Law Offices of
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104-2635
Telephone (415) 835-1600
Facsimile (415) 217-5333
Internet www.phjw.com
October 31, 2000
VIA EDGAR
---------
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: The Montgomery Funds II
File Nos. 33-69686 and 811-8064
Sir or Madam:
On behalf of The Montgomery Funds II (the "Registrant"),
attached please find the following for filing under Rule 485(b) under the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940, as amended: Post-Effective Amendment No. 53 to the Registrant's
Registration Statement on Form N-1A (the "Amendment").
The purposes of the Amendment are (1) to incorporate changes
requested by Mr. John M. Ganley of the Commission's staff to the Class R share,
the Class P share and the "GE" prospectuses with respect to various series of
the Registrant and The Montgomery Funds (each a "Fund" and collectively, the
"Funds"), (2) to respond to or elaborate on changes made to those prospectuses
as requested by Mr. Ganley, and (3) To update certain financial and other
information in the above-mentioned prospectuses and in the combined Statement of
Additional Information for the Class R and Class P shares of the Funds, as well
as in the prospectuses and combined Statement of Additional Information for the
Montgomery Institutional Series: International Growth Portfolio and the
Montgomery Institutional Series: Emerging Markets Portfolio, two series of the
Registrant.
On behalf of the Registrant, we offer the following responses
to comments made by Mr. Ganley to the Class R share, the Class P share and the
"GE" prospectuses:
1. Delete from the "Objective" section for each Fund language relating to
that Fund's proposed investment strategy.
Comment accepted. The prospectuses have been revised accordingly.
2. Delete the three-year performance returns for the Funds.
Comment accepted. The prospectuses have been revised accordingly.
<PAGE>
3. For the Montgomery Balanced Fund, provide a brief description of the
investment objective and investment strategy for each of the underlying
Funds.
Comment accepted. Brief descriptions of the investment objective and
investment strategy for each of the underlying Funds have been added to
the "Principal Strategy" section for the Fund in the prospectuses.
4. For the Montgomery Emerging Markets 20 Portfolio, determine whether
risks relating to investing in small- or mid-cap stocks should be
included in the "Principal Risks" section for the Fund.
The Registrant has determined that risk disclosures relating to
investing in small- or mid-cap stocks were not necessary with respect
to the Fund.
5. For the Montgomery Global Long-Short Fund, define "leverage positions"
and explain how the Fund would realize a profit or incur a loss from a
short position. Also, confirm that dividends paid on the securities
sold short are included in the calculation of the operating expenses of
the Fund.
Comment accepted. Additional disclosures have been made to the
"Principal Strategy" section with respect to the Fund in the Class R
prospectus. The Registrant hereby confirms that dividends paid on the
securities sold short are included in the calculation of the operating
expenses of the Fund.
6. The Registrant has also made various other minor changes requested by
Mr. Ganley.
We have assisted in the preparation of the Amendment, and we hereby
represent that the Amendment does not contain disclosures which render it
ineligible to become effective pursuant to paragraph (b) of Rule 485. Please
direct any inquiries regarding this filing to the undersigned (415) 835-1649.
Sincerely yours,
/s/ Thao H. Ngo
for PAUL, HASTINGS, JANOFSKY & WALKER LLP
Enclosures
cc: Ann Oglanian, Esq. (w/ enclosures)
David A. Hearth, Esq. and Julie Allecta, Esq. (w/ enclosures)
<PAGE>
As filed with the Securities and Exchange Commission on October 31, 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. 53
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 54
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)(1)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF THE POST-EFFECTIVE AMENDMENT
This Post-Effective Amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of the Post-Effective Amendment
Part A - Combined Prospectus for Class R shares of Montgomery Balanced
Fund, Montgomery Global Long-Short Fund, Montgomery Emerging
Markets 20 and other series of another Registrant.
Part A - Combined Prospectus for Class P shares of Montgomery Balanced
Fund and other series of another Registrant.
Part A - Combined Prospectus for Class P shares of Montgomery Balanced
Fund and other series of another Registrant.
Part A - Prospectus for Montgomery Institutional Series: International
Growth Portfolio.
Part A - Prospectus for Montgomery Institutional Series: Emerging
Markets Portfolio.
Part B - Combined Statement of Additional Information for Class R and
Class P shares of Montgomery Balanced Fund, Montgomery Global
Long-Short Fund, Montgomery Emerging Markets 20 and other
series of another Registrant.
Part B - Combined Statement of Additional Information for Montgomery
Institutional Series: International Growth Portfolio and
Montgomery Institutional Series: Emerging Markets Portfolio.
Part C - Other Information
Signature Page
Exhibits
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS R SHARES OF
MONTGOMERY BALANCED FUND
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTOGMERY EMERGING MARKETS 20 PORTFOLIO
AND
OTHER SERIES OF ANOTHER REGISTRANT
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 2000
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
Mid Cap 20 Portfolio
U.S. Emerging Growth Fund
Small Cap Fund
Balanced Fund
International & Global Equity Funds
International Growth Fund
International 20 Portfolio
Global Opportunities Fund
Global 20 Portfolio
Global Long-Short Fund
Global Communications Fund
Emerging Markets Fund
Emerging Markets 20 Portfolio (formerly named Emerging Markets 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
---------------------------
[Sidebar]
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 6:00 A.M. to 4:00 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
E-mail
[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 Mid Cap 20 Portfolio............................................
Montgomery U.S. Emerging Growth Fund.......................................
Montgomery Small Cap Fund..................................................
Montgomery Balanced Fund ..................................................
International and Global Equity Funds
Montgomery International Growth Fund.......................................
Montgomery International 20 Portfolio......................................
Montgomery Global Opportunities Fund.......................................
Montgomery Global 20 Portfolio.............................................
Montgomery Global Long-Short Fund..........................................
Montgomery Global Communications Fund......................................
Montgomery Emerging Markets Fund...........................................
Montgomery Emerging Markets 20 Portfolio
(formerly named 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............................................................
2
<PAGE>
Management Fees.................................................................
Additional Investment Strategies and Related Risks..............................
Montgomery International 20 Portfolio......................................
Montgomery Global Long-Short Fund..........................................
Montgomery Emerging Markets 20 Portfolio ..................................
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:
o Are not bank deposits
o 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
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in U.S. growth companies.
Under normal conditions, the Fund may invest in the stocks of 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 that are expected
to increase their sales and corporate earnings on a sustained basis. The Fund
leverages the strength of Montgomery's global research team, a centralized team
of analysts and portfolio managers that supports the firm's equity investment
strategies through extensive, original, fundamental analysis. When evaluating
investment opportunities, we favor companies that have a visible three-year
growth plan, are reasonably valued relative to their peers, and demonstrate
evidence of business momentum as a catalyst for growth and share price
appreciation. The Fund seeks to be fully invested and well-diversified with
high-quality holdings across a broad range of sectors.
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.
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)
+See page __ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 0.09% 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 0.49%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.49%
<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
-----------------------------------------------------
$151 $470 $811 $1,773
[clipart] [sidebar]
Portfolio Management
Andrew Pratt, CFA
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNGFX.html
Visit www.montgomeryfunds.com [on every odd page from this point on]
5
<PAGE>
Mid Cap 20 Portfolio
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in a concentrated portfolio of U.S. mid-cap companies.
The Fund normally concentrates its investments in 20 to 30 companies, but
generally not fewer than 20, and will invest at least 65% of its total assets in
those companies whose shares have a market value (market capitalization) profile
consistent with the S&P 400 MidCap Index. (This index had a weighted average
market capitalization of $2.14 billion and a median of $1.62 billion on June 30,
2000.)
The Fund's portfolio managers follow a growth strategy to invest in mid-cap
companies that they think have the potential to:
o Gain market share within their industries
o Deliver consistently high profits to shareholders
o Increase their corporate earnings each quarter
o 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. 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.
The Fund's focus on mid-cap stocks may expose shareholders to additional risks.
Securities of mid-cap companies may trade less frequently and in more-limited
volume than those of larger, more mature companies. As a result, mid-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 Fund was launched on October 31, 2000. Performance
results are not provided because the Fund has not been in existence for a full
calendar year.
--------------------------------------------------------------------------------
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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses# 0.93%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.93%
Fee Reduction and/or Expense Reimbursement 0.53%
Net Expenses 1.40%
<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 1.40%. This contract has a rolling
10-year term.
# Other expenses are based on estimated amounts for the current fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$142 $442 $764 $1,674
[clipart] [sidebar]
Portfolio Management
Cam Philpott, CFA
Paul LaRocco, CFA
Charles Reed, CFA
For more details see pages ___
7
<PAGE>
U.S. Emerging Growth Fund | MNMCX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in U.S. emerging growth companies.
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of emerging U.S. companies whose shares have a total stock market
value (market capitalization) of $2 billion or less at the time of purchase.
The Fund's strategy is to identify well-managed small-cap U.S. companies with
proprietary advantages and the potential for more rapid growth than the overall
economy. The Fund's investment team rigorously analyzes all prospective holdings
to identify companies with improving business fundamentals by conducting
in-depth analysis of each company's current business and future prospects. In
addition, the team favors companies whose share prices appear to be undervalued
relative to their growth potential.
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.
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.
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]
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)
+See page __ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 24.52% 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 reinvesting dividends.
<CAPTION>
<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 1.36%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.56%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.92%
Fee Reduction and/or Expense Reimbursement 0.37%
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.
++ 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.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$157 $488 $843 $1,839
[clipart][sidebar]
Portfolio Management
Kathryn Peters
For more details see pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNMCX.html
9
<PAGE>
Small Cap Fund | MNSCX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in rapidly growing U.S. small-cap companies.
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 $2 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:
o Gain market share within their industries
o Deliver consistently high profits to shareholders
o Increase their corporate earnings each quarter
o 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.
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.
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 a commonly
used index for its market segment. Of course, past performance is no guarantee
of future results.
--------------------------------------------------------------------------------
<TABLE>
[bar chart]
<CAPTION>
91 92 93 94 95 96 97 98 99
-------------- ----------- ----------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
98.75% 9.59% 24.31% -9.96% 35.12% 18.69% 23.86% -7.93% 55.81%
</TABLE>
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)
+See page __ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -2.56% 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 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 0.00%
Other Expenses 0.35%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.35%
<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
-----------------------------------------------------
$137 $427 $738 $1,618
[clipart][sidebar]
Portfolio Management
Stuart Roberts
Paul LaRocco, CFA
Cam Philpott, CFA
Charles Reed, CFA
For more details see pages ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNSCX.html
11
<PAGE>
Balanced Fund | MNAAX
Objective
o High total return consisting of capital appreciation and income
---------------------------------------------------------------------------
Principal Strategy [clipart]
Maintains a balanced allocation of stocks, bonds and money market securities.
The Fund's strategy is to maintain an exposure to stocks and bonds by investing
in the following underlying Funds:
o Montgomery Growth Fund - seeks long-term capital appreciation by investing
in U.S. growth companies
o Montgomery Total Return Bond Fund - seeks total return consisting of income
and capital appreciation by investing in investment grade bonds
o a Montgomery money market fund - seeks current income consistent with
liquidity and capital preservation by investing in money market eligible
U.S. government securities
The Fund's portfolio managers may also adjust the proportion of assets allotted
to the underlying portfolios in response to changing market conditions. In doing
so, the Fund's managers evaluate various market factors, including relative risk
and return, to help determine what they believe is an optimal allocation among
stocks, bonds and cash. The Fund's total equity exposure may range from 50 to
80% of its assets, and its bond exposure may range from 25 to 50% of its assets.
It may invest up to 20% of its assets in a Montgomery money market fund, hold
cash or cash equivalents and may invest directly in U.S. government securities.
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.
Principal Risks [clipart]
By investing a substantial portion of its assets in stock and bond mutual funds,
the Fund may expose you to certain risks that could cause you to lose money. The
value of the Fund's investments in the Montgomery Growth Fund, like investments
in any stock fund, will fluctuate on a daily basis with movements in the stock
market, as well as in response to the activities of the individual companies in
which 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.
12
<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%
------------------------------------------------------------------------------
1 Year 5 Years Inception
(3/31/94)
+See page __ for a description of these indices.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses
Top Fund Expenses 0.60%
Underlying Fund Expenses 1.17%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.77%
Fee Reduction and/or Expense Reimbursement 0.47%
Net Expenses 1.30%
<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.
++ In addition to the 0.60% 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, 2000, was 1.77%, calculated based on the Fund's total operating expense
ratio (0.60%) plus a weighted average of the expense ratios of its
underlying Funds (1.17%). 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.
13
<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.montgomeryfunds.com/Funds/MNAAX.html
14
<PAGE>
International Growth Fund | MNIGX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in medium- and large-cap companies in developed markets outside the U.S.
Under normal conditions, the Fund invests at least 65% of its total assets in
the common stocks of companies outside the U.S. 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 U.S., with no more
than 40% of its assets in any one country.
The Fund's portfolio managers seek well-managed companies that they believe will
be able to increase their sales and corporate earnings on a sustained basis.
From these prospective investments, the managers favor 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. The Fund's focus on mid-cap stocks may expose shareholders to
additional risks. Securities of mid-cap companies may trade less frequently and
in more-limited volume than those of larger, more mature companies. As a result,
mid-cap stocks--and therefore the Fund--may fluctuate significantly more in
value than larger-cap stocks and funds that focus on them.
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.
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]
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 9/30/00: -18.14% 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 0.82%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.92%
Fee Reduction and/or Expense Reimbursement 0.12%
Net Expenses 1.80%
<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 1.65%. 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
-----------------------------------------------------
$182 $565 $972 $2,107
[clipart] [sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNIGX.html
16
<PAGE>
International 20 Portfolio
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in a concentrated portfolio of companies in developed international
markets.
The Fund normally concentrates its investments in 20 to 30 companies, but
generally not fewer than 20, and invests at least 65% of its total assets in
companies whose shares have a total stock market value (market capitalization)
of at least $1 billion. The managers concentrate the Fund's investments in the
stock markets of western Europe, particularly the United Kingdom, France,
Germany, Italy and the Netherlands, as well as developed markets in Asia, such
as Japan and Hong Kong. The Fund typically invests in at least three countries
outside the U.S., with no more than 40% of its assets (or twice the benchmark
index weighting used by the Fund, whichever is greater) 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. The Fund's 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 if there is 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. This is a non-diversified mutual fund that typically
invests in the securities of as few as 20 companies. Consequently, the value of
an investment in the Fund will vary more in response to developments or changes
in market value affecting particular stocks than an investment in a diversified
mutual fund investing in a greater number of securities.
By investing primarily in foreign stocks, the Fund may expose shareholders to
additional risks. Foreign stock markets tend to be more volatile than the U.S.
market due to economic and political instability and regulatory conditions in
some countries. In addition, most of the securities in which the Fund invests
are denominated in foreign currencies, whose value may decline against the U.S.
dollar. To the extent that the Fund invests in small-cap foreign stocks, it may
expose shareholders to additional risks. These risks include limited or
inaccurate information; limited product lines, markets or financial resources;
and securities that may trade less frequently and in limited volume. As a
result, small-cap stocks may fluctuate significantly more in value than
larger-cap stocks.
17
<PAGE>
INTERNATIONAL & GLOBAL EQUITY FUNDS
--------------------------------------------------------------------------------
Past Fund Performance The Fund was launched on December 31, 1999. Performance
results have not been provided because the Fund has not been in existence for a
full calendar year.
--------------------------------------------------------------------------------
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.
<CAPTION>
<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 0.00%
Other Expenses 4.49%
-------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 5.59%
Fee Reduction and/or Expense Reimbursement 3.94%
Net Expenses 1.65%
<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 1.65%. 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
-----------------------------------------------------
$167 $519 $895 $1,947
[clipart] [sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see page ___
For financial highlights
see page ___
18
<PAGE>
Global Opportunities Fund | MNGOX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies of any size in the U.S. and abroad.
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of companies of any size throughout the world. The portfolio managers
typically invest most of the Fund's assets in the United States and in the
developed stock markets of western Europe and Asia, particularly 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 Fund's portfolio managers seek well-managed companies that they believe will
be able to increase their sales and corporate earnings on a sustained basis.
From these prospective investments, the managers favor 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.
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]
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+ 25.34% 20.25% 16.74%
--------------------------------------------------------------------------------
1 Year 5 Years Inception
(9/30/93)
+See page ___ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -17.79% 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 0.84%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.09%
Fee Reduction and/or Expense Reimbursement 0.14%
Net Expenses 1.95%
<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.
20
<PAGE>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$197 $611 $1,049 $2,265
[clipart][sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNGOX.html
21
<PAGE>
Global 20 Portfolio | MNSFX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in a concentrated portfolio of companies in the U.S. and abroad.
The Fund normally concentrates its investments in 20 to 30 companies, but
generally not fewer than 20. In identifying investment opportunities, the Fund
may select companies in the United States or in developed foreign and emerging
markets. 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, however, are
not subject to these limits.
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 under- or reasonably valued relative to their
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.
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, 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.
Because the Fund may invest up to 30% of its assets in any one developing
markets country, it may be exposed to additional risks. Foreign and emerging
markets tend to be more volatile than the U.S. due to economic and political
instability and regulatory conditions. This risk is heightened in 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.
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]
96 97 98 99
------------------- ----------------- ---------------- -----------------
20.46% 29.27% 9.40% 45.29%
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 Portfolio 45.29% 28.10%
MSCI World Index+ 25.34% 20.04%*
--------------------------------------------------------------------------------
*Calculated from 9/30/95 1 Year Inception
(10/2/95)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -13.08% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
+See page __ for a description of this index.
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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 1.51%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.76%
Fee Reduction and/or Expense Reimbursement 0.03%
Net Expenses 2.73%
<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 1.80%. 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
-----------------------------------------------------
$275 $845 $1,440 $3,045
[clipart] [sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see pages ___
For financial highlights
see page ___
23
<PAGE>
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNSFX.html
24
<PAGE>
Global Long-Short Fund | MNGLX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in long and short positions in equity securities in the U.S. and abroad.
The Fund is designed to harness the original research ideas generated by
Montgomery's global research team to invest opportunistically around the world.
The Fund is designed to profit from security selection, using long, short and
leverage positions in combination to generate capital appreciation for the
portfolio.
Under normal conditions, the Fund invests 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. Using
fundamental analysis, 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. A long position is when the Fund purchases a
stock outright, whereas 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 portfolio managers' 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 decreases or increases,
respectively, between the time it is sold and when the Fund replaces the
borrowed security. Because of the Fund's capital appreciation objective, the
portfolio managers typically will maintain a net long exposure, rather than take
positions designed to leave the Fund market neutral. The portfolio managers may
also leverage the Fund's portfolio by engaging in margin borrowing or using
options and financial futures contracts in an effort to enhance returns.
Principal Risks [clipart]
This Fund uses investment approaches that may present substantially higher risks
and greater volatility than most mutual funds. The Fund seeks to increase return
by using margin, leverage, short sales and other forms of volatile financial
derivatives such as options and futures. 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. See "Additional Investment Strategies and Related Risks" on page
__.
25
<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 Q2 2000 (-11.22%).#
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 9/30/00: -1.93% 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]
<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 reinvesting dividends.
<CAPTION>
<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 1.40%
Distribution (12b-1) Fee 0.00%
Other Expenses 2.26%
Shareholder Servicing Fee 0.25%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.91%
<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 2.35%. 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
-----------------------------------------------------
$391 $1,189 $2,002 $4,105
[clipart][sidebar]
Portfolio Management
Portfolio managers from the International
and Global Equity Teams.
For more details see pages ___
For financial highlights
see page ___
26
<PAGE>
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNGLX.html
27
<PAGE>
Global Communications Fund | MNGCX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies involved in the communications industry in the U.S. and
abroad.
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 of any size worldwide, including companies
involved in telecommunications, broadcasting, publishing, computer systems and
the Internet, among other industries. The Fund typically invests in at least
three countries, which may include the United States, with no more than 40% of
its assets in any one country other than the United States.
The Fund's portfolio managers seek well-managed communications companies that
they believe will be able to increase their sales and corporate earnings on a
sustained basis. From these prospective investments, the managers favor
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. Furthermore, most of the securities in which the
Fund invests are denominated in foreign currencies, whose value may decline
against the U.S. dollar.
28
<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%*
MSCI World Index+ 25.34% 20.25% 13.94%*
--------------------------------------------------------------------------------
*Calculated from 5/31/93 1 Year 5 Years Inception
(6/1/93)
+See page __ for a description of these indices.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -20.60% 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 reinvesting dividends.
<CAPTION>
<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 1.12%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.37%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.49%
<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
-----------------------------------------------------
$151 $470 $811 $1,773
[clipart][sidebar]
Portfolio Management
Oscar Castro, CFA
Stephen Parlett, CFA
For more details see page ___
For financial highlights,
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNGCX.html
29
<PAGE>
Emerging Markets Fund |MNEMX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies based or operating primarily in developing economies
throughout the world.
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of companies of any size and based in the world's developing
economies. The Fund typically maintains investments in at least six countries at
all times, with no more than 35% of its assets in any single one of them. These
may include:
o Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
o Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
o Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
o The Middle East: Israel and Jordan
o 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.
30
<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.
--------------------------------------------------------------------------------
<TABLE>
[bar chart]
<CAPTION>
93 94 95 96 97 98 99
------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
58.66% -7.72% -9.08% 12.32% -3.14% -38.28% 63.16%
</TABLE>
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.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -18.36% 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 reinvesting dividends.
<CAPTION>
<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 1.19%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.26%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.45%
Fee Reduction and/or Expense Reimbursement 0.16%
Net Expenses 2.29%
<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
-----------------------------------------------------
$231 $713 $1,222 $2,613
[clipart][sidebar]
Portfolio Management
Josephine Jimenez, CFA
Frank Chiang
For more details see pages ___
For financial highlights
see page ___
31
<PAGE>
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNEMX.html
32
<PAGE>
Emerging Markets 20 Portfolio |
Formerly named Montgomery Emerging Markets Focus Fund
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in a concentrated portfolio of companies based or operating primarily in
developing economies through the world.
The Fund normally concentrates its investments in 20 to 30 companies, but
generally not fewer than 20. 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 in the following regions: Latin America, Asia, Europe, the
Middle East and Africa. The Fund may invest up to 50% of its total assets in a
single emerging market.
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. The Fund allocates its assets among emerging
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
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. See "Additional Investment
Strategies and Related Risks" on page __.
33
<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 20 Portfolio 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 9/30/00: -8.41% 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 5.05%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 6.15%
Fee Reduction and/or Expense Reimbursement 4.53%
Net Expenses 1.62%
<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 1.60%. 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
-----------------------------------------------------
$164 $510 $879 $1,915
[clipart][sidebar]
Portfolio Management
Josephine Jimenez, CFA
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNEFX.html
34
<PAGE>
Emerging Asia Fund | MNEAX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies based or operating primarily in developing economies of
Asia.
<TABLE>
Under normal conditions, 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:
<CAPTION>
<S> <C> <C> <C>
o Bangladesh o India o The Philippines o Taiwan
o China/Hong Kong o Indonesia o Singapore o Thailand
China/Hong Kong is o Malaysia o South Korea o Vietnam
considered to be a o Pakistan o Sri Lanka
single emerging Asia
country.
</TABLE>
The Fund typically invests in at least three emerging Asia countries at all
times, with no more than one-third of its assets in any one country. The five
exceptions are China/Hong Kong, India, Malaysia, South Korea and Taiwan, where
the Fund may invest more than one-third and up to substantially all of its
assets.
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 portfolio 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 concentration in Asian markets, as they tend to be much more volatile
than the U.S. due to relative immaturity and relative 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. 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. See "Additional Investment Strategies and Related Risks" on
page __.
35
<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
------------------- ----------------- ----------------
-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 9/30/00: -23.52% 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 reinvesting dividends.
<CAPTION>
<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 0.00%
Other Expenses 1.84%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.09%
Fee Reduction and/or Expense Reimbursement 0.97%
Net Expenses 2.12%
<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
-----------------------------------------------------
$214 $662 $1,138 $2,441
[clipart][sidebar]
Portfolio Management
Frank Chiang
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNEAX.html
36
<PAGE>
Total Return Bond Fund | MNTRX
Objective
o Total return consisting of income and capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in investment-grade bonds.
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.
Effective duration is a measure of the expected change in value from changes in
interest rates. Typically, a bond with a low duration means that its value is
less sensitive to changes in interest rates, and a bond with a high duration
means that its value is more sensitive to changes in 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. The Fund's investments in mortgage-related debt securities may expose
it to prepayment risks when interest rates fall because the portfolio managers
may have to reinvest the prepayment proceeds at lower interest rates than those
of its previous investments. 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.
37
<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)
+See page ___ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 7.88% 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.
<CAPTION>
<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 0.00%
Other Expenses 0.63%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.13%
Fee Waiver and/or Expense Reimbursement 0.33%
Net Expenses 0.80%**
<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.
** Montgomery Asset Management enters into certain 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
0.10%. The operating expense ratio excluding these interest charges was
0.70%.
</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
-----------------------------------------------------
$81 $255 $443 $987
[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.montgomeryfunds.com/Funds/MNTRX.html
38
<PAGE>
Short Duration Government Bond Fund | MNSGX
Objective
o Current income consistent with capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in short-term U.S. government securities.
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 less than that of a three-year U.S. Treasury note.
Effective duration is a measure of the expected change in value from changes in
interest rates. Typically, a bond with a low duration means that its value is
less sensitive to changes in interest rates, and a bond with a high duration
means that its value is more sensitive to changes in 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 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. The Fund's investments in mortgage-related
debt securities may expose it to prepayment risks when interest rates fall
because the portfolio managers may have to reinvest the prepayment proceeds at
lower interest rates than those of its previous investments. 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.
39
<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>
93 94 95 96 97 98 99
------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
8.09% 1.13% 11.51% 5.14% 6.97% 7.38% 2.56%
</TABLE>
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 9/30/00: 5.35% 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.
<CAPTION>
<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 0.00%
Other Expenses 1.11%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.61%
Fee Reduction and/or Expense Reimbursement 0.50%
Net Expenses 1.11%***
<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 0.60%. This contract has a rolling
10-year term.
*** Montgomery Asset Management enters into certain 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 0.48%. The
operating expense ratio excluding these interest charges is 0.63%.
</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
-----------------------------------------------------
$113 $352 $610 $1,348
[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.montgomeryfunds.com/Funds/MNSGX.html
40
<PAGE>
Government Money Market Fund | MNGXX
Objective
o Current income consistent with liquidity and capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in money market eligible U.S. government securities.
Under normal conditions, the Fund invests at least 65% of its total assets in
short-term U.S. government securities, which may include bills, notes and bonds
issued by government agencies such as the Federal Home Loan Bank, 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.
41
<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>
93 94 95 96 97 98 99
------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
2.83% 3.78% 5.54% 5.04% 5.16% 5.14% 4.87%
</TABLE>
During the seven-year period described above in the bar chart, the Fund's best
quarter was Q2 2000 (+1.57%) 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 9/30/00: 4.48% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
Seven-Day Yield as of 6/30/00: 6.22%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 4:00 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.
<CAPTION>
<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 0.31%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.15%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.46%
<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
-----------------------------------------------------
$47 $147 $257 $578
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see pages ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNGXX.html
42
<PAGE>
California Tax-Free Intermediate Bond Fund | MNCTX
This Fund is intended for California residents only
Objective
o High current income exempt from federal and California state personal
income taxes
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in intermediate-maturity California municipal bonds.
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 manager invests in California municipal bonds that offer attractive
yields and are considered to be undervalued relative to issues of similar credit
quality and interest rate sensitivity. Although the Fund concentrates its assets
in California municipal bonds, the portfolio manager strives to diversify the
portfolio across sectors and issuers within that market. The portfolio manager
has 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.
43
<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
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 9/30/00: 6.32% 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.
<CAPTION>
<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 0.00%
Other Expenses 0.69%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.19%
Fee Reduction and/or Expense Reimbursement 0.49%
Net Expenses 0.70%
<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.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$71 $223 $389 $869
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MNCTX.html
44
<PAGE>
California Tax-Free Money Fund | MCFXX
This Fund is intended for California residents only
Objective
o Current income exempt from federal and California income taxes,
consistent with liquidity and capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in money market eligible California municipal bonds.
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 federal and
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.
45
<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 9/30/00: 2.27% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
Seven-Day Yield as of 6/30/00: 3.55%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 4:00 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.
<CAPTION>
<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 0.40%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.18%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.58%
<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
-----------------------------------------------------
$59 $185 $323 $724
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MCFXX.html
46
<PAGE>
Federal Tax-Free Money Fund | MFFXX
Objective
o Current income exempt from federal income taxes, consistent with
liquidity and capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in money market eligible municipal bonds.
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.
47
<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 Q2 2000 (+0.99%) 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 9/30/00: 2.74% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
Seven-Day Yield as of 6/30/00: 3.97%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 4:00 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.
<CAPTION>
<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 0.40%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.37%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.77%
Fee Reduction and/or Expense Reimbursement 0.17%
Net Expenses 0.60%
<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 0.60%. 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
-----------------------------------------------------
$61 $192 $334 $749
[clipart] [sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
48
<PAGE>
For daily performance and manager commentaries,
visit www.montgomeryfunds.com/Funds/MFFXX.html
49
<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
September 30, 2000 Montgomery Asset Management managed approximately $5 billion
on behalf of some 184,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] PAUL LAROCCO, CFA, Portfolio Manager
o Montgomery Small Cap Fund
o Montgomery Mid Cap 20 Portfolio
Mr. LaRocco joined Montgomery in 2000, co-managing the Montgomery Small Cap Fund
and the Mid Cap 20 Portfolio. From 1998 to 2000, he was a senior portfolio
manager at Founders Asset Management, with responsibility for several large- and
mid-cap growth funds. Prior to that he was a portfolio manager for a number of
small- and mid-cap funds at Oppenheimer Funds from 1993 to 1998. 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 degree in Biological Sciences
from the University of California, Santa Barbara. He is a Chartered Financial
Analyst.
[photo] KATHRYN PETERS, Portfolio Manager and Principal
o Montgomery U.S. Emerging Growth Fund
Ms. Peters joined Montgomery in 1995 as an analyst on the U.S. Growth Equity
team, responsible for the Montgomery U.S. Emerging Growth and Growth Funds. She
became portfolio manager for the U.S. Emerging Growth Fund in 1996. Before
joining Montgomery, Ms. Peters worked for the investment banking division of
Donaldson, Lufkin & Jenrette in New York, where she evaluated prospective equity
investments for the merchant banking fund and processed investment banking
transactions, including equity and high-yield offerings. Prior to that she
analyzed mezzanine investments for Barclays de Zoete Wedd in New York and worked
in the leveraged buyout group of Marine Midland Bank. Ms. Peters began her
investment career in 1987. She has a Master of Business Administration degree
from the Harvard Graduate School of Business Administration and a Bachelor of
Arts degree, magna cum laude, in Psychology with a concentration in Business
from Boston College.
[photo] ANDREW PRATT, CFA, Portfolio Manager and Principal
o Montgomery Growth Fund
o Montgomery Balanced Fund
Mr. Pratt joined Montgomery in 1993 as part of the Growth Equity team,
responsible for managing the Montgomery Growth and U.S. Emerging Growth Funds.
In 2000 he became portfolio manager of the Growth Fund and co-manager of the
Balanced Fund. In addition, he has been managing U.S. equity portfolios for
institutional clients. Prior to joining Montgomery, Mr. Pratt was with
Hewlett-Packard as an equity analyst covering a variety of industry groups.
While at HP he also managed a portfolio of small-cap technology companies and
researched private placement and venture capital investments. Mr. Pratt holds a
Bachelor of Business Administration degree from the University of Wisconsin and
a Master of Science degree in Finance from Boston College. He is a Chartered
Financial Analyst.
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
o Montgomery Small Cap Fund
o Montgomery Mid Cap 20 Portfolio
Mr. Philpott joined Montgomery in 1991 as an analyst for the Small Cap Equity
team. He has co-managed the Montgomery Small Cap Fund since 1993 and the Mid Cap
20 Portfolio since its inception in
50
<PAGE>
2000. Prior to Montgomery, Mr. Philpott served as a securities analyst with
Boettcher & Company, where he focused on the consumer and telecommunications
industries. Prior to that he worked as a general securities analyst at Berger
Associates, Inc., an investment management firm. 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. He is a Chartered Financial Analyst.
[photo] CHARLES I. REED, CFA, Portfolio Manager
o Montgomery Small Cap Fund
o Montgomery Mid Cap 20 Portfolio
Mr. Reed joined Montgomery in 1997 as an analyst for the Small Cap Equity team.
He has co-managed the Montgomery Small Cap Fund and the Mid Cap 20 Portfolio
since 2000. From 1995 to 1997, he was an equity analyst for Berger Associates,
Inc., 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. From 1992 to 1995, Mr. Reed worked as a project
manager for Lipper Analytical Services, Inc., performing mutual fund analysis on
performance and expenses. He received a Bachelor of Science degree in Finance
from Colorado State University and a Master of Science degree in Finance with an
emphasis in Financial Analysis from the University of Colorado. Mr. Reed is a
Chartered Financial Analyst.
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
o Montgomery Small Cap Fund
Mr. Roberts has been managing the Montgomery Small Cap Fund since its inception
in 1990 and has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery, he was vice president and portfolio manager at Founders
Asset Management, where he was responsible for managing 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 Global Opportunities Fund
o Montgomery International Growth Fund
o Montgomery International 20 Portfolio
o Montgomery Global 20 Portfolio
o Montgomery Global Long-Short Fund
Mr. Boich has co-managed the Montgomery Global Opportunities Fund since its
inception in 1993. He has co-managed the International Growth Fund since its
launch in 1995 and the International 20 Portfolio since its launch in 1999. In
addition, he has co-managed the Global 20 Portfolio and the Global Long-Short
Fund since 2000. Previously, Mr. Boich was vice president and portfolio manager
at The Boston Company Institutional Investors, Inc., responsible for the
development and subsequent management of its flagship international equity
product. Prior to that 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 Global Opportunities Fund
o Montgomery Global Communications Fund
o Montgomery International Growth Fund
o Montgomery International 20 Portfolio
o Montgomery Global 20 Portfolio
51
<PAGE>
o Montgomery Global Long-Short Fund
Mr. Castro has co-managed the Montgomery Global Opportunities Fund and managed
the Communications Fund since their launch in 1993. He has co-managed the
International Growth Fund since its inception in 1995 and the International 20
Portfolio since its inception in 1999. In addition, Mr. Castro has co-managed
the Global 20 Portfolio and the 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. Prior to that 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 in Pennsylvania and a Bachelor of Science degree in Chemical
Engineering from Simon Bolivar University in Venezuela. He is a Chartered
Financial Analyst.
[photo] FRANK CHIANG, Portfolio Manager and Principal
o Montgomery Emerging Markets Fund
o Montgomery Emerging Asia Fund
Mr. Chiang joined Montgomery in 1996, co-managing the Montgomery Emerging
Markets Fund and managing the Emerging Asia Fund since its inception. From 1993
to 1996, he was with TCW Asia Ltd., Hong Kong, where he was a managing director
and portfolio manager responsible for TCW's Asian Equity strategy. Prior to that
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 degree from New York University. He is fluent in three Chinese dialects:
Mandarin, Shanghainese and Cantonese.
[photo] JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
o Montgomery Emerging Markets Fund
o Montgomery Emerging Markets 20 Portfolio
o Montgomery Global Long-Short Fund
Ms. Jimenez joined Montgomery in 1991 to launch the firm's emerging markets
discipline and has managed the Montgomery Emerging Markets Fund since it
launched in 1992. In addition, she has managed the Montgomery Emerging Markets
20 Portfolio since its inception in 1997 and co-managed the 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 and a Bachelor of Science degree
from New York University. She is a Chartered Financial Analyst.
[photo] CHETAN JOGLEKAR, Portfolio Manager
o Montgomery Global Long-Short Fund
Mr. Joglekar joined Montgomery in 1997 as a senior trader responsible for the
Asian and European markets. He has been involved in executing long and short
trades for the Montgomery Global Long-Short Fund since its inception and has
been co-managing the Fund since 2000. 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 in India.
[photo] DANIEL S. KERN, CFA, Portfolio Manager and Principal
o Montgomery Global Long-Short Fund
Mr. Kern joined Montgomery in 1995 as manager of Private Asset Management and
later contributed to the investment implementation of all of Montgomery's
investment disciplines. Most recently, he is responsible for Montgomery's
international product area and has been co-managing the Montgomery
52
<PAGE>
Global Long-Short Fund since 2000. Mr. Kern began his investment management
career in 1990, and was previously a vice president at Wells Fargo Bank. He has
a Bachelor of Arts degree in Economics from Brandeis University and a Master of
Business Administration degree from the Walter A. Haas School of Business at the
University of California at Berkeley. Mr. Kern is a Chartered Financial Analyst.
[photo] NANCY KUKACKA, Portfolio Manager and Principal
o Montgomery Global Long-Short Fund
Ms. Kukacka has been managing the Montgomery Global Long-Short Fund since its
launch in 1997. She joined Montgomery in 1995 as a global equity research
analyst in the consumer non-durables, consumer services and health-care sectors.
Before joining Montgomery she worked as an equity research analyst at CS First
Boston Investments, covering the consumer cyclical and non-durables 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 and Principal
o Montgomery Global Communications Fund
Since joining the Montgomery Global Equity team in 1995, Mr. Parlett has been
responsible for global communications sector analysis. He has co-managed the
Montgomery Global Communications Fund since 2000. 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 and Principal
o Montgomery Global Long-Short Fund
Since joining Montgomery is 1998, Mr. Rezaee has been the sector team leader
responsible for leading research in the global technology sector. He has been
co-managing the Montgomery Global Long-Short Fund since 2000. Mr. Rezaee began
his investment career in 1993. From 1993 to 1998, he worked at Dresdner RCM
Global Investors as an analyst specializing in networking, telecommunications
equipment and enterprise software. Prior to that he worked as a senior 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 is a level III Chartered Financial Analyst candidate.
U.S. Fixed-Income and Money Market Funds
[photo] MARIE CHANDOHA, Portfolio Manager and Principal
o Montgomery Total Return Bond Fund
4o Montgomery Short Duration Government Bond Fund
Ms. Chandoha joined Montgomery in 1999 as portfolio manager of the Montgomery
Total Return Bond and Short Duration Government Bond Funds. She began her
investment career in 1983. From 1996 to 1999, she was chief bond strategist at
Goldman Sachs, where she advised institutional clients on optimal asset
allocation strategies in the U.S. bond market. From 1994 to 1996, she was
managing director of global fixed-income and economics research at Credit Suisse
First Boston, 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.
53
<PAGE>
[photo] WILLIAM STEVENS, Senior Portfolio Manager and Principal
o Montgomery Fixed-Income Funds
o Montgomery Balanced Fund
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income team since joining the firm in 1992, managing all Fixed-Income
Funds since their inceptions. He has also managed the Balanced Fund since its
launch in 1994. Prior to Montgomery he was responsible for starting the
collateralized mortgage obligation and asset-backed securities trading
department at Barclays de Zoete Wedd Securities. Previously, he had 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.
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 1.00% 1.49%
Montgomery Mid Cap 20 Portfolio 1.00% 1.40%
Montgomery U.S. Emerging Growth Fund 0.99% 1.50%
Montgomery Small Cap Fund 1.00% 1.35%
Montgomery Balanced Fund 0.00% 1.30%
International and Global Equity Funds
Montgomery International Growth Fund 1.05% 1.65%
Montgomery International 20 Portfolio 0.54% 1.65%
Montgomery Global Opportunities Fund 1.39% 1.90%
Montgomery Global 20 Portfolio 1.22% 1.80%
Montgomery Global Long-Short Fund 1.46% 2.06%
Montgomery Global Communications Fund 1.12% 1.49%
Montgomery Emerging Markets Fund 1.15% 1.90%
Montgomery Emerging Markets 20 Portfolio 1.10% 1.60%
Montgomery Emerging Asia Fund 0.87% 1.90%
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund 0.33% 0.70%
Montgomery Short Duration Government Bond Fund 0.27% 0.63%
Montgomery Government Money Market Fund 0.31% 0.46%
Montgomery California Tax-Free Intermediate Bond Fund 0.40% 0.70%
Montgomery California Tax-Free Money Fund 0.42% 0.58%
Montgomery Federal Tax-Free Money Fund 0.40% 0.60%
</TABLE>
54
<PAGE>
Additional Investmrnt Strategies and Related Risks
Montgomery International 20 Portfolio
To the extent that the Fund invests in Japanese securities, the Fund exposes
shareholders to certain risks. The Fund's share value may be more volatile than
that of mutual funds not sharing this geographic concentration. The value of the
Fund's shares may vary dramatically in response to political and economic
factors affecting companies in Japan.
Securities in Japan are denominated and quoted in yen. Yen are fully convertible
and transferable, based on floating exchange rates, into all readily convertible
currencies; there are no administrative or legal restrictions for both residents
and non-residents of Japan. As a result, in the absence of a successful currency
hedge, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in the value of Japanese yen
relative to the U.S. dollar.
The decline in the Japanese securities market since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-to-earnings ratios in comparison with those in the United States,
even after that market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States.
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 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, 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
55
<PAGE>
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.
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. 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. 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 negatively affect the Fund's investments in European companies.
Emerging Markets 20 Portfolio
The Fund's portfolio 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
56
<PAGE>
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, India 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. As a defensive measure to these risks, the Fund may invest in
the stocks of companies located in Japan, Australia or New Zealand.
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:
o Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
o The applicable conversion rate for contracts stated in the national
currency of an EU member
o How clearing and settlement systems needed to process transactions
reliably will work
o What the effects of the euro on European financial and commercial
markets will be
o How new legislation and regulations will affect 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.
57
<PAGE>
Portfolio Turnover
The Funds' portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Fund has owned that security.
Buying and selling securities generally involves some expense to a Fund, such as
commission paid to brokers and other transaction costs. By selling a security, a
Fund may realize taxable capital gains that it will subsequently distribute to
shareholders. Generally speaking, the higher a Fund's annual portfolio turnover,
the greater its brokerage costs and the greater the likelihood that it will
realize taxable capital gains. Increased brokerage costs may adversely affect a
Fund's performance. Also, unless you are a tax-exempt investor or you purchase
shares through a tax-exempt investor or you purchase shares through a
tax-deferred account, the distribution of capital gains may affect your
after-tax return. Annual portfolio turnover of 100% or more is considered high.
The following Montgomery Funds that invest in stocks will typically have annual
turnover in excess of that rate because of their portfolio managers' investment
styles: Growth, Small Cap, International Growth, Global Opportunities, Emerging
Asia, Global Long-Short, Global 20, Balanced Mid Cap 20, and Total Return Bond
Funds and Mid Cap 20, International 20 and Emerging Markets 20 Portfolios. See
"Financial Highlights," beginning on page __, for each Fund's historical
portfolio turnover.
Additional Benchmark Information
o The Lehman Brothers Aggregate Bond Index is composed of securities from
the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index and Yankee Bond Index (all U.S. dollar-denominated,
SEC-registered, fixed- rate debt issued or guaranteed by foreign
governments, municipalities, government agencies or international
agencies). Total return comprises price appreciation/ depreciation and
income as a percentage of the original investment. The index is rebalanced
monthly by market capitalization.
o The Morgan Stanley Capital International (MSCI) All-Country Asia-Free
(ex-Japan) Index comprises equities in 12 countries in the Asia Pacific
region.
o 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.
o 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.
o 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.
o The MSCI Telecommunications Index is a capitalization-weighted index
comprising of equity securities of communications companies in developed
countries worldwide.
o The MSCI World Index measures the performance of selected stocks in 22
developed countries. The index is presented net of dividend withholding
taxes.
o The Russell 2000 Index is a capitalization-weighted total return index
that includes the smallest 2,000 companies within the Russell 3000 Index.
o The Standard & Poor's (S&P) 500 Index covers 500 industrial, utility,
transportation and financial companies of the U.S. markets. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.
o The S&P Mid Cap 400 Index is an unmanaged broad-based composite index
that measures the performance of 400 mid-sized companies (with market
capitalizations between $189 million and $23 billion) in the U.S. market.
58
<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,
2000, June 30, 1999, March 31, 1999, and June 30, 1998, were audited by
PricewaterhouseCoopers LLP.
Their August 18, 2000, August 18, 1999, June 11, 1999, and August 14, 1998,
reports appear in the 2000, 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: 2000## 1999## 1998## 1997## 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 24.34 $ 23.68 $ 23.07 $ 21.94 $ 19.16
Net investment income/(loss) 0.00#++ 0.09 0.17 0.15 0.17
Net realized and unrealized gain/(loss)
on investments (0.04) 2.24 3.51 3.90 4.32
Net increase/(decrease) in net assets
resulting from investment operations (0.04) 2.33 3.68 4.05 4.49
Distributions:
Dividends from net investment income (0.18) (0.10) (0.15) (0.15) (0.17)
Dividends in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (3.01) (1.57) (2.92) (2.77) (1.54)
Distributions in excess of net realized
capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions (3.19) (1.67) (3.07) (2.92) (1.71)
Net Asset Value - End of Period $ 21.11 $ 24.34 $ 23.68 $ 23.07 $ 21.94
====================================================================================================================================
Total Return** 0.47% 11.41% 17.31% 20.44% 24.85%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $ 414,632 $ 669,789 $1,382,874 $1,137,343 $ 926,382
Ratio of net investment income/(loss) to average
net assets (0.02)% 0.46% 0.71% 0.69% 0.78%
Net investment income/(loss) before deferral
of fees by Manager $ 0.00# $ 0.09 $ 0.17 -- --
Portfolio turnover rate 79% 39% 54% 61% 118%
Expense ratio including interest and tax expenses 1.49% 1.38% 1.20% 1.27% 1.35%
Expense ratio before deferral of fees by
Manager including interest and tax expenses 1.49% 1.38% 1.20% -- --
Expense ratio excluding interest and tax expenses 1.46% 1.35% 1.19% -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of the purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
59
<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: 2000## 1999## 1998## 1997## 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 19.80 $ 21.89 $ 19.00 $ 17.82 $ 13.75
Net investment income/(loss) (0.35) (0.16) (0.18) (0.13) (0.04)
Net realized and unrealized gain/(loss)
on investments 8.07 (0.80) 4.21 2.54 4.26
Net increase/(decrease) in net assets
resulting from investment operations 7.72 (0.96) 4.03 2.41 4.22
Distributions:
Dividends from net investment income -- -- -- -- (0.04)
Dividends 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 $ 24.85 $ 19.80 $ 21.89 $ 19.00 $ 17.82
====================================================================================================================================
Total Return** 42.46% (4.07)% 22.18% 14.77% 30.95%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $ 224,944 $ 382,483 $ 391,973 $ 317,812 $ 306,217
Ratio of net investment income/(loss) to average
net assets (1.19)% (0.83)% (0.84)% (0.75)% (0.11)%
Net investment income/(loss) before deferral
of fees by Manager $ (0.45) $ (0.16) $ (0.18) -- $ (0.05)
Portfolio turnover rate 63% 76% 24% 79% 89%
Expense ratio including interest and tax expenses 1.55% 1.66% 1.57% 1.71% 1.75%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.92% 1.66% 1.57% -- 1.79%
Expense ratio excluding interest and tax expenses 1.50% 1.66% 1.56% -- --
<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
results of operations.
</FN>
</TABLE>
60
<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: 2000## 1999## 1998## 1997## 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 16.58 $ 20.73 $ 19.52 $ 21.55 $ 17.11
Net investment income/(loss) (0.28) (0.17) (0.15) (0.18) (0.09)
Net realized and unrealized gain/(loss)
on investments 5.90 (1.21) 4.33 1.43 6.31
Net increase/(decrease) in net assets
resulting from investment operations 5.62 (1.38) 4.18 1.25 6.22
Distributions:
Dividends from net investment income -- -- -- -- --
Dividends in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (0.00)# (2.07) (2.97) (3.28) (1.78)
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)
Net Asset Value - End of Period $ 22.20 $ 16.58 $ 20.73 $ 19.52 $ 21.55
====================================================================================================================================
Total Return** 34.12% (4.14)% 23.23% 6.81% 39.28%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of Period (in 000s) $ 102,622 $ 113,323 $ 203,437 $ 198,298 $ 275,062
Ratio of net investment income/(loss) to average
net assets (1.14)% (1.09)% (0.70)% (0.78)% (0.47)%
Net investment income/(loss) before deferral of
fees by Manager $ (0.28) $ (0.17) $ (0.15) -- --
Portfolio turnover rate 93% 71% 69% 59% 80%
Expense ratio including interest and tax expenses 1.35% 1.32% 1.24% 1.20% 1.24%
Expense ratio before deferral of fees by Manager,
including interest and tax expense 1.35% 1.32% 1.24% -- --
Expense ratio excluding interest and tax expenses 1.35% 1.32% 1.24% -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
U.S. Equity Funds
Balanced Fund
Fiscal Year Ended June 30,
Selected Per-Share Data for the Year or Period Ended: 2000## 1999## 1998## 1997## 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 16.77 $ 19.08 $ 19.89 $ 19.33 $ 16.33
Net investment income/(loss) 0.49 0.48 1.66 0.48 0.26
Net realized and unrealized gain/(loss)
on investments (0.19) 1.23 0.99 2.13 3.54
Net increase/(decrease) in net assets resulting from
investment operations 0.30 1.71 2.65 2.61 3.80
Distributions:
Dividends from net investment income (0.63) (0.93) (0.93) (0.39) (0.25)
Dividends in excess of net investment income -- -- (0.70) -- --
Distributions from net realized capital gains (0.31) (1.68) (1.83) (1.66) (0.55)
Distributions in excess of net realized
capital gains (0.13) (1.41) -- -- --
Total distributions (1.07) (4.02) (3.46) (2.05) (0.80)
Net Asset Value - End of Period $ 16.00 $ 16.77 $ 19.08 $ 19.89 $ 19.33
====================================================================================================================================
Total Return** 1.62% 11.93% 14.67% 14.65% 23.92%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $ 60,718 $ 81,133 $ 128,075 $ 127,214 $ 132,511
Ratio of net investment income/(loss) to average
net assets 2.62% 2.63% 3.10% 2.55% 1.85%
Net investment income/(loss) before deferral
of fees by Manager $ 0.43 $ 0.45 $ 1.63 $ 0.47 $ 0.24
Portfolio turnover rate 35% 36% 84% 169% 226%
Expense ratio including interest and tax expenses 0.13% 0.25% 0.26% 1.43% 1.42%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.60% 0.46% 0.31% 1.49% 1.55%
Expense ratio excluding interest and tax expenses 0.13% 0.25% 0.25% 1.31% 1.30%
<FN>
(a) The Fund converted to a fund of funds structure effective July 1, 1998.
Expense ratios prior to that date do not reflect expenses borne indirectly.
** Total return represents aggregate total return for the periods indicated.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
62
<PAGE>
<TABLE>
International and Global Equity Funds
<CAPTION>
International 20
International Growth Fund Portfolio
Fiscal Year
Ended
Selected Per-Share Data for the Year Fiscal Year Ended June 30, June 30,
or Period Ended: 2000## 1999 1998## 1997## 1996(b) 2000(c)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 18.97 $ 18.67 $ 16.24 $ 15.31 $ 12.00 $ 10.00
Net investment income/(loss) (0.17) 0.09 0.04 0.08 0.02 (0.02)
Net realized and unrealized
gain/(loss) on investments 2.11 0.31 3.48 2.53 3.29 0.03++
Net increase/(decrease) in net
assets resulting from investment
operations 1.94 0.40 3.52 2.61 3.31 0.01
Distributions:
Dividends from net investment
income -- -- (0.02) -- -- --
Dividends 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 $ 20.52 $ 18.97 $ 18.67 $ 16.24 $ 15.31 $ 10.01
====================================================================================================================================
Total Return** 10.16% 2.34% 23.27% 19.20% 27.58% 0.10%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $ 184,588 $ 227,287 $ 64,820 $ 33,912 $ 18,303 $ 2,264
Ratio of net investment
income/(loss) to average net assets (0.83)% 0.41% 0.22% 0.57% 0.26%+ (0.35)%+
Net investment income/(loss)
before deferral of fees by Manager $ (0.18) $ 0.09 $ (0.04) $ (0.02) $ (0.07) $ (0.20)
Portfolio turnover rate 207% 150% 127% 95% 239% 114%
Expense ratio including interest
and tax expense 1.80% 1.66% 1.66% -- -- 1.65%+
Expense ratio before deferral of
fees by Manager, including
interest and tax expense 1.92% 1.74% 2.13% 2.37% 2.91%+ 5.59%+
Expense ratio excluding interest
and tax expense 1.65% 1.65% 1.65% 1.66% 1.65%+ 1.65%+
<FN>
(b) The International Growth Fund's Class R shares commenced operations on July
3, 1995.
(c) The International 20 Portfolio's Class R shares commenced operations on
December 31, 1999.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amounts shown in this caption for each share outstanding throughout the
period may not be in accordance with the net realized and unrealized
gain/(loss) for the period because of the timing of the purchases and
withdrawals of shares in relation to the fluctuating market values of the
Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
63
<PAGE>
<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: 2000 1999 1998## 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 19.21 $ 19.19 $ 19.17 $ 16.96 $ 13.25
Net investment income/(loss) (0.24) (0.12) 0.00# (0.011) (0.06)
Net realized and unrealized
gain/(loss) on investments 4.42 2.56 3.87 3.14 3.84
Net increase/(decrease) in net assets
resulting from investment operations 4.18 2.44 3.87 3.03 3.78
Distributions:
Dividends from net investment income -- (0.22) -- -- (0.07)
Dividends in excess of net
investment income -- -- -- -- --
Distributions from net realized
capital gains (1.66) (2.20) (3.85) (0.82) --
Distributions in excess of net
realized capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions (1.66) (2.42) (3.85) (0.82) (0.07)
Net Asset Value - End of Period $ 21.73 $ 19.21 $ 19.19 $ 19.17 $ 16.96
====================================================================================================================================
Total Return** 21.46% 15.68% 27.12% 18.71% 28.64%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $ 85,723 $ 57,146 $ 96,412 $ 32,371 $ 28,496
Ratio of net investment income/(loss)
to average net assets (1.20)% (0.61)% (0.02)% (0.62)% (0.56)%
Net investment income/(loss) before
deferral of fees by Manager $ (0.26) $ (0.14) $ 0.00# $ (0.23) $ (0.16)
Portfolio turnover rate 203% 172% 135% 117% 164%
Expense ratio including interest and
tax expense 1.95% 2.01% 1.96% -- 2.05%
Expense ratio before deferral of fees
by Manager, including interest and
tax expense 2.09% 2.40% 2.37% 2.62% 3.10%
Expense ratio excluding interest and
tax expense 1.90% 1.90% 1.90% 1.90% 1.90%
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
Global 20 Portfolio
Fiscal Year Ended June 30,
Selected Per-Share Data for the Year
or Period Ended: 2000## 1999## 1998## 1997## 1996(d)
------------------------------------------------------------------------------------------------------------------------------------
<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) (0.43) (0.09) 0.12 0.01 0.06
Net realized and unrealized
gain/(loss)
on investments 4.17 2.70 2.70 4.16 4.45
Net increase/(decrease) in net
assets
resulting from investment operations 3.74 2.61 2.82 4.17 4.51
Distributions:
Dividends from net investment
income -- (0.24) -- (0.10) (0.04)
Dividends 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 $ 22.83 $ 22.20 $ 20.98 $ 20.01 $ 16.46
====================================================================================================================================
Total Return** 17.14% 13.89% 15.44% 26.35% 37.75%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $ 115,839 $ 136,792 $ 269,667 $ 172,509 $ 77,955
Ratio of net investment
income/(loss) to average
net assets (1.87)% (0.47)% 0.58% 0.04% 0.42%+
Net investment income/(loss) before
deferral
of fees by Manager $ (0.44) $ (0.09) $ 0.12 $ (0.01) $ 0.02
Portfolio turnover rate 181% 115% 151% 158% 106%
Expense ratio including interest
and tax expenses 2.73% 1.76% 1.81% -- --
Expense ratio before deferral of
fees by
Manager, including interest and tax
expenses 2.76% 1.76% 1.81% 1.92% 2.11%+
Expense ratio excluding interest
and tax expenses 1.80% 1.73% 1.80% 1.82% 1.80%+
International and Global Equity Funds
Global Long-Short Fund
Fiscal Year Ended Fiscal Year Ended
June 30, March 31,
2000 1999(f)(g) 1999## 1998(e)##
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - Beginning of Period $ 19.65 $ 16.47 $ 12.70 $ 10.00
Net investment income/(loss) (0.60) (0.06) (0.05) 0.02
Net realized and unrealized
gain/(loss)
on investments 13.74 3.24 4.92 2.68
Net increase/(decrease) in net
assets
resulting from investment operations 13.14 3.18 4.87 2.70
Distributions:
Dividends from net investment
income -- -- -- --
Dividends 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 $ 30.80 $ 19.65 $ 16.47 $ 12.70
====================================================================================================================================
Total Return** 67.54% 19.61% 39.87% 27.20%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $ 368,301 $ 216,300 $ 83,638 $ 16,579
Ratio of net investment
income/(loss) to average
net assets (1.92)% (2.30)%+ (0.35)% 0.65%+
Net investment income/(loss) before
deferral
of fees by Manager $ (0.60) $ (0.06) $ (0.09) $ (0.05)
Portfolio turnover rate 204% 43% 226% 84%
Expense ratio including interest
and tax expenses 3.91% 4.18%+ 3.40% 2.78%+
Expense ratio before deferral of
fees by
Manager, including interest and tax
expenses 3.91% 4.61%+ 3.79% 5.19%+
Expense ratio excluding interest
and tax expenses 2.06% 2.35%+ 2.35% 2.35%+
<FN>
(d) The Global 20 Portfolio's Class R shares commenced operations on October 2,
1995.
(e) The Global Long-Short Fund commenced operations on December 31, 1997.
(f) On January 29, 1999, the Global Long-Short Fund's Class R shares were
issued in exchange for Class A shares.
(g) The Global Long-Short Fund changed its year end from March 31 to June 30.
** 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
results of operations.
</FN>
</TABLE>
65
<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: 2000 1999 1998## 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $26.73 $22.88 $19.61 $18.05 $15.42
Net investment income/(loss) (0.35) 0.01 (0.17) (0.25) (0.20)
Net realized and unrealized gain/(loss)
on investments 14.04 6.35 7.19 2.72 2.83
Net increase/(decrease) in net assets
resulting from investment operations 13.69 6.36 7.02 2.47 2.63
Distributions:
Dividends from net investment income -- -- -- -- --
Dividends 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 -- -- -- -- --
Total distributions (6.25) (2.51) (3.75) (0.91) --
Net Asset Value - End of Period $34.17 $26.73 $22.88 $19.16 $18.05
====================================================================================================================================
Total Return** 51.53% 31.66% 45.45% 14.43% 17.06%
Ratios to Average Net Assets/ Supplemental Data
Net assets, end of Period (in 000s) $498,516 $354,730 $267,113 $153,995 $206,671
Ratio of net investment income/(loss) to
average net assets (1.01)% 0.02% (0.85)% (1.05)% (1.01)%
Net investment income/(loss) before deferral
of fees by Manager $(0.35) $0.01 $(0.17) $(0.27) $(0.22)
Portfolio turnover rate 186% 146% 80% 76% 104%
Expense ratio including interest and tax
expenses 1.49% 1.69% 1.93% -- 2.01%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.49% 1.69% 1.93% 2.00% 2.11%
Expense ratio excluding interest and tax
expenses 1.47% 1.68% 1.90% 1.91% 1.90%
<FN>
** Total return represents aggregate total return for the periods indicated.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
66
<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: 2000## 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $10.24 $9.86 $16.85 $14.19 $13.17
Net investment income/(loss) (0.12) 0.92 0.07 0.07 0.08
Net realized and unrealized gain/(loss)
on investments 1.92 (0.54) (6.58) 2.66 0.94
Net increase/(decrease) in net assets
resulting from investment operations 1.80 0.38 (6.51) 2.73 1.02
Distributions:
Dividends from net investment income -- -- (0.15) (0.07) --
Dividends in excess of net investment income -- -- -- -- --
Distributions from net realized capital
gains -- -- (0.33) -- --
Distributions in excess of net realized
capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions -- -- (0.48) (0.07) --
Net Asset Value - End of Period $12.04 $10.24 $9.86 $16.85 $14.19
====================================================================================================================================
Total Return** 17.58% 3.85% (39.20)% 19.34% 7.74%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $290,505 $344,907 $758,911 $1,259,457 $994,378
Ratio of net investment income/(loss) to
average
net assets (1.03)% 0.01% 0.55% 0.48% 0.58%
Net investment income/(loss) before deferral
of fees by Manager $(0.13) $0.96 $0.07 -- --
Portfolio turnover rate 113% 86% 97% 83% 110%
Expense ratio including interest and tax
expenses 2.29% 2.05% 1.65% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.45% 2.15% 1.65% -- --
Expense ratio excluding interest and tax
expenses 1.90% 1.90% 1.60% 1.67% 1.72%
<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
results of operations.
</FN>
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
Emerging Markets 20 Portfolio (h)
Fiscal Year Three Months Fiscal Year Ended
Selected Per-Share Data for the Year or Period Ended Ended June 30, March 31, March 31,
Ended: June 30, 2000 1999(j) 1999## 1998(i)##
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $13.15 $9.63 $11.43 $10.00
Net investment income/(loss) 0.19 0.04 0.12 0.27
Net realized and unrealized gain/(loss)
on investments 3.47 3.48 (1.76) 1.16
Net increase/(decrease) in net assets
resulting from investment operations 3.66 3.52 (1.64) 1.43
Distributions:
Dividends from net investment income (0.16) -- (0.16) --
Dividends in excess of net investment
income (0.08) -- -- --
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 $16.57 $13.15 $9.63 $11.43
====================================================================================================================================
Total Return** 27.91% 36.55% (14.04)% 14.40%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $4,725 $2,551 $1,655 $1,789
Ratio of net investment income/(loss) to
average
net assets 0.66% 0.05%+ 1.24% 10.46%+
Net investment income/(loss) before deferral
of fees by Manager $(0.79) $(0.10) $(0.52) (0.07)%
Portfolio turnover rate 264% 200% 437% 71%
Expense ratio including interest and tax
expenses 1.62% 1.73%+ 2.10% 2.10%+
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 6.15% 8.82%+ 8.68% 15.34%+
Expense ratio excluding interest and tax
expenses 1.60% 1.73%+ 2.10% 2.10%+
<FN>
(h) Formerly called Emerging Markets Focus Fund.
(i) The Emerging Markets 20 Portfolio commenced operations on December 31,
1997.
(j) For the period April 1, 1999, to June 30, 1999.
** 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
results of operations.
</FN>
</TABLE>
68
<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: 2000 1999 1998 1997(k)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $12.21 $6.18 $18.91 $12.00
Net investment income/(loss) (0.68) (0.01) 0.13 (0.01)
Net realized and unrealized gain/(loss)
on investments (0.81) 6.04 (11.74) 6.95
Net increase/(decrease) in net assets
resulting from investment operations (1.49) 6.03 (11.61) 6.94
Distributions:
Dividends from net investment income (0.46) (0.00)# (0.17) --
Dividends in excess of net investment income (0.18) -- -- --
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) (0.00)# (1.12) (0.03)
Net Asset Value - End of Period $10.08 $12.21 $6.18 $18.91
====================================================================================================================================
Total return** (12.56)% 97.44% (63.45)% 57.80%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $24,843 $63,196 $24,608 $68,095
Ratio of net investment income/(loss) to average
net assets (0.85)% (0.35%) 0.22% (0.42)%+
Net investment income/(loss) before deferral
of fees by Manager $(0.30) $(0.03) $(0.08) $(0.02)
Portfolio turnover rate 64% 233% 154% 72%
Expense ratio including interest and tax expenses 2.12% 2.19% 1.91% 2.20%+
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 3.09% 2.89% 2.27% 2.69%+
Expense ratio excluding interest and tax expenses 1.90% 1.90% 1.90% 1.80%+
<FN>
(k) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed-Income and Money Market Funds
Total Return Bond Fund Short Duration Government Bond Fund
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
Selected Per-Share Data for the Year
or Period Ended: 2000 1999 1998(l) 2000 1999 1998 1997## 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $11.66 $12.44 $12.00 $10.04 $10.14 $9.99 $9.92 $9.95
Net investment income/(loss) 0.77 0.73 0.72 0.58 0.53 0.57 0.59 0.60
Net realized and unrealized
gain/(loss)
on investments (0.20) (0.35) 0.56 (0.14) (0.05) 0.16 0.07 (0.04)
Net increase/(decrease) in net
assets
resulting from investment operations 0.57 0.38 1.28 0.44 0.48 0.73 0.66 0.56
Distributions:
Dividends from net investment
income (0.75) (0.73) (0.72) (0.57) (0.51) (0.56) (0.59) (0.59)
Dividends in excess of net
investment income -- (0.01) -- (0.01) (0.02) -- (0.00)# (0.00)#
Distributions from net realized
capital gains -- (0.42) (0.12) -- -- (0.02) -- --
Distributions in excess of net
realized capital gains (0.15) -- (0.00)# -- (0.05) -- -- --
Distributions from capital -- -- -- -- -- -- -- --
Total distributions (0.90) (1.16) (0.84) (0.58) (0.58) (0.58) (0.59) (0.59)
Net Asset Value - End of Period $11.33 $11.66 $12.44 $9.90 $10.04 $10.14 $9.99 $9.92
====================================================================================================================================
Total Return** 4.96% 3.20% 10.92% 4.55% 4.82% 7.56% 6.79% 5.74%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $28,112 $38,476 $77,694 $171,879 $154,365 $66,357 $47,265 $22,681
Ratio of net investment
income/(loss) to average
net assets 6.78% 5.88% 5.81% 5.84% 5.21% 5.83% 5.87% 5.88%
Net investment income/(loss) before
deferral
of fees by Manager $0.75 $0.72 $0.71 $0.56 $0.48 $0.51 $0.54 $0.52
Portfolio turnover rate 176% 158% 390% 188% 199% 502% 451% 350%
Expense ratio including interest and
tax expenses 0.80% 1.16% 1.29% 1.11% 1.35% 1.15% 1.55% 1.55%
Expense ratio before deferral of
fees by
Manager, including interest and tax
expenses 1.13% 1.25% 1.34% 1.61% 1.85% 1.73% 2.05% 2.31%
Expense ratio excluding interest and
tax expenses 0.70% 0.70% 0.70% 0.63% 0.62% 0.28% 0.60% 0.60%
<FN>
(l) 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
results of operations.
</FN>
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed-Income and Money Market Funds
Government Money Market Fund
Fiscal Year Ended June 30,
Selected Per-Share Data for the Year or Period Ended: 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<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) 0.054 0.047 0.052 0.049 0.052
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 0.054 0.047 0.052 0.049 0.052
Distributions:
Dividends from net investment income (0.054) (0.047) (0.052) (0.049) (0.052)
Dividends in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Total distributions (0.054) (0.047) (0.052) (0.049) (0.052)
Net Asset Value - End of Period $1.00 $1.00 $1.00 $1.00 $1.00
=======================================================================================================================
Total Return** 5.49% 4.81% 5.27% 5.03% 5.28%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $794,632 $575,387 $724,619 $473,154 $439,423
Ratio of net investment income/(loss) to average
net assets 5.41% 4.71% 5.15% 4.93% 5.17%
Net investment income/(loss) before deferral of
fees by Manager $0.054 $0.047 $0.052 $0.049 $0.050
Portfolio turnover rate -- -- -- -- --
Expense ratio including interest and tax expenses 0.46% 0.50% 0.53% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.46% 0.50% 0.48% 0.62% 0.74%
Expense ratio excluding interest and tax expenses 0.46% 0.50% 0.53% 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>
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<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: 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $12.67 $12.86 $12.53 $12.23 $12.04
Net investment income 0.51 0.49 0.51 0.53 0.54
Net realized and unrealized
gain/(loss)
on investments (0.04) (0.16) 0.33 0.30 0.19
Net increase/(decrease) in net
assets resulting from investment
operations 0.47 0.33 0.84 0.83 0.73
Distributions:
Dividends from net investment
income (0.52) (0.46) (0.51) (0.53) (0.54)
Dividends in excess of net
investment income -- (0.03) -- -- --
Distributions from net realized
capital gains -- (0.03) -- -- --
Distributions in excess of net
realized capital gains -- (0.00)# -- -- --
Total Distributions (0.52) (0.52) (0.51) (0.53) (0.54)
Net Asset Value - End of Period $12.62 $12.67 $12.86 $12.53 $12.23
=======================================================================================================================
Total Return** 3.83% 2.71% 6.85% 6.91% 6.11%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $27,405 $41,017 $35,667 $21,681 $13,948
Ratio of net investment income to
average net assets 4.14% 3.93% 4.03% 4.27% 4.34%
Net investment income/(loss) before
deferral of fees by Manager $0.50 $0.48 $0.44 $0.47 $0.43
Portfolio turnover rate 49% 184% 42% 26% 58%
Expense ratio including interest
and tax expenses 0.70% 0.69% 0.69% 0.68% 0.61%
Expense ratio before deferral of
fees by Manager, including interest
and tax expenses 1.19% 1.19% 1.19% 1.18% 1.43%
Expense ratio excluding interest
and tax expenses 0.70% 0.69% 0.68% -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
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: 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
<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 0.027 0.026 0.029 0.029 0.030
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 0.027 0.026 0.029 0.029 0.030
Distributions:
Dividends from net investment income (0.027) (0.026) (0.029) (0.029) (0.030)
Dividends in excess of net
investment income -- -- -- -- --
Distributions from net realized
capital gains -- -- -- -- --
Distributions in excess of net
realized capital gains -- -- -- -- --
Total Distributions (0.027) (0.026) (0.029) (0.029) (0.030)
Net Asset Value - End of Period $1.00 $1.00 $1.00 $1.00 $1.00
=================================================================================================================
Total Return** 2.72% 2.59% 3.00% 2.95% 3.03%
Ratios to Average Net
Assets/Supplemental Data
Net assets, end of period (in 000s) $378,819 $292,901 $187,216 $118,723 $98,134
Ratio of net investment income to
average net assets 2.69% 2.55% 2.96% 2.91% 2.99%
Net investment income/(loss) before
deferral of fees by Manager $0.023 $0.021 $0.029 $0.028 $0.028
Portfolio turnover rate -- -- -- -- --
Expense ratio including interest and
tax expenses 0.58% 0.58% 0.58% 0.58% 0.59%
Expense ratio before deferral of fees
by Manager, including interest and
tax expenses 0.58% 0.61% 0.68% 0.73% 0.80%
Expense ratio excluding interest and
tax expenses 0.58% 0.58% 0.58% -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
ss. Amount represents less than $0.001 per share.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed-Income and Money Market Funds
Federal Tax-Free Money Fund
Fiscal Year Ended June 30,
Selected Per-Share Data for the Year or Period Ended: 2000 1999 1998 1997(m)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $1.00 $1.00 $1.00 $1.00
Net investment income 0.032 0.028 0.031 0.032
Net realized and unrealized gain/(loss)
on investments 0.000ss. 0.000ss. 0.000ss. 0.000ss.
Net increase in net assets resulting
from investment operations 0.032 0.028 0.031 0.032
Distributions:
Dividends from net investment income (0.032) (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 (0.032) (0.028) (0.31) (0.032)
Net Asset Value - End of Period $1.00 $1.00 $1.00 $1.00
============================================================================================================================
Total Return** 3.25% 2.82% 3.12% 3.26%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of period (in 000s) $147,838 $116,341 $117,283 $114,197
Ratio of net investment income/(loss) to average
net assets 3.21% 2.80% 3.08% 3.24%+
Net investment income/(loss) before deferral of
fees by Manager $0.030 $0.026 $0.031 $0.030
Portfolio turnover rate -- -- -- --
Expense ratio including interest and tax expenses 0.60% 0.60% 0.60% 0.33%+
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.77% 0.80% 0.81% 0.69%+
Expense ratio excluding interest and tax expenses 0.60% 0.60% 0.60% --
<FN>
(m) 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>
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<PAGE>
<TABLE>
[table]
<CAPTION>
Investment Options
To open a new account, complete and mail the New Account application included with this prospectus ($2,500 minimum for regular
accounts and $1,000 for IRAs), or complete an application online by accessing www.montgomeryfunds.com ($1,000 minimum).
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Trade requests received after 1:00 P.M. Pacific time (4:00 P.M. Once an account is established, you can:
eastern time) will be executed at the following business day's closing
price. Once a trade is placed, it may not be altered or canceled. o Buy, sell or exchange shares by phone
Contact The Montgomery Funds at
Checks should be made payable to: 800.572.FUND [3863].
The Montgomery Funds
Press (1) for a shareholder service representative.
The minimum initial investment for each Fund is $2,500 ($1,000 for Press (2) for the automated Montgomery Star System.
IRAs), unless you use an application printed from
www.montgomeryfunds.com, in which case the minimum is just $1,000. The o Buy, sell or exchange shares online Go to
minimum subsequent investment is $100. www.montgomeryfunds.com. Follow online
instructions to enable this service.
o 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
o Buy or sell shares by wiring funds
To: State Street Bank and 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>
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<PAGE>
ACCOUNT INFORMATION
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in The Montgomery Funds. The minimum initial
investment for each Fund is $2,500 ($1,000 for IRAs) unless you use an
application from our Web site at www.montgomeryfunds.com or exchange into a Fund
online. In that case, the minimum is just $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 of $1,000 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:
o By Mail Send your signed, 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 on a bank located in the United States.
Dividends do not accrue until your check has cleared. 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.
o 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:
State Street Bank and 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.
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<PAGE>
o By Phone To make an initial investment by phone, you must have been a
current Montgomery shareholder for at least 30 days. Shares for Individual
Retirement Accounts (IRAs) may not be purchased by phone. Your purchase of a new
Fund must meet its investment minimum and is limited to the total value of your
existing accounts or $10,000, whichever is greater. To complete the transaction,
we must receive payment within three business days. We reserve the right to
collect any losses from any of your accounts if we do not receive payment within
that time.
o 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 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 provided in
the Statement of Additional Information.
o 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
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<PAGE>
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.
o 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.
o 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.
78
<PAGE>
<TABLE>
ACCOUNT INFORMATION
[Table]
www.montgomeryfunds.com
Manage your account(s) online.
<CAPTION>
<S> <C>
Our Account Access area offers free, secure, around-the-clock access to your Montgomery Funds account(s).
At www.montgomeryfunds.com shareholders can:
o Check current account balances o View statements
o Buy, exchange or sell shares o Order duplicate statements and tax forms
o View the most recent account activity and up to 160 records o View tax summaries
of account history within the past two years
o Change address of record
o Reorder checkbooks
Access your account(s) online today: Simply click on the Account Access tab and follow the simple steps to create a secure Personal
Identification Number (PIN). It takes only a minute.
For your protection this secure area of our site requires the use of browsers with 128-bit encryption. If you are not sure what
level of security your browser supports, click on our convenient browser check.
[clipart]
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</TABLE>
79
<PAGE>
Buying Additional Shares
o 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 a 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.
o By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a Fund you currently own or to invest in a new Fund,
call 800.572. FUND [3863]. Shares for IRAs may not be purchased by phone.
Telephone purchases can be made for up to five times your account value as of
the previous day.
We must receive payment for your purchase within three business days of
your request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account)
o Send us a check by overnight or second-day courier service
o Instruct your bank to wire money to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page __)
o 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 within two days of your purchase.
o By Wire There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page __).
Exchanging Shares
You may exchange Class R shares in one Fund for Class R shares in another in
accounts with the same registration, Taxpayer Identification Number and address.
There is a $100 minimum to exchange into a Fund you currently own and a $1,000
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
o We will process your exchange order at the next-calculated NAV.
o 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.
o 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.
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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.
o 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.
o 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.
o 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.
Redemption proceeds from shares purchased by check or bank transfer may be
delayed 15 calendar days to allow the check or transfer to clear. 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:
o For shares sold by wire, a $10 wire transfer fee that will be deducted
directly from the proceeds.
o For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission
(SEC), we reserve the right to suspend redemptions under extraordinary
circumstances.
Shares can be sold in several ways:
o 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 in the same way your account
is registered. If you have a joint account, all accountholders must sign the
letter.
If you want the proceeds to go to a party other than the account
owner(s) or your predesignated bank account, or if the dollar amount of your
redemption exceeds $50,000, you must obtain a signature guarantee (not a
notarization) available from many commercial banks, savings associations, stock
brokers and other National Association of Securities Dealers (NASD) member
firms.
If you want to wire your redemption proceeds but do not have a
predesignated bank account, include a preprinted voided check or deposit slip.
If you do not have a preprinted check, please send a signature-guaranteed letter
along with your bank instructions. The minimum wire amount is $500. Wire
charges, if
81
<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 4:00 P.M. Pacific time.
Shareholders can get information
or perform transactions
around-the-clock through the
Montgomery Star System or
www.montgomeryfunds.com.
o 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. Proceeds may not be available until your check or
bank transfer clears, which may take up to 15 days after the purchase date.
Checkwriting is not available for assets 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.
o By Internet or 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 next 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.
o Redemption Fee The redemption fees for the U.S. Equity Funds and the
International and 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.
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 servicing fee at an
annual rate of up to 0.25% of the Fund's
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<PAGE>
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 not for tracking uncashed checks or
determining why checks are uncashed. If your check is returned to us by the U.S.
Postal Service or other delivery service, we will hold it on your behalf for a
reasonable period of time. We will not invest the proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify The
Montgomery 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
Internet or telephone transaction privileges.
The shares you purchase over the Internet 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 instructions
that we reasonably believe to be genuine. We use the following safeguards to
ensure that the instructions we receive are accurate and authentic:
o Recording certain calls
o Requiring an authorization number or other personal information not likely
to be known by others
o Sending a transaction confirmation to the investor
83
<PAGE>
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 you 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 that all redemption requests made during this period 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:
o Using the automated Star System
o Via overnight courier
o 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 when using an online
application. Otherwise it is
$2,500 ($1,000 for IRAs). 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.
84
<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 tax, 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 Meet Montgomery Guide, which includes more
information about buying, exchanging and selling shares in The Montgomery Funds.
It also describes in more detail useful tools for investors such as the
Montgomery Star System and online transactions.
During the year we will also send you the following communications:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter (also
available online)
o Annual and semiannual reports, mailed approximately 60 days after June 30
and December 31
o 1099 tax form, sent by January 31
o 5498 tax form, sent by May 31
o 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.
85
<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.
State Street Bank and Trust Company (formerly 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 Money Declared daily and paid monthly on Declared and paid in the last
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 Fund's
appreciation.
One of best ways to stay informed about your Montgomery account(s) is to visit
www.montgomeryfunds.com daily.
86
<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.
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].
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.
Corporate Headquarters:
The MONTGOMERY Funds
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest wisely.(R)
---------------------------
800.572.FUND [3863]
www.montgomeryfunds.com
---------------------------
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/00 ___
87
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY BALANCED FUND
AND
OTHER SERIES OF ANOTHER REGISTRANT
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 2000
P - Class
The Montgomery Funds(SM)
U.S. Equity Funds
Growth Fund
Small Cap Fund
Balanced Fund
International & Global Equity Funds
International Growth Fund
Global 20 Portfolio
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 has 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 4:00 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 Growth Fund....................................................
Montgomery Small Cap Fund.................................................
Montgomery Balanced Fund..................................................
International and Global Equity Funds
Montgomery International Growth Fund......................................
Montgomery Global 20 Portfolio............................................
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.............................
The Euro: Single European Currency........................................
Defensive Investments.....................................................
Portfolio Turnover........................................................
Additional Benchmark Information..........................................
Financial Highlights...........................................................
Account Information............................................................
What You Need To Know About Your Montgomery Account.......................
Becoming a Montgomery Shareholder.........................................
How Fund Shares Are Priced................................................
Buying Additional Shares..................................................
Exchanging Shares.........................................................
2
<PAGE>
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:
o Are not bank deposits
o 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
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in U.S. growth companies.
Under normal conditions, the Fund may invest in the stocks of 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 that are expected
to increase their sales and corporate earnings on a sustained basis. The Fund
leverages the strength of Montgomery's global research team, a centralized team
of analysts and portfolio managers that support the firm's equity investment
strategies through extensive, original, fundamental analysis. When evaluating
investment opportunities, we favor companies that have a visible three-year
growth plan, are reasonably valued relative to their peers, and demonstrate
evidence of business momentum as a catalyst for growth and share price
appreciation. The Fund seeks to be fully invested and well-diversified with
high-quality holdings across a broad range of sectors.
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.
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
------------------- ----------------- ----------------
23.49% 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 9/30/00: -0.28% 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 reinvesting dividends.
<CAPTION>
<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 0.41%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.66%
<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
-----------------------------------------------------
$168 $522 $900 $1,958
[clipart] [sidebar]
Portfolio Management
Andrew Pratt, CFA
For more details see pages___
For financial highlights
see page ___
5
<PAGE>
Small Cap Fund | MNSCX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in rapidly growing U.S. small-cap companies.
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 $2 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:
o Gain market share within their industries
o Deliver consistently high profits to shareholders
o Increase their corporate earnings each quarter
o 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.
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 21.26% 12.84%+
-------------------------------------------------------------------------------
+ Calculated from 6/30/96 1 Year Inception
(7/1/96)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -2.76% 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 reinvesting dividends.
<CAPTION>
<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 0.36%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.61%
<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
-----------------------------------------------------
$163 $507 $874 $1,904
[clipart][sidebar]
Portfolio Management
Stuart Roberts
Paul LaRocco, CFA
Cam Philpott, CFA
Charles Reed, CFA
For more details see pages ___
For financial highlights
see page ___
7
<PAGE>
Balanced Fund | MNAAX
Objective
o High total return consisting of capital appreciation and income
---------------------------------------------------------------------------
Principal Strategy [clipart]
Maintains a balanced allocation of stocks, bonds and money market securities.
The Fund's strategy is to maintain an exposure to stocks and bonds by investing
in the following underlying Funds:
o Montgomery Growth Fund - seeks long-term capital appreciation by investing
in U.S. growth companies
o Montgomery Total Return Bond Fund - seeks total return consisting of income
and capital appreciation by investing in investment grade bonds
o a Montgomery money market fund - seeks current income consistent with
liquidity and capital preservation by investing in money market eligible
U.S. government securities
The Fund's portfolio managers may also adjust the proportion of assets allotted
to the underlying portfolios in response to changing market conditions. In doing
so, the Fund's managers evaluate various market factors, including relative risk
and return, to help determine what they believe is an optimal allocation among
stocks, bonds and cash. The Fund's total equity exposure may range from 50 to
80% of its assets, and its bond exposure may range from 25 to 50% of its assets.
It may invest up to 20% of its assets in a Montgomery money market fund, hold
cash or cash equivalents and may invest directly in U.S. government securities.
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.
Principal Risks [clipart]
By investing a substantial portion of its assets in stock and bond mutual funds,
the Fund may expose you to certain risks that could cause you to lose money. The
value of the Fund's investments in the Montgomery Growth Fund, like investments
in any stock fund, will fluctuate on a daily basis with movements in the stock
market, as well as in response to the activities of the individual companies in
which 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 (-6.38%).
Balanced Fund 12.18% 12.34%
S&P 500 Index 21.04% 26.39%+
Lehman Brothers Aggregate Bond
Index -0.82% 5.20%+
--------------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/3/96)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 3.20% 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 reinvesting dividends.
<CAPTION>
<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 0.62%
Underlying Fund Expenses 1.17%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.04%
Fee Reduction and/or Expense Reimbursement 0.49%
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 0.87% 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, 2000, was 2.04%, calculated based on the Fund's total operating expense
ratio (0.62%) plus a weighted average of the expense ratios of its
underlying Funds (1.17%) 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 1.55% (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
-----------------------------------------------------
$160 $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
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in medium- and large-cap companies in developed markets outside the U.S.
Under normal conditions, the Fund invests at least 65% of its total assets in
the common stocks of companies outside the U.S. 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 U.S., with no more
than 40% of its assets in any one country.
The Fund's portfolio managers seek well-managed companies that they believe will
be able to increase their sales and corporate earnings on a sustained basis.
From these prospective investments, the managers favor 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. The Fund's focus on mid-cap stocks may expose shareholders to
additional risks. Securities of mid-cap companies may trade less frequently and
in more-limited volume than those of larger, more mature companies. As a result,
mid-cap stocks--and therefore the Fund--may fluctuate significantly more in
value than larger-cap stocks and funds that focus on them.
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 2/29/96 1 Year Inception
(3/12/96)
++ See page __ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -17.77% 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 reinvesting dividends.
<CAPTION>
<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 0.82%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.17%
Fee Reduction and/or Expense Reimbursement 0.12%
Net Expenses 2.05%
<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
-----------------------------------------------------
$207 $641 $1,100 $2,369
[clipart] [sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see page ___
For financial highlights
see page ___
12
<PAGE>
Global 20 Portfolio | MNSFX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in a concentrated portfolio of companies in the U.S. and abroad.
The Fund normally concentrates its investments in 20 to 30 companies, but
generally not fewer than 20. In identifying investment opportunities, the Fund
may select companies in the United States or in any developed foreign and
emerging markets. 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,
however, are not subject to these limits.
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 under- or reasonably valued relative to their
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.
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, 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.
Because the Fund may invest up to 30% of its assets in any one developing
country, it may be exposed to additional risks. Foreign and emerging markets
tend to be more volatile than the U.S. due to economic and political instability
and regulatory conditions. This risk is heightened in 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.
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 Portfolio 43.80% 26.22%
MSCI World Index++ 25.34% 20.77%+
--------------------------------------------------------------------------------
+ Calculated from 11/30/96 1 Year Inception
(12/12/96)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -13.19% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
++See page __ for a description of this index.
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 reinvesting dividends.
<CAPTION>
<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 1.47%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.97%
Fee Reduction and/or Expense Reimbursement 0.03%
Net Expenses 2.94%
<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 2.05%. 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
-----------------------------------------------------
$296 $907 $1,543 $3,243
[clipart] [sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see pages ___
For financial highlights
see page ___
14
<PAGE>
Emerging Markets Fund | MNEMX
Objective
o Long-term capital appreciation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies based or operating primarily in developing economies
throughout the world.
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of companies of any size and based in the world's developing
economies. The Fund typically maintains investments in at least six countries at
all times, with no more than 35% of its assets in any single one of them. These
may include:
o Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
o Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
o Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
o The Middle East: Israel and Jordan
o 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++ 66.41% 2.64%+
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/12/96)
++See page __ for a description of this index.
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: -18.50% 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 reinvesting dividends.
<CAPTION>
<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 1.19%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 1.30%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.74%
Fee Reduction and/or Expense Reimbursement 0.16%
Net Expenses 2.58%
<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 2.15%. 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
-----------------------------------------------------
$260 $800 $1,366 $2,900
[clipart][sidebar]
Portfolio Management
Josephine Jimenez, CFA
Frank Chiang
For more details see pages ___
For financial highlights
see page ___
16
<PAGE>
Short Duration Government Bond Fund | MNSGX
Objective
o Current income consistent with capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in short-term U.S. government securities.
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 less than that of a three-year U.S. Treasury note.
Effective duration is a measure of the expected change in value from changes in
interest rates. Typically, a bond with a low duration means that its value is
less sensitive to changes in interest rates, and a bond with a high duration
means that its value is more sensitive to changes in 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 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. The Fund's investments in mortgage-related
debt securities may expose it to prepayment risks when interest rates fall
because the portfolio managers may have to reinvest the prepayment proceeds at
lower interest rates than those of its previous investments. 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 Q2 1999 (+0.29%).
Short Duration Gov't Bond Fund 2.31% 5.53%
Lehman Brothers Gov't.
Bond 1-3 Year Index 2.97% 5.52%+
--------------------------------------------------------------------------------
+ Calculated from 2/29/96 1 Year Inception
(3/12/96)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 5.04% 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.
<CAPTION>
<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 1.11%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.86%
Fee Reduction and/or Expense Reimbursement 0.50%
Net Expenses 1.36%**
<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 0.85%. 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
1.36%.
** Montgomery Asset Management enters into certain 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 0.48%. The
operating expense ratio excluding these interest charges is 0.88%.
</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
-----------------------------------------------------
$138 $430 $743 $1,629
[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
Objective
o Current income consistent with liquidity and capital preservation
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in money market eligible U.S. government securities.
Under normal conditions, the Fund invests at least 65% of its total assets in
short-term U.S. government securities, which may include bills, notes and bonds
issued by government agencies such as the Federal Home Loan Bank, 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 Q4 1999 (+1.25%) and the worst quarter was Q3 1998 (+0.86%).
Gov't Money Market Fund 4.58% 4.79%
Lipper U.S. Gov't Money
Market Fund Average 4.46% 4.79%+
--------------------------------------------------------------------------------
+ Calculated from 2/28/96 1 Year Inception
(3/12/96)
--------------------------------------------------------------------------------
2000 Return Through 9/30/00: 4.27% Average Annual Returns Through 12/31/99
--------------------------------------------------------------------------------
Seven-Day Yield as of 6/30/00: 6.22%
--------------------------------------------------------------------------------
Call 800.572.FUND [3863] between 6:00 A.M. and 4:00 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.
<CAPTION>
<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 0.31%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 0.16%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.72%
<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
-----------------------------------------------------
$73 $230 $400 $892
[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
o High current income exempt from federal and California state personal
income taxes
---------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in intermediate-maturity California municipal bonds.
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 manager invests in California municipal bonds that offer attractive
yields and are considered to be undervalued relative to issues of similar credit
quality and interest rate sensitivity. Although the Fund concentrates its assets
in California municipal bonds, the portfolio manager strives to diversify the
portfolio across sectors and issuers within that market. The portfolio manager
has 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
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 9/30/00: 6.32% 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.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee* 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses# 0.44%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.19%
Fee Reduction and/or Expense Reimbursement 0.24%
Net Expenses 0.95%
<FN>
* $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
++ Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 0.95%. This contract has a rolling
10-year term.
# Based on actual other expenses of another class of shares of the Fund not
subject to the Class P Rule 12b-1 fee.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$97 $302 $524 $1,163
[clipart][sidebar]
Portfolio Management
William Stevens
For more details see page ___
For financial highlights
see page ___
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
September 30, 2000, Montgomery Asset Management managed approximately $5 billion
on behalf of some 184,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] PAUL LAROCCO, CFA, Portfolio Manager
o Montgomery Small Cap Fund
Mr. LaRocco joined Montgomery in 2000, co-managing the Montgomery Small Cap
Fund. From 1998 to 2000, he was a senior portfolio manager at Founders Asset
Management, with responsibility for several large- and mid-cap growth funds.
Prior to that he was a portfolio manager for a number of small- and mid-cap
funds at Oppenheimer Funds from 1993 to 1998. 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 degree in Biological Sciences
from the University of California, Santa Barbara. He is a Chartered Financial
Analyst.
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
o Montgomery Small Cap Fund
Mr. Philpott joined Montgomery in 1991 as an analyst for the Small Cap Equity
team. He has co-managed the Montgomery Small Cap Fund since 1996. Prior to
Montgomery, Mr. Philpott served as a securities analyst with Boettcher &
Company, where he focused on the consumer and telecommunications industries.
Prior to that he worked as a general securities analyst at Berger Associates,
Inc., an investment management firm. 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. He is a
Chartered Financial Analyst.
[photo] ANDREW PRATT, CFA, Portfolio Manager and Principal
o Montgomery Growth Fund
o Montgomery Balanced Fund
Mr. Pratt joined Montgomery in 1993 as part of the Growth Equity team,
responsible for managing the Montgomery Growth Fund. In 2000 he became portfolio
manager of the Growth Fund and co-manager of the Balanced Fund. In addition, he
has been managing U.S. equity portfolios for institutional clients. Prior to
joining Montgomery, Mr. Pratt was with Hewlett-Packard as an equity analyst
covering a variety of industry groups. While at HP he also managed a portfolio
of small-cap technology companies and researched private placement and venture
capital investments. Mr. Pratt holds a Bachelor of Business Administration
degree from the University of Wisconsin and a Master of Science degree in
Finance from Boston College. He is a Chartered Financial Analyst.
[photo] CHARLES I. REED, CFA, Portfolio Manager
o Montgomery Small Cap Fund
Mr. Reed joined Montgomery in 1997 as an analyst for the Small Cap Equity team.
He has co-managed the Montgomery Small Cap Fund since 2000. From 1995 to 1997,
he was an equity analyst for Berger Associates, Inc., 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. From
1992 to 1995, Mr. Reed worked as a project manager for Lipper Analytical
Services, Inc., performing mutual fund analysis on performance and expenses. He
received a Bachelor of Science degree in Finance from Colorado State
23
<PAGE>
University and a Master of Science degree in Finance with an emphasis in
Financial Analysis from the University of Colorado. Mr. Reed is a Chartered
Financial Analyst.
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
o Montgomery Small Cap Fund
Mr. Roberts has been managing the Montgomery Small Cap Fund since its inception
in 1996 and has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery, he was vice president and portfolio manager at Founders
Asset Management, where he was responsible for managing 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
o Montgomery Global 20 Portfolio
Mr. Boich has co-managed the International Growth Fund since its launch in 1996
and the Global 20 Portfolio since 2000. Previously, Mr. Boich was vice president
and portfolio manager at The Boston Company Institutional Investors, Inc.,
responsible for the development and subsequent management of its flagship
international equity product. Prior to that 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
o Montgomery Global 20 Portfolio
Mr. Castro has co-managed the International Growth Fund since its inception in
1996 and the Global 20 Portfolio 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. Prior to that 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 in Pennsylvania and a Bachelor of Science degree in Chemical
Engineering from Simon Bolivar University in Venezuela. He is a Chartered
Financial Analyst.
[photo] FRANK CHIANG, Portfolio Manager and Principal
o Montgomery Emerging Markets Fund
Mr. Chiang joined Montgomery in 1996, co-managing the Montgomery Emerging
Markets Fund since its inception. From 1993 to 1996, he was with TCW Asia Ltd.,
Hong Kong, where he was a managing director and portfolio manager responsible
for TCW's Asian Equity strategy. Prior to that 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 degree from New York
University. He 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
Ms. Jimenez joined Montgomery in 1991 to launch the firm's emerging markets
discipline and has managed the Montgomery Emerging Markets Fund since it
launched in 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 and a Bachelor of Science degree
from New York University. She is a Chartered Financial Analyst.
U.S. Fixed-Income and Money Market Funds
[photo] MARIE CHANDOHA, Portfolio Manager and Principal
o Montgomery Short Duration Government Bond Fund
Ms. Chandoha joined Montgomery in 1999 as portfolio manager of the Montgomery
Short Duration Government Bond Fund. She began her investment career in 1983.
From 1996 to 1999, she was chief bond strategist at Goldman Sachs, where she
advised institutional clients on optimal asset allocation strategies in the U.S.
bond market. From 1994 to 1996, she was managing director of global fixed-income
and economics research at Credit Suisse First Boston, 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] WILLIAM STEVENS, Senior Portfolio Manager and Principal
o Montgomery Fixed-Income Funds
o Montgomery Balanced Fund
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income team since joining the firm in 1992, managing all Fixed-Income
Funds since their inceptions. He has also managed the Balanced Fund since its
launch in 1996. Prior to Montgomery he was responsible for starting the
collateralized mortgage obligation and asset-backed securities trading
department at Barclays de Zoete Wedd Securities. Previously, he had 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.
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 Growth Fund 1.00% 1.66%
Montgomery Small Cap Fund 0.99% 1.61%
Montgomery Balanced Fund 0.00% 1.55%
25
<PAGE>
LOWER OF TOTAL
MANAGEMENT EXPENSE LIMIT OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
-----------------------------------------------------------------------------------------------------------------
International and Global Equity Funds
Montgomery International Growth Fund 1.05% 1.90%
Montgomery Global 20 Portfolio 1.22% 2.01%
Montgomery Emerging Markets Fund 1.15% 2.15%
U.S. Fixed-Income and Money Market Funds
Montgomery Short Duration Government Bond Fund 0.27% 0.85%
Montgomery Government Money Market Fund 0.31% 0.72%
Montgomery California Tax-Free Intermediate Bond Fund 0.40% 0.95%
</TABLE>
26
<PAGE>
Additional Investment Strategies and Related Risks
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:
o Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
o The applicable conversion rate for contracts stated in the national
currency of an EU member
o How clearing and settlement systems needed to process transactions
reliably will work
o What the effects of the euro on European financial and commercial
markets will be
o How new legislation and regulations will affect 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: Growth, Small Cap, International Growth, and Balanced Funds and Global
20 Portfolio. See "Financial Highlights," beginning on page __, for each Fund's
historical portfolio turnover.
27
<PAGE>
Additional Benchmark Information
o The Lehman Brothers Aggregate Bond Index is composed of securities
from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index and Yankee Bond Index (all U.S.
dollar-denominated, SEC-registered, fixed- rate debt issued or
guaranteed by foreign governments, municipalities, government agencies
or international agencies). Total return comprises price appreciation/
depreciation and income as a percentage of the original investment. The
index is rebalanced monthly by market capitalization.
o The Morgan Stanley Capital International (MSCI) World Index measures
the performance of selected stocks in 22 developed countries. The index
is presented net of dividend withholding taxes.
o 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.
o 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.
o The Russell 2000 Index is a capitalization-weighted total return
index that includes the smallest 2,000 companies within the Russell
3000 Index.
o The Standard & Poor's (S&P) 500 Index covers 500 industrial, utility,
transportation and financial companies of the U.S. markets. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.
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,
2000, June 30, 1999, and June 30, 1998, were audited by PricewaterhouseCoopers
LLP. Their August 18, 2000, August 18, 1999, and August 14, 1998, reports appear
in the 2000, 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>
[table]
<CAPTION>
U.S. Equity Funds
Growth Fund
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 2000## 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) (0.07) 0.04 0.11 0.09 0.03
Net realized and unrealized gain/(loss)
on investments (0.07) 2.31 3.55 3.96 2.69
Net increase/(decrease) in net assets
resulting from investment operations (0.14) 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 $21.26 $24.51 $23.77 $23.12 $21.94
================================================================================================================================
Total return** 0.01% 11.62% 17.09% 20.41% 14.15%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $1,639 $219 $198 $212 $82
Ratio of net investment income/(loss) to average
net assets (0.32)% 0.21% 0.46% 0.44% 0.53%+
Net investment income/(loss) before deferral
of fees by Manager $(0.07) $0.04 $0.11 -- --
Portfolio turnover rate 79% 39% 54% 61% 118%
Expense ratio including interest and tax expense 1.66% 1.63% 1.45% 1.52% 1.60%+
Expense ratio before deferral of fees by
Manager including interest and tax expenses 1.66% 1.63% 1.45% -- --
Expense ratio excluding interest and tax expense 1.63% 1.60% 1.44% -- --
<FN>
(a) The Growth Fund's Class P shares commenced operations on January 12, 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
results of operations.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
U.S. Equity Funds
Small Cap Fund Balanced Fund
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED: 2000 1999## 1998## 1997(b) 2000 1999## 1998++ 1997## 1996(c)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $16.35 $20.53 $19.48 $21.73 $16.74 $19.11 $19.89 $19.33 $17.86
Net investment income/(loss) (0.28) (0.21) (0.20) (0.10) 0.58 0.44 1.62 0.43 0.09
Net realized and unrealized
gain/(loss)
on investments 5.78 (1.20) 4.22 1.13 (0.31) 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets
resulting from investment operations 5.50 (1.41) 4.02 1.03 0.27 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income -- -- -- -- (0.58) (0.89) (0.84) (0.34) --
Dividends in excess of net investment
income -- -- -- -- -- -- (0.74) -- --
Distributions from net realized
capital gains (0.00)# (2.07) (2.97) (3.28) (0.31) (1.68) (1.83) (1.66) --
Distributions in excess of net
realized capital gains -- (0.70) -- -- (0.13) (1.41) -- -- --
Total distributions (0.00)# (2.77) (2.97) (3.28) (1.02) (3.98) (3.41) (2.00) --
Net asset value - End of period $21.85 $16.35 $20.53 $19.48 $15.99 $16.74 $19.11 $19.89 $19.33
====================================================================================================================================
Total return** 33.95% (4.39)% 22.44% 5.74% 1.53% 11.15% 14.53% 14.35% 8.23%
Ratios to average net
assets/supplemental data
Net assets, end of period (in 000s) $27,927 $20,606 $21,548 $6,656 $2,803 $56 $71 $74 $43
Ratio of net investment income/(loss)
to average net assets (1.40)% (1.35)% (0.95)% (1.03)%+ 0.27% 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before
deferral of fees by Manager $(0.28) $(0.21) $(0.20) -- $0.09 $0.41 $1.59 $0.42 $0.08
Portfolio turnover rate 93% 71% 69% 59% 35% 36% 84% 169% 226%
Expense ratio including interest and
tax expense 1.61% 1.57% 1.49% 1.45%+ 0.40% 0.50% 0.51% 1.68% 1.67%+
Expense ratio before deferral of fees
by Manager, including interest and
tax expense 1.61% 1.57% 1.49% -- 0.87% 0.71% 0.56% 1.74% 1.80%+
Expense ratio excluding interest and
tax expense 1.61% 1.57% 1.49% -- 0.40% 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 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 Funds
International Growth Fund
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED: 2000## 1999 1998## 1997## 1996 (d)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $18.92 $18.64 $16.22 $15.31 $13.66
Net investment income/(loss) (0.25) 0.12 (0.01) 0.05 0.00#
Net realized and unrealized gain/(loss) on
investments 2.29 0.26 3.50 2.54 1.65
Net increase/(decrease) in net assets resulting
from investment operations 2.04 0.38 3.49 2.59 1.65
Distributions:
Dividends from net investment income -- -- -- -- --
Dividends 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 period $20.57 $18.92 $18.64 $16.22 $15.31
=========================================================================================================================
Total return** 10.67% 2.18% 23.03% 19.13% 12.08%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $9,352 $2,352 $5 $5 $1
Ratio of net investment income/(loss) to
average net assets (1.15)% 0.16% (0.03)% 0.32% 0.01%+
Net investment income/(loss) before deferral of
fees by Manager $(0.27) $0.12 $(0.08) $(0.06) $(0.05)
Portfolio turnover rate 207% 150% 127% 95% 239%
Expense ratio including interest and tax expense 2.05% 1.91% 1.91% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expense 2.17% 1.99% 2.38% 2.62% 3.16%+
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 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
results of operations.
</FN>
</TABLE>
31
<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: 2000## 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) (0.20) 0.00# 0.03 0.06 0.01
Net realized and unrealized gain/(loss)
on investments 1.94 0.31 (6.61) 2.58 1.56
Net increase/(decrease) in net assets
resulting from investment operations 1.74 0.31 (6.58) 2.64 1.57
Distributions:
Dividends from net investment income -- -- (0.12) (0.06) --
Dividends 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 $11.79 $10.05 $9.74 $16.77 $14.19
===============================================================================================================================
17.43% 3.08% (39.75)% 18.62% 12.44%
Total return**
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $6,531 $520 $413 $607 $2
Ratio of net investment income/(loss) to average
net assets (1.72)% (0.24)% 0.30% 0.23% 0.33%+
Net investment income/(loss) before deferral
of fees by Manager $(0.21) $0.01 $0.03 -- --
Portfolio turnover rate 113% 86% 97% 83% 110%
Expense ratio including interest and tax expense 2.58% 2.30% 1.90% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.74% 2.40% 1.90% -- --
Expense ratio excluding interest and tax expense 2.19% 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 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
results of operations.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
International and Global Equity Funds
Global 20 Portfolio
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 2000## 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) (0.47) (0.14) 0.09 (0.02)
Net realized and unrealized gain/(loss)
on investments 4.10 2.64 2.46 4.11
Net increase/(decrease) in net assets
resulting from investment operations 3.63 2.50 2.55 4.09
Distributions:
Dividends from net investment income -- (0.21) -- --
Dividends 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 $22.35 $21.83 $20.68 $19.98
============================================================================================================================
Total return** 16.91% 13.46% 14.12% 25.74%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $20 $55 $52 $9
Ratio of net investment income/(loss) to average
net assets (1.99)% (0.72)% 0.34% (0.21)%+
Net investment income/(loss) before deferral
of fees by Manager $(0.66) $(0.14) $0.09 $(0.03)
Portfolio turnover rate 181% 115% 151% 158%
Expense ratio including interest and tax expense 2.94% 2.01% 2.06% _
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.97% 2.01% 2.06% 2.17%+
Expense ratio excluding interest and tax expense 2.01% 1.98% 2.05% 2.07%+
<FN>
(f) The Global 20 Portfolio's Class P shares commenced operations on December
12, 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
results of operations.
</FN>
</TABLE>
33
<PAGE>
<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 ENDED: 2000 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) 0.56 0.41 0.61 0.59 0.16
Net realized and unrealized gain/(loss)
on investments (0.15) (0.06) 0.12 0.06 (0.05)
Net increase/(decrease) in net assets
resulting from investment operations 0.41 0.35 0.73 0.65 0.11
Distributions:
Dividends from net investment income (0.54) (0.41) (0.57) (0.58) (0.17)
Dividends in excess of net investment income (0.02) (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 (0.56) (0.47) (0.57) (0.58) (0.17)
Net asset value - End of period $9.88 $10.03 $10.15 $9.99 $9.92
==========================================================================================================================
4.18% 4.47% 7.34% 6.69% 1.12%
Total return**
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $4,087 $3,887 $3 $0 $1
Ratio of net investment income/(loss) to average
net assets 5.60% 4.96% 5.58% 5.62% 5.63%+
Net investment income/(loss) before deferral
of fees by Manager $0.54 $0.37 $0.55 $0.54 $0.14
Portfolio turnover rate 188% 199% 502% 451% 350%
Expense ratio including interest and tax expense 1.36% 1.60% 1.40% 1.80% 1.80%+
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.86% 2.10% 1.98% 2.30% 2.56%+
Expense ratio excluding interest and tax expense 0.88% 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 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
results of operations.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
U.S. Fixed-Income and Money Market Funds
Government Money Market Fund
Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 2000 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) 0.051 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 0.051 0.045 0.049 0.048 0.014
Distributions:
Dividends from net investment income (0.051) (0.045) (0.049) (0.048) (0.014)
Dividends in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Total distributions (0.051) $(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** 5.19% 4.54% 5.00% 4.88% 1.38%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $8,653 $1 -- -- $1
Ratio of net investment income/(loss) to average
net assets 5.53% 4.52% 4.90% 4.68% 4.91%+
Net investment income/(loss) before deferral of
fees by Manager $0.051 $0.045 $0.049 $0.048 $0.013
Portfolio turnover rate 5.53% -- --
Expense ratio including interest and tax expense 0.72% 0.75% 0.78% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 0.72% 0.75% 0.73% 0.87% 0.99%+
Expense ratio excluding interest and tax expense 0.72% 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 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 Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED: 2000(R) 1999(R) 1998(R) 1997(R) 1996(R)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $12.67 $12.86 $12.53 $12.23 $12.04
Net investment income 0.51 0.49 0.51 0.53 0.54
Net realized and unrealized gain/(loss)
on investments (0.04) (0.16) 0.33 0.30 0.19
Net increase/(decrease) in net assets
resulting from investment operations 0.47 0.33 0.84 0.83 0.73
Distributions:
Dividends from net investment income (0.52) (0.46) (0.51) (0.53) (0.54)
Dividends in excess of net investment
income -- (0.03) -- -- --
Distributions from net realized capital
gains -- (0.03) -- -- --
Dividends in excess of net realized
capital gains -- (0.00)# -- -- --
Total distributions (0.52) (0.52) (0.51) (0.53) (0.54)
Net asset value - End of period $12.62 $12.67 $12.86 $12.53 $12.23
==========================================================================================================
Total return** 3.83% 2.71% 6.85% 6.91% 6.11%
Ratios to average net assets/supplemental
data
Net assets, end of period (in 000s) $27,405 $41,017 $35,667 $21,681 $13,948
Ratio of net investment income to
average net assets 4.14% 3.93% 4.03% 4.27% 4.34%
Net investment income/(loss) before
deferral of fees by Manager $0.50 $0.48 $0.44 $0.47 $0.43
Portfolio turnover rate 49% 184% 42% 26% 58%
Expense ratio including interest and tax
expense 0.70% 0.69% 0.69% 0.68% 0.61%
Expense ratio before deferral of fees by
Manager, including interest and tax
expenses 1.19% 1.19% 1.19% 1.18% 1.43%
Expense ratio excluding interest and tax
expense 0.70% 0.69% 0.68% -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
36
<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 $2,500 ($1,000 for IRAs). The
minimum subsequent investment is $100.
Once an account is established, you can:
o 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.
o 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
o Buy or sell shares by wiring funds
To: State Street Bank and 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]
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 $2,500 ($1,000 for IRAs). 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 of $2,500 ($1,000 for IRAs) 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 reserves
the right to close or liquidate a Fund at their discretion.
Becoming a Montgomery Shareholder
To open a new account:
o By Mail Send your signed, 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.
Dividends do not accrue until your check has cleared. 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.
o 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:
State Street Bank and 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.
o 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
38
<PAGE>
value of your existing accounts or $10,000, whichever is greater. To complete
the transaction, we must receive payment within three business days. We reserve
the right to collect any losses from any of your accounts if we do not receive
payment within that time.
[sidebar]
Getting Started
To invest, complete the New Account application 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.
o 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.
o 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
39
<PAGE>
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.
o 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
o 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.
o By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a Fund you currently own or to invest in a new Fund,
call 800.572. FUND [3863]. Shares for IRAs may not be purchased by phone.
Telephone purchases can be made for up to five times your account value as of
the previous day.
We must receive payment for your purchase within three business days of
your request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account)
o Send us a check by overnight or second-day courier service
o Instruct your bank to wire money to our affiliated bank using the information
under "Becoming a Montgomery Shareholder" (page __)
o 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 $2,500
($1,000 for IRAs) 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
o We will process your exchange order at the next-calculated NAV.
o 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.
o 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.
o 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.
o 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.
o 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.
Redemption proceeds from shares purchased by check or bank transfer may be
delayed 15 calendar days to allow the check or transfer to clear. 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: 4
o For shares sold by wire, a $10 wire transfer fee that will be deducted
directly from the proceeds.
o For redemption checks requested by Federal Express, a $10 fee will be deducted
directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission
(SEC), we reserve the right to suspend redemptions under extraordinary
circumstances.
Shares can be sold in several ways:
o 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 4:00
P.M. Pacific time.
Shareholders can get information or perform transactions around-the-clock
through the Montgomery Star System or www.montgomeryasset.com.
o 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. Proceeds may not be available until your check or
bank transfer clears, which may take up to 15 days after the purchase date.
Checkwriting is not available for assets 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.
o 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
42
<PAGE>
you want proceeds to arrive at your bank on the next business day (subject to
bank cutoff times), there is a $10 fee. For more information about our telephone
transaction policies, see "Other Policies" below.
o Redemption Fee The redemption fees for the U.S. Equity Funds and the
International and 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 $2,500 ($1,000 for IRAs). 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
Montgomery 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:
o Recording certain calls
o Requiring an authorization number or other personal information not likely to
be known by others
o Sending a transaction confirmation to the investor
The Funds and our Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend
your telephone redemption privileges until 30 days after your notification, to
protect you and your account. We require all redemption requests made during
this period to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of volatile economic or market conditions. In these
cases you may want to transmit your redemption request:
o Using the automated Star System
o Via overnight courier
o By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If
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
The minimum initial investment is $2,500 ($1,000 for IRAs). 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 tax, 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 Meet Montgomery 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:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter
o Annual and semiannual reports, mailed approximately 60 days after June 30 and
December 31
o 1099 tax form, sent by January 31
o 5498 tax form, sent by May 31
o 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.
State Street Bank and Trust Company (formerly 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 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.
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].
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.
Corporate Headquarters:
The MONTGOMERY Funds
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest wisely.(R)
---------------------------
800.572.FUND [3863]
www.montgomeryasset.com
---------------------------
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/00
48
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS P SHARES OF
MONTGOMERY BALANCED FUND
AND
OTHER SERIES OF ANOTHER REGISTRANT
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 2000
Montgomery Asset Management, LLC
GE INVESTMENT RETIREMENT SERVICES
Small Cap Fund
Balanced Fund
Emerging Markets Fund
The Montgomery Funds has 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>
[Sidebar]
---------------------------
How to Contact Us
---------------------------
Montgomery Shareholder
Service Representatives
(800) 572-FUND [3863]
Available 6:00 A.M. to 4:00 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
Address General
Correspondence to:
The Montgomery Funds
101 California Street
San Francisco, CA
94111-9361
TABLE OF CONTENTS
U.S. Equity Funds
Montgomery Small Cap Fund.................................................
Montgomery Balanced Fund..................................................
International and Global Equity Fund
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 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:
o Are not bank deposits
o 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>
Small Cap Fund | MNSCX
Objective
o Long-term capital appreciation
--------------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in rapidly growing U.S. small-cap companies.
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 $2 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:
o Gain market share within their industries
o Deliver consistently high profits to shareholders
o Increase their corporate earnings each quarter
o 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.
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.
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
-------------- ----------- -----------
23.27% -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)
++See page __ for a description of this index.
<TABLE>
<CAPTION>
...................................................................................................................
2000 Return Through 9/30/00: -2.76% 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 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 0.36%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.61%
<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
-----------------------------------------------------
$163 $507 $874 $1,904
[clipart][sidebar]
Portfolio Management
Stuart Roberts
Paul LaRocco, CFA
Cam Philpott, CFA
Charles Reed, CFA
For more details see pages ___
For financial highlights
see page ___
5
<PAGE>
Balanced Fund | MNAAX
Objective
o High total return consisting of capital appreciation and income
--------------------------------------------------------------------------------
Principal Strategy [clipart]
Maintains a balanced allocation of stocks, bonds and money market securities.
The Fund's strategy is to maintain an exposure to stocks and bonds by investing
in the following underlying Funds:
o Montgomery Growth Fund - seeks long-term capital appreciation by investing
in U.S. growth companies
o Montgomery Total Return Bond Fund - seeks total return consisting of income
and capital appreciation by investing in investment grade bonds
o A Montgomery money market fund - seeks current income consistent with
liquidity and capital preservation by investing in money market eligible
U.S. government securities
The Fund's portfolio managers may also adjust the proportion of assets allotted
to the underlying portfolios in response to changing market conditions. In doing
so, the Fund's managers evaluate various market factors, including relative risk
and return, to help determine what they believe is an optimal allocation among
stocks, bonds and cash. The Fund's total equity exposure may range from 50 to
80% of its assets, and its bond exposure may range from 25 to 50% of its assets.
It may invest up to 20% of its assets in a Montgomery money market fund, hold
cash or cash equivalents and may invest directly in U.S. government securities.
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.
Principal Risks [clipart]
By investing a substantial portion of its assets in stock and bond mutual funds,
the Fund may expose you to certain risks that could cause you to lose money. The
value of the Fund's investments in the Montgomery Growth Fund, like investments
in any stock fund, will fluctuate on a daily basis with movements in the stock
market, as well as in response to the activities of the individual companies in
which 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.
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 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% 26.39%+
Lehman Brothers Aggregate Bond
Index++ -0.82% 5.20%+
--------------------------------------------------------------------------------
+ Calculated from 12/31/95 1 Year Inception
(1/3/96)
++See page __ for a description of this index.
<TABLE>
<CAPTION>
..................................................................................................................
2000 Return Through 9/30/00: 3.20% 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 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 0.62%
Underlying Fund Expenses 1.17%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.04%
Fee Reduction and/or Expense Reimbursement 0.47%
Net 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.
++In addition to the 0.87% 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,
2000, was 2.04%, calculated based on the Fund's total operating expense ratio
(0.62%) plus a weighted average of the expense ratios of its underlying Funds
(1.17%) 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 1.55% (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.
7
<PAGE>
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$159 $494 $853 $1,860
[clipart][sidebar]
Portfolio Management
Portfolio managers from
each underlying Fund
For more details see pages ___
For financial highlights
see page ___
8
<PAGE>
Emerging Markets Fund MNEMX
Objective
o Long-term capital appreciation
--------------------------------------------------------------------------------
Principal Strategy [clipart]
Invests in companies based or operating primarily in developing economies
throughout the world.
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of companies of any size and based in the world's developing
economies. The Fund typically maintains investments in at least six countries at
all times, with no more than 35% of its assets in any single one of them. These
may include:
o Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
o Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
o Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
o The Middle East: Israel and Jordan
o 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.
9
<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.
<TABLE>
<CAPTION>
...................................................................................................................
2000 Return Through 9/30/00: -18.50% 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 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 1.19%
Distribution/Service (12b-1) Fee 0.25%
Other Expenses 1.30%
--------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.74%
Fee Reduction and/or Expense Reimbursement 0.16%
Net Expenses 2.58%
<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 2.15%. 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
-----------------------------------------------------
$260 $800 $1,366 $2,900
[clipart][sidebar]
Portfolio Management
Josephine Jimenez, CFA
Frank Chiang
For more details see pages ___
For financial highlights
see page ___
10
<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
September 30, 2000, Montgomery Asset Management managed approximately $5 billion
on behalf of some 184,000 investors in The Montgomery Funds.
U.S. Equity Funds
[photo] PAUL LAROCCO, CFA, Portfolio Manager
o Montgomery Small Cap Fund
Mr. LaRocco joined Montgomery in 2000, co-managing the Montgomery Small Cap
Fund. From 1998 to 2000, he was a senior portfolio manager at Founders Asset
Management, with responsibility for several large- and mid-cap growth funds.
Prior to that he was a portfolio manager for a number of small- and mid-cap
funds at Oppenheimer Funds from 1993 to 1998. 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 degree in Biological Sciences
from the University of California, Santa Barbara. He is a Chartered Financial
Analyst.
[photo] JEROME "CAM" PHILPOTT, CFA, Portfolio Manager and Principal
o Montgomery Small Cap Fund
Mr. Philpott joined Montgomery in 1991 as an analyst for the Small Cap Equity
team. He has co-managed the Montgomery Small Cap Fund since 1996. Prior to
Montgomery, Mr. Philpott served as a securities analyst with Boettcher &
Company, where he focused on the consumer and telecommunications industries.
Prior to that he worked as a general securities analyst at Berger Associates,
Inc., an investment management firm. 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. He is a
Chartered Financial Analyst.
[photo] ANDREW PRATT, CFA, Portfolio Manager and Principal
o Montgomery Balanced Fund
Mr. Pratt joined Montgomery in 1993 as part of the Growth Equity team,
responsible for managing the Montgomery Growth Fund. In 2000 he became portfolio
manager of the Growth Fund and co-manager of the Balanced Fund. In addition, he
has been managing U.S. equity portfolios for institutional clients. Prior to
joining Montgomery, Mr. Pratt was with Hewlett-Packard as an equity analyst
covering a variety of industry groups. While at HP he also managed a portfolio
of small-cap technology companies and researched private placement and venture
capital investments. Mr. Pratt holds a Bachelor of Business Administration
degree from the University of Wisconsin and a Master of Science degree in
Finance from Boston College. He is a Chartered Financial Analyst.
[photo] CHARLES I. REED, CFA, Portfolio Manager
o Montgomery Small Cap Fund
Mr. Reed joined Montgomery in 1997 as an analyst for the Small Cap Equity team.
He has co-managed the Montgomery Small Cap Fund since 2000. From 1995 to 1997,
he was an equity analyst for Berger Associates, Inc., 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. From
1992 to 1995, Mr. Reed worked as a project manager for Lipper Analytical
Services, Inc., performing mutual fund analysis on performance and expenses. He
received a Bachelor of Science degree in Finance from Colorado State University
and a Master of Science degree in Finance with an emphasis in Financial Analysis
from the University of Colorado. Mr. Reed is a Chartered Financial Analyst.
11
<PAGE>
[photo] STUART ROBERTS, Senior Portfolio Manager and Principal
o Montgomery Small Cap Fund
Mr. Roberts has been managing the Montgomery Small Cap Fund since its inception
in 1996 and has specialized in small-cap growth investing since 1983. Prior to
joining Montgomery, he was vice president and portfolio manager at Founders
Asset Management, where he was responsible for managing 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
Mr. Chiang joined Montgomery in 1996, co-managing the Montgomery Emerging
Markets Fund. From 1993 to 1996, he was with TCW Asia Ltd., Hong Kong, where he
was a managing director and portfolio manager responsible for TCW's Asian Equity
strategy. Prior to that 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 degree from New York University. He is
fluent in three Chinese dialects: Mandarin, Shanghainese and Cantonese.
[photo] JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
o Montgomery Emerging Markets Fund
Ms. Jimenez joined Montgomery in 1991 to launch the firm's emerging markets
discipline and has managed the Montgomery Emerging Markets Fund since it
launched in 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 and a Bachelor of Science degree
from New York University. She is a Chartered Financial Analyst.
U.S. Fixed Income and Money Market Funds
[photo] WILLIAM STEVENS, Senior Portfolio Manager and Principal
o Montgomery Balanced Fund
Mr. Stevens began his investment career in 1984 and has directed Montgomery's
U.S. Fixed-Income team since joining the firm in 1992, managing all Fixed-Income
Funds since their inceptions. He has also managed the Balanced Fund since its
launch in 1996. Prior to Montgomery he was responsible for starting the
collateralized mortgage obligation and asset-backed securities trading
department at Barclays de Zoete Wedd Securities. Previously, he had 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.
<TABLE>
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
12
<PAGE>
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 0.99% 1.61%
Montgomery Balanced Fund 0.00% 1.55%
International and Global Equity Funds
Montgomery Emerging Markets Fund 1.15% 2.15%
</TABLE>
13
<PAGE>
Additional Investment Strategies and Related Risks
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:
o Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
o The applicable conversion rate for contracts stated in the national
currency of an EU member
o How clearing and settlement systems needed to process transactions
reliably will work
o What the effects of the euro on European financial and commercial markets
will be
o How new legislation and regulations will affect 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 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: Small Cap and Balanced
Funds. See "Financial Highlights," beginning on page __, for each Fund's
historical portfolio turnover.
Additional Benchmark Information
o The Lehman Brothers Aggregate Bond Index is composed of securities from
the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index and Yankee Bond Index (all
14
<PAGE>
U.S. dollar-denominated, SEC-registered, fixed- rate debt issued or
guaranteed by foreign governments, municipalities, government agencies or
international agencies). Total return comprises price appreciation/
depreciation and income as a percentage of the original investment. The
index is rebalanced monthly by market capitalization.
o The Morgan Stanley Capital International (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.
o The Russell 2000 Index is a capitalization-weighted total return index
that includes the smallest 2,000 companies within the Russell 3000 Index.
o The Standard & Poor's (S&P) 500 Index covers 500 industrial, utility,
transportation and financial companies of the U.S. markets. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.
15
<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,
2000, June 30, 1999, and June 30, 1998, were audited by PricewaterhouseCoopers
LLP. Their August 18, 2000, August 18, 1999, and August 14, 1998, reports appear
in the 2000, 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 Balanced Fund
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED: 2000 1999## 1998## 1997(a) 2000 1999## 1998++ 1997## 1996(b)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $16.35 $20.53 $19.48 $21.73 $16.74 $19.11 $19.89 $19.33 $17.86
Net investment income/(loss) (0.28) (0.21) (0.20) (0.10) 0.58 0.44 1.62 0.43 0.09
Net realized and unrealized gain/(loss)
on investments 5.78 (1.20) 4.22 1.13 (0.31) 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets
resulting from investment operations 5.50 (1.41) 4.02 1.03 0.27 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income -- -- -- -- (0.58) (0.89) (0.84) (0.34) --
Dividends in excess of net investment income -- -- -- -- -- -- (0.74) -- --
Distributions from net realized capital gains (0.00)# (2.07) (2.97) (3.28) (0.31) (1.68) (1.83) (1.66) --
Distributions in excess of net realized
capital gains -- (0.70) -- -- (0.13) (1.41) -- -- --
Total distributions (0.00)# (2.77) (2.97) (3.28) (1.02) (3.98) (3.41) (2.00) --
Net asset value - End of period $21.85 $16.35 $20.53 $19.48 $15.99 $16.74 $19.11 $19.89 $19.33
==================================================================================================================================
Total return** 33.95% (4.39)% 22.44% 5.74% 1.53% 11.15% 14.53% 14.35% 8.23%
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) 27,927 $20,606 $21,548 $6,656 $2,803 $56 $71 $74 $43
Ratio of net investment income/(loss) to
average net assets (1.40)% (1.35)% (0.95)% (1.03)%+ 0.27% 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before deferral
of fees by Manager (0.28) $(0.21) $(0.20) -- $0.09 $0.41 $1.59 $0.42 $0.08
Portfolio turnover rate 93% 71% 69% 59% 35% 36% 84% 169% 226%
Expense ratio including interest and tax
expense 1.61% 1.57% 1.49% 1.45+ 0.40% 0.50% 0.51% 1.68% 1.67%+
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.61% 1.57% 1.49% -- 0.87% 0.71% 0.56% 1.74% 1.80%+
Expense ratio excluding interest and tax
expense 1.61% 1.57% 1.49% -- 0.40% 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 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>
16
<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: 2000## 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) (0.20) 0.00# 0.03 0.06 0.01
Net realized and unrealized gain/(loss)
on investments 1.94 0.31 (6.61) 2.58 1.56
Net increase/(decrease) in net assets
resulting from investment operations 1.74 0.31 (6.58) 2.64 1.57
Distributions:
Dividends from net investment income -- -- (0.12) (0.06) --
Dividends 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 $11.79 $10.05 $9.74 $16.77 $14.19
===============================================================================================================================
17.43% 3.08% (39.75)% 18.62% 12.44%
Total return**
Ratios to average net assets/supplemental data
Net assets, end of period (in 000s) $6,531 $520 $413 $607 $2
Ratio of net investment income/(loss) to average
net assets (1.72)% (0.24)% 0.30% 0.23% 0.33%+
Net investment income/(loss) before deferral
of fees by Manager $(0.21) $0.01 $0.03 -- --
Portfolio turnover rate 113% 86% 97% 83% 110%
Expense ratio including interest and tax expense 2.58% 2.30% 1.90% -- --
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.74% 2.40% 1.90% -- --
Expense ratio excluding interest and tax expense 2.19% 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 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 results of
operations.
</FN>
</TABLE>
17
<PAGE>
[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.
--------------------------------------------------------------------------------
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 $2,500 ($1,000 for IRAs). The
minimum subsequent investment is $100.
Once an account is established, you can:
o 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.
o 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
o Buy or sell shares by wiring funds
To: State Street Bank and 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]
18
<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 $2,500 ($1,000 for IRAs). 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 of $2,500 ($1,000 for IRAs) 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 reserves
the right to close or liquidate a Fund at their discretion.
To open a new account:
o By Mail Send your signed, 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.
Dividends do not accrue until your check has cleared. 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.
o 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:
State Street Bank and 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.
o 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
19
<PAGE>
value of your existing accounts or $10,000, whichever is greater. To complete
the transaction, we must receive payment within three business days. We reserve
the right to collect any losses from any of your accounts if we do not receive
payment within that time.
[sidebar]
Getting Started
To invest, complete the New Account application 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. 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.
o 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.
20
<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.
21
<PAGE>
Buying Additional Shares
o 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.
o By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a Fund you currently own or to invest in a new Fund,
call 800.572.FUND [3863]. Shares for IRAs may not be purchased by phone.
Telephone purchases can be made for up to five times your account value as of
the previous day.
We must receive payment for your purchase within three business days of
your request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account)
o Send us a check by overnight or second-day courier service
o Instruct your bank to wire money to our affiliated bank using the information
under "Becoming a Montgomery Shareholder" (page __)
o 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 $2,500
($1,000 for IRAs) 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
o We will process your exchange order at the next-calculated NAV.
o 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.
o 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).
o 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.
o 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.
o 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.
22
<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.
Redemption proceeds from shares purchased by check or bank transfer may be
delayed 15 calendar days to allow the check or transfer to clear. 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:
o For shares sold by wire, a $10 wire transfer fee that will be deducted
directly from the proceeds
o For redemption checks requested by FedEx, 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:
o 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 4:00
P.M. Pacific time.
Shareholders can get information or perform transactions around-the-clock
through the Montgomery Star System or www.montgomeryfunds.com.
o 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 next business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies" below.
o 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.
23
<PAGE>
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum Fund account
balance of $2,500 ($1,000 for IRAs). 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
Montgomery 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.
24
<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:
o Recording certain calls
o Requiring an authorization number or other personal information not likely to
be known by others
o Sending a transaction confirmation to the investor
The Funds and our Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend
your telephone redemption privileges until 30 days after your notification, to
protect you and your account. We require all redemption requests made during
this period to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of volatile economic or market conditions. In these
cases you may want to transmit your redemption request:
o Using the automated Star System
o Via overnight courier
o By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If
25
<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
The minimum initial investment is $2,500 ($1,000 for IRAs). 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.
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 Meet Montgomery 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:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter
o Annual and semiannual reports, mailed approximately 60 days after June 30 and
December 31
o 1099 tax form, sent by January 31
o 5498 tax form, sent by May 31
26
<PAGE>
o 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.
State Street Bank and Trust Company (formerly Investors Fiduciary Trust
Company), also located in Kansas City, Missouri, assists DST Systems, Inc. with
certain recordkeeping and accounting functions for the Funds.
27
<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 Fund's appreciation.
28
<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.
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].
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.
Corporate Headquarters:
Montgomery Asset Management, LLC
101 California Street
San Francisco, CA 94111-9361
[Logo]
Invest wisely(R)
---------------------------
800.572.FUND [3863]
www.montgomeryfunds.com
---------------------------
SEC File Nos.: The Montgomery Funds 811-6011
The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/00
29
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS
FOR
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 2000
The Montgomery Funds II(SM)
MONTGOMERY INSTITUTIONAL SERIES:
International Growth Portfolio
The Montgomery Funds II has 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 Portfolio.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
[Sidebar]
----------------------------
How to Contact Us
----------------------------
Montgomery Institutional
Advisory Services
800.627.7933
Montgomery Web Site
www.montgomeryasset.com
Address General
Correspondence to:
The Montgomery Funds II
101 California Street
San Francisco, CA 94111-9361
-2-
<PAGE>
[Table of Contents]
MONTGOMERY INSTITUTIONAL SERIES:
International Growth Portfolio
TABLE OF CONTENTS
Objective.......................................................................
Principal Strategy..............................................................
Principal Risks.................................................................
Portfolio Management............................................................
Management Fees and Operating Expense Limits...............................
Additional Investment Strategies and Related Risks..............................
The Euro: Single European Currency.........................................
Defensive Investments......................................................
Portfolio Turnover.........................................................
Additional Benchmark Information...........................................
Financial Highlights............................................................
What You Need to Know About Your Montgomery Account.............................
How Portfolio Shares Are Priced............................................
Foreign Investors..........................................................
Investing in the Portfolio Through Financial Intermediaries.....................
Buying and Selling Shares Through Securities Brokers and
Benefit Plan Administrators................................................
Investing in the Portfolio Directly with Montgomery.............................
Opening a New Account....................................................
Buying Additional Shares.................................................
Exchanging Shares........................................................
Other Exchange Policies..................................................
Selling Shares...........................................................
Other Policies..................................................................
Minimum Account Balances...................................................
Expense Limitations........................................................
Uncashed Redemption Checks.................................................
In-kind Redemptions........................................................
Transaction Confirmation...................................................
Telephone Transactions.....................................................
Tax Withholding Information................................................
After You Invest...........................................................
-3-
<PAGE>
This prospectus contains important information about the investment objective,
strategy and risks of the Montgomery Institutional Series: International Growth
Portfolio that you should know before you invest. Please read it carefully and
keep it on hand for future reference.
Please be aware that the Portfolio:
o Is not a bank deposit
o Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Portfolio.
-4-
<PAGE>
International Growth Portfolio
Objective
o Long-term capital appreciation
Principal Strategy [clipart]
Invests in medium- and large-cap companies in developed markets outside the U.S.
Under normal conditions, the Portfolio invests at least 85% of its total net
assets in the stocks of companies outside the U.S. whose shares have a stock
market value (market capitalization) of more than $1 billion. The Portfolio
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 Portfolio
typically invests in at least three different countries outside the U.S., with
no more than 40% of its assets in any one country.
The Portfolio's managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis. From
these prospective investments, the managers favor 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 Portfolio's assets may be allocated
among countries in an attempt to take advantage of market trends. The
Portfolio's managers and analysts frequently travel to the countries in which
the Portfolio 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 Portfolio 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. The Portfolio's focus on mid-cap stocks may expose shareholders to
additional risks. Securities of mid-cap companies may trade less frequently and
in more-limited volume than those of larger, more mature companies. As a result,
mid-cap stocks--and therefore the Portfolio--may fluctuate significantly more in
value than larger-cap stocks and funds that focus on them.
By investing primarily in foreign stocks, the Portfolio 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 Portfolio
invests are denominated in foreign currencies, whose values may decline against
the U.S. dollar.
-5-
<PAGE>
--------------------------------------------------------------------------------
Past Portfolio Performance The bar chart on the left below shows the risks of
investing in the Portfolio and how the Portfolio's total return has varied from
year to year. The table on the right compares the Portfolio's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
--------------------------------------------------------------------------------
[bar chart]
1999
-------------------
26.77%
During the one-year period described above in the bar chart, the Portfolio's
best quarter was Q4 1999 (+28.81%) and the worst quarter was Q2 2000 (-11.35%).
Institutional International Growth Portfolio 26.77% 17.74%
MSCI EAFE Index* 27.30% 20.31%
--------------------------------------------------------------------------------
1 Year Inception
(6/30/98)
* See page 8 for a description of this index.
................................................................................
2000 Return Through 9/30/00: -15.24% 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 Portfolio. Montgomery does not impose any front-end or deferred
sales loads on this Portfolio.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee+ 1.50%
Annual Portfolio Operating Expenses (expenses that are deducted from
Portfolio assets)**
Management Fee++ 0.75%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.33%
--------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.08%
Fee Reduction and/or Expense Reimbursement 0.16%
Net Expenses 0.92%
+ Deducted from the net proceeds of shares redeemed (or exchanged) within one
year after purchase. Shareholders who have invested at least $2 million in
the Portfolio (less any prior redemptions) are not subject to the redemption
fee. $10 will be deducted from redemption proceeds sent by wire or overnight
courier.
** Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Portfolio's total annual operating
expenses (excluding interest and tax expenses) to 0.90%. This contract has a
rolling 10-year term.
++ The management fee of 0.75% will be reduced to 0.65% for accounts with assets
over $500 million.
Example of Portfolio expenses: This example is intended to help you compare the
cost of investing in the Portfolio 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
Portfolio's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$93 $293 $508 $1,128
[clipart][sidebar]
Portfolio Management
John Boich, CFA
Oscar Castro, CFA
For more details see page 7
For financial highlights
see page 9
-6-
<PAGE>
Portfolio Management
The investment manager of the Portfolio is Montgomery Asset Management, LLC.
Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank AG,
one of the largest publicly held commercial banks in Germany. As of September
30, 2000, Montgomery Asset Management managed approximately $5 billion on behalf
of some 184,000 investors in The Montgomery Funds. Montgomery may rely on the
expertise, research and resources of Commerzbank AG and its worldwide affiliates
in managing the Portfolio.
[photo] JOHN BOICH, CFA, Senior Portfolio Manager and Principal
Mr. Boich has co-managed the Montgomery International Growth Portfolio since its
inception in 1998. Prior to joining Montgomery in 1993, Mr. Boich was vice
president and portfolio manager at The Boston Company Institutional Investors,
Inc., responsible for the development and subsequent management of its flagship
international equity product. Prior to that 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
Mr. Castro has co-managed the Montgomery International Growth Portfolio since
its inception in 1998. Prior to joining Montgomery in 1993, 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. Prior to that 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 in Pennsylvania and a
Bachelor of Science degree in Chemical Engineering from Simon Bolivar University
in Venezuela. He is a Chartered Financial Analyst.
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 limit on total
operating expenses for the Portfolio. 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
MANAGEMENT EXPENSE LIMIT OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
................................ .................. .......................
Montgomery International
Growth Portfolio 0.65% 0.90%
-7-
<PAGE>
Additional Investment Strategies and Related Risks
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. Eleven of the 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:
o Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
o The applicable conversion rate for contracts stated in the national
currency of an EU member
o How clearing and settlement systems needed to process transactions
reliably will work
o What the effects of the euro on European financial and commercial
markets will be
o How new legislation and regulations will affect euro-related issues
These and other factors could cause market disruptions and affect the value of
your shares in the Portfolio in the event that 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), the Portfolio may invest up to
100% of its assets in cash for temporary defensive purposes. The Portfolio is
not required or expected to take such a defensive posture. But if used, such an
unlikely stance may help the Portfolio minimize or avoid losses during adverse
market, economic or political conditions. During such a period, the Portfolio
may not achieve its investment objective. For example, should the market advance
during this period, the Portfolio may not participate as much as it would have
if it had been more fully invested.
Portfolio Turnover
The Portfolio's managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Portfolio has owned that
security. Buying and selling securities generally involves some expense to the
Portfolio, such as commission paid to brokers and other transaction costs. By
selling a security, the Portfolio may realize taxable capital gains that it will
subsequently distribute to shareholders. Generally speaking, the higher the
Portfolio's annual portfolio turnover, the greater its brokerage costs and the
greater the likelihood that it will realize taxable capital gains. Increased
brokerage costs may adversely affect the Portfolio's performance. Also, unless
you are a tax-exempt investor or you purchase shares through a tax-exempt
investor or through a tax-deferred account, the distribution of capital gains
may affect your after-tax return. Annual portfolio turnover of 100% or more is
considered high. See "Financial Highlights" on page 9 for the Portfolio's
historical portfolio turnover.
-8-
<PAGE>
Additional Benchmark Information
o The Morgan Stanley Capital International (MSCI) Europe, Australasia and
Far East (EAFE) Index, a capitalization-weighted index, is composed of
21 developed market countries in Europe, Australasia and the Far East.
The returns are presented net of dividend withholding taxes.
-9-
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
Portfolio's performance for the periods shown.
The following selected per-share data and ratios for the periods ended June 30,
2000, and June 30, 1999, were audited by PricewaterhouseCoopers LLP.
Their August 18, 2000, and August 18, 1999, reports appear in the 2000 and 1999
Annual Reports of the Portfolio.
<TABLE>
The total return figures in the table represent the rate an investor would have
earned (or lost) on an investment in the Portfolio (assuming reinvestment of all
dividends and distributions).
[table]
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Montgomery Institutional Series:
International Growth Portfolio
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 2000## 1999(a)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value - beginning of period $10.18 $10.00
Net investment income/(loss) 0.01 0.08
Net realized and unrealized gain/(loss) on investments 1.41 0.10
Net increase/(decrease) in net assets
resulting from investment operations 1.42 0.18
Distributions:
Dividends from net investment income -- --
Dividends in excess of net investment income (0.01) --
Distributions from net realized capital gains (0.19) --
Distributions in excess of net realized capital gains -- --
Total distributions (0.20)
Net asset value - end of period $11.40 $10.18
===============================================================================================================
Total return** 13.91% 1.80%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $275,141 $148,831
Ratio of net investment income/(loss) to average net assets 0.12% 1.50%
Net investment income/(loss) before deferral of fees by
Manager $0.00# $0.07
Portfolio turnover rate 218% 155%
Expense ratio including interest and tax expenses 0.92% 0.90%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.08% 1.09%
Expense ratio excluding interest and tax expenses 0.90% 0.90
---------------------------------------------------------------------------------------------------------------
<FN>
(a) The Montgomery Institutional Series: International Growth Portfolio
commenced operations on June 30, 1998.
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
-10-
<PAGE>
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in the Portfolio. Trade requests received
after the close of trading on the New York Stock Exchange (NYSE), normally 1:00
P.M. Pacific time (4:00 P.M. eastern time) will be executed at the following
business day's closing price. The minimum initial investment in the Portfolio is
$2 million. Subsequent investments in the Portfolio must be at least $10,000.
Under certain conditions we may waive these minimums. If you buy shares through
a broker or investment advisor, different requirements may apply. All
investments must be made in U.S. dollars. Purchases may also be made in certain
circumstances by payment of securities. See "In-kind Purchases" below and the
Statement of Additional Information for further details.
We must receive payment from you within three business days of your purchase. In
addition, the Portfolio and the Distributor each reserve the right to reject any
purchase.
How Portfolio Shares Are Priced
How and when we calculate the Portfolio's price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate the
Portfolio's NAV by dividing the total value of its assets by the number of
outstanding shares. We base the value of the Portfolio's investments on their
market value, usually the last price reported for each security before the close
of market that day. A market price may not be available for securities that
trade infrequently. Occasionally, an event that affects a security's value may
occur after the market closes. This is more likely to happen for foreign
securities traded in foreign markets that have different time zones than in the
United States. Major developments affecting the prices of those securities may
occur after the foreign markets in which such securities trade have closed, but
before the Portfolio calculates its NAV. In this case, Montgomery, under the
supervision of the Portfolio's Board of Trustees or Pricing Committee, will make
a good-faith estimate of the security's "fair value," which may be higher or
lower than the security's closing price in its relevant market.
We calculate the Portfolio's NAV after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate the NAVs on days that the NYSE is
closed for trading. An exception applies as described below. If we receive your
order by the close of trading on the NYSE, you can purchase shares at the price
calculated for that day. The NYSE usually closes at 4:00 P.M. eastern time on
weekdays, except for holidays. If your order is received after the NYSE has
closed, your shares will be priced at the next NAV we determine after the
receipt of your order. More details about how we calculate the Portfolio's NAVs
are provided in the Statement of Additional Information.
o The Portfolio 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 Portfolio's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Portfolio.
Foreign Investors
Foreign citizens and resident aliens of the United States living abroad may not
invest in the Portfolio.
Investing in the Portfolio Through Financial Intermediaries
The Portfolio is available to institutional investors and investment advisors
through select programs.
-11-
<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 Portfolio may receive fees from the Portfolio or
Montgomery for providing those services.
Investing in the Portfolio Directly with Montgomery
Opening a New Account
o By Mail Send your signed, completed application, with a check payable to
Montgomery Institutional Series: International Growth Portfolio, to the
appropriate address at right. Your check must be in U.S. dollars and drawn only
on a bank located in the United States. We do not accept third-party checks,
"starter" checks, credit-card checks, instant-loan checks or cash investments.
We may impose a charge on checks that do not clear.
o By Wire Call us at 800.627.7933, option (2), to let us know that you
intend to make your initial investment by wire. Tell us your name and the amount
you want to invest. We will give you further instructions and a fax number to
which you should send your completed New Account application. To ensure that we
handle your investment accurately, include complete account information in all
wire instructions. Then request your bank to wire money from your account to the
attention of:
State Street Bank and Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds II
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Portfolio: Montgomery Institutional Series:
International Growth Portfolio
Please note that your bank may charge a wire transfer fee.
o By Phone To make an initial investment by phone, you must have been a
current Montgomery shareholder for at least 30 days. Your purchase of the
Portfolio must meet its investment minimum and is limited to the total value of
your existing accounts or $10,000, whichever is greater. To complete the
transaction, we must receive payment within three business days. We reserve the
right to collect any losses from your account if we do not receive payment
within that time.
o In-kind Purchases An investor may purchase shares of the Portfolio by
tendering payment in-kind in the form of securities, provided that any such
tendered securities are readily marketable, their acquisition is consistent with
the Portfolio's investment objectives and policies, and the tendered
-12-
<PAGE>
securities are otherwise acceptable to the Portfolio's managers. For purposes of
in-kind purchases, a security will be considered "readily marketable" if it is
in the process of undergoing customary settlement and/or registration in its
primary market. For purposes of sales of Portfolio shares, the tendered
securities shall be valued at the identical time and in the identical manner
that the portfolio securities of the Portfolio are valued for the purpose of
calculating the net asset value of the Portfolio's shares.
Buying Additional Shares
o By Mail Complete the form at the bottom of any Montgomery statement and mail
it with your check payable to Montgomery Institutional Series: International
Growth Portfolio. Or mail a check with a signed letter noting the name of the
Portfolio, your account number and your telephone number. We will mail you a
confirmation of your investment. Note that we may impose a charge on checks that
do not clear.
[sidebar]
Regular Mail
The Montgomery Funds II
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds II
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
o By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a Portfolio you currently own or to invest in a new
Portfolio, call 800.627.7933, option(2). There are restrictions on the dollar
amount of shares you may buy by phone.
We must receive payment for your purchase within three business days of your
request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account)
o Send us a check by overnight or second-day courier service
o Instruct your bank to wire money to our affiliated bank using the information
provided on this page
o By Wire There is no need to contact us when buying additional shares by wire.
Instruct your bank to wire funds to our affiliated bank using the information
on the previous page.
Exchanging Shares
o You may exchange shares in the Portfolio for shares in another, in accounts
with the same registration, Taxpayer Identification Number and address.
Applicable minimums apply to exchanges as well as purchases. Note that an
exchange is treated as a sale and may result in a realized gain or loss for tax
purposes. You may exchange shares by phone at 800.627.7933, option(2).
-13-
<PAGE>
Other Exchange Policies
o We will process your exchange order at the "next-calculated" NAV. This means
that if your exchange order is received after 4:00 P.M. eastern time on a
particular day, it will be processed at the NAV calculated on the next trading
day.
o You may exchange shares only if the Portfolio is qualified for sale in your
state. Call 800.627.7933, option(2), for information on availability in your
state. You may not exchange shares in one Portfolio for shares of another that
is currently closed to new shareholders unless you are already a shareholder in
the closed Portfolio.
o Because excessive exchanges can harm a Portfolio's performance, we reserve
the right to terminate your exchange privileges if you make more than four
exchanges out of any one Portfolio during a 12-month period. We may also refuse
an exchange into a Portfolio from which you have sold shares within the previous
90 days (accounts under common control and accounts having the same Taxpayer
Identification Number will be counted together).
Selling Shares
You may sell some or all of your Portfolio shares on days that the NYSE is open
for trading. Note that a redemption is treated as a sale and may result in a
realized gain or loss for tax purposes.
Your shares will be sold at the next NAV we calculate for the Portfolio after
receiving your order. We will promptly pay the proceeds to you, less any
redemption charges, normally within three business days of receiving your order
and all necessary documents (including a written redemption order with the
appropriate signature guarantee). We will mail or wire you the proceeds,
depending on your instructions. Redemption proceeds from shares purchased by
check or bank transfer may be delayed 15 calendar days to allow the check or
transfer to clear. Within this 15-day period, you may choose to exchange your
investment into a Montgomery Money Market Fund if you have a prospectus for one
of those Funds.
Shares can be sold in several ways:
o By Mail Send us a letter including your name, the Montgomery account number,
the name of the Portfolio and the dollar amount or number of shares you want to
sell. You must sign the letter in the same way your account is registered. If
you have a joint account, all account holders must sign the letter.
If you want the proceeds to go to a party other than the account owner(s) or
your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other National Association of Securities Dealers member firms.
If you want to wire your redemption proceeds but do not have a predesignated
bank account, include a voided check or deposit slip with your letter. The
minimum wire amount is $500. Wire charges, if any, will be deducted from the
redemption proceeds. We may permit lesser wire amounts or fees at our
discretion.
o By Phone You may accept or decline telephone redemption privileges on your
New Account application. If you accept, you will be able to sell up to $50,000
in shares by phone. If you included bank wire information on your New Account
application or made arrangements later for wire redemptions, proceeds can be
wired to your bank account. Please allow at least two business days for the
proceeds to be credited to your bank account. If you want proceeds to arrive at
your bank on the next business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies" below.
-14-
<PAGE>
o Redemption Fees The redemption fee is intended to compensate the Portfolio
for the increased expenses to longer-term shareholders and the disruptive effect
on the portfolio 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. The
Portfolio will retain the fee charged.
Shareholders who have invested at least $2 million (less any prior redemptions)
in the Portfolio are exempt from the redemption fee. This requirement also
applies individually to shareholders who own shares indirectly through a
financial intermediary (such as a no-transaction-fee network or a financial
advisor). When calculating the total amount invested for purposes of this
exception, any increase or decrease in the value of a shareholder's account due
to market appreciation and/or depreciation is not included.
Additionally, the following fees may also be charged when you sell your shares:
o For shares sold by wire, a $10 wire transfer fee will be deducted directly
from the proceeds.
o For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC), we
reserve the right to suspend redemptions under extraordinary circumstances.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $10,000. If your account balance falls below that amount for any
reason, we will ask you to add to your account. If your account balance is not
brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Portfolio below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Portfolio remains
within the applicable expense limitation. Montgomery generally seeks to recoup
the oldest amounts before seeking payment of fees and expenses for the current
year.
Uncashed Redemption Checks
If you receive your Portfolio redemption proceeds or distributions by check
(instead of by wire) and it does not arrive within a reasonable period of time,
call us at 800.627.7933, option(2). Please note that we are responsible only for
mailing redemption or distribution checks and not for tracking uncashed checks
or determining why checks are uncashed. If your check is returned to us by the
U.S. Postal Service or other delivery service, we will hold it on your behalf
for a reasonable period of time. We will not invest the proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
-15-
<PAGE>
In-kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Portfolio, an investor may redeem shares of the Portfolio and receive
securities from the Portfolio's portfolio selected by the Manager at its sole
discretion, provided that such redemption is not expected to affect the
Portfolio's ability to attain its investment objective or otherwise materially
affect its operations. For the purposes of redemptions in kind, the redeemed
securities shall be valued at the identical time and in the identical manner
that the other portfolio securities are valued for purposes of calculating the
net asset value of the Portfolio's shares.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify the
Montgomery Funds of such errors within 30 days following mailing of that
confirmation. The Montgomery Funds will not be responsible for any loss, damage,
cost or expense arising out of any transaction that appears on your confirmation
after this 30-day period.
Telephone Transactions
By buying, selling or exchanging shares over the phone, you agree to reimburse
the Portfolio 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. In addition, we may discontinue these privileges at any
time upon prior written notice. You may discontinue phone privileges at any
time.
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Portfolio as a
result.
Please note that we cannot be held liable for following telephone instructions
that we reasonably believe to be genuine. We use the following safeguards to
ensure that the instructions we receive are accurate and authentic, such as:
o Recording certain calls
o Requiring an authorization number or other personal information not likely to
be known by others
o Sending a transaction confirmation to the investor
Montgomery and its Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, to protect you and your account
we will temporarily suspend your telephone redemption privileges until 30 days
after your notification. 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:
-16-
<PAGE>
o By overnight courier
o By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting a local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. If the IRS has notified you
that you are subject to backup withholding because you failed to report all
interest and dividend income on your tax return, you must check the appropriate
item on the New Account application. Foreign shareholders should note that any
dividends the Portfolio pays to them may be subject to up to 30% withholding
instead of backup withholding.
After You Invest
Taxes
IRS rules require that the Portfolio distribute all of its net investment income
and capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time the Portfolio 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 Portfolio's distributions, whether received in cash or reinvested,
may be taxable. Any redemption of the Portfolio's shares or any exchange of the
Portfolio's shares for those of another Montgomery Fund will be treated as a
sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Portfolio can be found
in our Statement of Additional Information, available free by calling
800.627.7933, option (2). Consult your tax advisor about the potential tax
consequences of investing in the Portfolio.
Dividends and Distributions
As a shareholder in the Portfolio, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as a 401(k) plan). Dividends and
distributions are paid to all shareholders who maintain accounts with the
Portfolio as of its "record date."
If you would like to receive distributions in cash, indicate that choice on your
New Account application. Otherwise, the distributions will be reinvested in
additional Portfolio shares.
Referral Arrangements
The Distributor for the Portfolio compensates selected solicitors for bringing
new accounts or investments to the Portfolio. The Portfolio will not pay this
compensation out of its assets unless it has adopted a Rule 12b-1 plan. You may
request the Statement of Additional Information through the telephone number
given on the last page for specific information about these arrangements.
-17-
<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 Portfolio's
Master Transfer Agent. It performs
certain recordkeeping and accounting
functions for the Portfolio.
State Street Bank and Trust Company
(formerly Investors Fiduciary Trust
Company), also located in Kansas City,
Missouri, assists DST Systems, Inc.,
with certain recordkeeping and
accounting functions for the Portfolio.
-18-
<PAGE>
<TABLE>
<CAPTION>
[table]
------------------------------------------------------------------------------------------------------
<S> <C> <C>
MONTGOMERY FUND INCOME Dividends CAPITAL GAINS
Institutional International Declared and paid in the last Declared and paid in the last
Growth Portfolio quarter of each calendar year* quarter of each calendar year*
------------------------------------------------------------------------------------------------------
<FN>
* Following its fiscal year end (June 30), the Portfolio may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
During the year, we will also send you the following communications:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter
o Annual and semiannual reports, mailed approximately 60 days after June 30
and December 31
o 1099 tax form, sent by January 31
o Annual updated prospectus, mailed to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or other
mailing to your household if you hold accounts under common ownership or at the
same address (regardless of the number of shareholders or accounts at that
household or address), unless you request additional copies.
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in the
Portfolio, check if it is planning to
make a distribution in the near future.
Here's why: If you buy shares of the
Portfolio 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 Portfolio 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
Portfolio's appreciation.
-19-
<PAGE>
[Outside back cover: The Montgomery Funds II; Address; Contact Info; Logo]
You can find more information about Montgomery Institutional Series' investment
policies in the Statement of Additional Information (SAI), incorporated by
reference in this prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 800.627.7933, option (2). You can
review and copy further information about The Montgomery Funds II, including the
SAI, at the Securities and Exchange Commission's (SEC's) Public Reference Room
in Washington, D.C. To obtain information on the operation of the Public
Reference Room, please call 202.942.8090. Reports and other information about
The Montgomery Funds II are available through the SEC's Web site at www.sec.gov.
You can also obtain copies of this information, upon payment of a duplicating
fee, by writing the Public Reference Section of the SEC, Washington, D.C.,
20549-6009, or e-mailing the SEC at [email protected].
You can also find further information about Montgomery Institutional Series in
our annual and semiannual shareholder reports, which discuss the market
conditions and investment strategies that significantly affected the Portfolio's
performance during the previous fiscal period. To request a free copy of the
most recent annual or semiannual report, call us at 800.627.7933.
Corporate Headquarters:
The MONTGOMERY Funds II
101 California Street
San Francisco, CA 94111-9361
800.627.7933
www.montgomeryasset.com
SEC File Nos.: The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/00
-20-
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS
FOR
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
Prospectus
October 31, 2000
The Montgomery Funds II SM
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio
The Montgomery Funds II has registered the mutual fund offered in this
prospectus with the U.S. Securities and Exchange Commission (SEC). That
registration does not imply, however, that the SEC endorses the Portfolio.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
[Sidebar]
--------------------------
How to Contact Us
--------------------------
Montgomery Institutional
Advisory Services
800.627.7933
Montgomery Web Site
www.montgomeryasset.com
Address General
Correspondence to:
The Montgomery Funds II
101 California Street
San Francisco, CA 94111-9361
-2-
<PAGE>
[Table of Contents]
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio
TABLE OF CONTENTS
Objective......................................................................
Principal Strategy.............................................................
Principal Risks................................................................
Portfolio Management...........................................................
Management Fees and Operating Expense Limits..............................
Additional Investment Strategies and Related Risks.............................
Fund Operating Expenses...................................................
The Euro: Single European Currency........................................
Defensive Investments.....................................................
Portfolio Turnover........................................................
Additional Benchmark Information..........................................
Financial Highlights...........................................................
What You Need to Know About Your Montgomery Account............................
How Portfolio Shares Are Priced...........................................
Foreign Investors.........................................................
Investing in the Portfolio Through Financial Intermediaries....................
Buying and Selling Shares Through Securities Brokers and
Benefit Plan Administrators...............................................
Investing in the Portfolio Directly with Montgomery............................
Opening a New Account...................................................
Buying Additional Shares................................................
Exchanging Shares.......................................................
Other Exchange Policies.................................................
Selling Shares..........................................................
Other Policies.................................................................
Minimum Account Balances..................................................
Expense Limitations.......................................................
Uncashed Redemption Checks................................................
In-kind Redemptions.......................................................
Transaction Confirmation..................................................
Telephone Transactions....................................................
Tax Withholding Information...............................................
After You Invest..........................................................
-3-
<PAGE>
This prospectus contains important information about the investment objective,
strategy and risks of the Montgomery Institutional Series: Emerging Markets
Portfolio that you should know before you invest. Please read it carefully and
keep it on hand for future reference.
Please be aware that the Portfolio:
o Is not a bank deposit
o Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Portfolio.
-4-
<PAGE>
Emerging Markets Portfolio
Objective
o Long-term capital appreciation
Principal Strategy [clipart]
Invests in companies based or operating primarily in developing economies
throughout the world.
Under normal conditions, the Portfolio invests at least 85% of its total assets
in the stocks of companies of any size and based in the world's developing
economies. The Portfolio typically maintains investments in at least six
countries at all times, with no more than 25% of its assets in any single one of
them. These may include:
o Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
o Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
o Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
o The Middle East: Israel and Jordan
o Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Portfolio's strategy combines in-depth financial review with on-site
analysis of companies, countries and regions to identify potential investments.
The Portfolio's 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 Portfolio 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 Portfolio well diversified across individual stocks,
industries and countries to reduce its overall risk.
Principal Risks [clipart]
By investing in stocks, the Portfolio 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 Portfolio invests are denominated in foreign currencies,
whose values may decline against the U.S. dollar.
-5-
<PAGE>
--------------------------------------------------------------------------------
Past Portfolio Performance The bar chart on the left below shows the risks of
investing in the Portfolio and how the Portfolio's total return has varied from
year to year. The table on the right compares the Portfolio'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>
1994 1995 1996 1997 1998 1999
------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
-9.24% -7.12% 13.00% -2.00% -35.00% 66.87%
</TABLE>
During the six-year period described above in the bar chart, the Portfolio's
best quarter was Q4 1999 (+35.21%) and the worst quarter was Q3 1998 (-23.67%).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Institutional Emerging Markets Portfolio 66.87% 2.23% -0.47%
MSCI Emerging Markets Free Index* 66.41% 2.00% -0.38%
---------------------------------------------------------------------------------------------------------
1 Year 5 Years Inception
(12/17/93)
<FN>
* See page 9 for a description of this index.
</FN>
</TABLE>
................................................................................
2000 Return Through 9/30/00: -16.11% 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 the Portfolio. Montgomery does not impose any deferred sales loads on
this Portfolio.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Investment Expense Reimbursement Fee+ 0.75%
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)**
Management Fee++ 1.11%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 2.63%
--------------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 3.74%
Fee Reduction and/or Expense Reimbursement 1.59%
Net Expenses 2.15%
<FN>
+ The investment expense reimbursement fee is paid to the Portfolio to offset
certain costs, such as brokers' commissions, incurred by the Portfolio in
investing cash received from shareholders. This fee is paid directly to the
Portfolio. The investment expense reimbursement fee will not be charged on
investments made in the form of securities acceptable to the Manager.
Shares purchased by the Manager on behalf of advisory clients for which it
has investment discretion will not be subject to this fee. $10 will be
deducted from redemption proceeds sent by wire or overnight courier.
** Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Portfolio's total annual operating
expenses (excluding interest and tax expenses) to 1.25%. This contract has
a rolling 10-year term. See page __ for an explanation of interest and tax
expenses.
++ The management fee of 1.25% will be reduced to 1.00% for accounts with
assets over $50 million and to 0.90% for accounts with assets over $100
million.
</FN>
</TABLE>
Example of Portfolio expenses: This example is intended to help you compare the
cost of investing in the Portfolio 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 that an
investment is made with securities (so the investment expense reimbursement fee
does not apply) and 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 Portfolio's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
$217 $671 $1,151 $2,471
-6-
<PAGE>
[clipart][sidebar]
Portfolio Management
Josephine Jimenez, CFA
Frank Chiang
For more details see page 8
For financial highlights
see page 10
-7-
<PAGE>
Portfolio Management
The investment manager of the Portfolio is Montgomery Asset Management, LLC.
Founded in 1990, Montgomery Asset Management is a subsidiary of Commerzbank AG,
one of the largest publicly held commercial banks in Germany. As of September
30, 2000, Montgomery Asset Management managed approximately $5 billion on behalf
of some 184,000 investors in The Montgomery Funds. Montgomery may rely on the
expertise, research and resources of Commerzbank AG and its worldwide affiliates
in managing the Portfolio.
[photo]JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
Ms. Jimenez joined Montgomery in 1991 to launch the firm's emerging markets
discipline and has managed the Montgomery Emerging Markets Portfolio since it
launched in 1992. 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 and a Bachelor of Science degree
from New York University. She is a Chartered Financial Analyst.
[photo]FRANK CHIANG, Portfolio Manager and Principal
Mr. Chiang joined Montgomery in 1996 and has co-managed the Montgomery Emerging
Markets Portfolio since its inception. From 1993 to 1996, he was with TCW Asia
Ltd., Hong Kong, where he was a managing director and portfolio manager
responsible for TCW's Asian Equity strategy. Prior to that 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 degree from New York
University. He is fluent in three Chinese dialects: Mandarin, Shanghainese and
Cantonese.
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 limit on total
operating expenses for the Portfolio. 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>
Montgomery Emerging Markets Portfolio 0.86% 1.25%
</TABLE>
-8-
<PAGE>
Additional Investment Strategies and Related Risks
Fund Operating Expenses
The Manager contractually has agreed to reduce its fees and/or absorb expenses
to limit the Portfolio's total annual operating expenses to 1.25%. Certain
expenses, which are required to be excluded from the calculation of the expense
limit, cause the Portfolio's annual operating expenses to exceed the 1.25%
limit. The expenses include (a) interest expense incurred on (i) borrowings
under a line of credit used to meet shareholder redemption requests or (ii)
other borrowings and (b) commissions, duties and capital gain taxes imposed on
the sale of securities in certain foreign countries. Shareholders are not
entitled to a credit for foreign capital gain taxes incurred by the Portfolio.
However, a Portfolio may elect to pass through foreign income tax credits to the
shareholders.
The Euro: Single European Currency
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:
o Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
o The applicable conversion rate for contracts stated in the national
currency of an EU member
o How clearing and settlement systems needed to process transactions
reliably will work
o What the effects of the euro on European financial and commercial
markets will be
o How new legislation and regulations will affect euro-related issues
These and other factors could cause market disruptions and affect the value of
your shares in the Portfolio in the event that 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), the Portfolio may invest up to
100% of its assets in cash for temporary defensive purposes. The Portfolio is
not required or expected to take such a defensive posture. But if used, such an
unlikely stance may help the Portfolio minimize or avoid losses during adverse
market, economic or political conditions. During such a period, the Portfolio
may not achieve its investment objective. For example, should the market advance
during this period, the Portfolio may not participate as much as it would have
if it had been more fully invested.
Portfolio Turnover
The Portfolio's managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Portfolio has owned that
security. Buying and selling securities generally involves some expense to the
Portfolio, such as commission paid to brokers and other transaction costs. By
selling a security, the Portfolio may realize taxable capital gains that it will
subsequently distribute to shareholders.
-9-
<PAGE>
Generally speaking, the higher the Portfolio's annual portfolio turnover, the
greater its brokerage costs and the greater the likelihood that it will realize
taxable capital gains. Increased brokerage costs may adversely affect the
Portfolio's performance. Also, unless you are a tax-exempt investor or you
purchase shares through a tax-exempt investor or through a tax-deferred account,
the distribution of capital gains may affect your after-tax return. Annual
portfolio turnover of 100% or more is considered high. See "Financial
Highlights" on page 11 for the Portfolio's historical portfolio turnover.
Additional Benchmark Information
o The Morgan Stanley Capital International (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.
-10-
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
Portfolio's performance for the periods shown.
The following selected per-share data and ratios for the periods ended June 30,
2000, June 30, 1999, March 31, 1999, and June 30, 1998, were audited by
PricewaterhouseCoopers LLP.
Their August 18, 2000, August 18, 1999, and August 14, 1998, reports appear in
the 2000, 1999 and 1998 Annual Reports of the Portfolio. Information for the
period ended June 30, 1996, through June 30, 1997, was audited by other
independent accountants, whose report is not included here.
<TABLE>
The total return figures in the table represent the rate an investor would have
earned (or lost) on an investment in the Portfolio (assuming reinvestment of all
dividends and distributions).
[table]
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $39.05 $35.61 $58.52 $49.09 $44.61
Net investment income/(loss) (0.45) 0.38 0.32 0.43 0.50
Net realized and unrealized gain/(loss) on investments 8.47 3.06 (22.44) 9.46 3.93
Net increase/(decrease) in net assets
resulting from investment operations 8.02 3.44 (22.12) 9.89 4.43
Effect of redemption expense reimbursement fee -- -- -- 0.02 0.09
Distributions:
Dividends from net investment income -- -- (0.64) (0.48) (0.04)
Dividends in excess of net investment income -- 0.00# -- -- --
Distributions from net realized capital gains -- -- (0.15) -- --
Distributions in excess of net realized capital gains -- -- -- -- --
Total distributions -- -- (0.79) (0.48) (0.04)
Net asset value - end of period $47.07 $39.05 $35.61 $58.52 $49.09
=================================================================================================================================
Total return** 20.42% 9.75% (38.05)% 20.45% 10.14%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $104,553 $103,661 $197,578 $334,181 $270,878
Ratio of net investment income/(loss) to average net assets (0.77)% 0.79% 0.96% 0.86% 1.16%
Net investment income/(loss) before deferral of fees by
Manager $(1.38) $(0.11) $0.03 $0.26 $0.33
Portfolio turnover rate 116% 115% 104% 85% 88%
Expense ratio including interest and tax expenses 2.15% 1.45% 1.25% 1.26% 1.29%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 3.74% 2.42% 1.66% 1.61% 1.70%
Expense ratio excluding interest and tax expenses 1.25% 1.25% 1.25% 1.26% 1.29%
---------------------------------------------------------------------------------------------------------------------------------
<FN>
** Total return represents aggregate total return for the periods indicated.
# Amount represents less than $0.01 per share.
</FN>
</TABLE>
-11-
<PAGE>
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in the Portfolio. Trade requests received
after the close of trading on the New York Stock Exchange (NYSE), normally 1:00
P.M. Pacific time (4:00 P.M. eastern time) will be executed at the following
business day's closing price. The minimum initial investment in the Portfolio is
$2 million. Subsequent investments in the Portfolio must be at least $100,000.
Under certain conditions we may waive these minimums. If you buy shares through
a broker or investment advisor, different requirements may apply. All
investments must be made in U.S. dollars. Purchases may also be made in certain
circumstances by payment of securities. See "In-kind Purchases" below and the
Statement of Additional Information for further details.
We must receive payment from you within three business days of your purchase. In
addition, the Portfolio and the Distributor each reserve the right to reject any
purchase.
How Portfolio Shares Are Priced
How and when we calculate the Portfolio's price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate the
Portfolio's NAV by dividing the total value of its assets by the number of
outstanding shares. We base the value of the Portfolio's investments on their
market value, usually the last price reported for each security before the close
of market that day. A market price may not be available for securities that
trade infrequently. Occasionally, an event that affects a security's value may
occur after the market closes. This is more likely to happen for foreign
securities traded in foreign markets that have different time zones than in the
United States. Major developments affecting the prices of those securities may
occur after the foreign markets in which such securities trade have closed, but
before the Portfolio calculates its NAV. In this case, Montgomery, under the
supervision of the Portfolio's Board of Trustees or Pricing Committee, will make
a good-faith estimate of the security's "fair value," which may be higher or
lower than the security's closing price in its relevant market.
We calculate the Portfolio's NAV after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate the NAVs on days that the NYSE is
closed for trading. An exception applies as described below. If we receive your
order by the close of trading on the NYSE, you can purchase shares at the price
calculated for that day. The NYSE usually closes at 4:00 P.M. eastern time on
weekdays, except for holidays. If your order is received after the NYSE has
closed, your shares will be priced at the next NAV we determine after the
receipt of your order. More details about how we calculate the Portfolio's NAVs
are provided in the Statement of Additional Information.
o The Portfolio 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 Portfolio's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Portfolio.
Foreign Investors
Foreign citizens and resident aliens of the United States living abroad may not
invest in the Portfolio.
Investing in the Portfolio Through Financial Intermediaries
The Portfolio is available to institutional investors and investment advisors
through select programs.
-12-
<PAGE>
[sidebar]
Buying and Selling Shares Through Securities Brokers and Benefit Plan
Administrators
You may purchase and sell shares through securities brokers and benefit plan
administrators or their subagents. You should contact them directly for
information regarding how to invest or redeem through them. They may also charge
you service or transaction fees. If you purchase or redeem shares through them,
you will receive the NAV calculated after receipt of the order by them
(generally, 4:00 P.M. eastern time) on any day the NYSE is open. If your order
is received by them after that time, it will be purchased or redeemed at the
next calculated NAV. Brokers and benefit plan administrators who perform
shareholder servicing for the Portfolio may receive fees from the Portfolio or
Montgomery for providing those services.
Investing in the Portfolio Directly with Montgomery
Opening a New Account
o By Mail Send your signed, completed application, with a check payable to
Montgomery Institutional Series: Emerging Markets Portfolio, to the appropriate
address at right. Your check must be in U.S. dollars and drawn only on a bank
located in the United States. We do not accept third-party checks, "starter"
checks, credit-card checks, instant-loan checks or cash investments. We may
impose a charge on checks that do not clear.
o By Wire Call us at 800.627.7933, option (2), to let us know that you intend to
make your initial investment by wire. Tell us your name and the amount you want
to invest. We will give you further instructions and a fax number to which you
should send your completed New Account application. To ensure that we handle
your investment accurately, include complete account information in all wire
instructions. Then request your bank to wire money from your account to the
attention of:
State Street Bank and Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds II
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Portfolio: Montgomery Institutional Series: Emerging Markets Portfolio
Please note that your bank may charge a wire transfer fee.
o By Phone To make an initial investment by phone, you must have been a
current Montgomery shareholder for at least 30 days. Your purchase of the
Portfolio must meet its investment minimum and is limited to the total value of
your existing accounts or $10,000, whichever is greater. To complete the
transaction, we must receive payment within three business days. We reserve the
right to collect any losses from your account if we do not receive payment
within that time.
o In-kind Purchases An investor may purchase shares of the Portfolio by
tendering payment in-kind in the form of securities, provided that any such
tendered securities are readily marketable, their acquisition is consistent with
the Portfolio's investment objectives and policies, and the tendered securities
are otherwise acceptable to the Portfolio's managers. For purposes of in-kind
purchases, a
-13-
<PAGE>
security will be considered "readily marketable" if it is in the process of
undergoing customary settlement and/or registration in its primary market. For
purposes of sales of Portfolio shares, the tendered securities shall be valued
at the identical time and in the identical manner that the portfolio securities
of the Portfolio are valued for the purpose of calculating the net asset value
of the Portfolio's shares.
Buying Additional Shares
o By Mail Complete the form at the bottom of any Montgomery statement and mail
it with your check payable to Montgomery Institutional Series: Emerging Markets
Portfolio. Or mail a check with a signed letter noting the name of the
Portfolio, your account number and telephone number. We will mail you a
confirmation of your investment. Note that we may impose a charge on checks that
do not clear.
[sidebar]
Regular Mail
The Montgomery Funds II
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds II
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
o By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in a Portfolio you currently own or to invest in a new
Montgomery Fund, call 800.627.7933, option (2). There are restrictions on the
dollar amount of shares you may buy by phone.
We must receive payment for your purchase within three business days of your
request. To ensure that we do, you can:
o Transfer money directly from your bank account by mailing a written
request and a voided check or deposit slip (for a savings account)
o Send us a check by overnight or second-day courier service
o Instruct your bank to wire money to our affiliated bank using the
information provided on this page
o By Wire There is no need to contact us when buying additional shares by wire.
Instruct your bank to wire funds to our affiliated bank using the information on
the previous page.
Exchanging Shares
o You may exchange shares in the Portfolio for shares in another, in accounts
with the same registration, Taxpayer Identification Number and address.
Applicable minimums apply to exchanges as well as purchases. Note that an
exchange is treated as a sale and may result in a realized gain or loss for tax
purposes. You may exchange shares by phone at 800.627.7933, option (2).
Other Exchange Policies
o We will process your exchange order at the "next-calculated" NAV. This means
that if your exchange order is received after 4:00 P.M. eastern time on a
particular day, it will be processed at the NAV calculated on the next trading
day.
o You may exchange shares only if the Portfolio is qualified for sale in your
state. Call 800.627.7933,
-14-
<PAGE>
option (2), for information on availability in your state. You may not exchange
shares in one Portfolio for shares of another that is currently closed to new
shareholders unless you are already a shareholder in the closed Portfolio.
o Because excessive exchanges can harm a Portfolio's performance, we reserve
the right to terminate your exchange privileges if you make more than four
exchanges out of any one Portfolio during a 12-month period. We may also refuse
an exchange into a Portfolio from which you have sold shares within the previous
90 days (accounts under common control and accounts having the same Taxpayer
Identification Number will be counted together).
Selling Shares
You may sell some or all of your Portfolio shares on days that the NYSE is open
for trading. Note that a redemption is treated as a sale and may result in a
realized gain or loss for tax purposes.
Your shares will be sold at the next NAV we calculate for the Portfolio after
receiving your order. We will promptly pay the proceeds to you, less any
redemption charges, normally within three business days of receiving your order
and all necessary documents (including a written redemption order with the
appropriate signature guarantee). We will mail or wire you the proceeds,
depending on your instructions. Redemption proceeds from shares purchased by
check or bank transfer may be delayed 15 calendar days to allow the check or
transfer to clear. Within this 15-day period, you may choose to exchange your
investment into a Montgomery Money Market Fund if you have a prospectus for one
of those Funds.
Shares can be sold in several ways:
o By Mail Send us a letter including your name, the Montgomery account number,
the name of the Portfolio and the dollar amount or number of shares you want to
sell. You must sign the letter in the same way your account is registered. If
you have a joint account, all account holders must sign the letter.
If you want the proceeds to go to a party other than the account owner(s) or
your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other National Association of Securities Dealers member firms.
If you want to wire your redemption proceeds but do not have a predesignated
bank account, include a voided check or deposit slip with your letter. The
minimum wire amount is $500. Wire charges, if any, will be deducted from the
redemption proceeds. We may permit lesser wire amounts or fees at our
discretion.
o By Phone You may accept or decline telephone redemption privileges on your
New Account application. If you accept, you will be able to sell up to $50,000
in shares by phone. If you included bank wire information on your New Account
application or made arrangements later for wire redemptions, proceeds can be
wired to your bank account. Please allow at least two business days for the
proceeds to be credited to your bank account. If you want proceeds to arrive at
your bank on the next business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies" below.
o Investment Expense Reimbursement Fee The investment expense reimbursement
fee is intended to defray costs associated with investing the proceeds received
by the Portfolio and to offset the dilutive effect those costs would otherwise
have on the net asset value of shares held by existing shareholders.
Additionally, the following fees may also be charged when you sell your shares:
o For shares sold by wire, a $10 wire transfer fee will be deducted directly
from the proceeds.
-15-
<PAGE>
o For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC), we
reserve the right to suspend redemptions under extraordinary circumstances.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $10,000. If your account balance falls below that amount for any
reason, we will ask you to add to your account. If your account balance is not
brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Montgomery 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 Portfolio remains
within the applicable expense limitation. Montgomery generally seeks to recoup
the oldest amounts before seeking payment of fees and expenses for the current
year.
Uncashed Redemption Checks
If you receive your Portfolio redemption proceeds or distributions by check
(instead of by wire) and it does not arrive within a reasonable period of time,
call us at 800.627.7933, option (2). Please note that we are responsible only
for mailing redemption or distribution checks and not for tracking uncashed
checks or determining why checks are uncashed. If your check is returned to us
by the U.S. Postal Service or other delivery service, we will hold it on your
behalf for a reasonable period of time. We will not invest the proceeds in any
interest-bearing account. No interest will accrue on uncashed distribution or
redemption proceeds.
In-kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Portfolio, an investor may redeem shares of the Portfolio and receive
securities from the Portfolio's portfolio selected by the Manager at its sole
discretion, provided that such redemption is not expected to affect the
Portfolio's ability to attain its investment objective or otherwise materially
affect its operations. For the purposes of redemptions in kind, the redeemed
securities shall be valued at the identical time and in the identical manner
that the other portfolio securities are valued for purposes of calculating the
net asset value of the Portfolio's shares.
Transaction Confirmation
If you notice any errors on your trade confirmation, you must notify the
Portfolio of such errors within 30 days following mailing of that confirmation.
The Portfolio 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.
-16-
<PAGE>
Telephone Transactions
By buying, selling or exchanging shares over the phone, you agree to reimburse
the Portfolio 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. In addition, we may discontinue these privileges at any
time upon prior written notice. You may discontinue phone privileges at any
time.
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Portfolio as a
result.
Please note that we cannot be held liable for following telephone instructions
that we reasonably believe to be genuine. We use the following safeguards to
ensure that the instructions we receive are accurate and authentic, such as:
o Recording certain calls
o Requiring an authorization number or other personal information not likely
to be known by others
o Sending a transaction confirmation to the investor
Montgomery and its Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
phone privileges by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, to protect you and your account
we will temporarily suspend your telephone redemption privileges until 30 days
after your notification. We require all redemption requests made during this
period to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of volatile economic or market conditions. In these cases you may
want to transmit your redemption request:
o By overnight courier
o By telegram
You may discontinue telephone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting a local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. If the IRS has notified you
that you are subject to backup withholding because you failed to report all
interest and dividend income on your tax return, you must check the appropriate
item on the New Account application. Foreign shareholders should note that
-17-
<PAGE>
any dividends the Portfolio pays to them may be subject to up to 30% withholding
instead of backup withholding.
After You Invest
Taxes
IRS rules require that the Portfolio distribute all of its net investment income
and capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time the Portfolio 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 Portfolio's distributions, whether received in cash or reinvested,
may be taxable. Any redemption of the Portfolio's shares or any exchange of the
Portfolio's shares for those of another Montgomery Fund will be treated as a
sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Portfolio can be found
in our Statement of Additional Information, available free by calling
800.627.7933, option (2). Consult your tax advisor about the potential tax
consequences of investing in the Portfolio.
Dividends and Distributions
As a shareholder in the Portfolio, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as a 401(k) plan). Dividends and
distributions are paid to all shareholders who maintain accounts with the
Portfolio as of its "record date."
If you would like to receive distributions in cash, indicate that choice on your
New Account application. Otherwise, the distributions will be reinvested in
additional Portfolio shares.
Referral Arrangements
The Distributor for the Portfolio compensates selected solicitors for bringing
new accounts or investments to the Portfolio. The Portfolio will not pay this
compensation out of its assets unless it has adopted a Rule 12b-1 plan. You may
request the Statement of Additional Information through the telephone number
given on the last page for specific information about these arrangements.
[sidebar]
OUR PARTNERS
As a Montgomery shareholder,
you may see the names of our partners on
a regular basis. We all work together to
ensure that your investments are handled
accurately and efficiently.
Funds Distributor, Inc.,
located in New York City and Boston,
distributes the Montgomery Funds.
DST Systems, Inc., located in
Kansas City, Missouri, is the
Portfolio's Master Transfer Agent. It
performs certain recordkeeping and
accounting functions for the Portfolio.
State Street Bank and Trust
Company (formerly Investors Fiduciary
Trust Company), also located in Kansas
City, Missouri, assists DST Systems,
Inc., with certain recordkeeping and
accounting functions for the Portfolio.
-18-
<PAGE>
<TABLE>
[table]
------------------------------------------------------------------------------------------------------
<CAPTION>
MONTGOMERY FUND INCOME Dividends CAPITAL GAINS
<S> <C> <C>
Institutional Emerging Declared and paid in the last Declared and paid in the last
Markets Portfolio quarter of each calendar year* quarter of each calendar year*
------------------------------------------------------------------------------------------------------
<FN>
* Following its fiscal year end (June 30), the Portfolio may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
During the year, we will also send you the following communications:
o Confirmation statements
o Account statements, mailed after the close of each calendar quarter
o Annual and semiannual reports, mailed approximately 60 days after June 30
and December 31
o 1099 tax form, sent by January 31
o Annual updated prospectus, mailed to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or other
mailing to your household if you hold accounts under common ownership or at the
same address (regardless of the number of shareholders or accounts at that
household or address), unless you request additional copies.
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in the
Portfolio, check if it is planning to
make a distribution in the near future.
Here's why: If you buy shares of the
Portfolio 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 Portfolio 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
Portfolio's appreciation.
-19-
<PAGE>
[Outside back cover: The Montgomery Funds II; Address; Contact Info; Logo]
You can find more information about Montgomery Institutional Series' investment
policies in the Statement of Additional Information (SAI), incorporated by
reference in this prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 800.627.7933, option (2). You can
review and copy further information about The Montgomery Funds II, including the
SAI, at the Securities and Exchange Commission's (SEC's) Public Reference Room
in Washington, D.C. To obtain information on the operation of the Public
Reference Room, please call 202.942.8090. Reports and other information about
The Montgomery Funds II are available through the SEC's Web site at www.sec.gov.
You can also obtain copies of this information, upon payment of a duplicating
fee, by writing the Public Reference Section of the SEC, Washington, D.C.,
20549-6009, or e-mailing the SEC at [email protected].
You can also find further information about Montgomery Institutional Series in
our annual and semiannual shareholder reports, which discuss the market
conditions and investment strategies that significantly affected the Portfolio's
performance during the previous fiscal period. To request a free copy of the
most recent annual or semiannual report, call us at 800.627.7933, option (2).
Corporate Headquarters:
The MONTGOMERY Funds II
101 California Street
San Francisco, CA 94111-9361
800.627.7933
www.montgomeryasset.com
SEC File Nos.: The Montgomery Funds II 811-8064
Funds Distributor, Inc. 10/00
-20-
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
CLASS R SHARES OF
MONTGOMERY BALANCED FUND
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTOGMERY EMERGING MARKETS 20 PORTFOLIO
AND
OTHER SERIES OF ANOTHER REGISTRANT
AND
CLASS P SHARES OF CERTAIN FUNDS
---------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
THE MONTGOMERY FUNDS
MONTGOMERY GROWTH FUND
MONTGOMERY MID CAP 20 PORTFOLIO
MONTGOMERY U.S. EMERGING GROWTH FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY BALANCED FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL 20 PORTFOLIO
MONTGOMERY GLOBAL LONG-SHORT FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING MARKETS 20 PORTFOLIO
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
--------------------------------------------------------------------------------
October 31, 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 20 Portfolio,
which are series of The Montgomery Funds II (each a "Fund" and, collectively,
the "Funds"). This Statement of Additional Information contains information in
addition to that set forth in the combined prospectus for the Class R shares for
all Funds dated October 31, 2000, and that set forth in the combined
prospectuses for the Class P shares of certain Funds dated October 31, 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, 2000 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............................................39
TRUSTEES AND OFFICERS........................................................44
INVESTMENT MANAGEMENT AND OTHER SERVICES.....................................47
EXECUTION OF PORTFOLIO TRANSACTIONS..........................................57
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................60
DETERMINATION OF NET ASSET VALUE.............................................62
PRINCIPAL UNDERWRITER........................................................64
PERFORMANCE INFORMATION......................................................65
GENERAL INFORMATION..........................................................70
FINANCIAL STATEMENTS.........................................................81
Appendix.....................................................................82
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 Class R, Class B and
Class C). This Statement of Additional Information pertains to the following
series of The Montgomery Funds:
o Montgomery Growth Fund (the "Growth Fund");
o Montgomery Mid Cap 20 Portfolio (the "Mid Cap 20 Portfolio");
o Montgomery U.S. Emerging Growth Fund (the "U.S. Emerging Growth Fund);
o Montgomery Small Cap Fund (the "Small Cap Fund");
o Montgomery International Growth Fund (the "International Growth
Fund");
o Montgomery International 20 Portfolio (the "International 20
Portfolio")
o Montgomery Global Opportunities Fund (the "Global Opportunities
Fund");
o Montgomery Global 20 Portfolio (the "Global 20 Portfolio");
o Montgomery Global Communications Fund (the "Global Communications
Fund");
o Montgomery Emerging Markets Fund (the "Emerging Markets Fund");
o Montgomery Emerging Asia Fund (the "Emerging Asia Fund");
o Montgomery Total Return Bond Fund (the "Total Return Bond Fund");
o Montgomery Short Duration Government Bond Fund (the "Short Bond
Fund");
o Montgomery Government Money Market Fund (the "Government Money Fund");
o Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund");
o Montgomery California Tax-Free Money Fund (the "California Money
Fund");
o Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund");
as well as three series of The Montgomery Funds II:
o Montgomery Balanced Fund (the "Balanced Fund");
o Montgomery Global Long-Short Fund (the "Global Long-Short Fund"); and
o Montgomery Emerging Markets 20 Portfolio (the "Emerging Markets 20
Portfolio," prior to 10/00, called the "Montgomery 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 and the Mid Cap 20 Portfolio as the "U.S.
Equity Funds"; the International Growth, Global Opportunities, Global
Long-Short, Global Communications, Emerging Markets, and Emerging Asia Funds and
the International 20, Global 20 and Emerging Markets 20 Portfolios, 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 as the
"Money Market Funds"; and all of the Funds other than the Tax-Free Funds as the
"Taxable Funds."
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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 the Prospectuses. The following discussion supplements
the discussion in the Prospectuses.
Each Fund is a diversified series, except for the Tax-Free Funds, the
International 20 Portfolio, the Global 20 Portfolio and the Mid Cap 20
Portfolio, which are nondiversified series of The Montgomery Funds. 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.
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 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.
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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 advantages and disadvantages; research, product development and
marketing; development of new technologies; service; pricing flexibility;
quality of management; and general operating characteristics.
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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 Portfolio. The Global 20 Portfolio 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 Portfolio may be invested
in the stocks of companies based in the world's developing economies.
Additionally, the Global 20 Portfolio 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 Portfolio 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 Portfolio may invest up to 30% of its assets in companies based in developing
countries, shareholders may also be exposed to special risks. See "Risk Factors"
below.
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Emerging Markets 20 Portfolio. The Emerging Markets 20 Portfolio does
not intend to diversify its portfolio across a large number of emerging markets
countries. Instead, the Fund's investment advisor's objective is to concentrate
its investments in a small number of emerging markets countries (although it may
invest in a 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.
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
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("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 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
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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.
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
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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 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
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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
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
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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 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
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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 revolving credit (e.g., credit card) agreements.
Like mortgage-related securities, these securities are subject to the risk of
prepayment.
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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 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.
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<PAGE>
Municipal Securities. Because the Tax-Free Funds invest at least 80% of
their total assets in obligations either issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, authorities and instrumentalities,
including industrial development bonds, as well as obligations of certain
agencies and instrumentalities of the U.S. government, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Securities"), or exempt from federal and California personal income
tax ("California Municipal Securities"), and the California Money Fund invests
at least 65% of its total assets in California Municipal Securities, and may
invest in Municipal Securities, these Funds generally will have a lower yield
than if they primarily purchased higher yielding taxable securities, commercial
paper or other securities with correspondingly greater risk. Generally, the
value of the Municipal Securities and California Municipal Securities held by
these Funds will fluctuate inversely with interest rates.
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds, which may
pay tax-exempt interest, are, in most cases, revenue bonds and are issued by or
on behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from financial
institutions participation interests in Municipal Securities, such as industrial
development bonds and municipal lease/purchase agreements. A participation
interest gives a Fund an undivided interest in a Municipal Security in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Security. These instruments may have fixed, floating or
variable rates of interest. If the participation interest is unrated, it will
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<PAGE>
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 institution and receive their face value. As consideration for
providing the option, the financial institution
B-16
<PAGE>
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 the Fixed-Income and Money Market Funds as the income
accrues even though payment has not been received.
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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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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
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<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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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
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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.
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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 20 Portfolio 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"
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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. A Fund may lend its portfolio
securities in order to generate additional income. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high-grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. Loans are subject to termination at
the option of a Fund or the borrower at any
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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
20 Portfolio 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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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
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reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
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 Funds may
purchase securities in foreign countries. Accordingly, shareholders should
consider carefully the substantial risks involved in investing in securities
issued by companies and governments of foreign nations, which are in addition to
the usual risks inherent in domestic investments. Foreign investments involve
the possibility of expropriation, nationalization or confiscatory taxation;
taxation of income earned in foreign nations (including, for example,
withholding taxes on interest and dividends) or other taxes imposed with respect
to investments in foreign nations; foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country and
repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly
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available information about foreign issuers than those in the United States.
Foreign companies are often not subject to uniform accounting, auditing and
financial reporting standards. Further, these Funds may encounter difficulties
in pursuing legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Funds in other countries are generally greater
than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund if it had entered into a contract to sell the security. In certain
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The securities markets of many of the countries in which these
Funds may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
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 Equity Funds, particularly the Emerging
Markets Fund, the Emerging Markets 20 Portfolio 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
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volume of trading, which result in a lack of liquidity and in greater price
volatility; (iii) the existence of national policies which may restrict these
Funds' investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging market countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging market countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Policies
The Total Return Bond Fund and the International and Global Equity
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 concentrates its investments in the
global communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because the Global
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
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rate increase produces a decrease in value. The longer the remaining maturity of
a security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities in a Fund's portfolio. Mortgage prepayments are affected by the level
of interest rates and other factors, including general economic conditions and
the underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fixed-Income Fund and a 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 Equity 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 20
Portfolio may effect short sales of securities. The International 20 Portfolio
and the Mid Cap 20 Portfolio do not expect to make significant use of short
sales, but the portfolio managers may, from time to time, engage in short sales
when believed to be
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appropriate. 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 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 a 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, a Fund may not receive any
payments (including interest) on collateral deposited with the broker or
custodian. The Emerging Markets 20 Portfolio 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, the International 20 Portfolio,
the Global 20 Portfolio and the Mid Cap 20 Portfolio 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
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prior to the date of this Statement of Additional Information. Such information
has not been independently verified by the California Intermediate Bond and
California Money Funds.
Because the California Intermediate Bond and California Money Funds
expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by these Funds to pay interest
on, or principal of, such securities. The creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and there is no responsibility on
the part of the State of California to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within California, and it is
possible these Funds will invest in obligations of particular issuers as to
which such specific factors are applicable.
The California economy and general financial condition affect the
ability of the State and local governments to raise and redistribute revenues to
assist issuers of municipal securities to make timely payments on their
obligations. California is the most populous state in the nation with a total
population estimated at 33.4 million. California has a diverse economy, with
major employment in the agriculture, manufacturing, high technology, services,
trade, entertainment and construction sectors. After experiencing strong growth
throughout much of the 1980s, from 1990-1993 the State suffered through a severe
recession, the worst since the 1930's, heavily influenced by large cutbacks in
defense/aerospace industries, military base closures and a major drop in real
estate construction. California's economy has been performing strongly since the
start of 1994.
Certain of the State's significant industries, such as high technology,
are sensitive to economic disruptions in their export markets and the State's
rate of economic growth, therefore, could be adversely affected by any such
disruption. A significant downturn in U.S. stock market prices could adversely
affect California's economy by reducing household spending and business
investment, particularly in the important high technology sector. Moreover, a
large and increasing share of the State's General Fund revenue in the form of
income and capital gains taxes is directly related to, and would be adversely
affected by a significant downturn in the performance of, the stock markets.
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 and
significantly affect state and local government budgets.
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, 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 several
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fiscal years. The State has also increased aid to local governments and reduced
certain mandates for local services.
The combination of resurging exports, a strong stock market, and a
rapidly growing economy in 1999 and early 2000 resulted in unprecedented growth
in the State's General Fund revenues during fiscal year 1999-2000. Revenues are
estimated to have been about $71.2 billion, which is $8.2 billion higher than
projected for the 1999 Budget Act. The State's Special Fund for Economic
Uncertainties ("SFEU") had a record balance of over $7.2 billion on June 30,
2000. On that date, the Governor signed the 2000 Budget Act enacting the State's
fiscal year 2000-01 budget. The spending plan assumes General Fund revenues and
transfers of $73.9 billion, an increase of 3.8 percent above the estimates for
1999-2000. The Budget Act appropriates $78.8 billion from the General Fund, an
increase of 17.3 percent over 1999-2000, and reflects the use of $5.5 billion
from the SFEU. The Budget Act also includes Special Fund expenditures of $15.6
billion, from revenues estimated at $16.5 billion, and Bond Fund expenditure of
$5.0 billion.
In order not to place undue pressure on future budget years, about $7.0
billion of the increased spending in 2000-01 will be for one-time expenditures
and investments. The State estimates the SFEU will have a balance of $1.781
billion at June 30, 2001. In addition, the Governor held back $500 million as a
set aside for litigation costs. The Governor vetoed just over $1 billion in
General Fund and Special Fund appropriations from the 2000 Budget Act in order
to achieve the budget reserve. The State will not undertake a revenue
anticipation note borrowing in 2000-01.
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.
The State's improved economy and budget, however, have resulted in several
upgrades in its general obligation bond ratings. As of October 6, 2000, the
State's general obligation bonds were rated Aa2 by Moody's, AA by Standard &
Poor's, and AA by Fitch. 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.
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In response to the significant reduction in local property tax revenue
caused by the passage of Proposition 13, the State enacted legislation to
provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits the
amount of appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate 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). It is not possible to predict the future
impact of the voter initiatives, State constitutional amendments, legislation or
economic considerations described above, or of such initiatives, amendments or
legislation that may be enacted in the future, on the long-term ability of the
State of California or California municipal issuers to pay interest or repay
principal on their obligations. 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, California, together with its
pooled investment funds, which included investment funds from other local
governments, filed for bankruptcy. Los Angeles County, the nation's largest
county, in the recent past has also experienced financial difficulty and its
financial condition will continue to be affected by the large number of County
residents who are dependent on government services and by a structural deficit
in its health department. Moreover, California's improved economy has caused Los
Angeles County,
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and other local governments, to come under increased pressure from public
employee unions for improved compensation and retirement benefits.
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.
The Tax-Free Funds' (other than the Federal Money Fund) concentration
in California Municipal Securities provides a greater level of risk than a fund
that is diversified across numerous states and municipal entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund (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 International 20 Portfolio,
the Global 20 Portfolio, the Mid Cap 20 Portfolio, 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
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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.)
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.
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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 Funds
and the Emerging Markets 20 Portfolio) 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.)
13. Except as described in the relevant 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.
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DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Funds' net investment income,
substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of ordinary income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year a Fund realizes a
net gain on transactions involving investments held for the period required for
long-term capital gain or loss recognition or otherwise producing long-term
capital gains and losses, the Fund will have a net long-term capital gain. After
deduction of the amount of any net short-term capital loss, the balance (to the
extent not offset by any capital losses carried over from the eight previous
taxable years) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time that Fund's shares
may have been held by the shareholders.
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
B-39
<PAGE>
tax or excise taxes based on net income. However, the Boards of Trustees may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of a Fund.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of that Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal 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.
B-40
<PAGE>
If more than 50% in value of the total assets of a Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by that Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities of foreign corporations, that Fund
will not be entitled under the Code to pass through to its shareholders their
pro rata share of the foreign income taxes paid by that Fund. In this case,
these taxes will be taken as a deduction by that Fund.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that these Funds derive from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, a Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. A Fund will endeavor to limit its exposure to
the PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, a Fund may incur the PFIC tax in
some instances.
The Tax-Free Funds. Provided that, as anticipated, each Tax-Free Fund
qualifies as a regulated investment company under the Code, and, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of each of the California 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.
B-41
<PAGE>
The Code may also subject interest received on certain otherwise
tax-exempt securities to an alternative minimum tax. In addition, certain
corporations which are subject to the alternative minimum tax may have to
include a portion of exempt-interest dividends in calculating their alternative
minimum taxable income.
Exempt-interest dividends paid to shareholders that are corporations
subject to California franchise tax will be taxed as ordinary income to such
shareholders. Moreover, no exempt-interest dividends paid by these Funds will
qualify for the corporate dividends-received deduction for federal income tax
purposes.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of these Funds is not deductible for federal income tax
purposes. Under regulations used by the IRS for determining when borrowed funds
are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares of these Funds. California personal income tax law restricts the
deductibility of interest on indebtedness incurred by a shareholder to purchase
or carry shares of a fund paying dividends exempt from California personal
income tax, as well as the allowance of losses realized upon a sale or
redemption of shares, in substantially the same manner as federal tax law.
Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their own tax
advisors 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.
B-42
<PAGE>
Any security, option, or other position entered into or held by a Fund
that substantially diminishes that Fund's risk of loss from any other position
held by that Fund may constitute a "straddle" for federal income tax purposes.
In general, straddles are subject to certain rules that may affect the amount,
character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
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
B-43
<PAGE>
received from the Funds. Shareholders are advised to consult with their own tax
advisors 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 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.
B-44
<PAGE>
Kathleen K. 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.
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 TBCA.
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.
B-45
<PAGE>
Andrew Cox, Trustee (born 1944)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also a
member of the Archdiocese of San Francisco Finance Council, where she chairs the
Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (born 1939).+
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
The officers of the Trusts, and the Trustees who are considered
"interested persons" of the Trusts, receive no compensation directly from the
Trusts for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Funds. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 2000, and to be paid during the fiscal year ending June 30, 2001,
and the aggregate compensation paid to each of the Trustees during the fiscal
year ended June 30, 2000, and to be paid during the fiscal year ending June 30,
2001, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below.
----------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-46
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year
Ended June 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate Pension or Total Compensation
Compensation from Compensation from Retirement Benefits From the Trusts 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
---------------------------- -----------------------------------------------------------------------------------------------------
Fiscal Year
Ending June 30, 2001
----------------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate Pension or Total Compensation
Compensation from Compensation from Retirement Benefits From the Trusts and
The Montgomery The Montgomery Accrued as Part of Fund Complex
Name of Trustee Funds Funds II Fund Expenses* (1 additional Trust)
---------------------------- -----------------------------------------------------------------------------------------------------
R. Stephen Doyle None None -- None
---------------------------- -----------------------------------------------------------------------------------------------------
John A. Farnsworth $41,500 $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------------------------------
Andrew Cox $41,500 $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------------------------------
Cecilia H. Herbert $41,500 $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
The Class R, Class P and Class L shares of the Funds are all sold
without a sales load. Therefore, there is no existing arrangement to reduce or
eliminate any sales loads for Trustees and other affiliated persons of the
Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in each Prospectus,
investment management services are provided to the Funds (except the Global
Long-Short Fund, the Emerging Markets 20 Portfolio and the Balanced Fund) by
Montgomery Asset Management LLC (the "Manager"), pursuant to an Investment
Management Agreement between the Manager and The Montgomery Funds dated July 31,
1997; and to the Global Long-Short Fund, the Emerging Markets 20 Portfolio and
the Balanced Fund by the Manager pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds II dated July 31, 1997 (together,
the "Agreements").
The Agreements are in effect with respect to each Fund for two years
after the Fund's inclusion in its Trust's Agreement (on or around its beginning
of public operations) and then continue for each Fund for periods not exceeding
one year so long as such continuation is approved at least annually by (1) the
Board of the appropriate Trust or the vote of a majority of the outstanding
shares of that Fund, and (2) a majority of the Trustees who are not interested
persons of any party to the relevant Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreements may be terminated at any time, without penalty, by a Fund or the
Manager upon 60 days' written notice, and are automatically terminated in the
event of its assignment as defined in the Investment Company Act.
B-47
<PAGE>
<TABLE>
For services performed under the Agreements, each Fund pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Fund at the following annual rates:
<CAPTION>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
U.S. Equity Funds
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.85%
Montgomery Mid Cap 20 Portfolio First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
First $200 million 1.40%
Montgomery U.S. Emerging Growth Fund Over $200 million 1.25%
First $250 million 1.00%
Montgomery Small Cap Fund Over $250 million 0.80%
Montgomery Balanced Fund All Amounts NONE*
International and Global Equity Funds
First $500 million 1.10%
Montgomery International Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
First $500 million 1.10%
Montgomery International 20 Portfolio Next $500 million 1.00%
Over $1 billion 0.90%
First $500 million 1.25%
Montgomery Global Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
B-48
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
First $250 million 1.25%
Montgomery Global 20 Portfolio Next $250 million 1.00%
Over $500 million 0.90%
First $250 million 1.50%
Montgomery Global Long-Short Fund Over $250 million 1.25%
First $250 million 1.25%
Montgomery Global Communications Fund Over $250 million 1.00%
First $250 million 1.25%
Montgomery Emerging Markets Fund Over $250 million 1.00%
Montgomery Emerging Markets 20 Portfolio First $250 million 1.10%
(formerly Montgomery Emerging Markets Focus Fund) Next $250 million 1.00%
Over $500 million 0.90%
First $500 million 1.25%
Montgomery Emerging Asia Fund Next $500 million 1.10%
Over $1 billion 1.00%
Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
First $500 million 0.50%
Montgomery Short Duration Government Bond Fund Over $500 million 0.40%
First $250 million 0.40%
Montgomery Government Money Market Fund Next $250 million 0.30%
Over $500 million 0.20%
B-49
<PAGE>
First $500 million 0.50%
Montgomery California Tax-Free Intermediate Bond Fund Over $500 million 0.40%
First $500 million 0.40%
Montgomery California Tax-Free Money Fund Over $500 million 0.30%
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
<FN>
* This amount represents only the management fee of the Balanced Fund.
</FN>
</TABLE>
<TABLE>
As noted in the Prospectus, the Manager has agreed in an Operating
Expense Agreement with each Trust to reduce some or all of its management fee
(and to reimburse other Fund expenses) if necessary to keep total operating
expenses, expressed on an annualized basis, at or below the following
percentages of each Fund's average net assets (excluding interest, taxes,
dividend expenses and Rule 12b-1 Plan fees):
<CAPTION>
TOTAL EXPENSE LIMITATION
FUND (ANNUAL RATE)
U.S. Equity Funds
<S> <C> <C>
Montgomery Growth Fund 1.50%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Mid Cap 20 Portfolio 1.40%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery U.S. Emerging Growth Fund 1.50%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Small Cap Fund 1.40%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Balanced Fund 1.30%, including expenses of underlying Funds
----------------------------------------------------------------------------------- ------------------------------------------------
International and Global Equity Funds
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery International Growth Fund 1.65%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery International 20 Portfolio 1.65%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Global Opportunities Fund
1.90%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Global 20 Portfolio 1.80%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Global Long-Short Fund 2.35%
B-50
<PAGE>
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Global Communications Fund 1.90%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Emerging Markets Fund 1.90%
----------------------------------------------------------------------------------- ------------------------------------------------
Montgomery Emerging Markets 20 Portfolio (formerly Montgomery Emerging Markets 1.60%
Focus Fund)
----------------------------------------------------------------------------------- ------------------------------------------------
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 0.60%
----------------------------------------------------------------------------------- ------------------------------------------------
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%
----------------------------------------------------------------------------------- ------------------------------------------------
</TABLE>
The Operating Expense Agreements have a 10-year rolling term. The
Manager also may voluntarily reduce additional amounts to increase the return to
a Fund's investors. Any reductions made by the Manager in its fees are subject
to reimbursement by that Fund within the following three years provided the Fund
is able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Funds for fees and expenses for the
current year.
Operating expenses for purposes of the Agreements include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
Rule 12b-1 fees, expenses incurred in connection with any merger or
reorganization or extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the Boards at
duly called meetings. In considering the Agreements, the Trustees specifically
considered and approved the provision that permits the Manager to seek
reimbursement of any reduction made to its management fee within the three-year
period. The Manager's ability to request reimbursement is subject to various
conditions. First, any reimbursement is subject to a Fund's ability to effect
such reimbursement and remain in compliance with applicable expense limitations
in place at that time. Second, the Manager must specifically request the
reimbursement from the relevant Board. Third, the relevant Board must approve
such reimbursement as appropriate and not inconsistent with the best interests
of the Fund and the shareholders at the time such reimbursement is requested.
Because of these substantial contingencies, the potential reimbursements will be
accounted for as contingent liabilities that are not recordable on the balance
sheet of a Fund until collection is probable; but the full amount of the
potential liability will appear in a footnote to each Fund's financial
statements. At such time as it appears probable that a Fund is able to effect
such reimbursement, that the Manager intends to seek such reimbursement and that
the Board of Trustees has or is likely to approve the payment of such
reimbursement, the amount of the reimbursement will be accrued as an expense of
that Fund for that current period.
B-51
<PAGE>
<TABLE>
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
FUND YEAR OR PERIOD ENDED JUNE 30,
2000 1999 1998
U.S. Equity Funds
<S> <C> <C> <C>
Montgomery Growth Fund $ 5,221,816 $ 8,698,673 $ 12,414,444
Montgomery U.S. Emerging Growth Fund $ 3,596,622 $ 4,867,019 $ 4,997,558
Montgomery Small Cap Fund $ 1,394,554 $ 1,529,933 $ 2,244,080
Montgomery Balanced Fund $ 0+ $ 0+ $ 0+
International & Global Equity Funds
International and Global Equity Funds
Montgomery International Growth Fund $ 2,547,997 $ 2,215,164 $ 626,903
Montgomery International 20 Portfolio $ 11,254 N/A N/A
Montgomery Global Opportunities Fund $ 1,217,984 $ 923,286 $ 833,421
Montgomery Global 20 Portfolio $ 1,588,633 $ 2,118,848 $ 3,130,440
Montgomery Global Long-Short Fund $ 5,942,624 $ 885,497++ $ 63,717*
Montgomery Global Communications Fund $ 5,631,091 $ 3,513,626 $ 2,423,093
Montgomery Emerging Markets Fund $ 4,307,233 $ 4,630,828 $ 11,315,548
Montgomery Emerging Markets 20 Portfolio
(formerly Montgomery Emerging Markets Focus Fund) $ 33,286 $ 7,190++ $ 98,117
Montgomery Emerging Asia Fund $ 719,944 $ 562,967 $ 643,231
U.S. Fixed Income & Money Market Funds
Fixed Income and Money Market Funds
Montgomery Total Return Bond Fund $ 208,255 $ 340,724 $ 386,758
Montgomery Short Duration Government Bond Fund $ 1,308,664 $ 1,019,539 $ 296,242
Montgomery Government Money Market Fund $ 2,082,066 $ 2,230,429 $ 2,147,103
Montgomery California Tax-Free Intermediate Bond Fund $ 305,188 $ 357,085 $ 235,081
Montgomery California Tax-Free Money Fund $ 1,377,534 $ 1,135,573 $ 640,819
Montgomery Federal Tax-Free Money Fund $ 856,614 $ 763,874 $ 783,661
<FN>
* For the fiscal year ended March 31, 1999.
++ For the period of April 1, 1999 through June 30, 1999. The Global Long-Short
Fund changed its fiscal year from March 31 to June 30.
+ Does not include investment advisory fees paid to the underlying Funds.
++ For the period of April 1, 1999 through June 30, 1999, the Emerging Markets
20 Portfolio changed its fiscal year from March 31 to June 30.
</FN>
</TABLE>
The Manager also may act as an investment advisor 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 a Code of Ethics pursuant to
Section 17(j) of the Investment Company Act and Rule 17j-1 thereunder. The Code
of Ethics conforms to the provisions of Rule 17j-1 as
B-52
<PAGE>
adopted by the SEC on October 29, 1999. Currently, the Code of Ethics permits
personnel subject to the Code of Ethics to buy and sell securities for their
individual accounts, unless such securities at the time of such purchase or
sale: (i) are being considered for purchase or sale by a client account of the
Manager in the next seven (7) business days; (ii) are being purchased or sold by
a client account of the Manager; or (iii) were purchased or sold by a client
account of the Manager within the most recent seven (7) business days. These
restrictions are not required to be met where the trade in question meets
certain de minimis requirements and is not being purchased or sold by a client
account of the Manager.
The use of the name "Montgomery" by the Trusts and by the Funds is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share Marketing Plan
(or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds pursuant to
Rule 12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Funds pursuant to the 12b-1 Plan.
On August 24, 1995, the Board of Trustees of the Trusts, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the 12b-1 Plan
or in any agreement related to the 12b-1 Plan (the "Independent Trustees"), at
their regular quarterly meeting, adopted the 12b-1 Plan for the newly designated
Class P and Class L shares of each Fund. Class R shares are not covered by the
12b-1 Plan. The 12b-1 Plan applies to the Class B and Class C shares of the
Global Long-Short Fund.
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, 2000, the 12b-1 Plan incurred the
following expenses:
FUND COMPENSATION TO BROKER-DEALERS
Montgomery Growth Fund $918
Montgomery Small Cap Fund $63,656
Montgomery Balanced Fund $1,767
Montgomery International Growth Fund $1,806
Montgomery Global 20 Portfolio $188.21
Montgomery Global Long-Short Fund $247,647
Montgomery Emerging Markets Fund $4,436
Montgomery Short Duration Government Bond Fund $160.53
Montgomery Government Money Market Fund $8,747
B-53
<PAGE>
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, 2000, the total 12b-1 Plan expenses accrued but not paid for The
Montgomery Funds and The Montgomery Funds II were $467.73, 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 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.
B-54
<PAGE>
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.
The Custodian. The Chase Manhattan Bank (the "Custodian") 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.
B-55
<PAGE>
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
Balanced 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 Tremont 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
auditors with respect to the annual audit. This fee is based on all assets of
the Trusts and related trusts or funds and is equal to an annual rate of
0.04875% of the first $3 billion, plus 0.0375% of the next $2 billion and
0.0225% of amounts over $5 billion.
<TABLE>
The table below provides information on the administrative and
accounting fees paid over the past three fiscal years (or shorter period of
operations).
<CAPTION>
Administrative Fees Paid Fund Accounting Fees Paid
for year ended June 30, for period ended June 30,
FUND 2000 1999 1998 2000 1999 1998
U.S. Equity Funds
<S> <C> <C> <C> <C> <C> <C>
Montgomery Growth Fund $365,554 $596,578 $868,583 $307,401 $343,900 $375,344
Montgomery U.S. Emerging Growth Fund $184,611 $244,217 $250,482 $162,692 $123,298 $112,317
Montgomery Small Cap Fund $97,619 $107,095 $157,086 $82,044 $56,198 $67,348
Montgomery Balanced Fund # -- -- -- $33,173 $14,323 $10,235
B-56
<PAGE>
International and Global Equity Funds
Montgomery International Growth Fund $151,955 $128,893 $29,195 $117,301 $110,827 $26,492
Montgomery International 20 Portfolio** $716 N/A N/A $492 N/A N/A
Montgomery Global Opportunities Fund $55,473 $40,303 $34,872 $25,421 $34,332 $34,601
Montgomery Global 20 Portfolio $88,963 $118,656 $169,530 $82,718 $98,812 $161,222
Montgomery Global Long-Short Fund $268,678 $31,290+ $38,828*** $254,081 $27,883+ --
Montgomery Global Communications Fund $325,425 $198,318 $127,310 $246,157 $169,391 $118,147
Montgomery Emerging Markets Fund $222,101 $265,350 $666,433 $167,006 $269,638 $640,146
Montgomery Emerging Markets 20 Portfolio++ $2,120 $6,229 $238 $37,091 $281 N/A
Montgomery Emerging Asia Fund** $27,497 $22,722 $30,353 $24,371 $21,080 $26,355
Fixed Income and Money Market Funds
Montgomery Total Return Bond Fund** $15,780 $30,298 $38,676 $20,497 $27,733 $21,399
Montgomery Short Duration Government Bond Fund $84,664 $64,534 $26,924 $88,599 $47,513 $17,363
Montgomery Government Money Market Fund $291,413 $321,086 $283,260 $301,006 $341,653 $209,006
Montgomery California Tax-Free Intermediate Bond Fund $17,055 $20,231 $14,557 $22,417 $17,029 $8,698
Montgomery California Tax-Free Money Fund $163,417 $122,096 $88,361 $178,002 $89,625 $52,914
Montgomery Federal Tax-Free Money Fund*** $74,889 $62,270 $62,064 $72,709 $44,264 $37,807
<FN>
** Montgomery International 20 Portfolio commenced operations on December
31, 1999, 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 changed its fiscal year end
from March 31 to June 30.
+ For the period April 1, 1999 to June 30, 1999.
++ The administrative fee noted in the table is as of fiscal year end March
31, 1998. The Montgomery Emerging Markets 20 Portfolio changed its fiscal
year end from March 31 to June 30.
</FN>
</TABLE>
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the primary
consideration is to obtain the most favorable price and execution available. The
Manager determines which securities are to be purchased and sold by the Funds
and which broker-dealers are eligible to execute the Funds' portfolio
transactions, subject to the instructions of, and review by, the Funds and their
Boards. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a "market-maker"
unless, in the opinion of the Manager or a Fund, a better price and execution
can otherwise be obtained by using a broker for the transaction.
The International and Global Equity Funds contemplate purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
B-57
<PAGE>
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 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
B-58
<PAGE>
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 initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
<TABLE>
For the year ended June 30, 2000, the Funds' total securities
transactions generated commissions of $29,866,601, of which $367,535 was paid to
Banc of America Securities (formerly Nationsbanc Montgomery Securities). For the
year ended June 30, 1999, the Funds total securities transactions generated
commissions of $21,104,996, none of which $138,717 was paid to Banc of America
Securities. For the year ended June 30, 1998, the Funds' total securities
transactions generated commissions of $21,476,442, of which $27,015 was paid to
Banc of America Securities. For the three fiscal years ended June 30, 2000, the
Funds' securities transactions generated commissions of:
B-59
<PAGE>
<CAPTION>
Fund Commissions for fiscal year ended:
June 30, 1998 June 30, 1999 June 30, 2000
<S> <C> <C> <C>
Montgomery Growth Fund $2,798,653 $3,466,343 $1,822,235
Montgomery U.S. Emerging Growth Fund $1,209,313 $1,488,439 $1,422,070
Montgomery Small Cap Fund $1,416,883 $1,204,127 $1,030,319
Montgomery Balanced Fund $ 0+ $ 0+ $ 0+
Montgomery International Growth Fund $ 332,532 $2,028,321 $3,060,175++
Montgomery International 20 Portfolio N/A N/A $ 19,715
Montgomery Global Opportunities Fund $ 532,520 $ 822,932 $ 918,988
Montgomery Global 20 Portfolio $2,040,486 $1,878,608 $1,557,214
Montgomery Global Long-Short Fund N/A* $2,145,574 $9,027,765
Montgomery Global Communications Fund $1,370,035 $2,343,249 $5,404,128
Montgomery Emerging Markets Fund $9,442,852 $4,321,947 $3,871,486
Montgomery Emerging Markets 20 Portfolio (formerly Montgomery Emerging $ 8,616 $ 7,190++ $ 83,104
Markets Focus Fund)
Montgomery Emerging Asia Fund $ 675,563 $ 931,870 $ 505,517
<FN>
* For the period ended March 31, 1998.
+ Does not include commissions paid to the Underlying Funds as well as $43,885
of brokerage commissions attributable to the Montgomery Equity Income Fund
which was reorganized as an underlying Fund of the Balanced Fund on April 5,
2000.
++ For the 15-month period ended June 30, 1999. The Emerging Markets 20
Portfolio changed its fiscal year end from March 31 to June 30.
++ Includes $222,860 of brokerage commissions attributable to the Montgomery
International Small Cap Fund, which was reorganized into the Montgomery
International Growth Fund on April 5, 2000.
</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.
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
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<PAGE>
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 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
B-61
<PAGE>
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 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
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<PAGE>
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the 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 mean between the last bid and
asked prices. The value of a futures contract equals the unrealized gain or loss
on the contract that is determined by marking the contract to the current
settlement price for a like contract on the valuation date of the futures
contract if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Manager and the Trusts' Pricing
Committees determine their fair value, following procedures approved by the
Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
B-63
<PAGE>
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.
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.
B-64
<PAGE>
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).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
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<PAGE>
The Tax-Free Funds. A tax equivalent yield demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for one of the
Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30, 2000, were as follows:
<CAPTION>
TAX-EQUIV. TAX-EQUIV.
EFFECTIVE CURRENT EFFECTIVE CURRENT TAX-EQUIV.
FUND YIELD YIELD YIELD* YIELD* YIELD YIELD*
(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 6.50% N/A
Montgomery Short Duration Government N/A N/A N/A N/A 6.20% N/A
Bond Fund
Montgomery Government Money Market Fund 6.22% 6.42% N/A N/A N/A N/A
Montgomery California Tax-Free Intermediate N/A N/A N/A N/A 4.25% 4.33%
Bond Fund
Montgomery California Tax-Free Money Fund 3.55% 3.61% 6.48% 6.59% N/A N/A
Montgomery Federal Tax-Free Money Fund 3.97% 4.05% 7.25% 7.39% N/A N/A
</TABLE>
o 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
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<PAGE>
dividends and distributions and
complete redemption of the
hypothetical investment at the end
of the measuring period.
Aggregate Total Return. A Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in that Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$1,000.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a l-, 5- or
10-year period at the end of a l-,
5- or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
<TABLE>
The average annual total return for each Fund for the periods indicated
was as follows:
<CAPTION>
YEAR 5-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 2000
<S> <C> <C> <C>
Montgomery Growth Fund 0.47% 14.57% 18.78%
Montgomery U.S. Emerging Growth Fund 42.46% 20.12% 21.08%
Montgomery Small Cap Fund 34.12% 18.70% 19.27%
Montgomery Balanced Fund 1.62% 13.13% 16.29%
Montgomery International Growth Fund 10.16% N/A 16.15%
Montgomery International 20 Portfolio 0.10% N/A 0.10%
Montgomery Global Opportunities Fund 21.46% 22.22% 18.38%
Montgomery Global 20 Portfolio 17.14% N/A 23.08%
Montgomery Global Long-Short Fund 67.54% N/A 66.32%
Montgomery Global Communications Fund 51.53% 31.20% 25.52%
Montgomery Emerging Markets Fund 17.58% (0.93)% 3.69%
Montgomery Emerging Markets 20 Portfolio (formerly Montgomery Emerging 27.91% N/A 24.17%
Markets Focus Fund)
Montgomery Emerging Asia Fund (12.56)% N/A (0.11)%
Montgomery Total Return Bond Fund 4.96% N/A 6.30%
Montgomery Short Duration Government Bond Fund 4.86% 5.74% 5.49%
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<PAGE>
YEAR 5-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 2000
Montgomery California Tax-Free Intermediate Bond Fund 3.71% 5.02% 4.53%
<FN>
----------------
* Total return for periods of less than one year are aggregate, not annualized,
return figures. The dates of inception for the Funds were:
</FN>
</TABLE>
Growth Fund, September 30, 1993; U.S. Emerging Growth Fund, December
30, 1994; Small Cap Fund, July 13, 1990; Balanced Fund, March 31, 1994;
International Growth Fund, June 30, 1995; International 20 Portfolio,
December 31, 1999; Global Opportunities Fund, September 30, 1993;
Global 20 Portfolio, October 27, 1995; Global Long-Short Fund, December
31, 1997; Global Communications Fund, June 1, 1993; Emerging Markets
Fund, March 1, 1992; Emerging Markets 20 Portfolio (formerly 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.
Comparisons. To help investors better evaluate how an investment in the
Funds might satisfy their investment objectives, advertisements and other
materials regarding the Funds may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to, the following may be used in discussion
of a Fund's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
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<PAGE>
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Funds to calculate
their figures.
The Funds may also publish their relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time, the Funds may
publish or distribute information and reasons supporting the Manager's belief
that a particular Fund may be appropriate for investors at a particular time.
The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, WEFA, consensus estimates, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic 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.
B-69
<PAGE>
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 September 30,
2000 approximately $5 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Funds (as of September
30, 2000, around 184,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting separate series
of the Trusts have been assumed by each respective Fund. The expenses incurred
in connection with the establishment and registration of shares of the Funds as
separate series of the Trusts have been assumed by the respective Funds and are
being amortized over a period of five years commencing with 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.
B-70
<PAGE>
The validity of shares offered hereby has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The Montgomery Funds
II) as shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust ("Declaration of Trust")
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust. The Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Declaration of
Trust provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Funds or
Trust and satisfy any judgment thereon. All such rights are limited to the
assets of the Funds. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort and other
liabilities. Furthermore, the activities of the Trust as an investment company
as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
Among the Boards' powers enumerated in the Agreements and Declaration
of Trust is the authority to terminate the Trusts or any of their series, or to
merge or consolidate the Trusts or one or more of their series with another
trust or company without the need to seek shareholder approval of any such
action.
<TABLE>
As of September 30, 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:
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Growth Fund - Class R
<S> <C> <C>
Charles Schwab & Co., Inc. 4,900,657 27.34%
101 Montgomery Street
San Francisco CA 94104-4122
Asset Allocation Fund 1,420,374 7.92%
Attn. Mike Dominguez
101 California Street
San Francisco, CA 94111-5802
National Financial Services LLC 1,278,436 7.13%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-71
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
U.S. Emerging Growth Fund - Class R
Charles Schwab & Co., Inc. 2,288,752 27.63%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 585,771 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. 574,051 12.70%
101 Montgomery Street
San Francisco CA 94104-4122
Northern Trust Company Cust. 334,752 7.41%
FBO Dallas Symphony Fund for Excellence
A/C # 26-00196
P.O. Box 92956
Chicago, IL 60675-2956
International Growth Fund - Class R
Charles Schwab & Co., Inc. 2,567,035 42.82%
101 Montgomery Street
San Francisco CA 94104-4122
International Growth Fund - Class R
Charles Schwab & Co., Inc. 54,672 45.64%
101 Montgomery Street
San Francisco CA 94104-4122
Lieber Family Limited Partnership 25,202 21.04%
510 Little John Lane
Houston, TX 77024-5719
Mark Geist 10,000 8.35%
456 Oakshire Place
Alamo, CA 94507-2332
B-72
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Global Opportunities Fund - Class R
Charles Schwab & Co., Inc. 1,449,775 39.14%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 280,994 7.59%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global Communications Fund - Class R
Charles Schwab & Co., Inc. 4,782,283 35.84%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 883,134 6.62%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global Long-Short Fund - Class R
Charles Schwab & Co., Inc. 4,196,085 40.70%
101 Montgomery Street
San Francisco CA 94104-4122
Merrill, Lynch, Pierce, Fenner & Smith, Inc. 753,069 7.31%
FBO Its Customers
Attn. Fund Administration 97TN7
4800 Deer Lake Dr. E. Fl. 2
Jacksonville, FL 32246-6484
Emerging Markets Fund - Class R
Charles Schwab & Co., Inc. 8,363,547 37.71%
101 Montgomery Street
San Francisco CA 94104-4122
B-73
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
National Financial Services LLC 2,621,303 11.82%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Markets 20 Portfolio (formerly Emerging Markets Focus Fund) - Class R
Charles Schwab & Co., Inc. 242,043 67.79%
101 Montgomery Street
San Francisco CA 94104-4122
Merrill, Lynch, Pierce, Fenner & Smith, Inc. 42,017 11.77%
FBO Its Customers
Attn. Fund Administration 97TP0
4800 Deer Lake Dr. E. Fl. 2
Jacksonville, FL 32246-6484
Emerging Asia Fund - Class R
Charles Schwab & Co., Inc. 800,436 37.21%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 146,727 6.82%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global 20 Portfolio - Class R
Charles Schwab & Co., Inc. 1,239,629 26.38%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 364,626 7.76%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-74
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Balanced Fund - Class R
Charles Schwab & Co., Inc. 1,033,291 29.62%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 308,721 8.85%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Equity Income Fund - Class R
Asset Allocation Fund 344,278 100.00%
Attn. Mike Dominguez
101 California Street
San Francisco, CA 94111-5802
Total Return Bond Fund - Class R
Asset Allocation Fund 1,901,655 74.46%
Attn. Mike Dominguez
101 California Street
San Francisco, CA 94111-5802
Charles Schwab & Co., Inc. 431,602 16.90%
101 Montgomery Street
San Francisco CA 94104-4122
Short Duration Government Bond Fund - Class R
Charles Schwab & Co., Inc. 10,083,444 54.95%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 1,011,336 5.51%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-75
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Prudential Securities, Inc. 1,474,216 8.03%
Special Custody Account for the Exclusive
Benefit of Customers - PC
1 New York Plaza
Attn. Mutual Funds
New York, NY 10004-1901
Government Money Market Fund - Class R
Banc of America Securities 998,482,421 89.65%
Sweep Account FBO Clients
Attn. Mutual Funds
600 Montgomery Street
San Francisco, CA 94111-2702
Federal Tax-Free Money Fund - Class R
Banc of America Securities 138,476,888 96.56%
Sweep Account FBO Clients
Attn. Mutual Funds
600 Montgomery Street
San Francisco, CA 94111-2702
California Tax-Free Intermediate Bond Fund - Class R
Charles Schwab & Co., Inc. 1,564,455 69.75%
101 Montgomery Street
San Francisco CA 94104-4122
National Financial Services LLC 112,888 5.03%
For the Exclusive Benefit of Our Customers - Attn. Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
California Tax-Free Money Market - Class R
Banc of America Securities 327,503,053 70.89%
Sweep Account FBO Clients
Attn. Mutual Funds
600 Montgomery Street
San Francisco, CA 94111-2702
B-76
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Republic Bank of California NA 129,725,623 28.08%
Investment Dept.
445 N. Bedford Drive
Beverly Hills, CA 90210-4302
As of September 30, 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 ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Growth Fund - Class P
Inv. Fiduciary Trust Co. 2,671 38.74%
IRA Carl N. Grant
2008 Cutwater Ct.
Reston, VA 20191-3604
Dreyfus Investment Services Corp. 1,441 20.89%
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburgh, PA 15259-0001
Walter J. Klein Company Ltd. 581 8.42%
Profit Sharing Trust
5033 Carillon Way
Charlotte, NC 28270
Inv. Fiduciary Trust Co. Cust. 494 7.16%
IRA A/C Carol A. Grant
2008 Cutwater Ct.
Reston, VA 20191-3604
Equity Income Fund - Class P
Asset Allocation Fund 191,006 100.00%
Attn. Mike Dominguez
101 California Street
San Francisco, 94111-5802
B-77
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Small Cap Fund - Class P
Saxon & Co. 559,357 47.00%
FBO T/A Leaseway Transport
A/C #20-35-002-1037303
P.O. Box 7780-1888
Philadelphia, PA 19182-0001
State Street Bank & Trust Co. Tr. 340,192 28.59%
U/A December 1, 1993
Ameridata Tech Employee Savings Plan
Attn. Steven Shipman Master Tr. W6C
One Enterprise Dr.
No. Quincy, MA 02171-2126
State Street Bank & Trust Co. 107,886 9.07%
U/A January 2, 1996
Wavetek US, Inc. Employee Savings & Investments Plan
P.O. Box 1992
Boston, MA 02105-1992
MRA Systems, Inc. 69,271 5.82%
1 Neuman Way J-103
Evandale, OH 45215-1915
State Street 67,775 5.69%
Retirement Savings Plan
P.O. Box 1992
Boston, MA 02105-1992
International Growth Fund - Class P
Merrill, Lynch, Pierce, Fenner & Smith, Inc. 410,152 98.58%
For the Sole Benefit of Its Clients
4800 Deer Lake Dr.
E. Bldg. One
Jacksonville, FL 32246-6484
B-78
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
Emerging Markets Fund - Class P
State Street Bank & Trust Co. 42,878 60.52%
U/A/ January 2, 1996
Wavetek US Inc. Employee Savings & Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
Canada Life Insurance Company of America 6,871 9.70%
Attn. Mukesh Sharma
330 University Avenue SP12
Toronto, Ontario MSG 1R*
Canada
MSDW Online, Inc. 6,066 8.56%
780-16649-18
333 Market Street
San Francisco, CA 94105-2102
Dreyfus Investment Services Corp. 3,736 5.27%
FBO 636931621
2 Mellon Bank Center Room 177
Pittsburgh, PA 15259-0001
Global 20 Portfolio - Class P
E*TRADE Securities, Inc. 277 30.16%
A/C 1090-6929
Peter R. Daboll
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
Inv. Fiduciary Trust Co. 200 21.73%
IRA Carl N. Grant
2008 Cutwater Ct.
Reston, VA 20191-3604
BA Investment Services, Inc. 179 19.49%
FBO 211129251
185 Berry St., 3rd Floor #2640
San Francisco, CA 94107-1729
B-79
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
E*TRADE Securities, Inc. 122 13.22%
A/C 1961-0863
Mary Campbell
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3306
Balanced Fund - Class P
State Street Bank & Trust Co. Tr. 171,201 97.79%
U/A December 1, 1993
Ameridata Tech Employee Savings Plan
Attn. Steven Shipman Master Tr. W6C
One Enterprise Dr.
No. Quincy, MA 02171-2126
Short Government Bond Fund - Class P
Merrill, Lynch, Pierce, Fenner & Smith, Inc. 383,857 98.82%
For the Sole Benefit of Its Clients
4800 Deer Lake Dr.
E. Bldg. One
Jacksonville, FL 32246-6484
Government Money Market Fund - Class P
Aswan Investments LP 473 99.62%
P.O. Box 620922
Woodside, CA 94062-0922
</TABLE>
As of September 30, 2000, the Trustees and the officers of TMF owned,
as a group, more than 1% of the outstanding Class R shares of each of the
Montgomery International 20 Portfolio and the Montgomery Emerging Markets 20
Portfolio.
The Trusts are registered with the Securities and Exchange Commission
as non-diversified management investment companies, although each Fund, except
for the Global 20 Portfolio, the Mid Cap 20 Portfolio, the International 20
Portfolio and the Tax-Free Funds, is a diversified series of The Montgomery
Funds. Such a registration does not involve supervision of the management or
policies of the Funds. The Prospectuses 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.
B-80
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending June 30,
2000 for each Fund as contained in the Annual Report to Shareholders of those
Funds for the fiscal year ended June 30, 2000, are incorporated herein by
reference.
B-81
<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-82
<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-83
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
B-84
<PAGE>
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
B-85
<PAGE>
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
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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 B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
AND
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
-----------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
STATEMENT OF ADDITIONAL INFORMATION
October 31, 2000
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust, having different
series of shares of beneficial interest. Each of the above-named funds is a
separate series of the Trust (each a "Portfolio" and collectively, the
"Portfolios"). This Statement of Additional Information contains information in
addition to that set forth in the Prospectuses for the Montgomery Institutional
Series: International Growth Portfolio and the Montgomery Institutional Series:
Emerging Markets Portfolio, each dated October 31, 2000, as those prospectuses
may be revised from time to time (in reference to the appropriate Portfolio or
Portfolios, 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 the
appropriate Prospectuses.
<PAGE>
TABLE OF CONTENTS
THE TRUST.....................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS..........................3
RISK FACTORS.................................................................16
INVESTMENT RESTRICTIONS......................................................19
DISTRIBUTIONS AND TAX INFORMATION............................................21
TRUSTEES AND OFFICERS........................................................28
INVESTMENT MANAGEMENT AND OTHER SERVICES.....................................28
EXECUTION OF PORTFOLIO TRANSACTIONS..........................................32
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................35
DETERMINATION OF NET ASSET VALUE.............................................36
PRINCIPAL UNDERWRITER........................................................38
PERFORMANCE INFORMATION......................................................38
GENERAL INFORMATION..........................................................41
FINANCIAL STATEMENTS.........................................................43
APPENDIX.....................................................................44
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THE TRUST
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust on September 10, 1993.
The Trust is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Trust currently offers shares of beneficial
interest, $0.01 par value per share, in various series. This Statement of
Additional Information pertains to Montgomery Institutional Series:
International Growth Portfolio (the "International Growth Portfolio") and the
Montgomery Institutional Series: Emerging Markets Portfolio (the "Emerging
Markets Portfolio").
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
The Portfolios 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 Portfolios are
described in detail in the respective Prospectuses. The following discussion
supplements the discussion in the Prospectuses.
Each Portfolio is a diversified series of the Trust. The achievement of
each Portfolio's investment objective will depend on market conditions generally
and on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depositary Receipts. Each Portfolio may hold securities of foreign
issuers in the form of sponsored and unsponsored 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. Unsponsored ADR and EDR programs are organized without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs and EDRs, and
the prices of unsponsored ADRs and EDRs may be more volatile. For purposes of a
Portfolio's investment policies, its investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Convertible Securities. Each Portfolio may invest in convertible
securities. A convertible security is a fixed-income security (a bond or
preferred stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. Through their conversion feature, they provide an
opportunity to participate in capital appreciation resulting from a market price
advance in the underlying common stock. The price of a convertible security is
influenced by the market value of the underlying common stock and tends to
increase as the common stock's value rises and decrease as the common stock's
value declines. For purposes of allocating a Portfolio's investments, the
Manager regards convertible securities as a form of equity security.
B-3
<PAGE>
Securities Warrants. Each Portfolio may invest up to 5% of its net
assets in warrants. Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
Other Investment Companies. Each Portfolio may invest in securities
issued by other investment companies. Those investment companies must invest in
securities in which the Portfolio can invest in a manner consistent with the
Portfolio's investment objective and policies. Applicable provisions of the
Investment Company Act require that a Portfolio limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more than
10% of the value of a Portfolio's total assets will be invested in the aggregate
in securities of investment companies as a group; and (b) either (i) a Portfolio
and affiliated persons of that Portfolio 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 Portfolio in excess
of 1% of the company's total outstanding shares be deemed illiquid), or (ii) a
Portfolio 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
the only way for the Portfolios 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. A Portfolio may incur tax liability to the
extent it invests in the stock of a foreign issuer that is a "passive foreign
investment company" regardless of whether such "passive foreign investment
company" makes distribution to that Portfolio.
Each Portfolio does not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, a Portfolio bears its ratable
share of that investment company's expenses, including its advisory and
administrative 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 or closed-end.
Debt Securities. Each Portfolio 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 15% of
each Portfolio's total assets. Each Portfolio may invest in traditional
corporate, government debt securities rated within the four highest grades by
Standard and Poor's Corporation ("S&P") (at least BBB), Moody's Investors
Service, Inc. ("Moody's") (at least Baa) or Fitch Investors Service ("Fitch")
(at least Baa), or unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board. In selecting debt
securities, the Manager seeks out good credits and analyzes interest rate trends
and specific developments that may affect individual issuers.
Debt securities may also consist of participation 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 Portfolio and will be limited to
5% of a Portfolio's total assets.
B-4
<PAGE>
As an operating policy, which may be changed by the Board, a Portfolio
may invest in debt securities rated lower than investment grade. Subject to this
limitation, a Portfolio may invest in any debt security, including securities in
default. After its purchase, a debt security may cease to be rated or its rating
may be reduced below that required for purchase by the Portfolio. 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 Portfolio.
In addition to traditional corporate, government and supranational debt
securities, a Portfolio 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 Portfolio 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"). As a
result, that Portfolio generally will have a lower yield than if it purchased
higher yielding commercial paper or other securities with correspondingly
greater risk instead of U.S. government securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of 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 Portfolios' 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.
Structured Notes and Indexed Securities. Each Portfolio 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 Portfolio invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Asset-Backed Securities. Each Portfolio may invest up to 5% of its
total assets in asset-backed securities, which represent a direct or indirect
participation in, or are secured by and payable from, pools of assets, such as
motor vehicle installment sales contracts, installment from loan contracts,
leases of various types of real or personal property, and receivables from
revolving credit (e.g., credit card) agreements. Payments or distributions of
principal and interest on asset-backed securities may be supported by credit
enhancements, such as various
B-5
<PAGE>
forms of cash collateral accounts or letters of credit. Like mortgage-related
securities, these securities are subject to the risk of prepayment.
Privatizations. Each Portfolio 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 Portfolios may invest in privatizations. The
ability of U.S. entities, such as these Portfolios, 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. Each Portfolio may invest in special situations.
The Portfolios 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. The Portfolios 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 Portfolios to invest
directly. Investments in special situations may be illiquid, as determined by
the Manager based on criteria reviewed by the Board. The Portfolios 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 market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities. The net asset value of a Portfolio will reflect these
changes in market value.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities remaining in a Portfolio's portfolio. Mortgage prepayments are
affected by the level of interest rates and other factors, including general
economic conditions of the underlying location and age of the mortgage. In
periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment tends to increase, shortening
the average life of such a pool. Reinvestment of prepayments may occur at higher
or lower interest rates than the original investment, affecting a Portfolio's
yield.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P 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 Portfolio to sell the securities at
fair value either to meet
B-6
<PAGE>
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 Portfolio.
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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolios typically will not hedge against the foreign currency
exchange risks associated with their investments in foreign securities.
Consequently, the Portfolios will be very sensitive to any changes in exchange
rates for the currencies in which their foreign investments are denominated or
linked. These Portfolios 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 Portfolios 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 Portfolios might not enter into such transactions. Such
inopportune timing or utilization of hedging practices could result in
substantial losses to the Portfolios.
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 Portfolio 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 Portfolio 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
Portfolio's portfolio securities denominated in such currency, or when a
Portfolio 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.
B-7
<PAGE>
In connection with a Portfolio's forward contract transactions, an
amount of that Portfolio'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
Portfolio 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 (the "CFTC"), the CFTC may in the future regulate them, and the
ability of a Portfolio 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 Portfolio than if
it had not entered into such contracts. A Portfolio generally will not enter
into a forward foreign currency exchange contract with a term greater than one
year.
Futures Contracts and Options on Futures Contracts. The Portfolios
typically will not hedge against movements in interest rates, securities prices
or currency exchange rates. The Portfolios may still occasionally purchase and
sell various kinds of futures contracts and options on futures contracts. The
Portfolios 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 Portfolios have filed a notice of eligibility for exclusion from
the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that the Portfolios will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a
Portfolio 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 Portfolio'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 Portfolios will attempt to determine whether the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolios
or which they expect to purchase. When used, the Portfolios' futures
transactions generally will be entered into only for traditional hedging
purposes, i.e., futures contracts will be sold to protect against a decline in
the price of securities or currencies and will be purchased to protect a
Portfolio against an increase in the price of securities it intends to purchase
(or the currencies in which they are denominated). All futures contracts entered
into by the Portfolios 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 the Portfolios'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Portfolio may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
B-8
<PAGE>
By using futures contracts to hedge their positions, the Portfolios
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 the Portfolios propose to acquire. For example,
when interest rates are rising or securities prices are falling, a Portfolio 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
Portfolio, 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 Portfolio 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 Portfolio
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that the Portfolio has
acquired or expects to acquire.
As part of its hedging strategy, a Portfolio may also 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 Portfolio's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Portfolio'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 Portfolio enter into a greater
or lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that Portfolio'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
Portfolio'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
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio is
potentially unlimited.
A Portfolio 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 (the "Internal
Revenue Code"), for maintaining its qualification as a regulated investment
company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. Each
Portfolio 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 Portfolio
may invest. A Portfolio may also enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
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A Portfolio 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 Portfolio, 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 Portfolio may purchase and sell options traded on U.S. and foreign
exchanges. Although a Portfolio 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 Portfolio 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 the 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 Portfolios do not currently intend to do so, they may, in
the future, write (i.e., sell) covered put and call options on securities,
securities indices, and currencies in which they may invest. A covered call
option involves a Portfolio's giving another party, in return for a premium, the
right to buy specified securities owned by that Portfolio 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 Portfolio gives up the opportunity, while the
option is in effect, to realize a gain from any price increase (above the option
exercise price) in the underlying security. In addition, a Portfolio's ability
to sell the underlying security is limited while the option is in effect unless
that Portfolio effects a closing purchase transaction.
Each Portfolio may also write covered put options that give the holder
of the option the right to sell the underlying security to the Portfolio at the
stated exercise price. A Portfolio 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 Portfolio will cause its custodian to segregate cash, cash
equivalents, U.S. government securities or other liquid equity or debt
securities whose value is at least the value of the exercise price of the put
options. A Portfolio will not write put options if the aggregate value of the
obligations underlying the put options exceeds 25% of that Portfolio's total
assets (5% for the International Growth Portfolio).
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
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institution by an exchange of special procedures that may interfere with the
timely execution of the Portfolios' orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. Each
Portfolio may invest in S&P's 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 designated 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" below, because WEBS mirror the performance of a single-country
index, an economic downturn in a single country could significantly and
adversely affect the price of the WEBS for that country.
Leaps and Bounds. Subject to the limitation that no more than 25% of
its total assets be invested in options (5% for the International Growth
Portfolio), each Portfolio 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.
Other Investment Practices
Repurchase Agreements. Each Portfolio may enter into repurchase
agreements. A Portfolio'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
Portfolio. Alternatively, the purchase and repurchase prices may be the same,
with
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interest at a stated rate due to a Portfolio together with the repurchase price
on the date of repurchase. In either case, the income to a Portfolio is
unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Portfolios enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Board.
The Portfolios generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Portfolios regard repurchase agreements
with maturities in excess of seven days as illiquid. A Portfolio may not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from a Portfolio 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 Portfolio subject to a repurchase
agreement as being owned by that Portfolio or as being collateral for a loan by
that Portfolio to the seller. If bankruptcy or insolvency proceedings are
commenced with respect to the seller of the security before its repurchase, a
Portfolio 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 Portfolio
has not perfected a security interest in the security, that Portfolio may be
required to return the security to the seller's estate and be treated as an
unsecured creditor. As such, a Portfolio 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 Portfolio, 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
Portfolio also runs the risk that the seller may fail to repurchase the
security. However, each Portfolio 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
Portfolio plus accrued interest, and each Portfolio 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 Portfolio, pursuant to its repurchase agreement, may require the
seller of the security to deliver additional securities so that the market value
of all securities subject to the repurchase agreement equals or exceeds the
repurchase price (including interest) at all times.
The Portfolios may participate in one or more joint accounts with each
other and other series of the Trust 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.
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Reverse Repurchase Agreements. A Portfolio may enter into reverse
repurchase agreements. A Portfolio 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 Portfolio 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
Portfolio also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of the Portfolio's securities is
disadvantageous.
A Portfolio causes its custodian to segregate liquid assets, such as
cash, U.S. government securities or other liquid equity or debt securities equal
in value to its obligations (including accrued interest) with respect to reverse
repurchase agreements. Such assets are marked to market daily to ensure that
full collateralization is maintained.
Lending Portfolio Securities. Each Portfolio may lend securities to
brokers, dealers and other financial organizations. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans may not exceed 30% of the value of the
Portfolio's total assets (10% for the Emerging Markets Portfolio). 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 Portfolio may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Loans are subject to termination at the option of a Portfolio or the
borrower at any time. Upon such termination, that Portfolio is entitled to
obtain the return of these securities loaned within five business days.
For the duration of the loan, a Portfolio 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 failed
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
Such loans of securities are collateralized with collateral assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. There is a risk of delay in receiving collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower failed financially.
Leverage. Each Portfolio 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 Portfolio's
shares and in the yield on its portfolio. Although the principal of such
borrowings will be fixed, the Portfolio's assets may change in value while the
borrowing is outstanding. Leveraging creates interest expenses that can exceed
the income from the assets retained.
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When-Issued and Forward Commitment Securities. Each Portfolio 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 Portfolio to the
issuer. While the Portfolios reserve the right to sell when-issued or delayed
delivery securities prior to the settlement date, the Portfolios intend to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a Portfolio 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 Portfolios 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 Portfolios 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 Portfolio are held in cash pending the settlement of a purchase of
securities, that Portfolio will earn no income on these assets.
The Portfolios 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 Portfolio must obtain the security which it has made a
commitment to deliver. If the Portfolio 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 Portfolio may incur a loss as a result of this type of
forward commitment if the price of the security increases between the date the
Portfolio enters into the forward commitment and the date on which it must
purchase the security it is committed to deliver. The Portfolio 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 Portfolio may be required to pay in connection with this type of forward
commitment. Whenever a Portfolio engages in this type of transaction, it will
segregate assets as discussed above.
Illiquid Securities. Each Portfolio may invest up to 15% of its 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 Portfolio has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, securities subject to restrictions on repatriation for more
than seven days, securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested or profit, certain
restricted securities and securities that are otherwise not freely transferable.
Illiquid securities also include shares of an investment company held by a
Portfolio 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 Portfolio may include those that are
subject to restrictions on transferability contained in the securities laws of
other countries.
Securities that are freely marketable in the country where they are
principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Also, illiquid securities do not
include
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securities that are restricted from trading on formal markets for some period of
time but for which an active informal market exists, or securities that meet the
requirement of Rule 144A under the 1933 Act (see below) and that, subject to
review by the Board and guidelines adopted by the Board, the Manager has
determined to be liquid.
Where registration is required, a Portfolio 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 Portfolio may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, that Portfolio
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 Portfolio's inability to dispose of such securities promptly or
at favorable prices.
The Board has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Portfolios' portfolios
and reports periodically on such decisions to the Board.
Defensive Investments and Portfolio Turnover. Notwithstanding its
investment objective, each Portfolio 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 Portfolio 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
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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 Portfolio.
Portfolio securities are sold whenever the Manager believes it
appropriate, regardless of how long the securities have been held. The Manager
therefore changes the Portfolio's investments whenever it believes doing so will
further the Portfolio'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 Portfolio, 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 Portfolio does not regard portfolio turnover as a limiting
factor.
RISK FACTORS
The following describes certain risks involved with investing in the
Portfolios in addition to those described in the Prospectuses or elsewhere in
this Statement of Additional Information.
Small Companies
Since the Portfolios may invest in smaller companies, investors should
consider carefully the special risks involved. Smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Also, smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Foreign Securities
Each Portfolio may purchase securities in foreign countries.
Accordingly, shareholders should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation; taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations; foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments); default in
foreign government securities, and political or social instability or diplomatic
developments that could adversely affect investments. In addition, there is
often less publicly available information about foreign issuers than those in
the United States. Foreign companies are often not subject to uniform
accounting, auditing and financial reporting standards. Further, these
Portfolios 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 these Portfolios 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
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difficulty. The inability of a Portfolio 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 Portfolio if the value of the portfolio security
declined, or result in claims against the Portfolio 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 Portfolios 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 Portfolio's securities denominated in the currency.
Such changes also affect the Portfolio's income and distributions to
shareholders. A Portfolio may be affected either favorably or unfavorably by
changes in the relative rates of exchange among the currencies of different
nations, and a Portfolio 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 these Portfolios 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 Portfolio. Many countries in which a Portfolio 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 Portfolios. The Portfolios 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
Each Portfolio may invest in securities of companies domiciled in, and
in markets of, so-called "emerging market countries." These Portfolios 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. These Portfolios deem securities that are convertible to equity
investments to be equity-derivative securities.
These Portfolios consider a company to be an emerging markets company
if its securities are principally traded in the capital market of an emerging
markets country; it derives 50% of its total revenue from either goods produced
or services rendered in emerging markets countries or from sales made in such
emerging markets countries, regardless of where the securities of such companies
are principally traded; or it is organized under the laws of, and with a
principal office in, an emerging markets country. An emerging markets country is
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one having an economy that is or would be considered by the World Bank or the
United Nations to be emerging or developing.
Investments in companies and markets of emerging market countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict these Portfolios' 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 Portfolios 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 a Portfolio changes investments from one country to
another or when proceeds from the sale of shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent a Portfolio from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source or impose
other taxes, with respect to that Portfolio's investments in securities of
issuers of that country. There also is the possibility of expropriation,
nationalization, confiscatory or other taxation, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
A Portfolio 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 the likelihood of the imposition by any foreign
government of exchange control restrictions that would affect the liquidity of a
Portfolio's assets maintained with custodians in foreign countries, as well as
the degree of risk from political acts of foreign governments to which such
assets may be exposed. The Manager also considers the degree of risk attendant
to holding portfolio securities in domestic and foreign securities depositories
(see "Investment Management and Other Services").
Equity Swaps
Each Portfolio may invest in equity swaps. Equity swaps are derivatives
that 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. The value
of equity swaps can be very volatile. To the extent the Manager does not
accurately analyze and predict the potential relative fluctuation of the
components swapped with another party, the Portfolio 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
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changes in interest rates. Furthermore, during the period a swap is outstanding,
the Portfolio may suffer a loss if the counterparty defaults.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Portfolio and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Portfolio's outstanding
voting securities as defined in the Investment Company Act (unless otherwise
noted). Each Portfolio may not:
1. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more than 5% of the total
assets of that Portfolio would be invested in such issuer.
There are no limitations with respect to the remaining 25% of
that Portfolio's total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and
policies, (b) through the lending of up to 30% (10% for the
Emerging Markets Portfolio) 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.
3. (a) Borrow money, except for temporary or emergency
purposes from a bank and then not in excess of 10% of
its total assets (at the lower of cost or fair market
value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of
at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are
in excess of 10% (5% for the Emerging Markets
Portfolio) 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 purpose of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and
permissible forward contracts, futures contracts,
option contracts or other hedging transactions.
4. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities. (This does not preclude a Portfolio from obtaining
such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities.)
5. Buy or sell real estate or commodities or commodity contracts;
however, each Portfolio, to the extent not otherwise
prohibited in this Statement of Additional Information, may
invest in securities secured by real estate or interests
therein or issued by companies which invest in real estate or
interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts, and related
options generally as described in this Statement of Additional
Information. As an operating policy which
B-19
<PAGE>
may be changed without shareholder approval, the International
Growth Portfolio may invest in real estate investment trusts
only up to 10% of its total assets.
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude
permissible investments in marketable securities of issuers
engaged in such activities.)
7. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed this Statement of Additional Information or as such
securities may be acquired as part of a merger, consolidation
or acquisition of assets.
8. Invest, in the aggregate, more than 15% of its net assets in
illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities), securities which are not
otherwise readily marketable, repurchase agreements that
mature in more than seven days, and over-the-counter options
(and securities underlying such options) purchased by that
Portfolio. (This is an operating policy which 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 which
may be changed without shareholder approval, consistent with
the Investment Company Act.)
10. Invest more than 25% of the market value of its total assets
in the securities of companies engaged in any one industry.
(This does not apply to investment in the securities of the
U.S. government, its agencies or instrumentalities.) For
purposes of this restriction, each Portfolio 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 each Portfolio 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, dispose of or write put, call, straddle
or spread options unless the aggregate premiums paid on, and
assets subject to, all such options which are held at any time
do not exceed 25% of the Portfolio's total assets (5% for the
International Growth Portfolio).
13. Except as described in this Statement of Additional
Information, engage in short sales of securities. (This is an
operating policy which may be changed without shareholder
approval, consistent with applicable regulations.)
14. Invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of that Portfolio's net assets.
Warrants acquired by that Portfolio in units or attached to
securities may be deemed to be without value. (This is an
operating policy which may be changed without shareholder
approval.)
B-20
<PAGE>
15. Purchase more than 10% of the outstanding voting securities of
any one issuer. (This is an operating policy that may be
changed without shareholder approval.)
16. Invest in commodities, except for futures contracts or options
on futures contracts 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 Portfolio's total
assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums
on open futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board and notice to shareholders. If there is a change in
the investment objective or policies of the Portfolio, a shareholder should
consider whether the Portfolio remains an appropriate investment in light of its
then-current financial positions and needs.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
In the future each Portfolio has reserved the right, if approved by its
Board of Trustees, to convert to a "master/feeder" structure. In this structure,
the assets of mutual funds with common investment objectives and similar
parameters are combined into a pool, rather than being managed separately. The
individual funds are know as "feeder" funds and the pool as the "master" fund.
Although combining assets in this manner allows for economies of scale and other
advantages, this change will not affect the investment objectives, philosophies
or disciplines currently employed by the Portfolios. You would receive prior
notice before we took any such action. As of the date of this prospectus, we
have not proposed instituting alternative structures for any of the Portfolios.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Portfolios 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 Portfolios' net investment income,
substantially all of which will be declared as dividends to the Portfolios'
shareholders.
The amount of income dividend payments by the Portfolios is dependent
upon the amount of net investment income received by the Portfolios from their
portfolio holdings, is not guaranteed and is subject to the discretion of the
Portfolios' Board. These Portfolios do not pay "interest" or guarantee any fixed
rate of return on an investment in their shares.
The Portfolios also may derive capital gains or losses in connection
with sales or other dispositions of their portfolio securities. Any net gain a
Portfolio 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
Portfolio realizes a net gain on transactions involving investments held for the
period required for long-term capital gain or loss recognition or otherwise
producing
B-21
<PAGE>
long-term capital gains and losses, the Portfolio 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 Portfolio's shares may have been held by the shareholders.
The maximum long-term 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 Portfolio reduces that
Portfolio's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
Dividends and other distributions will be reinvested in additional
shares of the applicable Portfolio 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 Portfolio has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue 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 Portfolio that has filed a tax
return has so qualified and elected in prior tax years. Each Portfolio'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 Internal Revenue Code, so
that the Portfolio will not be subject to any federal income tax or excise taxes
based on net income. However, the Board may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of a
Portfolio.
In order to qualify as a regulated investment company, each Portfolio
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 Portfolio'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 Internal Revenue Code, a Portfolio will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Internal Revenue Code. If a Portfolio is unable to meet
certain requirements of the Internal Revenue Code, it may be subject to taxation
as a corporation.
B-22
<PAGE>
Distributions of net investment income and net realized capital gains
by a Portfolio 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 Portfolio
on the reinvestment date. Portfolio distributions also will be included in
individual and corporate shareholders' income on which the alternative minimum
tax may be imposed.
The Portfolios or any securities dealer effecting a redemption of the
Portfolios' shares by a shareholder will be required to file information reports
with the Internal Revenue Service (the "IRS") with respect to distributions and
payments made to the shareholder. In addition, the Portfolios 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 Portfolio 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 Portfolios 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 Portfolio 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 Portfolio may receive dividend distributions from U.S. corporations.
To the extent that a Portfolio receives such dividends and distributes them to
its shareholders, and meets certain other requirements of the Internal Revenue
Code, corporate shareholders of the Portfolio 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 Portfolio at the end
of its fiscal year is invested in stock or other securities of foreign
corporations, that Portfolio may elect to pass through to its shareholders the
pro rata share of all foreign income taxes paid by that Portfolio. 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 Portfolio,
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 Internal Revenue Code,
including certain holding period requirements. In this case, shareholders will
be informed in writing by that Portfolio 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 Portfolio) to
be included in their income tax returns. If 50% or less in value of that
Portfolio's total assets at the end of its fiscal year are invested in stock or
other securities of foreign corporations, that Portfolio will not be entitled
under the Internal Revenue Code to pass through to its shareholders their pro
rata share of the foreign income taxes paid by that Portfolio. In this case,
these taxes will be taken as a deduction by that Portfolio.
A Portfolio may be subject to foreign withholding taxes on dividends
and interest earned with respect to securities of foreign corporations. A
Portfolio may invest up to 10% of its total assets in the stock of foreign
B-23
<PAGE>
investment companies. Such companies are likely to be treated as "passive
foreign investment companies" ("PFICs") under the Internal Revenue 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 Portfolios derive from PFIC stock may be subject to a non-deductible
federal income tax at the Portfolio level. In some cases, a Portfolio 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
Portfolio 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 Portfolio may incur the PFIC tax in some instances.
The Trust and the Portfolios intend to comply with the requirements of
Section 817(h) of the Internal Revenue Code and related regulations, including
certain diversification requirements that are in addition to the diversification
requirements of Subchapter M and the Investment Company Act.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by a Portfolio. 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 Portfolio with respect to its business of investing in securities
or foreign currencies will qualify as permissible income under Subchapter M of
the Internal Revenue Code.
For accounting purposes, when a Portfolio purchases an option, the
premium paid by that Portfolio is recorded as an asset and is subsequently
adjusted to the current market value of the option. Any gain or loss realized by
a Portfolio upon the expiration or sale of such options held by that Portfolio
generally will be capital gain or loss.
Any security, option or other position entered into or held by a
Portfolio that substantially diminishes that Portfolio's risk of loss from any
other position held by that Portfolio 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 Portfolio'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 Portfolio'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
Portfolio that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Internal Revenue Code ("Section 1256 Contracts")
and that are held by a Portfolio at the end of its taxable year generally will
be required to be "marked to market" for federal income tax purposes, that is,
deemed to have been sold at market value. Sixty percent of any net gain or loss
recognized on these deemed sales and 60% of any net gain or loss realized from
any actual sales of Section 1256 Contracts will be treated as long-term capital
gain or loss, and the balance will be treated as short-term capital gain or
loss.
Section 988 of the Internal Revenue 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
B-24
<PAGE>
Portfolio. 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 Internal Revenue Code and for which no election is made) is treated
as ordinary income or loss. Some part of a Portfolio'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 Internal Revenue Code, rather than as capital gain or loss.
Redemptions and exchanges of shares of a Portfolio 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. All or a portion of a loss realized upon the
redemption of shares of a Portfolio may be disallowed to the extent shares of
that Portfolio 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 Prospectuses are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Portfolios. 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
Portfolios. Shareholders are advised to consult with their own tax advisers
concerning the application of foreign, federal, state and local taxes to the
ownership of an investment in the Portfolios.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Portfolios, including general supervision and review of their investment
activities. The officers (the Trust as well as two affiliated Trusts, The
Montgomery Funds and The Montgomery Funds III, have the same officers), who
administer the Portfolios' daily operations, are appointed by the Board. The
current Trustees and officers of the Trust performing a policy-making function
and their affiliations and principal occupations for the past five years are set
forth below:
George A. Rio, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. ("FDI")
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 was Senior Vice President and Manager of
Client Services; and Director of Internal Audit at the Boston Company.
B-25
<PAGE>
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 K. 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.
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 TBCA.
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
B-26
<PAGE>
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.
Cecilia H. Herbert, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also a
member of the Archdiocese of San Francisco Finance Council, where she chairs the
Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (born 1939).+
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both
--------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
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<PAGE>
retail and institutional accounts. Mr. Doyle was also with Connecticut General
Insurance, where he served as a Consultant to New York Stock Exchange Member
Firms in the area of financial planning.
<TABLE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Portfolios and Funds Distributor, Inc., will receive commissions
for executing portfolio transactions for the Portfolios. 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, 2000, and to be paid during the fiscal year ending June 30, 2001,
and the aggregate compensation paid to each of the Trustees during the fiscal
year ended June 30, 2000, and to be paid during the fiscal year ending June 30,
2001, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below.
<CAPTION>
-----------------------------------------------------------------------------
Fiscal Year Ended June 30, 2000
----------------------------------------------------------------------------------------------------------
Name of Trustee Aggregate Pension or Total Compensation From
Compensation Retirement the Trust and Fund
from The Montgomery Benefits Accrued as Part Complex
Funds II of Portfolio Expenses* (2 additional Trusts)
---------------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
---------------------------- -----------------------------------------------------------------------------
John A. Farnsworth $15,000 -- $55,000
---------------------------- -----------------------------------------------------------------------------
Andrew Cox $15,000 -- $55,000
---------------------------- -----------------------------------------------------------------------------
Cecilia H. Herbert $15,000 -- $55,000
---------------------------- -----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Fiscal Year Ending June 30, 2001
----------------------------------------------------------------------------------------------------------
Name of Trustee Aggregate Pension or Total Compensation From
Compensation Retirement the Trust and Fund
from The Montgomery Benefits Accrued as Part Complex
Funds II of Portfolio Expenses* (2 additional Trusts)
---------------------------- -----------------------------------------------------------------------------
R. Stephen Doyle None -- None
---------------------------- -----------------------------------------------------------------------------
John A. Farnsworth $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------
Andrew Cox $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------
Cecilia H. Herbert $17,500 -- $65,000
---------------------------- -----------------------------------------------------------------------------
<FN>
* The Trust does not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectuses,
investment management services are provided to the Portfolios by Montgomery
Asset Management, LLC (the "Manager"), pursuant to an Investment Management
Agreement between the Manager and The Montgomery Funds II dated July 31, 1997,
as amended (the "Agreement").
The Agreement with respect to each Portfolio is in effect for two years
after the Portfolio's inclusion in the Trust's Agreement (on or around its
beginning of public operations) and then continues for each Portfolio for
periods not exceeding one year so long as such continuation is approved at least
annually by (1) the Board or the vote of a majority of the outstanding shares of
that Portfolio, and (2) a majority of the Trustees who are not
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<PAGE>
interested persons of any party to the Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreement may be terminated at any time, without penalty, by a Portfolio or the
Manager upon 60 days' written notice, and is automatically terminated in the
event of its assignment as defined in the Investment Company Act.
<TABLE>
For services performed under the Agreement, each Portfolio pays the
Manager a management fee (accrued daily but paid when requested by the Manager)
based upon the average daily net assets of the Portfolio at the following annual
rates:
<CAPTION>
-------------------------------------------- ----------------------------------------- -----------------------
PORTFOLIO AVERAGE DAILY NET ASSETS ANNUAL RATE
-------------------------------------------- ----------------------------------------- -----------------------
<S> <C> <C>
International Growth Portfolio First $500 million 0.75%
Over $500 million 0.65%
-------------------------------------------- ----------------------------------------- -----------------------
Emerging Markets Portfolio First $50 million 1.25%
Next $50 million 1.00%
Over $100 million 0.90%
-------------------------------------------- ----------------------------------------- -----------------------
</TABLE>
As noted in the Prospectus, the Manager has agreed in an Operating
Expense Agreement with the Trust to reduce some or all of its management fee
(and to reimburse other Portfolio expenses) if necessary to keep total operating
expenses, expressed on an annualized basis, at or below the following
percentages of each Portfolio's average net assets (excluding interest, taxes,
dividend expenses and Rule 12b-1 Plan fees):
--------------------------------------------------------------------------------
PORTFOLIO TOTAL EXPENSE LIMITATION
(ANNUAL RATE)
--------------------------------------------------------------------------------
International Growth Portfolio 0.90%
Emerging Markets Portfolio 1.25%
The Operating Expense Agreements have a 10-year rolling term. The
Manager also may voluntarily reduce additional amounts to increase the return to
a Portfolio's investors. Any reductions made by the Manager in its fees are
subject to reimbursement by that Portfolio within the following three years
provided the Portfolio 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
Portfolios 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 Portfolio by the
Boards at duly called meetings. In considering the Agreements, the Trustees
specifically considered and approved the provision that permits the Manager to
seek reimbursement of any reduction made to its management fee within the
three-year period. The Manager's ability to request reimbursement is subject to
various conditions. First, any reimbursement is subject to a Portfolio'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
B-29
<PAGE>
relevant Board. Third, the relevant Board must approve such reimbursement as
appropriate and not inconsistent with the best interests of the Portfolio 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
Portfolio until collection is probable; but the full amount of the potential
liability will appear in a footnote to each Portfolio's financial statements. At
such time as it appears probable that a Portfolio 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 Portfolio
for that current period.
<TABLE>
As compensation for its investment management services, each of the
following Portfolios 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 Portfolios as discussed previously.
<CAPTION>
---------------------------------------- ---------------------------------------------------------------
PORTFOLIO FOR THE PERIOD ENDED JUNE 30,
2000 1999 1998
---------------------------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C>
International Growth Portfolio* $ 1,936,239 $ 591,014 $ 0
---------------------------------------- --------------------- --------------------- -------------------
Emerging Markets Portfolio* $ 2,646,222 $ 2,664,737 $ 3,536,299
---------------------------------------- --------------------- --------------------- -------------------
<FN>
* The International Growth Portfolio commenced operations on June 30, 1998,
and the Emerging Markets Portfolio commenced operations on December 17,
1993.
</FN>
</TABLE>
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The Trust and the Manager have adopted a Code of Ethics pursuant to
Section 17(j) of the Investment Company Act and Rule 17j-1 thereunder. The Code
of Ethics conforms to the provisions of Rule 17j-1 as adopted by the SEC on
October 29, 1999. Currently, the Code of Ethics permits personnel subject to the
Code of Ethics to buy and sell securities for their individual accounts, unless
such securities at the time of such purchase or sale: (i) are being considered
for purchase or sale by a client account of the Manager in the next seven (7)
business days; (ii) are being purchased or sold by a client account of the
Manager; or (iii) were purchased or sold by a client account of the Manager
within the most recent seven (7) business days. These restrictions are not
required to be met where the trade in question meets certain de minimis
requirements and is not being purchased or sold by a client account of the
Manager.
The use of the name "Montgomery" by the Trust and by the Portfolios is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Portfolios.
The Distributor. Funds Distributor, Inc. (the "Distributor") may
provide certain administrative services to the Portfolios on behalf of the
Manager. The Distributor will also perform investment banking, investment
advisory and brokerage services for persons other than the Portfolios, including
issuers of securities in which the Portfolios may invest. These activities from
time to time may result in a conflict of interests of the Distributor with those
of the Portfolios, and may restrict the ability of the Distributor to provide
services to the Portfolios.
B-30
<PAGE>
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 Portfolio 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.
The Custodian. The Chase Manhattan Bank (the "Custodian") serves as
principal custodian of the Portfolios' 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 Portfolios 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 Portfolios pursuant to an
Administrative Services Agreement between the Trust and MAM (the "Agreement").
In approving the Agreement, the Board of the Trust, including a majority of the
independent Trustees, recognizes that the Agreement involves an affiliate of the
Trust; however, it has made separate determinations that, among other things,
the nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trust and the supervision of
the Board of the Trust, the Administrator performs the following types of
services for the Portfolios: (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 Portfolio, pays the Administrator an administrative fee based upon a
percentage of the average daily net assets of each Portfolio. The fee per
Portfolio varies from an annual rate of 0.07% to 0.04% depending on the
Portfolio and level of assets.
Chase Global Funds Services Company ("Chase"), 73 Tremont Street,
Boston, Massachusetts 02108, serves as the sub-administrator to the Portfolios
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 Trust,
Chase assists MAM in providing administrative services to the Portfolios. As
compensation for the services rendered pursuant to the Sub-Agreement, MAM pays
Chase an annual sub-administrative fee based upon a percentage of the average
net assets in the aggregate of the Trust, The Montgomery Funds II and The
Montgomery Funds III. The sub-administrative fee is paid monthly for the month
or portion of the month Chase assists MAM in providing administrative services
to the Portfolios. This fee is based on all assets of the Trust and related
trusts or funds and is equal to an annual rate of 0.01625% of the first $3
billion, plus 0.0125% of the next $2 billion and 0.0075% of amounts over $5
billion. The sub-administrative fee paid to Chase is paid from
B-31
<PAGE>
the administrative fees paid to MAM by the Portfolios. Chase succeeded First
Data Corporation as sub-administrator.
Chase also serves as Fund Accountant to the Trust pursuant to Mutual
Funds Service Agreements ("Fund Accounting Agreement") entered into between the
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 Trust. As
Fund Accountant, Chase provides the Trust with various services, including, but
are not limited to: (i) maintaining the books and records for the Portfolios'
assets, (ii) calculating net asset values of the Portfolios, (iii) accounting
for dividends and distributions made by the Portfolios, and (iv) assisting the
Portfolios' independent auditors with respect to the annual audit. This fee is
based on all assets of the Trust and related trusts or funds and is equal to an
annual rate of 0.04875% of the first $3 billion, plus 0.0375% of the next $2
billion and 0.0225% of amounts over $5 billion.
<TABLE>
The table below provides information on the administrative and
accounting fees paid over the past three fiscal years (or shorter period of
operations).
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Administrative Fees Paid Fund Accounting Fees Paid
for year ended June 30, for period ended June 30,
PORTFOLIO 2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth Portfolio* $118,963 $39,401 N/A $115,620 $52,548 N/A
Emerging Markets Portfolio* $54,009 $75,002 $133,581 $69,418 $74,449 N/A
<FN>
* International Growth Portfolio commenced operations on June 30, 1998, and
the Montgomery Emerging Markets Portfolio commenced operations on December
17, 1993.
</FN>
</TABLE>
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Portfolios, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Manager determines which securities
are to be purchased and sold by the Portfolios and which broker-dealers are
eligible to execute the Portfolios' portfolio transactions, subject to the
instructions of, and review by, that Portfolio and its Board. 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 Portfolio, a better price and execution can otherwise be
obtained by using a broker for the transaction.
The Portfolios contemplate purchasing most equity securities directly
in the securities markets located in emerging or developing countries or in the
over-the-counter markets. A Portfolio may contemplate purchasing most equity
securities directly in the securities markets located in emerging or developing
countries or in the over-the-counter markets. A Portfolio 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 Portfolio may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Portfolios 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 Portfolios will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from
B-32
<PAGE>
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 Portfolios, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Portfolios are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Portfolios' 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 Portfolios is
subject to rules adopted by NASD Regulation, Inc.
While the Portfolios' 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
Portfolios or to the Manager, even if the specific services were not imputed
just to the Portfolios and may be lawfully and appropriately used by the Manager
in advising other clients. The Manager considers such information, which is in
addition to, and not in lieu of, the services required to be performed by it
under the Agreement, to be useful in varying degrees, but of indeterminable
value. In negotiating any commissions with a broker or evaluating the spread to
be paid to a dealer, the Manager, acting on behalf of a Portfolio, may therefore
pay a higher commission or spread than would be the case if no weight were given
to the furnishing of these supplemental services, provided that the amount of
such commission or spread has been determined in good faith by that Portfolio
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 Portfolio or assist the Manager in carrying out
its responsibilities to that Portfolio. These brokerage, research and
statistical services may include research/analysis reports, on-line quotation
and news services, industry publications, portfolio management software, access
to market information (e.g., last sales, bid-asked, and order) on various equity
and options exchanges, and investment workshops. The standard of reasonableness
is to be measured in light of the Manager's overall responsibilities to the
Portfolios. The Board reviews all brokerage allocations where services other
than best price and execution capabilities are a factor to ensure that the other
services provided meet the criteria outlined above and produce a benefit to the
Portfolios.
Investment decisions for a Portfolio 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 Portfolios 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 Portfolios 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
B-33
<PAGE>
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 Portfolio 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 Portfolio 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
Portfolio 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 Portfolio is purchasing or selling, each day's transactions in
such security generally will be allocated between that Portfolio 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 Portfolio's
transactions are bunched with the transactions for other client accounts. It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as that Portfolio is concerned. In other
cases, however, it is believed that the ability of a Portfolio to participate in
volume transactions may produce better executions for that Portfolio.
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 Portfolio, sell decisions at the country level are dependent
on the results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
For the year ended June 30, 2000, the Portfolios' total securities
transactions generated commissions of $4,427,501, none of which was paid to Banc
of America Securities (formerly Nationsbanc Montgomery Securities). For the year
ended June 30, 1999, the Portfolios total securities transactions generated
commissions of $2,848,870, none of which was paid to Banc of America Securities.
For the year ended June 30, 1998, the Portfolios' total securities transactions
generated commissions of $2,250,280, none of which was paid to Banc of America
Securities. For the three fiscal years ended June 30, 2000, the Portfolios'
securities transactions generated commissions of:
B-34
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- -----------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
---------------------------------------- -----------------------------------------------------------------------
2000 1999 1998
Portfolio
---------------------------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
International Growth Portfolio* $ 3,204,121 $1,020,365 $ 0
---------------------------------------- ----------------------- ----------------------- -----------------------
Emerging Markets Portfolio* $ 1,223,380 $1,828,505 $ 2,250,280
---------------------------------------- ----------------------- ----------------------- -----------------------
<FN>
* The International Growth Portfolio commenced operations on June 30,
1998, and the Emerging Markets Portfolio commenced operations on
December 17, 1993.
</FN>
</TABLE>
The Portfolios do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
such brokers solely for selling shares of the Portfolios. However, brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Portfolios for their customers.
Depending on the Manager's view of market conditions, a Portfolio 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 Portfolios may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of its Portfolios' 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 Portfolio.
When in the judgment of the Manager it is in the best interests of a
Portfolio, an investor may purchase shares of that Portfolio by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable (e.g., the Portfolio will not acquire
restricted securities), their acquisition is consistent with that Portfolio's
investment objective and policies, and the tendered securities are otherwise
acceptable to that Portfolio's Manager. Such securities are acquired by that
Portfolio only for the purpose of investment and not for resale. For the
purposes of sales of shares of that Portfolio for such securities, the tendered
securities shall be valued at the identical time and in the identical manner
that the portfolio securities of that Portfolio are valued for the purpose of
calculating the net asset value of that Portfolio's shares. A shareholder who
purchases shares of a Portfolio 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 Portfolio and the purchase price of the Portfolio's shares
acquired by the shareholder.
Payments to shareholders for shares of a Portfolio redeemed directly
from that Portfolio 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 Prospectuses, except that a
Portfolio 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 Portfolio pursuant to Section 22(e) of the Investment Company
Act) making disposal of portfolio securities or valuation
B-35
<PAGE>
of net assets of a Portfolio not reasonably practicable; or (iii) for such other
period as the SEC may permit for the protection of the Portfolio's shareholders.
The Portfolios intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Portfolios 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 Portfolios 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 Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Portfolios pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Portfolio's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Portfolio 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 Portfolio 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 Prospectuses, the net asset value of shares of the
Portfolios generally will be determined at least once daily as of 4:00 P.M.,
Eastern time, (or earlier when trading closes earlier) on each day the NYSE is
open for trading. It is expected that the NYSE will be closed on Saturdays and
Sundays and for New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The national bank holidays, in addition to New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas, include Columbus Day and Veterans
Day. The Portfolios 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 Portfolios' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Portfolio 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 Portfolio'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 Portfolios' investments are valued at market value or,
in the absence of a market value, at fair value as determined in good faith by
the Manager and the Trust's Pricing Committee pursuant to procedures approved by
or under the direction of the Board.
B-36
<PAGE>
The Portfolios' securities, including ADRs, EDRs and GDRs, which are
traded on securities exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
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 Portfolio if
acquired within 60 days of maturity or, if already held by a Portfolio on the
60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Portfolios are valued on the basis of valuations provided
by dealers in those instruments, by an independent pricing service, approved by
the Board, or at fair value as determined in good faith by procedures approved
by the Board. Any such pricing service, in determining value, will use
information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities, and
yield-to-maturity information.
An option that is written by a Portfolio 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 Portfolio is generally valued at the last sale
price or, in the absence of the last sale price, the mean between the last bid
and asked prices. 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 Board.
If any securities held by a Portfolio are restricted as to resale or do
not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board. The Board periodically reviews such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Portfolio 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
B-37
<PAGE>
against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Portfolios are valued in such manner as the
Board in good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02190, also acts as the Portfolios' principal underwriter
in a continuous public offering of the Portfolios' 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 Portfolio and the Distributor is in effect for each
Portfolio 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 Portfolio (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
Portfolio 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 Portfolios' shares. The Principal Underwriter
has not been paid any underwriting commissions for underwriting securities of
the Portfolios during each of the Portfolios' last three fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectuses, the Portfolios may, from time to time and
in accordance with applicable law, quote various performance figures in
advertisements and other communications to illustrate their past performance.
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 Portfolio will be accompanied by information on
that Portfolio's average annual compounded rate of return over the most recent
four calendar quarters and the period from that Portfolio's inception of
operations. The Portfolios may also advertise aggregate and average total return
information over different periods of time. A Portfolio'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.
B-38
<PAGE>
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 Portfolio's "aggregate total return" figures
represent the cumulative change in the value of an investment in that Portfolio
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 Portfolio'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 Portfolio'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 Portfolio with certain bank deposits
or other investments that pay a fixed yield for a stated period of time.
Investors comparing that Portfolio's performance with that of other investment
companies should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
<TABLE>
The average annual total return* for each Portfolio for the periods
indicated was as follows:
<CAPTION>
-------------------------------------------- ------------------------------ ------------------------------ ----------------------
INCEPTION*
YEAR ENDED 5-YEARS ENDED THROUGH
PORTFOLIO JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 2000
-------------------------------------------- ------------------------------ ------------------------------ ----------------------
<S> <C> <C> <C>
International Growth Portfolio* 13.91% N/A 7.67%
-------------------------------------------- ------------------------------ ------------------------------ ----------------------
Emerging Markets Portfolio* 20.42% 1.66% -0.48%
-------------------------------------------- ------------------------------ ------------------------------ ----------------------
<FN>
* The dates of inception (i.e., start of operations) for the Portfolios were:
International Growth Portfolio, June 30, 1998; and Emerging Markets
Portfolio, December 17, 1993.
</FN>
</TABLE>
Comparisons. To help investors better evaluate how an investment in the
Portfolios might satisfy their investment objectives, advertisements and other
materials regarding the Portfolios 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 a discussion
of a Portfolio's performance or the investment opportunities it may offer:
B-39
<PAGE>
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) Lipper Mutual 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.
c) 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 Portfolios.
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 Portfolios' 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 Portfolios to
calculate their figures.
The Portfolios may also publish their relative rankings as determined
by independent mutual fund ranking services like Lipper Analytical Services,
Inc., VARDS, and Morningstar, Inc.
Investors should note that the investment results of the Portfolios
will fluctuate over time, and any presentation of a Portfolios' total return for
any period should not be considered as a representation of what an investment
may earn or what a investor's total return may be in any future period.
Reasons to Invest in the Portfolios. From time to time the Portfolios
may publish or distribute information and reasons supporting the Manager's
belief that a particular Portfolio 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 Portfolios 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 Portfolios may, by way of further example, present a region as possessing
the fastest growing economies and may also present projected gross domestic
product (GDP) for selected economies.
Research. The Manager has 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 Portfolios 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.
B-40
<PAGE>
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that may be used for the
Portfolios.
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 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 September 30,
2000, over $5 billion for retail and institutional investors) and total
shareholders invested in the Montgomery Funds (as of September 30, 2000, around
184,000).
GENERAL INFORMATION
Investors in the Portfolios will be informed of the Portfolios'
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 Trust have been assumed by a series of the Trust not part of
this Statement of Additional Information. Expenses incurred in connection with
the establishment and registration of shares of each of the other funds
constituting Trust as separate series of the Trust have been assumed by each
respective Portfolio. The expenses incurred in connection with the establishment
and registration of shares of the Portfolios as separate series of the Trust
have been assumed by the respective Portfolios 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 Portfolios and will be reimbursed for such expenses
after commencement of those Portfolios' operations. Investors purchasing shares
of a Portfolio bear such expenses only as they are amortized daily against that
Portfolios' investment income.
As noted above, The Chase Manhattan Bank acts as the custodian of the
securities and other assets of the Portfolios. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Portfolios.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105,
is the Portfolios' Master Transfer Agent and Paying Agent.
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the independent accountant for the Portfolios.
The validity of shares offered hereby have been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
B-41
<PAGE>
Among the Board's powers enumerated in the Agreement and Declaration of
Trust is the authority to terminate the Trust or any series of the Trust or to
merge or consolidate the Trust or one or more of its series with another trust
or company without the need to seek shareholder approval of any such action.
<TABLE>
As of September 30, 2000, to the knowledge of the Portfolios, the
following shareholders owned of record 5% or more of the outstanding shares of
the respective Portfolios indicated:
<CAPTION>
NAME OF PORTFOLIO/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Institutional International Growth Portfolio
----------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 9,182,085 40.47%
101 Montgomery Street
San Francisco, California 94104-4122
Virginia S. Eckert Tr. 7,119,411 31.38%
FBO Municipal Police Empl. Retirement System
8401 United Plaza Blvd., Suite 270
Baton Rouge, LA 70809-7017
Springfield Massachusetts Contributory System 1,790,872 7.89%
36 Court Street
Springfield, MA 01103-1699
----------------------------------------------------------------------------------------------------------------------
Institutional Emerging Markets Portfolio
----------------------------------------------------------------------------------------------------------------------
Leland Stanford Junior University 1,026,514 46.26%
Merged Endowment Pool
Attn. Robert Blagden
2770 Sand Hill Road
Menlo Park, CA 94025-7020
Asea Brown Boveri Master Trust 571,182 25.74%
c/o Eric W. Wood
P.O. Box 120071
Stamford, CT 06912-0071
Middlesex County Retirement System 224,516 10.12%
Attn. Nancy B. Oneil
40 Thorndike Street,
New Superior Courthouse, 3rd Level
Cambridge, MA 02141-1755
The McConnell Foundation 117,857 5.31%
Attn. Lee Salter
P.O. Box 492050
Redding, CA 96049-2050
</TABLE>
As of September 30, 2000, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of each Portfolio.
The Trust is registered with the SEC as a non-diversified management
investment company, although each Portfolio is a diversified series of the
Trust. Such a registration does not involve supervision of the
B-42
<PAGE>
management or policies of the Portfolios. The Prospectuses and this Statement of
Additional Information omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of the Registration Statement
may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
The audited financial statements for the relevant periods ending June
30, 2000 for the International Growth Portfolio and the Emerging Markets
Portfolio, as contained in the respective Annual Reports to Shareholders of
those Portfolios (the "Report"), are incorporated herein by reference to the
Report.
B-43
<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-44
<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-45
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
B-46
<PAGE>
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
B-47
<PAGE>
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
B-48
<PAGE>
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
B-49
<PAGE>
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 payment.
B-50
<PAGE>
____________________________________________________
PART C
OTHER INFORMATION
___________________________________________________
<PAGE>
THE MONTGOMERY FUNDS II
______________
FORM N-1A
______________
PART C
______________
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 37
to the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 37").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 37.
(c) Instruments Defining Rights of Security Holder - Not
applicable.
(d) Investment Advisory Contracts - Form of Investment Management
Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective Amendment No.
22").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 22.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 37.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 22.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 37.
(i) Opinion of Counsel as to legality of shares - Filed herewith.
(j) Other Opinions: Independent Auditors' Consent - Filed
herewith.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re:
Initial Shares is incorporated by reference to Post-Effective
Amendment No. 37.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1Plan)
is incorporated by reference to Post-Effective Amendment No.
22.
(n) Financial Data Schedule - Not applicable.
(o) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan
is incorporated by reference to Post-Effective Amendment No.
37.
(p) Code of Ethics is incorporated by reference to Post-Effective
Amendment No. 50 to the Registration Statement as filed with
the Commission on April 6, 2000.
<PAGE>
Item 24. Persons Controlled by or Under Common Control with the Fund
Montgomery Asset Management, LLC, a Delaware limited liability company,
is the manager of each series of the Registrant, of The Montgomery Funds, a
Massachusetts business trust, and of The Montgomery Funds III, a Delaware
business trust. Montgomery Asset Management, LLC is a subsidiary of Commerzbank
AG based in Frankfurt, Germany. The Registrant, The Montgomery Funds and The
Montgomery Funds III are deemed to be under the common control of each of those
two entities.
Item 25. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to the Trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Effective July 31, 1997, Montgomery Asset Management, L.P. completed
the sale of substantially all of its assets to the current investment manager,
Montgomery Asset Management, LLC ("MAM, LLC"), a subsidiary of Commerzbank A.G.
Information about the officers and directors of MAM, LLC is provided below. The
address for the following persons is 101 California Street, San Francisco,
California 94111.
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
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
Dr. Friedrich Schmitz Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
C-2
<PAGE>
Item 27. Principal Underwriter
(a) Funds Distributor, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies.
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Kobrick-Cendant Investment Trust
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Orbitex Group of Funds
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
The Distributor is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. Funds Distributor is
located at 60 State Street, Suite 1300, Boston, Massachusetts
02109. Funds Distributor is an indirect wholly owned
subsidiary of Boston Institutional Group, Inc., a holding
company all of whose outstanding shares are owned by key
employees.
(b) The following is a list of the executive officers, directors
and partners of Funds Distributor, Inc.
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Director, President and Chief Executive Officer Marie E. Connolly
Executive Vice President George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President, General Counsel, Chief Margaret W. Chambers
Compliance Officer, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Treasurer and Joseph F. Tower, III
Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and Trust
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to shareholders, upon request and without
charge.
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act which requires the prompt convening of
a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event
that less than a majority of the trustees have been elected to
such position by shareholders. Registrant has also undertaken
promptly to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of
not less than 10 percent of the Registrant's outstanding
shares and to assist its shareholders in communicating with
other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that this Amendment meets all of the requirements to become effective under Rule
485(b) of the Securities Act of 1933 and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, the State of California, on this
30th day of October, 2000.
THE MONTGOMERY FUNDS II
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 October 30, 2000
------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the October 30, 2000
------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee October 30, 2000
------------
Andrew Cox
Cecilia H. Herbert * Trustee October 30, 2000
--------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee October 30, 2000
--------------------
John A. Farnsworth
* By: /s/ Julie Allecta
------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
C-5
<PAGE>
--------------------------------------------------------------------------------
Exhibit 23 (i)
Consent and Opinion of Counsel as to Legality of Shares
--------------------------------------------------------------------------------
C-6
<PAGE>
Law Offices of
Paul, Hastings, Janofsky & Walker LLP
A Limited Liability Partnership Including Professional Corporations
345 California Street
San Francisco, California 94104-2635
Telephone (415) 835-1600
Facsimile (415) 217-5333
Internet www.phjw.com
October 27, 2000
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
Re: The Montgomery Funds II (the "Registrant")
Ladies and Gentlemen:
We hereby consent to the continued use in the Registrant's Registration
Statement, until its withdrawl, of our opinion given on October 26, 1998 (the
"Prior Opinion") respecting the legality of the shares of beneficial interest
for the Montgomery Balanced Fund, the Montgomery Global-Long Short Fund and the
Montgomery Emerging Markets 20 Portfolio (formerly called Montgomery Emerging
Markets Focus Fund).
The Prior Opinion was filed as an exhibit to Post-Effective Amendment
No. 37 filed with the Commission on October 29, 1998.
Very truly yours,
Paul, Hastings, Janofsky & Walker LLP
<PAGE>
--------------------------------------------------------------------------------
Exhibit 23 (j)
Independent Auditors Consent
--------------------------------------------------------------------------------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post Effective
Amendment #53 to the Registration Statement on Form N-1A of our report dated
August 18, 2000, relating to the financial statements and financial highlights
appearing in the June 30, 2000 Annual Report to Shareholders of the Montgomery
Growth Fund, Montgomery U.S. Emerging Growth Fund, Montgomery Small Cap Fund,
Montgomery International Growth Fund, Montgomery International 20 Portfolio,
Montgomery Global Opportunities Fund, Montgomery Global 20 Portfolio, 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 Federal Tax-Free Money
Fund, Montgomery California Tax-Free Money Fund and Montgomery U.S. Select 20
Portfolio (seventeen of the portfolios constituting The Montgomery Funds) and
Montgomery Balanced Fund, Montgomery Global Long-Short Fund, Montgomery Emerging
Markets 20 Portfolio, Montgomery Institutional Series: International Growth
Portfolio and Montgomery Institutional Series: Emerging Markets Portfolio (five
of the portfolios constituting The Montgomery Funds II), which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the Prospectus
and under the heading "General Information" in such Registration Statement.
PricewaterhouseCoopers LLP
San Francisco, CA
October 31, 2000