized gain/(loss)
on investments (0.13) (0.05) 0.16 0.07 (0.04) 0.16
Net increase/(decrease) in net assets
resulting from investment operations 0.16 0.48 0.73 0.66 0.56 0.78
Distributions:
Dividends from net investment income (0.29) (0.51) (0.56) (0.59) (0.59) (0.62)
Distributions in excess of net investment income -- (0.02) -- (0.00)# (0.00)# --
Distributions from net realized capital gains -- -- (0.02) -- -- --
Distributions in excess of net realized capital gains -- (0.05) -- -- -- --
Distributions from capital -- -- -- -- -- (0.01)
Total distributions (0.29) (0.58) (0.58) (0.59) (0.59) (0.63)
Net asset value-end of period $ 9.91 $ 10.04 $ 10.14 $ 9.99 $ 9.92 $ 9.95
============================================================================================================================
Total return** 1.57% 4.82% 7.56% 6.79% 5.74% 8.28%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $166,445 $154,365 $66,357 $47,265 $22,681 $17,093
Ratio of net investment income/(loss) to average
net assets 2.68%+ 5.21% 5.83% 5.87% 5.88% 6.41%
Net investment income/(loss) before deferral
of fees by Manager $ 5.54 $ 0.48 $ 0.51 $ 0.54 $ 0.52 $ 0.54
Portfolio turnover rate 271% 199% 502% 451% 350% 284%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.43%+ 1.85% 1.73% 2.05% 2.31% 2.23%
Expense ratio including interest and tax expenses 0.92%+ 1.35% 1.15% 1.55% 1.55% 1.38%
Expense ratio excluding interest and tax expenses 0.68%+ 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>
www.montgomeryfund.com
61
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
U.S. Fixed Income and Money Market Fund
-------------------------------------------------------------------------
Government Money Market Fund
-------------------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 12/31/99 1999 1998 1997 1996 1995
(Unaudited)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income/(loss) 0.025 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. 0.000ss.
Net increase/(decrease) in net assets resulting
from investment operations 0.025 0.047 0.052 0.049 0.052 0.049
Distributions:
Dividends from net investment income (0.025) (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 (0.025) (0.047) (0.052) (0.049) (0.052) (0.049)
Net asset value-end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================================================================================================
Total return** 2.55% 4.81% 5.27% 5.03% 5.28% 4.97%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $560,020 $575,387 $724,619 $473,154 $439,423 $258,956
Ratio of net investment income/(loss) to average
net assets 5.00%+ 4.71% 5.15% 4.93% 5.17% 4.92%
Net investment income/(loss) before deferral of
fees by Manager $ 0.025 $ 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 0.52%+ 0.50% 0.48% 0.62% 0.74% 0.79%
Expense ratio including interest and tax expenses 0.37%+ 0.50% 0.53% -- -- 0.63%
Expense ratio excluding interest and tax expenses 0.37%+ 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>
Call toll-free 800.572.FUND [3863]
62
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed Income and Money Market Funds
-------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund
-------------------------------------------------------------------
Fiscal year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR
OR PERIOD ENDED: 12/31/99 1999 1998 1997 1996 1995(a)
(Unaudited)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-beginning of period $ 12.67 $ 12.86 $ 12.53 $ 12.23 $ 12.04 $ 11.79
Net investment income 0.26 0.49 0.51 0.53 0.54 0.44
Net realized and unrealized
gain/(loss)
on investments (0.26) (0.16) 0.33 0.30 0.19 0.25
Net increase/(decrease) in net
assets resulting from investment
operations 0.00# 0.33 0.84 0.83 0.73 0.69
Distributions:
Dividends from net investment income (0.26) (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) -- -- -- --
Distributions in excess of net
realized capital gains -- (0.00)#
Total Distributions (0.26) (0.52) (0.51) (0.53) (0.54) (0.44)
Net asset value-end of period $ 12.41 $ 12.67 $ 12.86 $ 12.53 $ 12.23 $ 12.04
=============================================================================================================
Total return** (0.02)% 2.71% 6.85% 6.91% 6.11% 6.03%
Ratios to average net
assets/supplemental data
Net assets, end of period (in 000s) $34,293 $41,017 $35,667 $21,681 $13,948 $ 5,153
Ratio of net investment income to
average net assets 4.08%+ 3.93% 4.03% 4.27% 4.34% 3.71%
Net investment income/(loss) before
deferral of fees by Manager $ 0.44 $ 0.48 $ 0.44 $ 0.47 $ 0.43 $ 0.34
Portfolio turnover rate 42% 184% 42% 26% 58% 38%
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 1.20%+ 1.19% 1.19% 1.18% 1.43% 1.41%
Expense ratio including interest and
tax expenses 0.70%+ 0.69% 0.69% 0.68% 0.61% 0.56%
Expense ratio excluding interest and
tax expenses 0.70%+ 0.69% 0.68% -- -- --
-------------------------------------------------------------------------
U.S. Fixed Income and Money Market Funds
-------------------------------------------------------------------------
California Tax-Free Money Fund
-------------------------------------------------------------------------
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR
OR PERIOD ENDED: 12/31/99 1999 1998 1997 1996 1995(b)
(Unaudited)
-------------------------------------------------------------------------------------------------------------------
Net asset value-beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income 0.010 0.026 0.029 0.029 0.030 0.027
Net realized and unrealized
gain/(loss)
on investments 0.000ss. 0.000ss. 0.000ss. 0.000ss. 0.000ss. 0.000ss.
Net increase/(decrease) in net
assets resulting from investment
operations 0.010 0.026 0.029 0.029 0.030 0.027
Distributions:
Dividends from net investment income (0.010) (0.026) (0.029) (0.029) (0.030) (0.027)
Distributions in excess of net
investment income -- -- -- -- -- (0.000)ss.
Distributions from net realized
capital gains -- -- -- -- -- --
Distributions in excess of net
realized capital gains --
Total Distributions (0.010) (0.026) (0.029) (0.029) (0.030) (0.027)
Net asset value-end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===================================================================================================================
Total return** 1.27% 2.59% 3.00% 2.95% 3.03% 2.68%
Ratios to average net
assets/supplemental data
Net assets, end of period (in 000s) $317,463 $292,901 $187,216 $118,723 $98,134 $64,780
Ratio of net investment income to
average net assets 1.62%+ 2.55% 2.96% 2.91% 2.99% 3.55%+
Net investment income/(loss) before
deferral of fees by Manager $ 0.012 $ 0.021 $ 0.029 $ 0.028 $ 0.028 $ 0.023
Portfolio turnover rate -- -- -- -- -- --
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 0.60%+ 0.61% 0.68% 0.73% 0.80% 0.86%+
Expense ratio including interest and
tax expenses 0.60%+ 0.58% 0.58% 0.58% 0.59% 0.33%+
Expense ratio excluding interest and
tax expenses 0.60%+ 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>
www.montgomeryfund.com
63
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------
U.S. Fixed Income and Money Market Funds
----------------------------------------
Federal Tax-Free Money Fund
----------------------------------------
Fiscal Year End June 30,
----------------------------------------
12/31/99
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999 1998 1997(a)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income/loss 0.014 0.028 0.031 0.032
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 0.014 0.028 0.031 0.032
Distributions:
Dividends from net investment income (0.014) (0.028) (0.031) (0.032)
Dividends in excess of net investment income -- (0.000)ss. -- (0.000)ss.
Distributions from net realized capital gains -- -- -- --
Total distributions (0.014) (0.028) (0.31) (0.032)
Net asset value-end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================
Total return** 1.45% 2.82% 3.12% 3.26%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $224,387 $ 116,341 $ 117,283 $ 114,197
Ratio of net investment income/(loss) to average
net assets 2.90%+ 2.80% 3.08% 3.24%+
Net investment income/(loss) before deferral of
fees by Manager $ 0.014 $ 0.026 $ 0.031 $ 0.030
Portfolio turnover rate -- -- -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.96%+ 0.80% 0.81% 0.69%+
Expense ratio including interest and tax expenses 0.60%+ 0.60% 0.60% 0.33%+
Expense ratio excluding interest and tax expenses 0.60%+ 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>
Call toll-free 800.572.FUND [3863]
64
<PAGE>
[table]
Investment Options
To open a new account, complete and mail the New Account application included
with this prospectus, or print an application from www.montgomeryfunds.com.
--------------------------------------------------------------------------------
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. The minimum subsequent
investment is $100.
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]
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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. 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.
From time to time, Montgomery may close and reopen any of its Funds to new
investors at its discretion. Shareholders who maintain open accounts that meet
the minimum required balance in a Fund when it closes may make additional
investments in it. Employer-sponsored retirement plans, if they are already
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 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. If you do not own shares of a
closed Fund, you may not exchange shares from other Montgomery Funds for shares
of that 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 name]
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
Call toll-free 800.572.FUND [3863]
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<PAGE>
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.
* Online Visit www.montgomeryfunds.com to print out an application, or to
exchange at least $1,000 from an existing account into a new account.
[sidebar]
Getting Started
To invest, complete the New Account application included with 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 with 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, 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
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' NAVs 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 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.
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<PAGE>
* 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.
Call toll-free 800.572.FUND [3863]
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<PAGE>
ACCOUNT INFORMATION
[Table]
www.montgomeryfunds.com
Manage your account(s) online.
Our Account Access area offers free, secure access to your Montgomery Funds
account(s) around-the-clock.
At www.montgomeryfunds.com shareholders can:
> Check current account balances
> Buy, exchange or sell shares
> View the most recent account activity and up to 80 records of account
history within the past two years
> View statements
> Order duplicate statements and tax forms
> View tax summaries
> Change address of record
> 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 128bit encryption. If you are not sure what level of
security your browser supports, click on our convenient browser check.
[clipart]
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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 under "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 at
www.montgomeryfunds.com to create a PIN for accessing your account(s). 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 59).
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
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.
Call toll-free 800.572.FUND [3863]
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<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.
* Redemption fees may apply to exchanges or redemptions out of some Funds.
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 your
investment 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:
> For sharers sold by wire, a $10 wire transfer fee that 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.
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 (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
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<PAGE>
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 or perform transactions around-the-clock
through the Montgomery Star System or www.montgomeryfunds.com.
* By Check. If you have checkwriting privileges on 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 in 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 Internet or telephone redemption
privileges on your New Account application. If you accept, you will be able to
sell up to $50,000 in shares through our Web site at www.montgomeryfunds.com,
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 Internet or telephone transaction policies, see "Other
Policies" below.
* Redemption Fee. The redemption fees for the U.S. Equity Funds and the
International & Global Equity Funds 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 Fund 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
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.
Call toll-free 800.572.FUND [3863]
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<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.
Internet and Telephone Transactions
By buying or selling shares over the Internet or 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 online or by phone will be priced at the first net
asset value we determine after receiving your request. 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 a Fund as a result.
Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use 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
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<PAGE>
> 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 transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
Internet or 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, or change your address
online, 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 Internet and/or 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
> Via overnight courier
> By telegram
You may discontinue Internet or 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. 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'll
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.
Call toll-free 800.572.FUND [3863]
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<PAGE>
Additional information about tax issues relating to The Montgomery 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 to shareholders what
the IRS calls "exempt-interest dividends" 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 should also
consult your advisor 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 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 distributions will
be reinvested in additional Fund shares.
Keeping You Informed
After you invest you will receive our Shareholder Services Guide, which includes
more information about buying, exchanging and selling shares in The Montgomery
Funds. It also describes in more detail useful tools for investors such as the
Montgomery Star System and online transactions.
During the year, we will also send you the following communications:
> Confirmation statements
> Account statements, mailed after the close of each calendar quarter (also
available online)
> 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 a 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.
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<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.
DST Systems, Inc., located in Kansas City, Missouri, is the Funds' Master
Transfer Agent. It performs certain recordkeeping and accounting functions for
the Funds.
Investors Fiduciary Trust Company, also located in Kansas City, Missouri,
assists DST Systems, Inc. with certain recordkeeping and accounting functions
for the Funds.
[table]
<TABLE>
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
<S> <C> <C>
U.S., International and Declared and paid in the last Declared and paid in the last
Global Equity Funds quarter of each calendar year* quarter of each calendar year*
Balanced 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*
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 quarter of each calendar year*
<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 the 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.
One of best ways to stay informed about your Montgomery account(s) is to visit
www.montgomeryfunds.com daily.
Call toll-free 800.572.FUND [3863]
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[Outside back cover:]
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.
You can also 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 free copy of the most recent annual or
semiannual report, call us at 800.572.FUND [3863], option 3.
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. To obtain information on the operation of the Public
Reference Room please call 202.942.8090. Reports and other information about The
Montgomery Funds 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, or e-mailing the SEC at [email protected].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest Wisely(R)
The Montgomery Funds
101 California Street
-------------------------
800.572.FUND [3863]
www.montgomeryfunds.com
-------------------------
San Francisco, California 94111-9361
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 4/00 111
www.montgomeryfund.com
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<PAGE>
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PART A
COMBINED PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY GROWTH FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY GLOBAL 20 50 FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT MONEY MARKET FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
---------------------------------------------------------------------
<PAGE>
Prospectus
June __, 2000
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
Small Cap Fund
Balanced Fund (formerly named U.S. Asset Allocation Fund)
International & Global Equity Funds
International Growth Fund
Global 20 Fund (formerly named Select 50 Fund)
Emerging Markets 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.
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.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 Balanced Fund (formerly named U.S. Asset Allocation Fund) ....
International and Global Equity Funds
Montgomery International Growth Fund.....................................
Montgomery Global 20 Fund (formerly named Select 50 Fund)................
Montgomery Emerging Markets 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..........................................................
Management Fees...............................................................
Additional Investment Strategies and Related Risks............................
Montgomery Global 20 Fund................................................
The Euro: Single European Currency.......................................
Defensive Investments....................................................
Portfolio Turnover.......................................................
Additional Benchmark Information.........................................
Financial Highlights..........................................................
Account Information...........................................................
Becoming a Montgomery Shareholder........................................
How Fund Shares Are Priced...............................................
Buying Additional Shares.................................................
2
<PAGE>
Exchanging Shares........................................................
Selling Shares...........................................................
Other Policies...........................................................
Tax Withholding 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>
--------------------------------------------------------------------------------
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>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
23.16% 2.02% 20.46%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q2 1999 (+17.61%) and the worst quarter was Q3 1998 (-19.32%).
Growth Fund 20.46% 16.44%
S&P 500 Index 21.04% 26.39%
----------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/12/96)
2000 Return Through 3/31/00: 3.46% Average Annual Returns Through 12/31/99
Fees & Expenses [clipart]
<TABLE>
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.
<S> <C>
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 0.95%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.43%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.63%
<FN>
* Deducted from the net proceeds of shares redeemed (or exchanged) within three
months after purchase. This fee is retained by the Fund. $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 pages ___
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>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
-------------- ----------- -----------
23.27% -8.19% 55.69%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+47.36%) and the worst quarter was Q3 1998 (-32.44%).
Small Cap Fund 55.69% 17.45%
Russell 2000 Index 55.81% 12.84%
-------------------------------------------------------------------------------
+ Calculated from 6/30/96 1 Year Inception
(7/3/96)
2000 Return Through 3/31/00: 7.86% Average Annual Returns Through 12/31/99
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 * 2.00%
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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within three
months after purchase. This fee is retained by the Fund. $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
Paul LaRocco
For more details see pages ___
For financial highlights
see page ___
7
<PAGE>
--------------------------------------------------------------------------------
Balanced Fund | MNAAX
--------------------------------------------------------------------------------
Formerly named Montgomery U.S. Asset Allocation Fund.
Objective
|_| Seeks high total return (consisting of both capital appreciation and
income) while also seeking to reduce risk by allocating its assets among
stocks, bonds and money market securities
Principal Strategy [clipart]
As a "fund-of-funds," the Montgomery Balanced Fund currently invests its assets
in four underlying Montgomery Funds:
|_| For U.S. Equity Exposure, Montgomery Growth Fund and Montgomery Equity
Income Fund
|_| For U.S. bond exposure, Montgomery Total Return Bond Fund
|_| For cash exposure, Montgomery Money Market Fund
The Fund's strategy is to analyze various market factors, including relative
risk and return, to help determine what we believe is an optimal allocation
among stocks, bonds and cash. The Fund's total equity exposure may range from 50
to 80% and its bond exposure may range from 20 to 50% of its assets. It may
invest up to 20% of its assets in a Montgomery Money Market Fund. At times, the
Fund may also invest a small portion of its assets in other Montgomery Funds to
gain exposure to additional areas, such as the international markets.
For details about the strategies of the Montgomery Growth Fund and the
Montgomery Money Market Fund, please see the respective sections of this
prospectus. The Montgomery Equity Income Fund seeks current income and long-term
capital appreciation, while striving to minimize portfolio volatility by
investing in large, dividend-paying U.S. companies. The Montgomery 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 may adjust the proportion of assets allotted to
the underlying portfolios in response to changing market conditions, when
appropriate.
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 and the Montgomery
Equity Income 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 those Funds invest. 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.
8
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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 commonly used
indices for its market segment. Of course, past performance is no guarantee of
future results.
--------------------------------------------------------------------------------
[bar chart]
97 98 99
------------------- ----------------- ----------------
18.68% 6.03% 12.18%
During the three-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 (-6.30%).
Balanced Fund 12.18% 12.34%
S&P 500 Index 21.04% 26.42%
Lehman Brothers Aggregate Bond
Index -0.82% 5.20%
--------------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/2/96)
2000 Return Through 3/31/00: 3.39% Average Annual Returns Through 12/31/99
Fees & Expenses [clipart]
<TABLE>
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.
<S> <C>
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 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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within three
months after purchase. This fee is retained by the Fund. $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 1.96%,
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) 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.
9
<PAGE>
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 pages ___
For financial highlights
see page ___
10
<PAGE>
--------------------------------------------------------------------------------
International Growth Fund | MNIGX
--------------------------------------------------------------------------------
Objective
|_| Seeks long-term capital appreciation by investing in medium- and large-cap
companies in developed stock markets outside the United States
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 France, Germany, Italy, the Netherlands and the United Kingdom, 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 values may decline against the U.S. dollar.
11
<PAGE>
INTERNATIONAL & GLOBAL
EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
9.84% 28.65% 26.02%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+29.17%) and the worst quarter was Q3 1998 (-17.24%).
International Growth Fund 26.02% 21.67%
MSCI EAFE Index++ 27.30% 13.95%
------------------------------------------------------------------------------
+Calculated from 2/28/96 1 Year Inception
(3/11/96)
++ See page __ for a description of this index.
2000 Return Through 3/31/00: 0.56% Average Annual Returns Through 12/31/99
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 * 2.00%
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>
* Deducted from net proceeds of shares redeemed (or exchanged) within three
months after purchase. 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 1.65%. 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
-----------------------------------------------------
$193 $599 $1,029 $2,223
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
For financial highlights
see page ___
12
<PAGE>
--------------------------------------------------------------------------------
Global 20 Fund | MNSFX
--------------------------------------------------------------------------------
Formerly named the Montgomery Select 50 Fund
Objective
|_| Seeks long-term capital appreciation by investing in a concentrated
portfolio of companies located throughout the world
Principal Strategy [clipart]
Under normal conditions, the Fund invests in a limited number of companies
worldwide, typically between 20 and 30, but generally not fewer than 20. The
Fund will limit its investment in any one country to no more than 40% of its
assets, or no more than two times the country's percentage weighting in the
benchmark MSCI World Index-whichever is greater. The MSCI World Index is
described on page __. The Fund's investments in U.S. companies are not subject
to these limits, however.
The Fund's portfolio managers seek well-managed companies of any size that they
believe will be able to increase their corporate sales and earnings on a
sustained basis. From these prospective investments, the managers favor
companies that they consider undervalued or reasonably valued relative to the
issuer's long-term prospects. The managers also favor companies that they
believe have a competitive advantage, offer innovative products or services and
may profit from such trends as deregulation and privatization. The Fund's
portfolio managers and analysts frequently travel to the countries where the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends affecting investments in those countries.
Because the Fund may concentrate up to 35% of its assets in the global
communications industry, its share value may be more volatile than that of more
diversified funds and may reflect trends in the global communications industry,
which may be subject to greater changes in governmental policies and regulation
than any other industries.
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. Because the Fund is a
non-diversified mutual fund that typically invests in the securities of only 20
to 30 companies, the value of an investment in the Fund will vary more in
response to developments or changes in the market value affecting particular
stocks than will an investment in a diversified mutual fund investing in a
greater number of securities.
To the extent that the Fund may invest 40% or more of its assets in any one
country, the Fund's share may be more volatile than that of mutual funds not
sharing this geographic concentration. In addition, the Fund may invest up to
30% of the Fund's assets in any one emerging markets country, which may expose
it to additional risks. Foreign and emerging 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 and 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. For a more detailed discussion
of the risks mentioned above, see "Additional Investment Strategies and Related
Risks" on page 46.
13
<PAGE>
INTERNATIONAL & GLOBAL
EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
27.53% 9.16% 43.80%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+30.40%) and the worst quarter was Q3 1998 (-17.40%).
Global 20 Fund 43.80% 26.32%
MSCI World Index++ 25.34% 20.77%
--------------------------------------------------------------------------------
+ Calculated from 11/30/96 1 Year Inception
(12/12/96)
2000 Return Through 3/31/00: 5.06% Average Annual Returns Through 12/31/99
++See page __ for a description of this index. The Fund was formerly compared
with the S&P 500 Index. This change was effected because the MSCI World Index
better represents the types of securities in which the Fund may invest.
Fees & Expenses [clipart]
<TABLE>
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.
<S> <C>
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 0.25%
Other Expenses 0.51%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.01%
<FN>
* Deducted from the net proceeds of shares redeemed (or exchanged) within three
months after purchase. This fee is retained by the Fund. $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
Portfolio managers from each equity team
For more details see pages ___
For financial highlights
see page ___
14
<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 in-depth financial review with 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 values may decline against the U.S. dollar.
15
<PAGE>
INTERNATIONAL & GLOBAL EQUITY
FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
-3.83% -38.89% 62.76%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+35.89%) and the worst quarter was Q3 1998 (-25.15%).
Emerging Markets Fund 62.76% 1.36%
MSCI Emerging Markets Free Index++ 63.16% 2.64%
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/1/96)
++See page __ for a description of this index. The Fund was formerly compared
with only the IFC Global Composite Index. This change was effected because the
MSCI Emerging Markets Free Index better represents the types of foreign
securities in which the Fund may invest.
2000 Return Through 3/31/00: 2.43% Average Annual Returns Through 12/31/99
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* 2.00%
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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within three
months after purchase. 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.
</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 pages ___
For financial highlights
see page ___
16
<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.
17
<PAGE>
U.S. FIXED-INCOME & MONEY
MARKET FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
6.18% 7.48% 2.31%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+3.14%) and the worst quarter was Q1 1997 (0.29%).
Short Duration Gov't Bond Fund 2.31% 5.53%
Lehman Brothers Gov't.
Bond 1-3 Year Index 2.98% 5.52%
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
2000 Return Through 3/31/00: 1.11% Average Annual Returns Through 12/31/99
Fees & Expenses [clipart]
<TABLE>
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.
<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) 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 1.60%.
***Montgomery Asset Management enters into special transactions that are
expected to increase the net income yield of the Fund (such as reverse
repurchase agreement transactions). These transactions also generate interest
charges, however, which are reflected in the expense ratio above. The interest
charges generated for the period presented were 0.73%. The operating expense
ratio excluding these interest charges is 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 ___
18
<PAGE>
--------------------------------------------------------------------------------
Government Money Market Fund | MNGXX
--------------------------------------------------------------------------------
Formerly named Montgomery Government Reserve Fund.
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.
19
<PAGE>
U.S. FIXED-INCOME & MONEY
MARKET FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
4.89% 4.87% 4.58%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q2 1995 (+1.39%) and the worst quarter was Q2 1993 (+0.65%).
Gov't Money Market Fund 4.58% 4.79%
Lipper U.S. Gov't Money
Market Fund Average 4.46%
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/11/96)
2000 Return Through 3/31/00: 1.29% Average Annual Returns Through 12/31/99
Seven-Day Yield as of 12/31/99: 5.28%
Call 800.572.FUND [3863] between 6:00 A.M. and 5:00 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 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.
<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 pages ___
20
<PAGE>
--------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund | MNCTX
--------------------------------------------------------------------------------
This fund is intended for California residents only.
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. 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 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. 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.
21
<PAGE>
U.S. FIXED-INCOME & MONEY
MARKET FUNDS
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
<TABLE>
[bar chart]
<CAPTION>
94 95 96 97 98 99
------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
0.05% 11.41% 4.51% 7.50% 6.06% -1.24%
</TABLE>
During the six-year period described above in the bar chart, the Fund's best
quarter was Q3 1998 (+3.59%) and the worst quarter was Q2 1999 (-2.02%).
CA Tax-Free Int. Bond Fund -1.24% 5.57% 4.63%
Merrill Lynch CA Intermediate 0.27% 5.77% 4.27%+
Municipal Bond Index
-----------------------------------------------------------------------------
+ Calculated from 6/30/93 1 Year 5 Years Inception
(7/1/93++)
2000 Return Through 3/31/00: 2.35% Average Annual Returns Through 12/31/99
++ 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 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.
<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# 0.69%
--------------------------------------------------------------------------------------------------------
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) 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%.
#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 ___
22
<PAGE>
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
The investment manager of The Montgomery Funds is Montgomery Asset Management,
LLC. Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank
AG, one of the largest publicly held commercial banks in Germany. As of December
31, 1999, Montgomery Asset Management managed approximately $5 billion on behalf
of some 200,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, Senior Portfolio Manager and Principal
o Montgomery Growth Fund (since 1996)
o Montgomery Balanced Fund (since 1996)
o Montgomery Global 20 Fund (since 1996)
Mr. Honor joined Montgomery in 1993 from Twentieth Century Investors in Kansas
City, Missouri, where he was a vice president and portfolio manager. There, he
helped manage several growth mutual funds. Before joining Twentieth Century, he
was vice president and portfolio manager at Alliance Capital Management in San
Francisco. Mr. Honour has a bachelor of science degree and obtained highest
honors in finance from the University of Louisville, Kentucky.
[photo] BRADFORD KIDWELL, Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Mr. Kidwell joined Montgomery from Oasis Financial Partners, a Montgomery
Securities-affiliated fund investing in savings and loans, where he was a
general partner and portfolio manager. Prior to that he was vice president of
equity research at Dean Witter Reynolds, with responsibility for covering the
savings and loan industry. Mr. Kidwell received a bachelor of arts degree in
economics from the University of California, Los Angeles and has done graduate
work in Finance at the University of San Francisco.
[photo] PAUL LAROCCO, Portfolio, Manager and Principal
o Montgomery Small Cap Fund (since 2000)
Before joining Montgomery Mr. LaRocco was a senior portfolio manager at Founders
Asset Management from 1998 to 1999, with responsibility for several large- and
mid-cap growth funds. From 1993 to 1998 he was a portfolio manager for a number
of small- and mid-cap funds at Oppenheimer Funds. Mr. LaRocco holds a master of
business administration degree in finance from the University of Chicago
Graduate School of Business and has a bachelor of science degree in
physiological psychology and a bachelor of arts in biological sciences from the
University of California, Santa Barbara.
[photo] KATHRYN PETERS, Portfolio Manager and Principal
o Montgomery Growth Fund (since 1996)
o Montgomery Global 20 Fund (since 1996)
Before joining Montgomery Ms. Peters worked for the investment banking division
of Donaldson, Lufkin & Jenrette in New York, evaluating prospective equity
investments for the merchant banking fund, including equity and high-yield
offerings. Prior to that she analyzed mezzanine investments for Barclays de
Zoete Wedd in New York and worked in the leveraged buyout group of Marine
Midland Bank. Ms. Peters has a master of business of administration degree from
Harvard Graduate School of Business Administration and a bachelor of arts degree
with high honors in psychology with a concentration in business from Boston
College.
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Before joining Montgomery in 1991, Mr. Philpott served as a securities analyst
with Boettcher & Company, where he focused on the consumer and
telecommunications industries. Prior to that he worked with Berger Associates,
Inc., an investment management firm, as a general securities analyst. Mr.
Philpott holds a master of business administration degree from the Darden School
at the University of Virginia and a bachelor of arts degree in economics from
Washington and Lee University. Mr. Philpott is a
23
<PAGE>
Chartered Financial Analyst.
[photo] CHARLES I. REED, Portfolio Manager
o Montgomery Small Cap Fund (since 2000)
Before joining Montgomery in 1997, Mr. Reed was an equity analyst for Berger
Associates from 1995 to 1997 where he conducted research on publicly traded
companies, performed fundamental analysis of data networking companies, and
developed and maintained financial models on companies within the financial
telecommunications and temporary staffing industries. Mr. Reed received a
bachelor of science degree in finance from Colorado State University and he is
currently completing his master of science degree in finance with an emphasis in
financial analysis from the University of Colorado. He is a Chartered Financial
Analyst.
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Mr. Roberts has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery in 1990, he was vice president and portfolio manager at
Founders Asset Management, where he was responsible for the management of three
separate growth-oriented small cap mutual funds. Before joining Founders, Mr.
Roberts managed a health care sector mutual fund as portfolio manager at
Financial Programs, Inc. He holds a master of business administration degree
from the University of Colorado and a bachelor of arts degree in economics and
history from Bowdoin College.
International and Global Equity Funds
[photo] JOHN BOICH, CFA, Senior Portfolio Manager and Principal
o Montgomery International Growth Fund (since 1996)
o Montgomery Global 20 Fund (since 2000)
Prior to joining Montgomery, Mr. Boich was vice president and portfolio manager
at The Boston Company Institutional Investors, Inc., with responsibility for the
development and subsequent management of their flagship international equity
product. Before joining The Boston Company, he was a founder and co-manager of
The Common Goal World Fund, a global equity partnership. Mr. Boich holds a
bachelor of arts degree in economics from the University of Colorado, and is a
Chartered Financial Analyst.
[photo] OSCAR CASTRO, CFA, Senior Portfolio Manager and Principal
o Montgomery International Growth Fund (since 1996)
o Montgomery Global 20 Fund (since 2000)
Prior to joining Montgomery, Mr. Castro was vice president and portfolio manager
at G.T. Capital Management, where he helped launch and manage mutual funds
specializing in global telecommunications and Latin America. Preceding this he
was a founder and co-manager of The Common Goal World Fund, a global equity
partnership. Mr. Castro holds a master of business administration degree in
finance from Drexel University, Pennsylvania and a bachelor of science degree in
chemical engineering from Simon Bolivar University in Venezuela, and is a
Chartered Financial Analyst.
[photo] FRANK CHIANG, Portfolio Manager and Principal
o Montgomery Emerging Markets Fund (since 1996)
Mr. Chiang was formerly with TCW Asia Ltd., Hong Kong, where he was a managing
director and portfolio manager responsible for TCW's Asian Equity strategy.
Prior to TCW Asia, he was associate director and portfolio manager for Wardley
Investment Services, Hong Kong, where he created and managed three dedicated
China funds. Mr. Chiang has a bachelor of science degree in physics and
mathematics from McGill University in Montreal, Canada and a master of business
administration and finance from New York University. Mr. Chiang is fluent in
three Chinese dialects: Mandarin, Shanghainese and Cantonese.
24
<PAGE>
[photo] JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
o Montgomery Emerging Markets Fund (since 1996)
Prior to joining Montgomery, Ms. Jimenez was a portfolio manager at Emerging
Markets Investors Corporation. From 1981 through 1988, she analyzed U.S. equity
securities, first at Massachusetts Mutual Life Insurance Company, then at
Shawmut Corporation. She received a master of science degree from the
Massachusetts Institute of Technology in 1981; a bachelor of science degree from
New York University in 1979 and is a Chartered Financial Analyst. Ms. Jimenez
serves on the Board of Trustees of M.I.T. and is a member of the Investment
Committee overseeing M.I.T.'s endowment fund.
U.S. Fixed Income and Money Market Funds
[photo] MARIE CHANDOHA, Portfolio Manager
o Montgomery Short Duration Government Bond Fund (since 1999)
Ms. Chandoha began her investment career in 1983. Before joining Montgomery, she
was chief bond strategist at Goldman Sachs from 1996 to 1999, where she advised
institutional clients on optimal asset allocation strategies I the U.S. bond
market. Prior to that she was managing director of global fixed-income and
economics research at Credit Suisse First Boston from 1994 to 1996, where she
managed the global bond and economics research department. Ms. Chandoha is a Phi
Beta Kappa graduate of Harvard University with a bachelor of arts degree in
economics.
[photo] WILLIAMS STEVENS, Senior Portfolio Manager and Principal
o Montgomery Fixed-Income Funds (since 1996)
o Montgomery Balanced Fund (since 1996)
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income Division team joining the company in 1992. Before that, he was
responsible for starting the collateralized mortgage obligation and asset-backed
securities trading department at Barclays de Zoete Wedd Securities. Prior to
that he headed the Structured Product Department at Drexel Burnham Lambert,
which included both origination and trading. Mr. Stevens has a master of
business administration degree from the Harvard Business School and is a Phi
Beta Kappa graduate of Wesleyan University.
Montgomery Equity Income Fund
[photo] WILLIAM KING, CFA, Portfolio Manager
o Montgomery Equity Income Fund (since 1994)
Before joining Montgomery in 1994, Mr. King gained analytical and portfolio
management experience at Merus Capital Management. Previously, he was a
financial analyst/manager for SEI and a division controller and financial
analyst for Kaiser Aluminum and Kaiser Industries.
Management Fees and Operating Expense Limits
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 shown 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.
LOWER OF TOTAL
EXPENSE LIMIT OR
MANAGEMENT TOTAL EXPENSES
FEES ACTUAL
MONTGOMERY FUND (annual rate) (annual rate)
------------- -------------
U.S. Equity Funds
Montgomery Growth Fund 0.95% 1.60%
Montgomery Small Cap Fund 1.00% 1.57%
Montgomery Balanced Fund 0.00% 1.55%
International and Global Equity Funds
Montgomery International Growth Fund 1.12% 1.90%
Montgomery Global 20 Fund 1.25% 1.98%
Montgomery Emerging Markets Fund 1.06% 2.15%
U.S. Fixed-Income and Money Market Funds
25
<PAGE>
LOWER OF TOTAL
EXPENSE LIMIT OR
MANAGEMENT TOTAL EXPENSES
FEES ACTUAL
MONTGOMERY FUND (annual rate) (annual rate)
------------- -------------
Montgomery Short Duration Government Bond Fund 0.29% 0.87%
Montgomery Government Money Market Fund 0.30% 0.75%
Montgomery California Tax-Free Int. Bond Fund 0.38% 0.70%
26
<PAGE>
--------------------------------------------------------------------------------
Additional Investment Strategies and Related Risks
--------------------------------------------------------------------------------
Montgomery Global 20 Fund
The portfolio management teams responsible for managing this Fund allocate its
assets among their investments and country selections through a consensus
approach, rather than a fixed equal weighting. The Fund may invest a portion of
its assets 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.
The Euro: Single European Currency
Investors in the International and Global Equity Funds should note the
following: On January 1, 1999, the European Union (EU) introduced a single
European currency called the euro. Eleven of the 15 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, 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.
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
27
<PAGE>
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
styles: International Growth, Global 20 and Balanced Funds. See "Financial
Highlights," beginning on page __, for each Fund's historical portfolio
turnover.
Additional Benchmark Information
> The MSCI World Index measures the performance of selected stocks in 22
developed countries. The index is presented net of dividend withholding taxes.
> 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 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.
28
<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.
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>
<CAPTION>
[table]
------------------------------------------------------------------------------------------------------------------------------------
U.S. Equity Funds
-----------------------------------------------------
Growth Fund
-----------------------------------------------------
Fiscal Year End June 30,
-----------------------------------------------------
12/31/99##
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999## 1998## 1997## 1996(a)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 24.51 $ 23.77 $ 23.12 $ 21.94 $ 19.22
Net investment income/(loss) 0.00# 0.04 0.11 0.09 0.03
Net realized and unrealized gain/(loss)
on investments 0.26 2.31 3.55 3.96 2.69
Net increase/(decrease) in net assets
resulting from investment operations 0.26 2.35 3.66 4.05 2.72
Distributions:
Dividends from net investment income (0.10) (0.04) (0.09) (0.10) --
Distribution from net realized capital gains (3.01) (1.57) (2.92) (2.77) --
Distribution in excess of net realized capital gains -- -- -- -- --
Total distributions (3.11) (1.61) (3.01) (2.87) --
Net asset value--end of period $ 21.66 $ 24.51 $ 23.77 $ 23.12 $ 21.94
====================================================================================================================================
Total return** 1.98% 11.62% 17.09% 20.41% 14.15%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 158 $ 219 $ 198 $ 212 $ 82
Ratio of net investment income/(loss) to average
net assets 0.15%+ 0.21% 0.46% 0.44% 0.53%+
Net investment income/(loss) before deferral
of fees by Manager $ 0.01 $ 0.04 $ 0.11 -- --
Portfolio turnover rate 23% 39% 54% 61% 118%
Expense ratio before deferral of pees by
Manager including interest and tax expenses 1.70%+ 1.63% 1.45% -- --
Expense ratio including interest and tax expenses 1.70%+ 1.63% 1.45% 1.52% 1.60%+
Expense ratio excluding interest and tax expenses 1.70%+ 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.
# 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>
29
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------
<CAPTION>
U.S. Equity Funds
--------------------------------------------------
Small Cap Fund
-------------------------------------------------
Fiscal Year End June 30,
-------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD 12/31/99
ENDED: (Unaudited) 1999## 1998## 1997(b)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of peroid $ 16.35 $ 20.53 $ 19.48 $ 21.73
Net investment income/(loss) (0.12) (0.21) (0.20) (0.10)
Net realized and unrealized gain/(loss)
on investments 6.92 (1.20) 4.22 1.13
Net increase/(decrease) in net assets
resulting from investment operations 6.80 (1.41) 4.02 1.03
Distributions:
Dividends from net investment income -- -- -- --
Distributions from net realized capital gains (0.00)# (2.07) (2.97) (3.28)
Distributions in excess of net realized
capital gains -- (0.70) -- --
Total distributions (0.00)# (2.77) (2.97) (3.28)
Net asset value--end of peroid $ 23.15 $ 16.35 $ 20.53 $ 19.48
==================================================================================================
Total return** 41.85% (4.39)% 22.44% 5.74%
Ratios to average net assets/supplemental data
Net assets, end of peroid (in 000s) $ 27,675 $ 20,606 $ 21,548 $ 6,656
Ratio of net investment income/(loss) to
average net assets (1.32)%+ (1.35)% (0.95)% (1.03)%
Net investment income/(loss) before deferral
of fees by Manager $ (0.12) $ (0.21) $ (0.20) --
Portfolio turnover rate 79% 71% 69% 59%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.56%+ 1.57% 1.49% 1.45+
Expense ratio including interest and tax
expenses 1.56%+ 1.57% 1.49% --
0.34%
Expense ratio excluding interest and tax
expenses 1.56%+ 1.57% 1.49% --
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. Equity Funds
----------------------------------------------------------
Balanced Fund
----------------------------------------------------------
Fiscal Year End June 30,
----------------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD 12/31/99
ENDED: (Unaudited) 1999## 1998++ 1997## 1996(c)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of peroid $16.74 $ 19.11 $ 19.89 $ 19.33 $ 17.86
Net investment income/(loss) 1.55 0.44 1.62 0.43 0.09
Net realized and unrealized gain/(loss)
on investments (1.34) 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets
resulting from investment operations 0.21 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income (0.25) (0.89) (0.84) (0.34) --
Dividends 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 (0.45) (1.41) -- -- --
Total distributions (0.70) (3.98) (3.41) (2.00) --
Net asset value--end of peroid $16.75 $ 16.74 $ 19.11 $ 19.89 --
==========================================================================================================
Total return** 1.01% 11.15% 14.53% 14.35% 8.23%
Ratios to average net assets/supplemental data
Net assets, end of peroid (in 000s) $ 57 $ 56 $ 71 $ 74 $ 43
Ratio of net investment income/(loss) to
average net assets 19.70+ 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before deferral
of fees by Manager $ 1.50 $ 0.41 $ 1.59 $ 0.42 $ 0.08
Portfolio turnover rate 22% 36% 84% 169% 226%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 0.86% 0.71% 0.56% 1.74% 1.80%+
Expense ratio including interest and tax
expenses 0.34% 0.50% 0.51% 1.68% 1.67%+
0.34%
Expense ratio excluding interest and tax
expenses 0.34% 0.50% 0.50% 1.56% 1.55%+
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
<FN>
(b) The Small Cap Fund's Class P shares commenced operations on July 1, 1996.
(c) The Balanced Fund's (formerly U.S. Asset Allocation Fund) Class P shares
commenced operations on January 3, 1996.
** Total return represents aggregate total for the periods indicated.
++ 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.
+ 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
results of operations.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
International and Global Equity Fund
-------------------------------------------------
International Growth Fund
-------------------------------------------------
Fiscal Year End June 30,
-------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD 12/31/99
ENDED: (Unaudited) 1999 1998## 1997## 1996 (d)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of period $18.92 $ 18.64 $ 16.22 $ 15.31 $ 13.66
Net investment income/(loss) (0.06) 0.12 (0.01) 0.05 0.00#
Net realized and unrealized gain/(loss) on
investments 4.89 0.26 3.50 2.54 1.65
Net increase/(decrease) in net assets resulting
from investment operations 4.83 0.38 3.49 2.59 1.65
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions in excess of net investment
income -- -- 0.00# -- --
Distributions from net realized capital gains (0.39) (0.10) (1.07) (1.68) --
Distributions in excess of net realized
capital gains -- -- -- -- --
Total distributions (0.39) (0.10) (1.07) (1.68) --
Net asset value--end of peroid $23.36 $ 18.92 $ 18.64 $ 16.22 $ 15.31
====================================================================================================================================
Total return** $25.68% 2.18% 23.03% 19.13% 12.08%
Ratios to average net assets/supplemental data
Net assets, end of peroid (in 000s) $4,970 $ 2,352 $ 5 $ 5 $ 1
Ratio of net investment income/(loss) to
average net assets (1.00)%+ 0.16% (0.03)% 0.32% 0.01%+
Net investment income/(loss) before deferral of
fees by Manager $(0.06) $ 0.12 $ (0.08) $ (0.06) $ (0.05)
Portfolio turnover rate 199% 150% 127% 95% 239%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 2.11%+ 1.99% 2.38% 2.62% 3.16%+
Expense ratio including interest and tax expense 1.97%+ 1.91% 1.91% -- --
Expense ratio excluding interest and tax expense 1.90%+ 1.90% 1.90% 1.91% 1.90%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(d) The International Growth Fund's Class P shares commenced operations on
March 11, 1996.
** 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>
31
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
International and Global Equity Funds
------------------------------------------------
Emerging Markets Fund
------------------------------------------------
Fiscal Year End June 30,
------------------------------------------------
12/31/99##
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999 1998 1997 1996(e)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 10.05 $ 9.74 $ 16.77 $ 14.19 $ 12.62
Net investment income/(loss) (0.04) 0.00# 0.03 0.06 0.01
Net realized and unrealized gain/(loss)
on investments 2.72 0.31 (6.61) 2.58 1.56
Net increase/(decrease) in net assets
resulting from investment operations 2.68 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 period $ 12.73 $ 10.05 $ 9.74 $ 16.77 $ 14.19
====================================================================================================================================
Total return** 27.09% 3.08% (39.75)% 18.62% 12.44%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 914 $ 520 $ 413 $ 607 $ 2
Ratio of net investment income/(loss) to average
net assets (0.85)%+ (0.24)% 0.30% 0.23% 0.33%+
Net investment income/(loss) before deferral
of fees by Manager $ (1.05) $ 0.01 $ 0.03 -- --
Portfolio turnover rate 112% 86% 97% 83% 110%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.72%+ 2.40% 1.90% -- --
Expense ratio including interest and tax expenses 2.29%+ 2.30% 1.90% -- --
Expense ratio excluding interest and tax expenses 2.15%+ 2.15% 1.85% 1.92% 1.97%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(e) 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.
## 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 method did not accord with results of operations.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
International and Global Equity Funds
---------------------------------------
Global 20 Fund
---------------------------------------
12/31/99##
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999## 1998## 1997(f)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of period $ 21.83 $ 20.68 $ 19.98 $ 15.89
Net investment income/(loss) (0.25) (0.14) 0.09 (0.02)
Net realized and unrealized gain/(loss)
on investments 5.42 2.64 2.46 4.11
Net increase/(decrease) in net assets
resulting from investment operations 5.17 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 (3.11) (1.05) (1.85) --
Distributions in excess of net realized capital gains -- -- -- --
Distributions from capital -- -- -- --
Total distributions (3.11) (1.35) (1.85) --
Net asset value--end of period $ 23.89 $ 21.83 $ 20.68 $ 19.98
====================================================================================================================================
Total return** 25.02% 13.46% 14.12% 25.74%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 27 $ 55 $ 52 $ 9
Ratio of net investment income/(loss) to average
net assets (2.29)%+ (0.72)% 0.34% (0.21)%+
Net investment income/(loss) before deferral
of fees by Manager $ (0.27) $ (0.14) $ 0.09 $ (0.03)
Portfolio turnover rate 122% 115% 151% 158%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 3.62%+ 2.01% 2.06% 2.17%+
Expense ratio including interest and tax expenses 3.51%+ 2.01% 2.06% --
Expense ratio excluding interest and tax expenses 2.05%+ 1.98% 2.05% 2.07%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(f) The Global 20 Fund's (formerly Select 50 Fund) 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>
33
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------
Short Duration Government
Bond Fund
-----------------------------------------------
Fiscal Year End June 30,
-----------------------------------------------
12/31/99
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999 1998 1997## 1996(g)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 10.03 $ 10.15 $ 9.99 $ 9.92 $ 9.98
Net investment income/(loss) 0.27 0.41 0.61 0.59 0.16
Net realized and unrealized gain/(loss)
on investments (0.07) (0.06) 0.12 0.06 (0.05)
Net increase/(decrease) in net assets
resulting from investment operations 0.20 0.35 0.73 0.65 0.11
Distributions:
Dividends from net investment income (0.27) (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 (0.27) (0.47) (0.57) (0.58) (0.17)
Net asset value--end of period $ 9.96 $ 10.03 $ 10.15 $ 9.99 $ 9.92
====================================================================================================================================
Total return** 1.45% 4.47% 7.34% 6.69% 1.12%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 3,759 $ 3,887 $ 3 $ 0 $ 1
Ratio of net investment income/(loss) to average
net assets 5.43%+ 4.96% 5.58% 5.62% 5.63%+
Net investment income/(loss) before deferral
of fees by Manager $ 5.28 $ 0.37 $ 0.55 $ 0.54 $ 0.14
Portfolio turnover rate 271% 199% 502% 451% 350%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.68%+ 2.10% 1.98% 2.30% 2.56%+
Expense ratio including interest and tax expenses 1.17%+ 1.60% 1.40% 1.80% 1.80%+
Expense ratio excluding interest and tax expenses 0.93%+ 0.87% 0.53% 0.85% 0.85%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(g) 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>
34
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. Fixed-Income and Money Market Funds
-------------------------------------------------
Government Money Market Fund
-------------------------------------------------
Fiscal Year End June 30,
-------------------------------------------------
12/31/99
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999 1998 1997 1995(h)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income/(loss) 0.024 0.045 0.049 0.048 0.014
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 0.024 0.045 0.049 0.048 0.014
Distributions:
Dividends from net investment income (0.024) (0.045) (0.049) (0.048) (0.014)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Total distributions (0.024) $ (0.045) (0.049) (0.048) (0.014)
Net asset value--end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================================
Total return** 2.40% 4.54% 5.00% 4.88% 1.38%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $3,087 $ 1 -- -- $ 1
Ratio of net investment income/(loss) to average
net assets 4.92%+ 4.52% 4.90% 4.68% 4.91%+
Net investment income/(loss) before deferral of
fees by Manager $ 0.024 $ 0.045 $ 0.049 $ 0.048 $ 0.013
Portfolio turnover rate -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.77%+ 0.75% 0.73% 0.87% 0.99%+
Expense ratio including interest and tax expenses 0.62%+ 0.75% 0.78% -- --
Expense ratio excluding interest and tax expenses 0.62%+ 0.75% 0.78% 0.85% 0.85%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(h) The Government Money Bond Fund's Class P shares commenced operations on
March 11, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
ss. Amount represents less than $0.001 per share.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. Fixed-Income and Money Market Funds
-----------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund
-----------------------------------------------------------------------------
Fiscal Year End June 30,
-----------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR 12/31/99
OR PERIOD ENDED: (Unaudited) 1999(R) 1998(R) 1997(R) 1996(R) 1995(R)(i)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 12.67 $ 12.86 $ 12.53 $ 12.23 $ 12.04 $ 11.79
Net investment income 0.26 0.49 0.51 0.53 0.54 0.44
Net realized and unrealized
gain/(loss)
on investments (0.26) (0.16) 0.33 0.30 0.19 0.25
Net increase/(decrease) in net
assets resulting from investment
operations 0.00# 0.33 0.84 0.83 0.73 0.69
Distributions:
Dividends from net investment
income (0.26) (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 (0.26) (0.52) (0.51) (0.53) (0.54) (0.44)
Net asset value--end of period $ 12.41 $ 12.67 $ 12.86 $ 12.53 $ 12.23 $ 12.04
====================================================================================================================================
Total return** (0.02)% 2.71% 6.85% 6.91% 6.11% 6.03%
Ratios to average net
assets/supplemental data
Net assets, end of period (in 000s) $34,293 $41,017 $35,667 $21,681 $13,948 $ 5,153
Ratio of net investment income to
average net assets 4.08%+ 3.93% 4.03% 4.27% 4.34% 3.71%
Net investment income/(loss) before
deferral of fees by Manager $ 0.44 $ 0.48 $ 0.44 $ 0.47 $ 0.43 $ 0.34
Portfolio turnover rate 42% 184% 42% 26% 58% 38%
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 1.20%+ 1.19% 1.19% 1.18% 1.43% 1.41%
Expense ratio including interest
and tax expenses 0.70%+ 0.69% 0.69% 0.68% 0.61% 0.56%
Expense ratio excluding interest
and tax expenses 0.70%+ 0.69% 0.68% -- -- --
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(i) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
36
<PAGE>
[table]
Investment Options
<TABLE>
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 Once an account is established, you can:
(4:00 P.M. eastern time) will be executed at the
following business day's closing price. Once a trade is |_| Buy, sell or exchange shares by phone. Contact The
placed it may not be altered or canceled. Montgomery Funds at 800.572.FUND [3863].
Checks should be made payable to: Press 1 for a shareholder service representative.
The Montgomery Funds Press 2 for the automated Montgomery Star System.
The minimum initial investment for each fund is $1,000. |_| Buy or sell shares by mail.
The minimum subsequent investment is $100. 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>
37
<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 charge 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.
From time to time, Montgomery may close and reopen any of its Funds to new
investors at its discretion. Shareholders who maintain open accounts that meet
the minimum required balance in a Fund when it closes may make additional
investments in it. Employer-sponsored retirement plans, if they are already
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 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. If you do not own shares of a
closed Fund, you may not exchange shares from other Montgomery Funds for shares
of that 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 name]
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
38
<PAGE>
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 included with
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 with 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, 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' NAVs are in the Statement of
Additional Information.
|_| Money Market Fund. The price of the 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 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
39
<PAGE>
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.
40
<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
under "Becoming a Montgomery Shareholder" (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" (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.
|_| Redemption fees may apply to exchanges or redemptions out of some Funds.
Selling Shares
You may sell some or all of your fund shares on days that the NYSE is open for
trading (except bank
41
<PAGE>
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 your
investment 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:
> For shares sold by wire, a $10 wire transfer fee that 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.
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 (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
or perform transactions
around-the-clock through the
Montgomery Star System or
www.montgomeryasset.com.
|_| By Check. If you have checkwriting privileges on 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 in 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 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
42
<PAGE>
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.
|_| Redemption Fee. The redemption fees for the U.S. Equity Funds and the
International & Global Equity Funds are 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. Each Fund
will retain the fee charged.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum Fund 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
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 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.
43
<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 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 request. 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 a Fund as a result.
Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use 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 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
> Via 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
44
<PAGE>
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 Montgomery 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 California Tax-Free Intermediate Bond Fund intends to continue paying to
shareholders what the IRS calls "exempt-interest dividends" 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 it derives 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 should also consult your advisor 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 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 distributions 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.
45
<PAGE>
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 a 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.
DST Systems, Inc., located in Kansas City,
Missouri, is the Funds' Master Transfer Agent. It
performs certain recordkeeping and accounting
functions for the Funds.
Investors Fiduciary Trust Company, also located in
Kansas City, Missouri, assists DST Systems, Inc.
with certain recordkeeping and accounting
functions for the Funds.
46
<PAGE>
<TABLE>
[table]
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
<S> <C> <C>
U.S., International and Declared and paid in the last Declared and paid in the last
Global Equity Funds quarter of each calendar year* quarter of each calendar year*
Balanced 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*
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 quarter of each calendar year*
<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 the
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.
47
<PAGE>
[Outside back cover:]
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.
You can also 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 free copy of the most recent annual or
semiannual report, call us at 800.572.FUND [3863], option 3.
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. To obtain information on the operation of the Public
Reference Room please call 202.942.8090. Reports and other information about The
Montgomery Funds 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, or e-mailing the SEC at [email protected].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest Wisely(R)
The Montgomery Funds
101 California Street
---------------------------
800.572.FUND [3863]
www.montgomeryasset.com
---------------------------
San Francisco, California 94111-9361
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 4/00
48
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY SMALL CAP FUND
Montgomery Balanced Fund
MONTGOMERY EMERGING MARKETS FUND
---------------------------------------------------------------------
<PAGE>
Prospectus
June _, 2000
The Montgomery Funds(SM)
GE INVESTMENT RETIREMENT SERVICES
Small Cap Fund
Balanced Fund (formerly U.S. Asset Allocation Fund)
Emerging Markets 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.
1
<PAGE>
---------------------------
How to Contact Us
---------------------------
[Sidebar]
Montgomery Shareholder
Service Representatives
(800) 572-FUND [3863]
Available 6:00 A.M. to 5:00 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 Small Cap Fund..............................................
Montgomery Balanced Fund (formerly U.S. Asset Allocation Fund).........
International and Global Equity Funds
Montgomery Emerging Markets Fund.......................................
Portfolio Management........................................................
Management Fees.............................................................
Additional Investment Strategies and Related Risks..........................
The Euro: Single European Currency.....................................
Defensive Investments..................................................
Portfolio Turnover.....................................................
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 Withholding Information............................................
After You Invest.......................................................
2
<PAGE>
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.
1
<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.
2
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
-------------- ----------- -----------
23.27% -8.19% 55.69%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+47.36%) and the worst quarter was Q3 1998 (-32.44%).
Small Cap Fund 55.69% 17.45%
Russell 2000 Index 21.26% 12.84%+
-------------------------------------------------------------------------------
+ Calculated from 6/30/96 1 Year Inception
(7/1/96)
--------------------------------------------------------------------------------
2000 Return Through 3/31/00: 7.86% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
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 * 2.00%
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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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
Paul LaRocco
For more details see pages ___
For financial highlights
see page ___
3
<PAGE>
--------------------------------------------------------------------------------
Balanced Fund | MNAAX
--------------------------------------------------------------------------------
Formerly named Montgomery U.S. Asset Allocation Fund.
Objective
| | Seeks high total return (consisting of both capital appreciation and
income) while also seeking to reduce risk by allocating its assets among
stocks, bonds and money market securities
--------------------------------------------------------------------------------
Principal Strategy [clipart]
As a "fund-of-funds," the Montgomery Balanced Fund currently invests its assets
in four underlying Montgomery Funds:
| | For U.S. Equity Exposure, Montgomery Growth Fund and Montgomery Equity
Income Fund
| | For U.S. bond exposure, Montgomery Total Return Bond Fund
| | For cash exposure, Montgomery Money Market Fund
The Fund's strategy is to analyze various market factors, including relative
risk and return, to help determine what we believe is an optimal allocation
among stocks, bonds and cash. The Fund's total equity exposure may range from 50
to 80% and its bond exposure may range from 20 to 50% of its assets. It may
invest up to 20% of its assets in a Montgomery Money Market Fund. At times, the
Fund may also invest a small portion of its assets in other Montgomery Funds to
gain exposure to additional areas, such as the international markets.
The Montgomery Growth Fund seeks long-term capital appreciation, by investing 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 Montgomery
Equity Income Fund seeks current income and long-term capital appreciation,
while striving to minimize portfolio volatility by investing in large,
dividend-paying U.S. companies. The Montgomery 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 Montgomery Money Market Fund seeks current income
consistent with liquidity and preservation of capital by investing in short-term
U.S. government securities.
The Fund's portfolio managers may adjust the proportion of assets allotted to
the underlying portfolios in response to changing market conditions, when
appropriate.
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 and the Montgomery
Equity Income 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 those Funds invest. 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.
4
<PAGE>
U.S. EQUITY FUNDS
--------------------------------------------------------------------------------
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 commonly used
indices for its market segment. Of course, past performance is no guarantee of
future results.
--------------------------------------------------------------------------------
[bar chart]
97 98 99
------------------- ----------------- ----------------
18.68% 6.03% 12.18%
During the three-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%).
Balanced Fund 12.18% 12.34%
S&P 500 Index 21.04% 26.42%+
Lehman Brothers Aggregate Bond
Index -0.82% 5.20%+
--------------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/3/96)
--------------------------------------------------------------------------------
2000 Return Through 3/31/00: 3.39% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
Fees & Expenses [clipart]
<TABLE>
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.
<S> <C>
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 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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. This fee is retained by the Fund. $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 1.96%, 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) 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.
5
<PAGE>
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 pages ___
For financial highlights
see page ___
6
<PAGE>
--------------------------------------------------------------------------------
Emerging Markets Fund | MNEMX
--------------------------------------------------------------------------------
Objective
|X| 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 in-depth financial review with 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 values may decline against the U.S. dollar.
7
<PAGE>
INTERNATIONAL & GLOBAL
EQUITY FUNDS
--------------------------------------------------------------------------------
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]
97 98 99
------------------- ----------------- ----------------
-3.83% -38.89% 62.76%
During the three-year period described above in the bar chart, the Fund's best
quarter was Q4 1999 (+35.91%) and the worst quarter was Q3 1998 (-24.65%).
Emerging Markets Fund 62.76% 1.36%
MSCI Emerging Markets Free Index++ 66.41% 2.64%+
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/12/96)
++See page __ for a description of this index. The Fund was formerly compared
with only the IFC Global Composite Index. This change was effected because the
MSCI Emerging Markets Free Index better represents the types of foreign
securities in which the Fund may invest.
--------------------------------------------------------------------------------
2000 Return Through 3/31/00: 2.43% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
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* 2.00%
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>
* Deducted from the net proceeds of shares redeemed (or exchanged) within
three months after purchase. 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.
</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 pages ___
For financial highlights
see page ___
8
<PAGE>
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
The investment manager of The Montgomery Funds is Montgomery Asset Management,
LLC. Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank
AG, one of the largest publicly held commercial banks in Germany. As of December
31, 1999, Montgomery Asset Management managed approximately $5 billion on behalf
of some 200,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] ROGER HONOUR, Senior Portfolio Manager and Principal
o Montgomery Growth Fund (since 1996)
o Montgomery Balanced Fund (since 1996)
Mr. Honour joined Montgomery in 1993 from Twentieth Century Investors in Kansas
City, Missouri, where he was a vice president and portfolio manager. There, he
helped manage several growth mutual funds. Before joining Twentieth Century, he
was vice president and portfolio manager at Alliance Capital Management in San
Francisco. Mr. Honour has a bachelor of science degree and obtained highest
honors in finance from the University of Louisville, Kentucky.
[photo] BRADFORD KIDWELL, Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Mr. Kidwell joined Montgomery from Oasis Financial Partners, a Montgomery
Securities-affiliated fund investing in savings and loans, where he was a
general partner and portfolio manager. Prior to that he was vice president of
equity research at Dean Witter Reynolds, with responsibility for covering the
savings and loan industry. Mr. Kidwell received a bachelor of arts degree in
economics from the University of California, Los Angeles and has done graduate
work in Finance at the University of San Francisco.
[photo] PAUL LAROCCO, Portfolio, Manager and Principal
o Montgomery Small Cap Fund (since 2000)
Before joining Montgomery Mr. LaRocco was a senior portfolio manager at Founders
Asset Management from 1998 to 1999, with responsibility for several large- and
mid-cap growth funds. From 1993 to 1998 he was a portfolio manager for a number
of small- and mid-cap funds at Oppenheimer Funds. Mr. LaRocco holds a master of
business administration degree in finance from the University of Chicago
Graduate School of Business and has a bachelor of science degree in
physiological psychology and a bachelor of arts in biological sciences from the
University of California, Santa Barbara.
[photo] KATHRYN PETERS, Portfolio Manager and Principal
o Montgomery Growth Fund (since 1996)
Before joining Montgomery Ms. Peters worked for the investment banking division
of Donaldson, Lufkin & Jenrette in New York, evaluating prospective equity
investments for the merchant banking fund, including equity and high-yield
offerings. Prior to that she analyzed mezzanine investments for Barclays de
Zoete Wedd in New York and worked in the leveraged buyout group of Marine
Midland Bank. Ms. Peters has a master of business of administration degree from
Harvard Graduate School of Business Administration and a bachelor of arts degree
with high honors in psychology with a concentration in business from Boston
College.
9
<PAGE>
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Before joining Montgomery in 1991, Mr. Philpott served as a securities analyst
with Boettcher & Company, where he focused on the consumer and
telecommunications industries. Prior to that he worked with Berger Associates,
Inc., an investment management firm, as a general securities analyst. Mr.
Philpott holds a master of business administration degree from the Darden School
at the University of Virginia and a bachelor of arts degree in economics from
Washington and Lee University. Mr. Philpott is a Chartered Financial Analyst.
[photo] CHARLES I. REED, Portfolio Manager
o Montgomery Small Cap Fund (since 2000)
Before joining Montgomery in 1997, Mr. Reed was an equity analyst for Berger
Associates from 1995 to 1997 where he conducted research on publicly traded
companies, performed fundamental analysis of data networking companies, and
developed and maintained financial models on companies within the financial
telecommunications and temporary staffing industries. Mr. Reed received a
bachelor of science degree in finance from Colorado State University and he is
currently completing his master of science degree in finance with an emphasis in
financial analysis from the University of Colorado. He is a Chartered Financial
Analyst.
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
o Montgomery Small Cap Fund (since 1996)
Mr. Roberts has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery in 1990, he was vice president and portfolio manager at
Founders Asset Management, where he was responsible for the management of three
separate growth-oriented small cap mutual funds. Before joining Founders, Mr.
Roberts managed a health care sector mutual fund as portfolio manager at
Financial Programs, Inc. He holds a master of business administration degree
from the University of Colorado and a bachelor of arts degree in economics and
history from Bowdoin College.
International and Global Equity Funds
[photo] FRANK CHIANG, Portfolio Manager and Principal
o Montgomery Emerging Markets Fund (since 1996)
Mr. Chiang was formerly with TCW Asia Ltd., Hong Kong, where he was a managing
director and portfolio manager responsible for TCW's Asian Equity strategy.
Prior to TCW Asia, he was associate director and portfolio manager for Wardley
Investment Services, Hong Kong, where he created and managed three dedicated
China funds. Mr. Chiang has a bachelor of science degree in physics and
mathematics from McGill University in Montreal, Canada and a master of business
administration and finance from New York University. Mr. Chiang is fluent in
three Chinese dialects: Mandarin, Shanghainese and Cantonese.
[photo] JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
o Montgomery Emerging Markets Fund (since 1996)
Prior to joining Montgomery, Ms. Jimenez was a portfolio manager at Emerging
Markets Investors Corporation. From 1981 through 1988, she analyzed U.S. equity
securities, first at Massachusetts Mutual Life Insurance Company, then at
Shawmut Corporation. She received a master of science degree from the
Massachusetts Institute of Technology in 1981; a bachelor of science degree from
New York University in 1979 and is a Chartered Financial Analyst. Ms. Jimenez
serves on the Board of Trustees of M.I.T. and is a member of the Investment
Committee overseeing M.I.T.'s endowment fund.
U.S. Fixed Income and Money Market Funds
[photo] WILLIAMS STEVENS, Senior Portfolio Manager and Principal
o Montgomery Fixed-Income Funds (since 1996)
o Montgomery Balanced Fund (since 1996)
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income
10
<PAGE>
Division team joining the company in 1992. Before that, he was responsible for
starting the collateralized mortgage obligation and asset-backed securities
trading department at Barclays de Zoete Wedd Securities. Prior to that he headed
the Structured Product Department at Drexel Burnham Lambert, which included both
origination and trading. Mr. Stevens has a master of business administration
degree from the Harvard Business School and is a Phi Beta Kappa graduate of
Wesleyan University.
Montgomery Equity Income Fund
[photo] WILLIAM KING, CFA, Portfolio Manager
o Montgomery Equity Income Fund (since 1994)
Before joining Montgomery in 1994, Mr. King gained analytical and portfolio
management experience at Merus Capital Management. Previously, he was a
financial analyst/manager for SEI and a division controller and financial
analyst for Kaiser Aluminum and Kaiser Industries.
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 shown 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 Small Cap Fund 1.00% 1.57%
Montgomery Balanced Fund 0.00% 1.55%
International and Global Equity Funds
Montgomery Emerging Markets Fund 1.06% 2.15%
</TABLE>
11
<PAGE>
--------------------------------------------------------------------------------
Additional Investment Strategies and Related Risks
--------------------------------------------------------------------------------
The Euro: Single European Currency
Investors in the Montgomery Emerging Markets Fund should note the following: On
January 1, 1999, the European Union (EU) introduced a single European currency
called the euro. Eleven of the 15 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,
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 the Fund to the extent it 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-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," beginning on page __, for each Fund's historical
portfolio turnover.
12
<PAGE>
Additional Benchmark Information
> 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.
13
<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.
<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).
[table]
<CAPTION>
-----------------------------------------------------------------------------------------------
U.S. Equity Funds
--------------------------------------------
Small Cap Fund
--------------------------------------------
Fiscal Year Ended June 30,
--------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD 12/31/99
ENDED: (Unaudited) 1999## 1998## 1997(a)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value--beginning of period $ 16.35 $ 20.53 $ 19.48 $ 21.73
Net investment income/(loss) (0.12) (0.21) (0.20) (0.10)
Net realized and unrealized gain/(loss)
on investments 6.92 (1.20) 4.22 1.13
Net increase/(decrease) in net assets
resulting from investment operations 6.80 (1.41) 4.02 1.03
Distributions:
Dividends from net investment income -- -- -- --
Dividends in excess of -- -- -- --
Distributions from net realized capital gains (0.00)# (2.07) (2.97) (3.28)
Distributions in excess of net realized
capital gains -- (0.70) -- --
Total distributions (0.00)# (2.77) (2.97) (3.28)
Net asset value--end of period $ 23.15 $ 16.35 $ 20.53 $ 19.48
===============================================================================================
Total return** 41.85% (4.39)% 22.44% 5.74%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $27,675 $ 20,606 $ 21,548 $ 6,656
Ratio of net investment income/(loss) to
average net assets (1.32)%+ (1.35)% (0.95)% (1.03)%+
Net investment income/(loss) before deferral
of fees by Manager $ (0.12) $ (0.21) $ (0.20) --
Portfolio turnover rate 79% 71% 69% 59%
Expense ratio including interest and tax
expenses 1.52%+ 1.57% 1.49% --
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.56%+ 1.57% 1.49% 1.45+
Expense ratio excluding interest and tax
expenses 1.56%+ 1.57% 1.49% --
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
U.S. Equity Funds
---------------------------------------------------------
Balanced Fund
---------------------------------------------------------
Fiscal Year Ended June 30,
--------------------------------------------------------
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD 12/31/99
ENDED: (Unaudited) 1999## 1998++ 1997## 1995(b)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 16.74 $ 19.11 $ 19.89 $ 19.33 $ 17.86
Net investment income/(loss) 1.55 0.44 1.62 0.43 0.09
Net realized and unrealized gain/(loss)
on investments (1.34) 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets
resulting from investment operations 0.21 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income (0.25) (0.89) (0.84) (0.34) --
Dividends in excess of investment income -- -- 0.74% -- --
Distributions from net realized capital gains (0.45) (1.68) (1.83) (1.66) --
Distributions in excess of net realized
capital gains -- (1.41) -- -- --
Total distributions (0.70) (3.98) (3.41) (2.00) --
Net asset value--end of period $ 16.25 $ 16.74 $ 19.11 $ 19.89 $ 19.33
===========================================================================================================
Total return** 1.01% 11.15% 14.53% 14.35% 8.23%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) 57 $ 56 $ 71 $ 74 $ 43
Ratio of net investment income/(loss) to
average net assets 19.70%+ 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before deferral
of fees by Manager $ 1.50 $ 0.41 $ 1.59 $ 0.42 $ 0.08
Portfolio turnover rate 22% 36% 84% 169% 226%
Expense ratio including interest and tax
expenses 0.86+ 0.50% 0.51% 1.68% 1.67%+
Expense ratio before deferral of fees by
Manager, including interest and tax expense 0.34%+ 0.71% 0.56% 1.74% 1.80%+
Expense ratio excluding interest and tax
expenses 0.34%+ 0.50% 0.50% 1.56% 1.55%+
-----------------------------------------------------------------------------------------------------------
<FN>
(a) The Small Cap Fund's Class P shares commenced operations on July 1, 1996.
(b) The Balanced Fund's (formerly U.S. Asset Allocation Fund) Class P shares
commenced operations on January 3, 1996.
** Total return represents aggregate total for the periods indicated.
++ 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.
+ 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
results of operations.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
---------------------------------------------------
Emerging Markets Fund
---------------------------------------------------
12/31/99
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: (Unaudited) 1999 1998 1997 1996(c)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $ 10.05 $ 9.74 $ 16.77 $ 14.19 $ 12.62
Net investment income/(loss) (0.04) 0.00# 0.03 0.06 0.01
Net realized and unrealized gain/(loss)
on investments 2.72 0.31 (6.61) 2.58 1.56
Net increase/(decrease) in net assets
resulting from investment operations 2.68 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 period $ 12.73 $ 10.05 $ 9.74 $ 16.77 $ 14.19
====================================================================================================================================
Total return** 27.09% 3.08% (39.75)% 18.62% 12.44%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $ 914 $ 520 $ 413 $ 607 $ 2
Ratio of net investment income/(loss) to average
net assets (0.85)%+ (0.24)% 0.30% 0.23% 0.33%+
Net investment income/(loss) before deferral
of fees by Manager $ (1.05) $ 0.01 $ 0.03 -- --
Portfolio turnover rate 112% 86% 97% 83% 110%
Expense ratio including interest and tax expenses 2.72%+ 2.30% 1.90% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.29%+ 2.40% 1.90% -- --
Expense ratio excluding interest and tax expenses 2.15% 2.15% 1.85% 1.92% 1.97%+
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(c) 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.
## 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 method did not accord with results
of operations.
</FN>
</TABLE>
15
<PAGE>
[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.
--------------------------------------------------------------------------------
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. The minimum subsequent
investment is $100.
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 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]
16
<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 charge 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.
From time to time, Montgomery may close and reopen any of its Funds to new
investors at its discretion. Shareholders who maintain open accounts that meet
the minimum required balance in a Fund when it closes may make additional
investments in it. Employer-sponsored retirement plans, if they are already
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 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. If you do not own shares of a
closed Fund, you may not exchange shares from other Montgomery Funds for shares
of that 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 name]
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
17
<PAGE>
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 included with
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 with 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, 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 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. 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. 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' NAVs are in the Statement of Additional Information.
| | Foreign Funds. The Montgomery Emerging Markets 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.
18
<PAGE>
[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.
19
<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
under "Becoming a Montgomery Shareholder" (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" (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). |X| 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.
| | Redemption fees may apply to exchanges or redemptions out of some Funds.
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.
20
<PAGE>
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.
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 shares sold by wire, a $10 wire transfer fee that 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.
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 (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
or perform transactions
around-the-clock through the
Montgomery Star System or
www.montgomeryasset.com.
| | 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.
| | Redemption Fee. The redemption fees for the Funds 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 Fund 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
21
<PAGE>
our shareholders.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
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 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.
22
<PAGE>
The shares you purchase by phone will be priced at the first net asset
value we determine after receiving your request. 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 a Fund as a result.
Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use 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 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
> Via 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 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.
23
<PAGE>
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 Montgomery 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.
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 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 distributions 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 a 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.
24
<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.
DST Systems, Inc., located in Kansas City,
Missouri, is the Funds' Master Transfer Agent. It
performs certain recordkeeping and accounting
functions for the Funds.
Investors Fiduciary Trust Company, also located in
Kansas City, Missouri, assists DST Systems, Inc.
with certain recordkeeping and accounting
functions for the Funds.
25
<PAGE>
<TABLE>
[table]
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
<S> <C> <C>
U.S., International and Declared and paid in the last Declared and paid in the last
Global Equity Funds quarter of each calendar year* quarter of each calendar year*
Balanced 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*
<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 the
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.
26
<PAGE>
[Outside back cover:]
You can find more information about the investment policies of The Montgomery
Funds' investment policies in the Statement of Additional Information (SAI),
incorporated by reference into this prospectus, which is available free of
charge.
You can also find further information about the Funds in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Funds' performance during
its most recent fiscal period. To request a free copy of the most recent annual
or semiannual report, please call us at 800.572.FUND [3863], option 3.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Funds, including the SAI, at the
Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room please call 202.942.8090. Reports and other information about the 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, or e-mailing the SEC
at [email protected].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest Wisely(R)
The Montgomery Funds
101 California Street
---------------------------
800.572.FUND [3863]
www.montgomeryasset.com
---------------------------
San Francisco, California 94111-9361
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 4/00
27
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
CLASS R SHARES
MONTGOMERY GROWTH FUND
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL 20 FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT MONEY MARKET FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
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 BALANCED FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL 20 PORTFOLIO
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING MARKETS FOCUS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT MONEY MARKET FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
June _, 2000
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 Balanced Fund, Montgomery
Global Long-Short Fund and Montgomery Emerging Markets Focus 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 June _, 2000, and that set forth in the combined prospectuses
for the Class P shares of certain Funds dated June _, 2000, 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.
<PAGE>
TABLE OF CONTENTS
Page
----
STATEMENT OF ADDITIONAL INFORMATION......................................... 1
THE TRUSTS.................................................................. 3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS............................. 4
RISK FACTORS................................................................ 28
INVESTMENT RESTRICTIONS..................................................... 32
DISTRIBUTIONS AND TAX INFORMATION........................................... 38
TRUSTEES AND OFFICERS....................................................... 43
INVESTMENT MANAGEMENT AND OTHER SERVICES.................................... 47
EXECUTION OF PORTFOLIO TRANSACTIONS......................................... 57
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 60
DETERMINATION OF NET ASSET VALUE............................................ 61
PRINCIPAL UNDERWRITER....................................................... 64
PERFORMANCE INFORMATION..................................................... 64
GENERAL INFORMATION......................................................... 69
FINANCIAL STATEMENTS........................................................ 80
APPENDIX.................................................................... 81
B-2
<PAGE>
THE TRUSTS
The Montgomery Funds is an open-end management investment company organized
as a Massachusetts business trust on May 10, 1990, and The Montgomery Funds II
is an open-end management investment company organized as a Delaware business
trust on September 10, 1993. Both are registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). The Trusts currently
offer shares of beneficial interest, $0.01 par value per share, in various
series. Each series offers three classes of shares (Class R, Class P and Class
L, 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 International Growth Fund (the "International Growth Fund");
>> Montgomery Global Opportunities Fund (the "Global Opportunities Fund");
>> Montgomery Global 20 Fund (the "Global 20 Fund," prior to 4/00, called the
"Montgomery Select 50 Fund");
>> Montgomery Global Communications Fund (the "Global Communications Fund");
>> Montgomery Emerging Markets Fund (the "Emerging Markets Fund");
>> Montgomery Emerging Asia Fund (the "Emerging Asia 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 "Montgomery Government Reserve Fund");
>> Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund," prior to 6/95, called "Montgomery California
Tax-Free Short/Intermediate Fund" and, prior to 12/94, called "Montgomery
California Tax-Free Bond Fund");
>> Montgomery California Tax-Free Money Fund (the "California Money Fund");
>> Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund");
as well as two series of The Montgomery Funds II:
>> Montgomery Balanced Fund (the "Balanced Fund," prior to 4/00, called the
"Montgomery U.S. Asset Allocation Fund" and prior to 10/97, called
"Montgomery Asset Allocation Fund");
>> Montgomery Global Long-Short Fund (the "Global Long-Short Fund"); and
>> Montgomery Emerging Markets Focus Fund (the "Emerging Markets Focus 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 Balanced Funds as the "U.S. Equity Funds"; the
International Growth, Global Opportunities, Global 20, Global Long-Short, Global
Communications, Emerging Markets, Emerging Markets Focus and Emerging Asia
Funds, as the "International and Global Equity 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 Federal Money
Funds
B-3
<PAGE>
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 and the
Global 20 Fund 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 Balanced Fund is a fund-of-funds. Other than U.S. government
securities, the Balanced Fund does not own securities of its own. Instead, the
Balanced Fund invests its assets in a number of funds in The Montgomery Funds
family (each, an "Underlying Fund"). Investors of the Balanced Fund should
therefore review the discussion in this Statement of Additional Information that
relates to each Underlying Fund of the Balanced Fund. (References in this
Statement of Additional Information to investments by the International and
Global Equity Funds, which includes the Balanced 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 Emerging Asia Fund. The Emerging Asia Fund invests primarily in
"emerging Asian companies." This Fund considers a company to be an emerging
Asian company if its securities are principally traded in the capital market of
an emerging Asian country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging Asian countries or from
sales made in such emerging Asian
B-4
<PAGE>
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 Global 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 Global 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 Global 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 Global Communications Fund invests in companies that, in the opinion
of the Manager, have potential for above-average, long-term growth in sales and
earnings on a sustained basis and that are reasonably priced. The Manager
considers a number of factors in evaluating potential investments, including a
company's per-share sales and earnings growth; return on capital; balance sheet;
financial and accounting policies; overall financial strength; industry sector;
competitive
B-5
<PAGE>
advantages and disadvantages; research, product development and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Global Communications Fund may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Global 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 Global
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 Global 20 Fund. The Global 20 Fund is a non-diversified mutual
fund that typically invests in the securities of as few as 20 companies
worldwide. No more than 40% of its assets, or two times its benchmark weight,
whichever is greater, may be invested in any one country. Investments in
companies based in the United States are not subject to this limit. No more than
30% of the assets of the Global 20 Fund may be invested in the stocks of
companies based in the world's developing economies. Additionally, the Global 20
Fund may concentrate up to 35% of its total assets in the stocks of
communications companies worldwide, including companies involved in
telecommunications, broadcasting, publishing and the Internet, among other
industries. Because the Global 20 Fund may invest a significant portion of its
assets in a particular country or in the communications industry, its share
value may be more volatile than that of mutual funds not sharing this geographic
and/or industry concentration. Finally, to the extent that the Global 20 Fund
may invest up to 30%
B-6
<PAGE>
of its assets in companies based in developing countries, shareholders may also
be exposed to special risks. See "Risk Factors" below.
Emerging Markets Focus Fund. The Fund does not intend to diversify its
portfolio across a large number of emerging markets countries. Instead, the
Fund's investment adviser objective is to concentrate its investments in a small
number of emerging markets countries (although it may invest in a large number
of companies in each selected country). Such a heavy concentration may make the
Fund's net asset value extremely volatile and, if economic downturns or other
events occur that adversely affect one or more of the countries the Fund invests
in, such events' impact on the Fund will be more magnified than if the Fund did
not have such a narrow concentration.
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 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.
B-7
<PAGE>
Portfolio Securities
Depositary Receipts, Convertible Securities and Securities Warrants. The
International and Global Equity 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 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 Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International and Global
Equity Funds also may incur tax liability to the extent that they invest in the
stock of a foreign issuer that is a "passive foreign investment company"
regardless of whether such "passive foreign investment company" makes
distributions to the Funds.
The U.S. Equity Funds, the International and Global Equity 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' and the International and Global Equity Funds' 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
B-8
<PAGE>
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 International and Global Equity Funds may invest in
external (i.e., to foreign lenders) debt obligations issued by the governments,
government entities and companies of emerging markets countries. The percentage
distribution between equity and debt will vary from country to country, based on
anticipated trends in inflation and interest rates; expected rates of economic
and corporate profits growth; changes in 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. 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.
B-9
<PAGE>
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.
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
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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.
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
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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 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
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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.
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
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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.
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
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securities in its overall assessment of the effective duration of the Fund's
portfolio in an effort to monitor the Fund's interest rate risk.
Municipal Securities. Because the Tax-Free Funds invest at least 80% of
their total assets in obligations either issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, authorities and instrumentalities,
including industrial development bonds, as well as obligations of certain
agencies and instrumentalities of the U.S. government, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Securities"), or exempt from federal and California personal income
tax ("California Municipal Securities"), and the California Money Fund invests
at least 65% of its total assets in California Municipal Securities, and may
invest in Municipal Securities, these Funds generally will have a lower yield
than if they primarily purchased higher yielding taxable securities, commercial
paper or other securities with correspondingly greater risk. Generally, the
value of the Municipal Securities and California Municipal Securities held by
these Funds will fluctuate inversely with interest rates.
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds, which may pay
tax-exempt interest, are, in most cases, revenue bonds and are issued by or on
behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from financial
institutions participation interests in Municipal Securities, such as industrial
development bonds and municipal lease/purchase agreements. A participation
interest gives a Fund an undivided interest in a Municipal Security in the
proportion
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that the Fund's participation interest bears to the total principal amount of
the Municipal Security. These instruments may have fixed, floating or variable
rates of interest. If the participation interest is unrated, it will be backed
by an irrevocable letter of credit or guarantee of a bank that the Board of
Trustees has approved as meeting the Board's standards, or, alternatively, the
payment obligation will be collateralized by U.S. Government securities
For certain participation interests, these Funds will have the right to
demand payment, on not more than seven days' notice, for all or any part of
their participation interest in a Municipal Security, plus accrued interest. As
to these instruments, these Funds intend to exercise their right to demand
payment only upon a default under the terms of the Municipal Securities, as
needed to provide liquidity to meet redemptions, or to maintain or improve the
quality of their investment portfolios. The California Intermediate Bond Fund
will not invest more than 15% of its total assets and the California Money Fund
will not invest more than 10% of its total assets in participation interests
that do not have this demand feature, and in other illiquid securities.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial receipts
representing the right to receive certain future principal and interest payments
on Municipal Securities that underlie the custodial receipts. A number of
different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by one
of these Funds should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private placements and
are subject to these Funds' limitation with respect to illiquid investments. The
Tax-Free Funds also may purchase directly from issuers, and not in a private
placement, Municipal Securities having the same characteristics as the custodial
receipts.
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
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institution and receive their face value. As consideration for providing the
option, the financial institution receives periodic fees equal to the difference
between the Municipal Security's fixed coupon rate and the rate, as determined
by a remarketing or similar agent at or near the commencement of such period,
that would cause the securities, coupled with the tender option, to trade at par
on the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. The Manager, on behalf of a Tax-Free
Fund, considers on a periodic basis the creditworthiness of the issuer of the
underlying Municipal Security, of any custodian and of the third party provider
of the tender option. In certain instances and for certain tender option bonds,
the option may be terminable in the event of a default in payment of principal
or interest on the underlying Municipal Obligations and for other reasons. The
California Intermediate Bond Fund will not invest more than 15% of its total
assets and the California Money Fund more than 10% of its total assets in
securities that are illiquid (including tender option bonds with a tender
feature that cannot be exercised on not more than seven days' notice if there is
no secondary market available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may purchase Municipal
Securities together with the right to resell the securities to the seller at an
agreed-upon price or yield within a specified period prior to the securities'
maturity date. Although an obligation with a put attached is not a put option in
the usual sense, it is commonly known as a "put" and is also referred to as a
"stand-by commitment." These Funds will use such puts in accordance with
regulations issued by the Securities and Exchange Commission ("SEC"). In 1982,
the Internal Revenue Service (the "IRS") issued a revenue ruling to the effect
that, under specified circumstances, a regulated investment company would be the
owner of tax-exempt municipal obligations acquired with a put option. The IRS
also has issued private letter rulings to certain taxpayers (which do not serve
as precedent for other taxpayers) to the effect that tax-exempt interest
received by a regulated investment company with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The last such ruling was issued in
1983. The IRS subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the securities, or the participation interest
therein, to be purchased by either the seller or a third party. The Tax-Free
Funds intend to take the position that they are the owners of any municipal
obligations acquired subject to a stand-by commitment or a similar put right and
that tax-exempt interest earned with respect to such municipal obligations will
be tax exempt in its hands. There is no assurance that stand-by commitments will
be available to these Funds nor have they assumed that such commitments would
continue to be available under all market conditions. There may be other types
of municipal securities that become available and are similar to the foregoing
described Municipal Securities in which these Funds may invest.
Zero Coupon Bonds. 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
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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 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 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.
Risk Factors/Special Considerations Relating to Debt Securities
The International and Global Equity 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.
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<PAGE>
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 International and Global Equity 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 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
B-19
<PAGE>
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.
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
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<PAGE>
or take delivery of the underlying securities or currencies whenever it appears
economically advantageous. A clearing corporation associated with the exchange
on which futures on securities or currencies are traded guarantees that, if
still open, the sale or purchase will be performed on the settlement date.
By using futures contracts to hedge their positions, these Funds seek to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that Fund has acquired or
expects to acquire.
As part of its hedging strategy, a Fund also may enter into other types of
financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for that Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in a Fund's portfolio may be more or less volatile than prices of
such futures contracts, the Manager will attempt to estimate the extent of this
difference in volatility based on historical patterns and to compensate for it
by having that Fund enter into a greater or lesser number of futures contracts
or by attempting to achieve only a partial hedge against price changes affecting
that Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
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
B-21
<PAGE>
Fund may invest. A Fund also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest or a
positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign exchanges.
Although a Fund will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
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.
B-22
<PAGE>
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.
Leaps and Bounds. Subject to the limitation that no more than 25% of its
assets be invested in options, each of the Global Long-Short Fund and the
Emerging Markets Focus Fund may invest in long-term, exchange-traded equity
options called Long-term Equity Anticipation Securities ("LEAPS") and Buy-Write
Options Unitary Derivatives ("BOUNDS"). LEAPS provide a holder the opportunity
to participate in the underlying securities' appreciation in excess of a fixed
dollar amount, and BOUNDS provide a holder the opportunity to retain dividends
on the underlying securities while potentially participating in the underlying
securities' capital appreciation up to a fixed dollar amount.
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.
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"
B-23
<PAGE>
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 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.
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<PAGE>
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, 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.
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
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<PAGE>
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.
Such loans of securities are collateralized with collateral assets in an
amount at least equal to the current value of the loaned securities, plus
accrued interest. There is a risk of delay in receiving collateral or recovering
the securities loaned or even a loss of rights in the collateral should the
borrower failed financially.
Leverage. Each of the Global Long-Short Fund and the Emerging Markets Focus
Fund may leverage its portfolio in an effort to increase the total return.
Although leverage creates an opportunity for increased income and gain, it also
creates special risk considerations. For example, leveraging may magnify changes
in the net asset value of a Fund's shares and in the yield on its portfolio.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value whole the borrowing is outstanding. Leveraging creates interest
expenses that can exceed the income from the assets retained.
When-Issued and Forward Commitment Securities. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Funds may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
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<PAGE>
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.
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
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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.
Defensive Investments and Portfolio Turnover. Notwithstanding its
investment objective, each Fund may adopt up to 100% cash or cash equivalent
position for temporary defensive purposes to protect against the erosion of its
capital base. Depending on the Manager's analysis of the various markets and
other considerations, all or part of the assets of the Fund may be held in cash
and cash equivalents (denominated in U.S. dollars or foreign currencies), such
as U.S. government securities or obligations issued or guaranteed by the
government of a foreign country or by an international organization designed or
supported by multiple foreign governmental entities to promote economic
reconstruction or development, high-quality commercial paper, time deposits,
savings accounts, certificates of deposit, bankers' acceptances, and repurchase
agreements with respect to all of the foregoing. Such investments also may be
made for temporary purposes pending investment in other securities and following
substantial new investment of the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objectives or when it appears that a position of the desired
size cannot be accumulated. Portfolio turnover generally involves some expenses
to the Fund, including brokerage commissions, dealer markups, and other
transaction costs and may result in the recognition of gains that may be
distributed to shareholders. Portfolio turnover in excess of 100% is considered
high and increases such costs. Even when portfolio turnover exceeds 100%,
however, the Fund does not regard portfolio turnover as a limiting factor.
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 and International and Global Equity 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
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subject to uniform accounting, auditing and financial reporting standards.
Further, these Funds may encounter difficulties in pursuing legal remedies or in
obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating
to investments by the Funds in other countries are generally greater than in the
United States. Foreign markets have different clearance and settlement
procedures from those in the United States, and certain markets have experienced
times when settlements did not keep pace with the volume of securities
transactions which resulted in settlement difficulty. The inability of a Fund to
make intended security purchases due to settlement difficulties could cause it
to miss attractive investment opportunities. Inability to sell a portfolio
security due to settlement problems could result in loss to the Fund if the
value of the portfolio security declined, or result in claims against the Fund
if it had entered into a contract to sell the security. In certain countries
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid and subject to greater price volatility
than those in the United States.
Because certain securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
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 International and Global Funds, particularly the Emerging Markets
Funds, the Emerging Markets Focus Fund and the Emerging Asia Fund, may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to potentially higher risks
than investments in developed countries. These risks include (i) volatile
social, political and economic conditions; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) the existence of national policies
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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 Fund and the International and Global Funds endeavor
to buy and sell foreign currencies on favorable terms. Some price spreads on
currency exchange (to cover service charges) may be incurred, particularly when
these Funds change investments from one country to another or when proceeds from
the sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
these Funds from repatriating invested capital and dividends, withhold portions
of interest and dividends at the source, or impose other taxes, with respect to
these Funds' investments in securities of issuers of that country. There also is
the possibility of expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
exchange control regulations and indigenous economic and political developments.
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 Global Communications Fund concentrate 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
Communications 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
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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" 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 and 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.
Short Sales
Each of the Global Long-Short Fund and the Emerging Markets Focus Fund may
effect short sales of securities. Short sales are transactions in which a Fund
sells a security or other asset which it does not own, in anticipation of a
decline in the market value of the security or other asset. A Fund will realize
a profit or incur a loss depending upon whether the price of the security sold
short decreases or increases in value between the
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date of the short sale and the date on which that Fund must replace the borrowed
security. Short sales are speculative investments and involve special risks,
including greater reliance on the Manager's accurately anticipating the future
value of a security. Short sales also may result in a Fund's recognition of gain
for certain portfolio securities.
Until the Fund replaces a borrowed security, it will instruct its custodian
to identify as unavailable for investment cash, U.S. government securities, or
other liquid debt or equity securities such that the amount so identified plus
any amount deposited with a broker or other custodian as collateral will equal
the current value of the security sold short and will not be less than the value
of the security at the time it was 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 Emerging
Markets Focus Fund will not make a short sale if, after giving effect to the
short sale, the market value of all securities sold exceeds 25% of the value of
the Fund's total assets.
Non-Diversified Portfolio
The California Intermediate Bond Fund and the Global 20 Fund are
"non-diversified" investment companies under the Investment Company Act. This
means that, with respect to 50% of each Fund's 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 each Fund's total assets may be invested in the
securities of any one issuer. 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, each Fund's policy of acquiring large positions in the shares or
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.
For purposes of this limitation with respect to the California Intermediate
Bond Fund, 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.
California Municipal Securities
The information set forth below is a general summary intended to give a
recent historical description. It is not a discussion of any specific factors
that may affect any particular issuer of California Municipal Securities. The
information is not intended to indicate continuing or future trends in the
condition, financial or otherwise, of California. Such information is derived
from official statements utilized in connection with securities offerings of the
State of California that have come to the attention of the Trusts and were
available prior to the date of this Statement of Additional Information. Such
information has not been independently verified by the California Intermediate
Bond and California Money Funds.
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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 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
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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.
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
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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.
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.
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INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund (unless otherwise noted) and 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 (unless otherwise noted).
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 Global 20 Fund, the Balanced Fund
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 the prohibited
issuance of a senior security within the meaning of Section 18(f) of
the Investment Company Act.)
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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 Global
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,
Global Long-Short and Emerging Markets Focus 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
(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.)
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<PAGE>
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 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
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<PAGE>
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. 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
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<PAGE>
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 share of the foreign income taxes paid by that Fund. In this case,
these taxes will be taken as a deduction by that Fund
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<PAGE>
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 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
B-41
<PAGE>
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 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.
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<PAGE>
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:
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")
and an officer of certain investment companies distributed by FDI or its
affiliates (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
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<PAGE>
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 Vice President and Senior Counsel of FDI and an officer of certain
investment companies distributed by FDI or its affiliates. From June 1994 to
January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration, Scudder, Stevens
& Clark, Inc.
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 and an officer of certain investment
companies distributed by FDI or its affiliates (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 Senior Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies distributed by FDI or its affiliates.
From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
Financial Group.
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 distributed by FDI or its
affiliates. From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client
Manager for The Boston Company, Inc.
Kathleen Morrisey, Vice President and Assistant Treasurer (born 1972)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Morrisey is the
Assistant Vice President and Manager of Financial Administration of FDI and an
officer of certain investment companies distributed by FDI or its affiliates.
From July 1994 to November 1995, Ms. Morrisey was a Fund Accountant II for
Investors Bank & Trust Company.
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<PAGE>
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies distributed
by FDI or its 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 The Boston Company Advisers, Inc.
Douglas C. Conroy, Vice President and Assistant Treasurer (born 1969)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is a Vice
President and Senior Client Service Manager of FDI and an officer of certain
investment companies distributed by FDI or its affiliates. From January 1995 to
June 1998, Mr. Conroy was the Assistant Vice President and Manager of Treasury
Services and Administration. From April 1993 to January 1995, Mr. Conroy was a
Senior Fund Accountant at Investors Bank & Trust Company.
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.
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<PAGE>
Cecilia H. Herbert, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the 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.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1999
-----------------------------------------------------------------------------------
Aggregate Aggregate Pension or Total Compensation
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
</TABLE>
* The Trusts do not maintain pension or retirement plans
The Class R, Class P and Class L shares of the Funds are all sold without a
sales load. Therefore, there is no existing arrangement to reduce or eliminate
any sales loads for Trustees and other affiliated persons of the Trust.
----------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
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<PAGE>
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
Balanced 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 Balanced 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.
For services performed under the Agreements, each Fund pays the Manager a
management fee (accrued daily but paid when requested by the Manager) based upon
the average daily net assets of the Fund at the following annual rates:
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
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%
Montgomery Balanced Fund (formerly Over $250 million 0.80%
U.S. Asset Allocation Fund) All Amounts NONE*
B-47
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
International and Global Equity Funds
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global 20 Portfolio First $250 million 1.25%
(formerly Montgomery Select 50 Fund) Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Global Long-Short Fund First $250 million 1.50%
Over $250 million 1.25%
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Markets Focus Fund First $250 million 1.10%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
B-48
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Short Duration Government First $500 million 0.50%
Bond Fund Over $500 million 0.40%
Montgomery Government Money Market Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Montgomery California Tax-Free First $500 million 0.50%
Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
* This amount represents only the management fee of the Balanced Fund.
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%
B-49
<PAGE>
Montgomery Balanced Fund 1.30%, including
(formerly the Montgomery U.S. Asset expenses of
Allocation Fund) underlying Funds
International and Global Equity Funds
-------------------------------------
Montgomery International Growth Fund 1.65%
Montgomery Global Opportunities Fund 1.90%
Montgomery Global 20 Portfolio
(formerly Montgomery Select 50 Fund) 1.80%
Montgomery Global Long-Short Fund 2.35%
Montgomery Global Communications Fund 1.90%
Montgomery Emerging Markets Fund 1.90%
Montgomery Emerging Markets Focus Fund 1.60%
Montgomery Emerging Asia Fund 1.90%
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 California Tax-Free Intermediate Bond Fund 0.70%
Montgomery California Tax-Free Money Fund 0.60%
Montgomery Federal 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
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<PAGE>
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.
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<TABLE>
<CAPTION>
YEAR OR PERIOD ENDED JUNE 30
FUND (MARCH 30 FOR THE EMERGING MARKETS FOCUS FUND)
---- ----------------------------------------------
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 Balanced Fund (formerly
Montgomery U.S. Asset Allocation Fund) $ 0+ $ 0+ $ 1,211,759
International and Global Equity Funds
-------------------------------------
Montgomery International Growth Fund $2,215,164 $ 626,903 $ 378,515
Montgomery Global Opportunities Fund $ 923,286 $ 833,421 $ 562,210
Montgomery Global 20 Portfolio (formerly
Montgomery Select 50 Fund) $2,118,848 $ 3,130,440 $ 1,366,989
Montgomery Global Long-Short Fund $ 885,497++ $ 863,717* N/A
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 Markets Focus Fund $ 52,492++ $ 4,244 N/A
Montgomery Emerging Asia Fund $ 562,967 $ 643,231 $ 257,092
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 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
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
YEAR OR PERIOD ENDED JUNE 30
FUND (MARCH 30 FOR THE EMERGING MARKETS FOCUS FUND)
---- ----------------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Montgomery Federal Tax-Free Money Fund $ 763,874 $ 783,661 $ 319,348
</TABLE>
----------
* 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.
++ The Emerging Markets Focus Fund changed its fiscal year from March 31 to
June 30.
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 Trusts and the Manager have adopted respective Codes of Ethics pursuant
to Section 17(j) of the Investment Company Act and Rule 17j-1 thereunder
(collectively, the "Codes of Ethics"). Both the Trusts and the Manager intend to
revise their respective Codes of Ethics, as appropriate, to conform with certain
new provisions of Rule 17j-1 as adopted by the SEC on October 29, 1999.
Currently, the Codes of Ethics for both the Manager and the Trusts permit
personnel subject to such Codes to buy and sell securities for their individual
account, unless such securities at the time of such purchase or sale: (i) are
being considered for purchase or sale by a Fund; (ii) are being purchased or
sold by a Fund; or (iii) were purchased or sold by a Fund within the most recent
15 days.
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.
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.
For the fiscal year ended June 30, 1999, the 12b-1 Plan incurred the
following expenses:
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<PAGE>
FUND COMPENSATION TO BROKER-DEALERS
---- ------------------------------
Montgomery Growth Fund $ 432
Montgomery Small Cap Fund $ 45,933
Montgomery Equity Income Fund $ 7,483
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 Global 20 Fund (formerly
Montgomery Select 50 Fund) $ 116
Montgomery Balanced Fund (formerly
Montgomery U.S. Asset Allocation Fund) $ 165
Montgomery Short Duration Government Bond Fund $ 4,785
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, 1999, the total 12b-1 Plan expenses accrued but not paid for The
Montgomery Funds and The Montgomery Funds II were $137.41, which amounted to
0.00% of the Funds' net assets at that time.
The 12b-1 Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Trustees of the Trust, including a
majority of the Independent Trustees, vote annually to continue the 12b-1 Plan.
The Board determined that there are various anticipated benefits to the Funds
from such continuation, including the likelihood that the Plan will stimulate
sales of shares of the Trusts and assist in increasing the asset base of the
Trusts in the face of competition from a variety of financial products and the
potential advantage to the shareholders of the Trusts of prompt and significant
growth of the asset base of the Trusts, including greater liquidity, more
investment flexibility and achievement of greater economies of scale. The 12b-1
Plan (and any distribution agreement between the Fund, the Distributor or the
Manager and a selling agent with respect to the 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
B-53
<PAGE>
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 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.
B-54
<PAGE>
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.
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
B-55
<PAGE>
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.
The table below provides information on the administrative and accounting
fees paid over the past three fiscal years (or shorter period of operations).
<TABLE>
<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 Balanced Fund# -- -- $ 93,812 $ 14,323 $ 10,235 $ 52,839
International and Global Equity Funds
-------------------------------------
Montgomery International Growth Fund $128,893 $ 29,195 $ 17,056 $110,827 $ 26,492 $ 21,242
Montgomery Global Opportunities Fund $ 40,303 $ 34,872 $ 20,336 $ 34,332 $ 34,601 $ 23,797
Montgomery Global 20 Fund## $118,656 $169,530 $ 71,610 $ 98,812 $161,222 $ 82,884
Montgomery Global Long-Short Fund $ 31,290+ $ 38,828*** -- $ 27,883+ -- --
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
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 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
Montgomery Federal Tax-Free Money Fund*** $ 62,270 $ 62,064 $ 39,920 $ 44,264 $ 37,807 $ 31,496
<FN>
----------
* Formerly Montgomery Micro Cap Fund.
** 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 U.S. Asset Allocation Fund prior to April 2000, and
formerly Montgomery Asset Allocation Fund prior to October 1997.
## Formerly Montgomery Select 50 Fund.
+ For the period April 1, 1999 to June 30, 1999.
</FN>
</TABLE>
B-56
<PAGE>
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 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
B-57
<PAGE>
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 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
B-58
<PAGE>
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 Funds total securities transactions
generated commissions of $21,104,996, 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 $21,476,442, 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:
<TABLE>
<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 Balanced Fund (formerly
Montgomery U.S. Asset Allocation Fund) $ 289,657 $ 0+ $ 0+
Montgomery International Growth Fund $ 243,582 $ 332,532 $2,028,321
Montgomery Global Opportunities Fund $ 297,275 $ 532,520 $ 822,932
Montgomery Global 20 Fund (formerly
Montgomery Select 50 Fund) $1,181,215 $2,040,486 $1,878,608
Montgomery Global Long-Short Fund N/A N/A* $2,145,574
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 Markets Focus Fund $ 0 $ 8,616 $ 17,190++
Montgomery Emerging Asia Fund $ 539,472 $ 675,563 $ 931,870
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.
++ For the 15-month period ended June 30, 1999. The Emerging Markets Focus
Fund changed its fiscal year end from March 31 to June 30
</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 Funds.
However, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Funds for their customers.
B-59
<PAGE>
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 anticipate that they will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trusts have elected to be governed by
the provisions of Rule 18f-1 under the Investment Company Act, which require
that the Funds pay in cash all
B-60
<PAGE>
requests for redemption by any shareholder of record limited in amount, however,
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Trust's net assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable Funds through an
IRA, there is available through these Funds a prototype individual retirement
account and custody agreement. The custody agreement provides that DST Systems,
Inc. will act as custodian under the plan, and will furnish custodial services
for an annual maintenance fee per participating account of $10. (These fees are
in addition to the normal custodian charges paid by these Funds and will be
deducted automatically from each Participant's account.) For further details,
including the right to appoint a successor custodian, see the plan and custody
agreements and the IRA Disclosure Statement as provided by these Funds. An IRA
that invests in shares of these Funds may also be used by employers who have
adopted a Simplified Employee Pension Plan. Individuals or employers who wish to
invest in shares of a Fund under a custodianship with another bank or trust
company must make individual arrangements with such institution. 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 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
B-61
<PAGE>
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 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
B-62
<PAGE>
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-63
<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).
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<PAGE>
c = the average daily number of shares outstanding during
the period that were entitled toreceive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates,
these Funds' yields will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, monies received by these Funds from
the continuous sale of their shares will likely be invested in instruments
producing lower yields than the balance of their portfolio of securities,
thereby reducing the current yield of these Funds. In periods of rising interest
rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the taxable yield
necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for one of the
Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
Yields. The yields for the indicated periods ended June 30, 1999, were as
follows:
<TABLE>
<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 6.25% N/A
Montgomery Short Duration Government
Bond Fund N/A N/A N/A N/A 5.54% N/A
Montgomery Government Money Market Fund 4.04% 4.12% N/A N/A N/A N/A
Montgomery California Tax-Free
Intermediate Bond Fund N/A N/A N/A N/A 3.92% 7.16%
Montgomery California Tax-Free Money Fund 2.73% 2.77% 4.98% 5.06% N/A N/A
Montgomery Federal Tax-Free Money Fund 3.17% 3.22% 5.25% 5.33% N/A N/A
</TABLE>
B-65
<PAGE>
----------
* Calculated using a combined federal and California income tax rate of
45.22% for the California Funds and a federal rate of 39.6% for the Federal
Money Fund.
Average Annual Total Return. Total return may be stated for any relevant
period as specified in the advertisement or communication. Any statements of
total return for a Fund will be accompanied by information on that Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from that Fund's inception of operations. The Funds may
also advertise aggregate and average total return information over different
periods of time. A Fund's "average annual total return" figures are computed
according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of each
respective period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Aggregate Total Return. A Fund's "aggregate total return" figures represent
the cumulative change in the value of an investment in that Fund for the
specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a l-, 5- or
10-year period at the end of a l-,
5- or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Each Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods indicated was
as follows:
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<PAGE>
<TABLE>
<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 -4.07% N/A 16.80%
Montgomery Small Cap Fund -4.14% 16.12% 17.72%
Montgomery Balanced Fund (formerly
Montgomery U.S. Asset Allocation Fund) 11.93% 19.92% 19.33%
Montgomery International Growth Fund 2.34% N/A 17.72%
Montgomery Global Opportunities Fund 15.68% 19.02% 17.86%
Montgomery Global 20 Fund (formerly
Montgomery Select 50 Fund) 13.89% N/A 24.73%
Montgomery Global Long-Short Fund 51.78%+ N/A 65.67%
Montgomery Global Communications Fund 31.66% 22.79% 21.71%
Montgomery Emerging Markets Fund 3.85% -3.82% 1.93%
Montgomery Emerging Markets Focus Fund 43.80%+ N/A 21.70%
Montgomery Emerging Asia Fund 97.44% N/A 4.84%
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%
</TABLE>
----------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were:
Growth Fund, September 30, 1993; U.S. Emerging Growth Fund, December 30,
1994; Small Cap Fund, July 13, 1990; Balanced Fund (formerly U.S. Asset
Allocation Fund), March 31, 1994; International Growth Fund, June 30, 1995;
Global Opportunities Fund, September 30, 1993; Global 20 Fund (formerly
Select 50 Fund), October 27, 1995; Global Long-Short Fund, December 31,
1997; Global Communications Fund, June 1, 1993; Emerging Markets Fund,
March 1, 1992; Emerging Markets Focus Fund, December 31, 1997; Emerging
Asia Fund, September 30, 1996; 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-67
<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-68
<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 the 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 December 31,
1999 approximately $5 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Funds (as of December
31, 1999, around 200,000).
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
B-69
<PAGE>
been assumed by the respective Funds and are being amortized over a period of
five years commencing with their respective dates of inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by certain Funds and will be reimbursed for such expenses after commencement of
those Funds' operations. Investors purchasing shares of a Fund bear such
expenses only as they are amortized daily against that Fund's investment income.
As noted above, 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, is
the 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.
As of February 29, 2000, 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-70
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Growth Fund - Class R
---------------------
Charles Schwab & Co., Inc. 6,468,544 29.46%
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Balanced Fund 1,786,145 8.14%
(Formerly U.S. Asset Allocation Fund)
Attn: Mike Dominguez
101 California Street
San Francisco, CA 94111-5802
National Financial Services Corp. 1,706,451 7.77%
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. 2,833,485 30.53%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 655,912 7.07%
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. 603,518 12.04%
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust Company Customer 278,228 5.55%
FBO Dallas Symphony
A/C# 26-00196
P.O. Box 92956
Chicago, IL 60675-2956
B-71
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
International Growth Fund - Class R
-----------------------------------
Charles Schwab & Co., Inc. 4,063,922 43.88%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,078,103 11.64%
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Global Opportunities Fund - Class R
-----------------------------------
Charles Schwab & Co., Inc. 1,422,200 38.05%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 392,038 10.49%
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. 5,449,772 34.36%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,033,513 6.52%
For The Exclusive Benefit Our Customers
PO Box 3730
Church Street Station
New York, NY 10008-3730
Resources Trust Company Customer 976,692 6.16%
For the Exclusive Benefit of
Various Customers of IMS
P.O. Box 3865
Englewood, CO 80155-3865
B-72
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Global Long-Short Fund - Class R
--------------------------------
Charles Schwab & Co., Inc. 5,692,473 37.11%
101 Montgomery Street
San Francisco, CA 94104
FTC & Co. 1,402,477 9.26%
Datalynx House Acct
PO Box 173736
Denver, CO 82017-3736
Merrill Lynch Pierce Fenner & Smith 997,282 6.50%
FBO Its Customers
Attn Fund Administration 97TN7
4800 Deer Lake Dr E Fl 2
Jacksonville, FL 32246-6484
National Investor Services Corporation 773,021 5.04%
For the Exclusive Benefit of Our Customers
55 Water Street, 32nd Floor
New York, NY 10041-3299
Emerging Markets Fund - Class R
-------------------------------
Charles Schwab & Co., Inc. 10,253,595 39.05%
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 3,227,729 12.59%
For the Exclusive Benefit of
Our Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Markets Focus Fund - Class R
-------------------------------------
Charles Schwab & Co., Inc. 98,697 45.35%
101 Montgomery Street
San Francisco, CA 94014-4122
B-73
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Merrill Lynch Pierce Fenner & Smith 78,128 35.90%
FBO Its Customers
Attn Fund Administration 97TP0
4800 Deer Lake Dr E Fl 2
Jacksonville, FL 32246-6484
Bryan L. Sudweeks & Anne D. Sudweeks 11,084 5.09%
JT WROS
817 Ashley Lane
Walnut Creek, CA 94596-3271
Emerging Asia Fund - Class R
----------------------------
Charles Schwab & Co., Inc. 1,068,997 35.78%
101 Montgomery Street
San Francisco, CA 94104-4122
National Investor Services Corp. 195,470 6.54%
For the Exclusive Benefit of
Our Customers
55 Water Street, 32nd Floor
New York, NY 10041-3299
Global 20 Fund (formerly Select 50 Fund) - Class R
--------------------------------------------------
Charles Schwab & Co., Inc. 1,465,608 27.45%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 402,634 7.54%
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Balanced Fund (formerly U.S. Asset Allocation Fund) - Class R
-------------------------------------------------------------
Charles Schwab & Co., Inc. 1,061,948 29.00%
101 Montgomery St
San Francisco, CA 94104-4122
B-74
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
National Financial Services Corp. 324,024 9.02%
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 1,840,724 75.58%
Attn: Mike Dominguez
101 California Street
San Francisco, CA 94111-5802
Charles Schwab & Co., Inc. 416,686 17.11%
101 Montgomery Street
San Francisco, CA 94104-4122
Short Duration Government Bond Fund - Class R
---------------------------------------------
Charles Schwab & Co., Inc. 9,357,879 56.59%
101 Montgomery Street
San Francisco, CA 94104-4122
Prudential Securities Inc. 1,466,840 8.87%
Special Custody Account for The
Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
Donaldson, Lufkin & Jenrette 1,219,374 7.37%
Securities Corporation
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
National Financial Services Corp. 1,058,385 6.40%
For the Exclusive Benefit of Our
Customers - Attention: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-75
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Government Money Market Fund - Class R
--------------------------------------
Banc of America Securities 659,692,950 85.41%
Sweep Account FBO Clients
Attn: Mutual Funds
600 Montgomery Street
San Francisco, CA 94115-2011
Federal Tax-Free Money Fund - Class R
-------------------------------------
Banc of America Securities 134,976,832 96.99%
Sweep Account FBO Clients
Attn: Mutual Funds
600 Montgomery Street
San Francisco, CA 94115-2011
California Tax-Free Intermediate Bond Fund - Class R
----------------------------------------------------
Charles Schwab & Co., Inc. 1,842,791 75.05%
101 Montgomery Street
San Francisco, CA 94104-4122
California Tax-Free Money Market - Class R
------------------------------------------
Republic Bank California NA 221,968,188 60.29%
Investment Department
445 North Bedford Drive
Beverly Hills, CA 90210-4302
Banc of America Securities 139,225,501 37.82%
Sweep Account FBO Clients
Attn: Mutual Funds
600 Montgomery Street
San Francisco, CA 94115-2011
B-76
<PAGE>
As of February 29, 2000, to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class P Shares
of the respective Funds indicated:
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Growth Fund - Class P
---------------------
Bear Stearns Securities Corporation 33,770 83.02%
FBO 103-01380-26
1 Metrotech Center North
Brooklyn, NY 11201-3870
Inv. Fiduciary Trust Co. 2,634 6.48%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
Small Cap Fund - Class P
------------------------
Saxon & Co. 559,357 44.27%
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 313,082 24.78%
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. 119,402 9.45%
U/A January 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 70,522 5.58%
Retirement Savings Plan
P.O. Box 1992
Boston, MA 02105-1992
B-77
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
MRA Systems, Inc. 69,271 5.48%
1 Neuman Way J-103
Evandale, OH 45215-1915
State Street Bank Trust 64,192 5.08%
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 02266-8705
International Growth Fund - Class P
-----------------------------------
Merrill Lynch, Pierce, Fenner & 341,472 86.98%
Smith Inc.
For the Sole Benefit of its Clients
4800 Deer Lake Dr., E Bldg
Jacksonville, FL 32246-6484
Bear Stearns Securities Corporation 21,945 5.59%
FBO 103-01703-26
1 Metrotech Center North
Brooklyn, NY 11201-3870
Bear Stearns Securities Corporation 21,683 5.52%
FBO 103-01374-24
1 Metrotech Center North
Brooklyn, NY 11201-3859
Emerging Markets Fund - Class P
-------------------------------
State Street Bank & Trust Co. 49,411 42.59%
V/A Jan. 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
Bear Stearns Securities Corporation 38,927 33.55%
FBO 103-01703-26
1 Metrotech Center North
Brooklyn, NY 11201-3870
B-78
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Canada Life Insurance Company of America 7,789 6.71%
Attn: Mukesh Sharma
330 University Avenue SP12
Toronto, Ontario M5G 1R8
Canada
MSDW Online, Inc. 6,066 5.23%
780-16649-18
333 Market Street
San Francisco, CA 94105-2102
Global 20 Fund (formerly Select 50 Fund) - Class P
--------------------------------------------------
Bear Stearns Securities Corporation 35,568 97.21%
FBO 103-82002-16
1 Metrotech Center North
Brooklyn, NY 11201-3870
Balanced Fund (formerly U.S. Asset Allocation Fund) - Class P
-------------------------------------------------------------
Inv. Fiduciary Trust Co. 2,689 75.09%
IRA Carl N. Grant
2008 Cutwater Court
Reston, VA 20191-3604
National Investor Services Corp. 594 16.60%
For The Exclusive Benefit of Our Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
Carl N. Grant 190 5.30%
U/A 06/22/1999
Carl N. Grant Revocable Trust
2008 Cutwater Court
Reston, VA 20191-3604
Short Government Bond Fund - Class P
------------------------------------
Merrill Lynch, Pierce,
Fenner & Smith Inc.
For the Sole Benefit of Its Clients
4800 Deer Lake Drive E Building One
Jacksonville, FL 32246-6484 370,293 98.84%
B-79
<PAGE>
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
----------------------- ------------ ---------
Government Money Market Fund - Class P
--------------------------------------
Bear Stearns Securities Corporation 3,401,558 77.10%
FBO 103-08168-29
1 Metrotech Center North
Brooklyn, NY 11201-3870
Bear Stearns Securities Corporation 100,145 22.67%
FBO 755-31787-11
1 Metrotech Center North
Brooklyn, NY 11201-3870
As of February 29, 2000, officers and directors of the Montgomery Funds
owned, in aggregate, of record more than 1% of the outstanding shares in the
Montgomery Emerging Markets Focus Fund Class R Shares, holding a combined 3% of
shares outstanding of the Fund.
The Trusts are registered with the Securities and Exchange Commission as
non-diversified management investment companies, although each Fund, except for
the Global 20 Fund and 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 and Emerging
Markets Focus Fund, as contained in the Annual Report to Shareholders of that
Fund for the fiscal year ended March 31, 1999.
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<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in higher rated categories.
BB Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, they face major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments.
B Bonds rated B have a greater vulnerability to default but presently
have the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to default
and are dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
B-81
<PAGE>
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days. Issues assigned an A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with doubtful
capacity for payment.
D Issues carrying this designation are in default, and payment of
interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally
are known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
B-82
<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
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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
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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.
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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.
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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 C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 37
to the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 37").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 37.
(c) Instruments Defining Rights of Security Holder - Not
applicable.
(d) Investment Advisory Contracts - Form of Investment Management
Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective Amendment No.
22").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 22.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 37.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 22.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 37.
(i) Opinion of Counsel as to legality of shares is incorporated by
reference to Post-Effective Amendment No. 50 as filed with the
Commission on April 6, 2000.
(j) Other Opinions: Independent Auditors' Consent is incorporated
by reference to Post-Effective Amendment No. 50 as filed with
the Commission on April 6, 2000.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re:
Initial Shares is incorporated by reference to Post-Effective
Amendment No. 37.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1
Plan) is incorporated by reference to Post-Effective Amendment
No. 22.
C-13
<PAGE>
(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.
(p) Code of Ethics is incorporated by reference to Post-Effective
Amendment No. 50 as filed with the Commission on April 6,
2000.
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.
R. Stephen Doyle Chairman of the Board of Directors
Mark B. Geist Chief Executive Officer of MAM, LLC
F. Scott Tuck President of MAM, LLC
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<PAGE>
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
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.
C-15
<PAGE>
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.
Director, President and Chief Marie E. Connolly
Executive Officer
Executive Vice President George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President, General Margaret W. Chambers
Counsel, Chief Compliance Officer,
Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Joseph F. Tower, III
Treasurer and Chief Financial
Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
(c) Not Applicable.
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and Trust
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
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-16
<PAGE>
(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-17
<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 certifies
that it meets all the requirements for effectiveness of this Amendment pursuant
to Rule 485(b) under the 1933 Act and that the Registrant has duly caused this
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, the State
of California, on this 1st day of June, 2000.
THE MONTGOMERY FUNDS
By: George A. Rio*
--------------
George A. Rio
President and Principal
Executive Officer;
Treasurer and Principal
Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
George A. Rio* President and June 2, 2000
-------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the June 2, 2000
------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee June 2, 2000
------------
Andrew Cox
Cecilia H. Herbert * Trustee June 2, 2000
--------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee June 2, 2000
--------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
C-18
