<PAGE>
Montgomery Variable Series:
Emerging Markets Fund
ANNUAL REPORT
December 31, 1996
[LOGO]
THE MONTGOMERY FUNDS
Invest wisely.
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1996
Investment Review
Q. How did the Variable Series: Emerging Markets Fund perform relative to its
benchmark?
A. Since its inception on February 2, 1996, the Fund outperformed the IFC
Global Composite Index by a wide margin.
Q. What markets and holdings performed especially well during the period?
A. Since the Fund's inception, we have maintained a heavy exposure to Brazil,
a move that paid off handsomely because that market was one of the
strongest in the world during 1996.
We also have a strong weighting in Hong Kong. We were rewarded when that
market rallied strongly late in the year in response to growing enthusiasm
about the colony's impending reunification with China, recovering property
prices and attractive stock valuations. Another positive move during the
period was our decision to scale back on the Fund's exposure to Mexico.
Q. What markets and holdings were disappointing?
A. Our exposure to Thailand and South Korea continued to hurt the Fund
throughout the second half of 1996. One of the factors that drew us to
Thailand in 1996 was that real interest rates there seemed high in
comparison to those in other Southeast Asian countries, leading us to
believe that Thailand's central bank might bring rates down.
Unfortunately, this did not happen. The country also had to grapple with
political uncertainties and worries surrounding the stability of the
banking system. These factors drove that market down sharply during the
second half of 1996.
In South Korea, as in Thailand, a combination of factors drove the
market down. The weakness of the Japanese yen, for example, has been a
problem for South Korean exporters, because many of them compete directly
with Japanese firms in overseas markets. (A weaker yen makes the price of
Japanese exports more attractive.) Threats of a pending nation-wide labor
strike late in 1996 further clouded the horizon.
Q. How are you positioning the Fund for the year ahead?
A. As always, we will keep the Fund diversified across roughly 30 markets and
about 150 individual holdings. We believe that the stage has been set for
a rally in the emerging markets across all regions in 1997. Beginning with
Asia, we believe that 1997 will present some unique opportunities. The
reunification of Hong Kong and China will redirect world attention, we
think, to the opportunities the 1.2 billion people in China can present,
given the human and financial capital that Hong Kong will bring to the
table.
<TABLE>
<CAPTION>
PORTFOLIO MANAGEMENT
- ----------------------------------------------------------------
<S> <C>
Josephine Jimenez................. Senior Portfolio Manager
Bryan Sudwecks.................... Senior Portfolio Manager
Angeline Ee............................ Portfolio Manager
Frank Chiang........................... Portfolio Manager
- ----------------------------------------------------------------
</TABLE>
FUND PERFORMANCE
- ----------------------------------------------------------------
Aggregate total returns for the period
ended 12/31/96
- ----------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
EMERGING MARKETS FUND
<TABLE>
<S> <C>
Since inception (2/2/96)................................ 6.79%
IFC GLOBAL COMPOSITE INDEX
Since (1/31/96)......................................... 2.53%
- ----------------------------------------------------------------
</TABLE>
Past performance is not grarantee of future results. Net asset
value, investment return and principal value will fluctuate so
that shares, when redeemed, may be worth more or less than their
original cost
- ----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
Montgomery Variable Series Emerging Markets Fund
IFC Global Composite Fund Index
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUNDS
IFC GLOBAL COMPOSITE FUND INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period MONTGOMERY VARIABLE SERIES: IFC GLOBAL
(Fiscal Year Covered) EMERGING MARKETS FUND COMPOSITE
- ------------------- -------------------------- ----------
<S> <C> <C>
Measurement Pt- 1/96 $10,000 $10,000
FYE 2/96 $ 9,720 $ 9,937
FYE 3/96 $10,100 $10,088
FYE 4/96 $10,330 $10,841
FYE 5/96 $10,580 $10,630
FYE 6/96 $10,560 $10,780
FYE 7/96 $10,050 $10,113
FYE 8/96 $10,500 $10,338
FYE 9/96 $10,510 $10,431
FYE 10/96 $10,310 $10,190
FYE 11/96 $10,470 $10,373
FYE 12/96 $10,679 $10,253
</TABLE>
*The IFC Global Composite Index is comprised of more than 1,200
individual stocks from 25 developing countries in Asia, Latin
America, Middle East, Africa and Europe.
1
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1996
In Latin America, we expect 1997 to be the year when Brazil will
deliver the "big ticket" reforms the world has been waiting for. Should
these reforms go through as planned, we also expect real interest rates to
fall from their current level of 15%. That, in turn, should stimulate
further growth in the economy and the stock market.
In Europe, stronger economic growth in the region (led by Germany) augers
well for the emerging economies there. In the Middle East, Israel's recent
decision to withdraw from the Hebron in cause for some optimism about the
peace process.
Q. Why should an investor consider the Montgomery Variable Series:
Emerging Markets Fund?
A. The emerging market economies continue to grow at a rate of nearly 6% a
year. Inflation and real interest rates in many of these nations are also
headed downward, and we expect companies in them to post average real
earnings growth of 20 to 25%. We are convinced that 1997 could prove to be
the year of the emerging markets bull run, and we believe that excellent
long-term opportunities are opening up for investors who have the
wherewithal to wait out the inevitable ups and downs of these markets.
Top Five Countries
(as a percentage of total net assets)
<TABLE>
---------------------------------------------------------
<S> <C>
Brazil........................................ 15.1%
Malaysia...................................... 12.6
China/Hong Kong............................... 7.8
South Africa.................................. 6.5
Portugal...................................... 5.2
---------------------------------------------------------
</TABLE>
Top Ten Holdings
(as a percentage of total net assets)
<TABLE>
---------------------------------------------------------
<S> <C>
Uniao de Bancos Brasileiros................... 2.7%
Telebras, ADR................................. 2.7
Banco Bradesco................................ 2.5
Sonae Investmentos............................ 2.4
Lonrho........................................ 2.3
IOI Corporation Oxygen, Inc................... 2.1
IJM Corporation Berhad........................ 2.0
Telefonos de Venezuela, ADR................... 1.9
Capital Portugal Fund......................... 1.8
Compania de Telefonos de Chile, ADR........... 1.8
---------------------------------------------------------
</TABLE>
2
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
________________________________________________________________________________
Portfolio Investments
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks--78.7%
Shares Value (Note 1)
<S> <C>
Argentina--4.5%
150,300 Astra Cia Argentina de Petroleo (Oil) $ 287,126
11,524 Banco Frances del Rio de La Plata, ADR (Banks) 316,910
48,000 Cresud S.A.+ (Real Estate) 84,976
16,200 Inversiones y Representaciones (Real Estate) 52,012
42,500 Siderar S.A. (Steel) 122,423
13,600 Telefonica de Argentina, Sponsored ADR
(Telephone/Networks) 351,900
----------
1,215,347
----------
Brazil--6.2%
11,900 Cemig, ADS (Electric Utilities) 404,243
580 Centrais Electrobas Sta Cat, GDS+*** (Electric Utilities) 54,123
7,200 Multicanal, ADR+ (Cable Television) 92,250
9,600 Telebras, ADR (Telephone/Networks) 734,400
3,670,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 263,127
12,000 Usiminas, ADR*** (Steel) 122,700
----------
1,670,843
----------
Chile--2.0%
4,760 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless) 481,355
1,000 Sociedad Quimica y Minera de Chile (Chemicals) 54,125
----------
535,480
----------
China/Hong Kong--7.8%
21,000 Cheung Kong Holdings (Real Estate) 186,664
24,000 China Light and Power Company (Electric Utilities) 106,742
34,000 China Resources Enterprises Ltd. (Holding) 76,488
111,000 Concord Land Development Company Ltd.+ (Real Estate) 48,077
32,000 Guoco Group, Ltd., ORD (Diversified Financial Services) 179,145
8,000 Henderson Land Development Company (Real Estate) 80,677
12,200 HSBC Holdings (Banks) 261,051
41,000 Hutchison Whampoa Ltd. (Conglomerates) 322,031
48,000 New World Development Company Ltd. (Holding) 324,261
20,000 Shanghai Industrial Holdings Ltd.+ (Conglomerates) 72,920
44,000 Shangri-La Asia (Lodging) 65,137
15,000 Sun Hung Kai Properties Ltd. (Real Estate) 183,755
10,000 Swire Pacific Company, Ltd., Class A (Holding) 95,352
38,000 Wheelock and Company, Ltd. (Holding) 108,333
----------
2,110,633
----------
Czech Republic--2.5%
3,050 SPT Telecom A.S.+ (Telephone/Networks) 379,708
33,800 The Czech Value Fund+ (Mutual Funds) 287,300
----------
667,008
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks (continued)
Shares Value (Note 1)
<S> <C>
Egypt--0.3%
4,000 Tora Cement+ (Cement) $ 80,757
--------
Greece--0.2%
15,000 Aegek (Heavy Construction) 55,328
--------
Hungary--0.3%
3,000 Borsodchem, GDR*** (Chemicals) 75,450
--------
India--2.1%
3,300 Bajaj Auto, Ltd., GDR*** (Auto/Auto Parts) 109,939
3,700 Bajaj Auto, Ltd., GDS (Auto/Auto Parts) 123,266
10,000 Gujarat Ambuja Cement Ltd., GDR*** (Cement) 86,000
5,800 Indian Petrochemicals Corporation Ltd., GDR*** (Chemicals) 66,990
16,700 Tata Engineering and Locomotive Company, Ltd., GDR*** (Auto/Auto Parts) 178,523
--------
564,718
--------
Indonesia--3.3%
66,000 Ciputra Development (F)** (Auto/Auto Parts) 68,459
16,000 Hanjaya Mandala Sampoerna (F)** (Tobacco) 85,351
90,000 Semen Gresik (F) (Building Materials) 289,585
1,900 Tambang Timah, GDR (Euro) (Metals and Mining) 34,152
17,600 Tambang Timah, GDR*** (Metals and Mining) 316,360
2,700 Telekomunikas Indonesia, ADR (Telephone/Regional - Local) 93,150
--------
887,057
--------
Israel--0.7%
4,000 Teva Pharmaceuticals, ADR (Pharmacy/Drugs) 200,250
--------
Korea--2.9%
18,700 Korea Electric Power Corporation, ADR (Electric Utilities) 383,350
2,060 Korea Mobile Telecommunications, ADR (Telephone/Wireless) 26,523
1,854 Korea Mobile Telecommunications, ADS (Telephone/Wireless) 23,870
14,000 Pohang Iron and Steel Company, Ltd., ADS (Steel) 283,500
2,100 Samsung Electronics, Ltd., GDS*** (Electronics) 38,745
1,600 Samsung Electronics, Ltd., GDS, Non-voting*** (Electronics) 29,520
--------
785,508
--------
Malaysia--12.5%
41,000 Arab Malaysian Corporation (Diversified Financial Services) 204,554
15,000 Development and Commercial Bank Holdings Corporation (Banks) 51,376
14,000 Genting Berhad (Leisure Time) 96,456
67,000 Guinness Anchor Berhad (Food and Beverage) 164,482
16,000 Hong Leong Bank Berhad** (Banks) 55,751
228,000 IJM Corporation Berhad (Heavy Construction) 537,161
29,000 Innovest Berhad+ (Real Estate) 103,346
373,000 IOI Corporation Oxygen, Inc. (Chemicals) 573,051
23,000 Leader Universal Holdings Berhad (Telecommunications Equipment) 48,268
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks (continued)
Shares Value (Note 1)
<S> <C>
Malaysia (continued)
37,000 Lingkaran Trans Kota Holdings Berhad+ (Real Estate) $ 76,183
10,000 Metacorp Berhad (Chemicals) 25,539
29,000 New Straits Times** (Newspaper/Publishing) 167,650
36,000 Oriental Holdings Berhad (Auto/Auto Parts) 245,179
169,000 Public Bank Berhad (F)** (Banks) 358,008
29,000 Resorts World Berhad (Leisure Time) 132,053
28,000 Tanjong PLC (Leisure Time) 111,978
15,000 Telekom Malaysia Berhad** (Telecommunications/Other) 133,637
31,000 United Engineers Berhad (Heavy Construction) 279,865
----------
3,364,537
----------
Mexico--2.3%
14,400 Bufete Industrial S.A.+ (Heavy Construction) 306,000
16,000 Cementos Mexicanos S.A. CPO (Building Materials) 57,317
14,000 Grupo Modelo S.A. de C.V., Series C (Food and Beverage) 81,275
49,000 Industrias Penoles CPO (Metals and Mining) 173,666
----------
618,258
----------
Morocco--0.2%
3,500 Banque Marocaine du Commerce Exterieur, GDR+*** (Banks) 54,679
----------
Peru--0.6%
4,092 Credicorp, Ltd. (Banks) 75,702
5,600 Minas Buenaventura, ADR (Metals and Mining) 40,743
----------
2,200 Telefonica del Peru S.A., ADR, Series B (Telephone/Networks) 41,525
----------
157,970
----------
Philippines--2.9%
581,100 Aboitiz Equity Ventures (Conglomerates) 58,552
6,300 Manila Electric Company, Class B (Electric Utilities) 51,502
766,000 Metro Pacific Inc., Class B (Conglomerates) 189,316
100,000 Music Semiconductors Corporation+ (Semiconductor) 49,430
189,000 PCI Leasing and Financing, Inc.+** (Diversified Financial Services) 49,945
2,800 Philippine Long Distance Telephone, (Telephone/Long Distance) 153,840
2,700 Philippine Long Distance Telephone, ADR (Telephone/Long Distance) 137,700
514,000 Republic Glass (Glass) 99,673
----------
789,958
----------
Portugal--5.2%
4,600 Banco Totta E Acores, SA (Banks) 86,749
4,200 Capital Portugal Fund+ (Mutual Funds) 484,876
17,000 Portucel Industries Empresa (Pulp and Paper) 98,678
20,300 Sonae InvestImentos (Conglomerates) 642,844
1,500 Telecel-Comunicacaoes Pessoai, SA+ (Telecommunications/Wireless) 95,776
----------
1,408,923
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks (continued)
Shares Value (Note 1)
<S> <C>
Russia--3.2%
2,300 AO Mosenergo, ADS*** (Electric Utilities) $ 70,926
9 Irkutskenegro, RDC+*** (Oilfield Equipment) 251,100
3,300 LukOil Company, ADR (Oil) 153,862
1,200 Tatneft, ADS+ (Oil) 55,500
6,950 Tatneft, Sponsored ADR***+ (Oil) 333,600
----------
864,988
----------
Singapore--1.7%
363,000 CDL Hotels International, Ltd. (Real Estate) 207,677
27,000 Far East Levingston (Heavy Construction) 140,856
13,000 Keppel Corporation, ORD (Shipping) 101,265
----------
449,798
----------
Slovakia--0.1%
1,200 VUB Kupon Fund+ (Mutual Funds) 22,508
----------
South Africa--6.5%
4,800 Anglo American Gold Investment Company (Metals and Mining) 365,502
36,300 Barlow, Ltd. (Building Materials) 321,994
290,256 Lonrho (Conglomerates) 616,682
38,600 Sasol, Ltd. (Metals and Mining) 457,903
----------
1,762,081
----------
Taiwan--3.6%
192,000 Bank Sinopac** (Banks) 208,058
28,000 Cathay Life Insurance** (Insurance) 178,182
56,000 China Development Corporation** (Diversified Financial Services) 171,054
73,000 China Steel Corporation** (Steel) 68,487
111,000 Pacific Construction** (Heavy Construction) 94,855
54,000 Taiwan Semiconductor Company** (Semiconductor) 110,945
12,200 Yageo Corporation, GDR+*** (Electronics) 122,031
----------
953,612
----------
Thailand--3.9%
6,200 Ban Pu Coal Public Company, Ltd. (F) (Coal) 115,074
48,000 Bangkok Bank Public Company, Ltd., Series 2 (F) (Banks) 357,600
26,000 Electricity Generation Power Company (F) (Electric Utilities) 70,966
76,000 IFCT Finance and Securities Plc (F) (Securities Brokerage) 205,958
10,000 PTT Exploration and Production Public Company, Ltd. (F) (Oil) 144,272
1,300 Siam Cement Public Company, Ltd., Local Series 2 (Building Materials) 40,963
3,800 Siam Cement Public Company, Ltd. (F) (Building Materials) 119,722
----------
1,054,555
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks--(continued)
Shares Value (Note 1)
<S> <C>
Turkey--1.3%
1,088,333 Koc Holdings (Holding) $ 190,672
882,000 Trakya Cam Sanayil (Glass) 44,730
1,083,000 Turk Sise ve Cam (Glass) 114,841
-----------
350,243
-----------
Venezuela--1.9%
18,100 Telefonos de Venezuela, ADR+ (Telephone/Networks) 509,063
-----------
Total Common Stocks (Cost $20,684,538) 21,209,552
-----------
Preferred Stocks--8.9%
Brazil--8.9%
92,940,000 Banco Bradesco (Banks) 673,504
5,200,000 CESP-Cia Ener Sao Paulo (Electric Utilities) 202,725
396,000 Electropaulo, "B" (Electric Utilities) 58,499
15,500,000 Lojas Americanas (Retail Trade) 204,360
800,000 Petroleo Brasileiro (Oil) 127,418
22,570,000 Uniao de Bancos Brasileiros (Banks) 736,332
394,600,000 Usiminas (Steel) 402,537
-----------
Total Preferred Stocks (Cost $2,313,255) 2,405,375
-----------
Convertible Bonds--1.8%
Principal Amount
Mexico--1.2%
$300,000 Alfa S.A. de C.V.,
8.000% due 09/15/00*** (Steel) 331,125
-----------
Thailand--0.6%
150,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01 (Real Estate) 156,938
-----------
Total Convertible Bonds
(Cost $485,902) 488,063
-----------
Warrants--0.1%
(Cost $28,571)
Shares
Malaysia--0.1%
24,000 Development and Commercial Bank Holdings Corporation, Warrants,
Expire 12/27/99+ (Banks) 36,112
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Rights - 0.0%#
(Cost $0)
Shares Value (Note 1)
<S> <C>
Argentina--0.0%#
150,300 Astra Cia Argentina de Petroleo, Rights,
Expire 01/10/97+ (Oil) $ 0
___________
Total Securities (Cost $23,512,266) 24,139,102
___________
<CAPTION>
Repurchase Agreements--13.3%
Principal Amount
$1,789,000 Agreement with Bear Stearns Companies Inc. Tri-Party, 7.500% dated
12/31/96, to be repurchased at $1,789,745, on 01/02/97,
collateralized by $1,838,660 market value of U.S. Government
securities, having various maturities and various interest rates 1,789,000
1,789,000 Agreement with Chase Manhattan Corporation Tri-Party, 7.500%
dated 12/31/96, to be repurchased at $1,789,745, on 01/02/97,
collateralized by $1,824,832 market value of U.S. Government
securities, having various maturities and various interest rates 1,789,000
___________
Total Repurchase Agreements (Cost $3,578,000) 3,578,000
___________
Total Investments (Cost $27,090,266*) 102.8% 27,717,102
Other Assets and Liabilities (Net) (2.8) (751,359)
_____ ___________
Net Assets 100.0% $26,965,743
===== ===========
</TABLE>
_____________________________________
* Aggregate cost for Federal tax purposes is $27,149,843.
** Illiquid Security or Special Situation Security ( See Note 6 to
Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or alien share.
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
RDC Russian Depositary Certificate
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value (Identified cost $27,090,266) (Note 1)
Securities................................................................ $24,139,102
Repurchase agreements..................................................... 3,578,000
-----------
Total investments................................................................. 27,717,102
Cash.............................................................................. 100,461
Foreign currency (Cost $502,449).................................................. 502,644
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to buy, at value
(Contract cost $961,133) (Note 3)......................................... 962,903
Receivables:
Shares of beneficial interest sold........................................ 261,771
Dividends................................................................. 28,071
Interest.................................................................. 10,869
Other Assets:
Organization costs (Note 1)............................................... 50,776
-----------
Total Assets...................................................................... 29,634,597
Liabilities:
Forward foreign currency exchange contracts:
Payable for forward foreign currency exchange contracts
to buy (Note 3)........................................................... $ 961,133
Payables:
Investment securities purchased........................................... 1,602,655
Organization cost......................................................... 61,485
Management fee............................................................ 23,906
Custodian fees............................................................ 10,263
Trustees' fees and expenses............................................... 1,000
Shares of beneficial interest redeemed.................................... 782
Other accrued liabilities and expenses.................................... 7,630
----------
Total Liabilities................................................................. 2,668,854
-----------
Net Assets........................................................................ $26,965,743
Net Assets consist of:
Accumulated net investment loss................................................... $ (15,221)
Accumulated net realized loss on securities sold, forward foreign
currency exchange contracts and foreign currency transactions.................... (101,401)
Net unrealized appreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and other net assets........... 626,197
Shares of beneficial interest..................................................... 25,320
Additional paid-in capital........................................................ 26,430,848
-----------
Net Assets........................................................................ $26,965,743
===========
Net Asset Value, offering and redemption price per share
($26,965,743 - 2,531,992 shares of beneficial interest outstanding).............. $ 10.65
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Operations
For the Period Ended December 31, 1996*
<TABLE>
<S> <C> <C>
Net Investment Income:
Dividends (Net of foreign withholding taxes of $5,564)............................ $ 101,935
Interest.......................................................................... 89,692
--------
Total Investment Income........................................................... 191,627
--------
Expenses:
Management fee (Note 2)........................................................... $105,768
Legal and audit fees.............................................................. 36,031
Custodian fees.................................................................... 31,516
Amortization of organization expenses (Note 1).................................... 11,384
Trustees' fees and expenses (Note 2).............................................. 9,295
Other............................................................................. 15,341
Total Expenses.................................................................... 209,335
Fees deferred by Manager (Note 2)................................................. (86,264)
--------
Net Expenses...................................................................... 123,071
--------
Net Investment Income............................................................. 68,556
--------
Net Realized and Unrealized Gain/(Loss) on Investments
(Notes 1 and 3)
Net realized gain/(loss) on:
Security transactions........................................................ (101,401)
Forward foreign currency exchange contracts.................................. (28,943)
Foreign currency transactions................................................ 11,084
--------
Net realized loss on investments during the period................................ (119,260)
--------
Change in unrealized appreciation/(depreciation) of:
Securities................................................................... 626,836
Forward foreign currency exchange contracts.................................. 1,770
Foreign currency transactions and net other assets........................... (2,409)
Net unrealized appreciation of investments
during the period............................................................ 626,197
--------
Net Realized and Unrealized Gain on Investments................................... 506,937
--------
Net Increase in Net Assets Resulting from Operations.............................. $ 575,493
</TABLE>
- ------------------
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Changes in Net Assets
For the Period Ended December 31, 1996*
<TABLE>
<S> <C>
Net Increase/(Decrease) in Net Assets Resulting from Operations:
Net investment income............................................................... $ 68,556
Net realized loss on securities, forward foreign currency
exchange contracts and foreign currency transactions during the period............. (119,260)
Net unrealized appreciation of securities, forward foreign currency
exchange contracts, foreign currency transactions and net other
assets during the period........................................................... 626,197
-----------
Net increase in net assets resulting from operations................................ 575,493
Distributions to Shareholders:
Distributions from net investment income............................................ (65,918)
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 4)......................... 25,956,168
-----------
Net increase in net assets.......................................................... 26,465,743
Net Assets:
Beginning of period................................................................. 500,000
-----------
End of period....................................................................... $26,965,743
===========
Accumulated net investment loss..................................................... $ (15,221)
===========
Financial Highlights
Selected Per Share Data for the Period Ended:
12/31/96*
Net asset value - beginning of period............................................... $ 10.00
-----------
Net investment income............................................................... 0.03
Net realized and unrealized gain on investments..................................... 0.65
-----------
Net increase in net assets resulting from investment operations..................... 0.68
Distributions to shareholders:
Distributions from net investment income........................................ (0.03)
-----------
Net asset value - end of period..................................................... $ 10.65
===========
Total return **..................................................................... 6.79%
===========
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000's)................................................ $ 26,966
Ratio of net investment income to average net assets................................ 0.81%+
Ratio of operating expenses to average net assets................................... 1.45%+
Portfolio turnover rate............................................................. 43%
Average commission rate paid (a).................................................... $ 0.0002
Net investment loss before deferral of fees and absorption
of expenses by Manager............................................................. $ (0.01)
Operating expense ratio before deferral of fees and absorption
of expenses by Manager............................................................. 2.47%+
</TABLE>
______________________
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and sold
by the Fund.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
1. Significant Accounting Policies:
The Montgomery Funds III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-
end management investment company. As of December 31, 1996, the Trust had
three series, the Montgomery Variable Series: Growth Fund, the Montgomery
Variable Series: Emerging Markets Fund and the Montgomery Variable Series:
International Small Cap Fund.
The Trust was organized as a Delaware business trust on August 24, 1994.
Prior to the public offerings of shares of the Funds, a limited number of
shares were sold to Montgomery Asset Management, L.P. and/or affiliated
persons of Montgomery Asset Management in private placement offerings.
Otherwise, the Funds had no significant operations prior to February 2,
1996, the date on which the Montgomery Variable Series: Emerging Markets
Fund commenced operations (i.e., commenced selling shares to the public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Information presented in these financial statements pertains to the
Montgomery Variable Series: Emerging Markets Fund (the "Fund"). The
Montgomery Variable Series: Growth Fund and the Montgomery Variable Series:
International Small Cap Fund are presented under separate covers.
The following is a summary of significant accounting policies.
a. Portfolio Valuation
The Fund's securities are valued using current market valuations:
either the last reported sales price or, lacking any reported sales,
and in the case of fixed income securities, the mean between the
closing bid and asked prices. The value of securities denominated in
foreign currencies and traded on foreign exchanges or in foreign
markets will be translated into U.S. dollars at the last price of
their respective currency denomination against U.S. dollars quoted by
a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good
faith by the Board of Trustees. Securities 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 supervision of the
Trust in accordance with methods which are authorized by the Trust's
Board of Trustees.
Short term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-
term securities with maturities of 60 days or less are carried at
amortized cost, which approximates market value.
b. Dividends and Distributions
Dividends, if any, from net investment income of the Fund are declared
and paid at least annually.
Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional
distributions of net investment income and capital gains for the Fund
may be made in order to avoid the application of a 4% non-deductible
excise tax on certain undistributed amounts of ordinary income and
capital gains. Income distributions and capital gain distributions
are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and
gains on various investment securities held by the Fund, timing
differences and differing characterizations of distributions made by
the Fund.
Permanent differences incurred during the year ended December 31,
1996, resulting from differences in book and tax accounting have been
reclassified at year end to reflect a decrease to undistributed net
investment income of $17,859 and an increase to accumulated realized
loss of $17,859.
c. Forward Foreign Currency Exchange Contracts
The Fund may engage in forward foreign currency exchange contracts
with off balance sheet risk in the normal course of investing
activities in order to manage exposure to market risks. Forward
foreign currency exchange contracts are valued at the forward rate and
are marked-to-market daily. The change in market value is recorded by
the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Forward
foreign currency exchange contracts have been used solely to establish
a rate of exchange for settlement of transactions. Although forward
foreign currency exchange contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any
potential gain that might result should the value of the currency
increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their
contracts.
12
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
d. Foreign Currency
Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the
end of the period, and purchases and sales of investment securities
and income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses which result from changes
in foreign currency exchange rates on investments have been included
in the unrealized appreciation/(depreciation) of securities. Net
realized foreign currency gains and losses resulting from movement in
exchange rates include foreign currency gains and losses between trade
date and settlement date on investment securities, transactions,
foreign currency transactions and the difference between the amounts
of interest and dividends recorded on the books of the Fund and the
amount actually received and the portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date.
e. Repurchase Agreements
The Fund may engage in repurchase agreement transactions individually
or jointly through a joint repurchase account with other series of the
Trust pursuant to a joint repurchase agreement. Under the terms of a
typical repurchase agreement, the Fund writes a financial contract
with a counterparty and takes possession of a government debt
obligation as collateral. The Fund also agrees with the counterparty
to allow the counterparty to repurchase the financial contract at a
specified date and price, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's
holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including
interest. In the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There could be
potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of
the underlying securities, while the Fund seeks to assert its rights.
The Fund's investment manager, acting under the supervision of the
Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters
into repurchase agreements to evaluate potential risks. The Fund may
also participate on an individual or joint basis in tri-party
repurchase agreements which involve a counterparty and a custodian
bank.
f. Securities Transactions and Investment Income
Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions is recorded on the specific
identified cost basis. Dividend income is recognized on the ex-
dividend date and interest income, including, where applicable,
amortization of discount on short-term investments, is recognized on
an accrual basis. Dividend income on foreign securities is recognized
as soon as the Fund is informed of the ex-dividend date.
g. Federal Income Taxes
It is the intention of the Fund to qualify and elect treatment as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), by complying with the
provisions available to certain investment companies, as defined in
applicable sections of the Code, and to make distributions of taxable
income to shareholders sufficient to relieve the Fund from all or
substantially all Federal income taxes.
h. Organization Costs
Expenses incurred in connection with the organization of the Fund are
amortized on a straight-line basis over a period of five years from
commencement of operations.
2. Management Fees and Other Transactions with Affiliates:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the
"Manager"). The Manager, a California limited partnership, is an
investment adviser registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The general partner of the Manager is Montgomery
Asset Management, Inc. The sole limited partner of the Manager is
Montgomery Securities. Under the Advisers Act, both Montgomery Asset
Management, Inc. and Montgomery Securities may be deemed controlling
persons of the Manager. Although the operations and management of the
Manager are independent from those of Montgomery Securities, it is
expected that the Manager may draw upon the research and
administrative resources of Montgomery Securities at its discretion in
a manner consistent with applicable regulations.
Pursuant to the investment management agreement ("Investment
Management Agreement"), the Manager provides the Fund with advice on
buying and selling securities, manages the investments of the Fund
including the placement of orders for portfolio
13
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
transactions, furnishes the Fund with office space and certain
administrative services, and provides the personnel needed by the
Trust with respect to the Manager's responsibilities under such
Agreement. As compensation, the Fund pays the Manager a monthly
management fee (accrued daily) at the following annual rates based
upon the average daily net assets of the Fund:
First $250 Million Over $250 Million
__________________ _________________
1.25% 1.00%
The Manager has agreed to reduce some or all of its management fee or
absorb the Fund expenses if necessary to keep the Fund's annual
operating expenses, exclusive of interest or taxes, at or below 1.75%
of the average daily net assets of the Fund or the maximum allowed by
applicable state expense limitations for the Fund.
Any reductions or absorptions made for the Fund by the Manager of its
fees are subject to recovery within the following three years provided
the Fund is able to affect such reimbursement and remain in compliance
with applicable expense limitations. Any of the Manager's voluntary
absorptions are also subject to recovery.
For the period ended December 31, 1996, the Manager has deferred fees
of $86,264.
As of December 31, 1996, the deferred management fees subject to
recoupment are $86,264.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as
defined in the 1940 Act. Each Trustee who is not an "affiliated
person" receives an annual retainer and quarterly meeting fees
totalling $35,000 per annum, as well as reimbursement for expenses,
for services as Trustee of all three Trusts advised by the Manager
($5,000 of which will be allocated to the Montgomery Funds III).
c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.
3. Securities Transactions:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the period ended December 31,
1996, were $27,059,237 and $3,456,120, respectively.
b. At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $1,532,059 and $964,800, respectively.
c. The schedule of forward foreign currency exchange contracts at
December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Buy: Contract Value Date Value (Note 1)
<S> <C> <C>
413,581 Brazilian Real 01/02/97 $398,019
1,276,582 Hong Kong Dollar 01/03/97 165,051
45,413,241 Portuguese Escudo 01/03/97 292,890
500,849 South African Commercial Rand 01/07/97 106,943
--------
Total Forward Foreign Currency Exchange
Contracts to Buy (Contract Cost $961,133) $962,903
</TABLE>
d. Under an unsecured Revolving Credit Agreement with Deutsche Bank (New
York), the Montgomery Variable Series: Emerging Markets Fund, along
with other funds of Montgomery Funds I, Montgomery Funds II,and
Montgomery Funds III, may for one year starting August 6, 1996, borrow
(consistent with applicable law and its investment policies) up to 10%
of its net asset value, provided that the aggregate principal amount
of outstanding loans under the agreement to all Funds does not exceed
$300,000,000. For the period ended December 31, 1996, there were no
borrowings under this agreement.
14
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
4. Transactions in Shares of Beneficial Interest:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the period indicated below were:
<TABLE>
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
Shares Sold 2,724,011 $28,483,626
Issued as Reinvestment
of Dividends 6,363 65,918
Shares Redeemed (248,382) (2,593,376)
--------- -----------
Net Increase 2,481,992 $25,956,168
========= ===========
</TABLE>
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
5. Foreign Securities:
The Fund purchases securities in emerging market countries. Securities of
foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies
and the U.S. government. These risks include re-evaluation of currencies,
less reliable information about issuers, differences in the clearance and
settlement of securities transactions practices, and future adverse
political and economic developments. These risks are heightened for
investments in emerging market countries. Moreover, securities of many
foreign companies and foreign governments and their markets may be less
liquid and their prices more volatile than those securities of comparable
U.S. companies and the U.S. government.
6. Special Situation Securities:
The Fund may not invest more than 15% of its net assets in illiquid
securities. The securities shown in the table below have been determined by
the Manager to be illiquid because they are restricted or because there is
an exceptionally low trading volume in the primary trading market for these
securities at December 31, 1996. These securities are valued at market
price:
<TABLE>
<CAPTION>
12/31/96
Acquisition Market Value % of Total
Security Date Shares Value Per Share Cost Net Assets
<S> <C> <C> <C> <C> <C> <C>
Bank Sinopac 07/17/96 192,000 $208,058 $ 1.08 $179,949 0.77%
Cathay Life Insurance 09/12/96 28,000 178,182 6.36 177,506 0.66
China Development Corporation 09/12/96 56,000 171,054 3.05 154,621 0.63
China Steel Corporation 09/12/96 73,000 68,487 0.94 70,710 0.25
Pacific Construction 09/12/96 111,000 94,855 0.85 106,648 0.35
PCI Leasing and Financing, Inc. 12/26/96 189,000 49,945 0.26 50,916 0.19
Taiwan Semiconductor Company 07/17/96 54,000 110,945 2.05 98,957 0.41
-------- ----
$881,526 3.26%
======== ====
</TABLE>
The following securities held by the Fund on December 31, 1996, are
generally unrestricted securities for which reliable market prices can be
established. These securities are valued at their market prices. However,
because the process of re-registering foreign securities in the Fund's name
can take more than seven days, the following shares of each of these
securities were deemed temporarily restricted or illiquid in the hands of
the Fund at December 31, 1996. The Fund bears the cost of re-registering
these securities:
15
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
<TABLE>
<CAPTION>
12/31/96
Acquisition Market Value % of Total
Security Date Shares Value Per Share Cost Net Assets
<S> <C> <C> <C> <C> <C> <C>
Ciputra Development (F) 10/16/96 22,000 $ 22,820 $ 1.04 $ 59,084 0.08%
Hanjaya Mandala Sampoerna (F) 07/11/96 3,700 19,737 5.33 89,211 0.07
Hong Leong Bank Berhad 11/15/96 16,000 55,751 3.48 53,358 0.21
New Straits Times 09/04/96 29,000 167,650 5.78 158,862 0.62
Public Bank Berhad (F) 12/13/96 169,000 358,008 2.12 336,981 1.33
Telekom Malaysia Berhad 08/20/96 15,000 133,637 8.90 136,263 0.50
-------- ----
$757,603 2.81%
======== ====
</TABLE>
7. Capital Loss Carryforward
At December 31, 1996, the Fund had available for Federal income tax
purposes unused capital losses of $84,636 expiring in 2004.
Under current tax law, net short-term capital losses realized after October
31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended December 31, 1996, the
Fund elected to defer net short-term capital losses of $14,382 occurring
between November 1, 1995, and December 31, 1996.
Such deferred losses will be treated as arising on the first day of the
fiscal year ended December 31, 1997.
16
<PAGE>
To the Board of Trustees and the Shareholders of The Montgomery Funds III:
We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Variable Series:
Emerging Markets Fund (the "Fund") as of December 31, 1996, and the related
statement of operations, statement of changes in net assets and the
financial highlights for the period February 2, 1996 (commencement of
operations) to December 31, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management, Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement, An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at December 31, 1996, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed
other auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1996, the results of its operations, the changes in its net
assets and its financial highlights for the period February 2, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche, LLP.
San Francisco, California
January 31, 1997
17
