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[LOGO OF THE MONTGOMERY FUNDS APPEARS HERE]
Variable Series
Emerging Markets
Semiannual Report
June 30, 1999
Invest Wisely
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-----------------------
Montgomery
Variable Series
-----------------------
Emerging Markets Fund
-----------------------
Portfolio Highlights
(Unaudited)
INVESTMENT REVIEW
Q: How did the Fund perform during the year ended June 30, 1999?
A: In an extremely challenging year for emerging markets, the Fund returned
10.8% versus a 28.7% return for the benchmark Morgan Stanley Capital
International (MSCI) Emerging Markets Free Index. Although this underperformance
is disappointing, the Fund lost most ground during the difficult market
conditions in the second half of 1998. We are pleased to report that by the end
of June, our relative performance against the benchmark improved considerably.
Q: What factors contributed to these results?
A: There were a couple of factors. First, the Funds bias toward small- and
mid-cap stocks placed it in a much more vulnerable position than many of its
peers during the severe correction in global markets and the subsequent "flight
to quality." Smaller-cap companies felt the most severe impact of such capital
outflows, as investors who remained in the emerging markets sought the relative
safety of large-cap, highly liquid securities.
Second, our cautious approach to the rebounding markets of South Korea and
Indonesia meant that we did not fully participate in these markets
fourth-quarter 1998 rally, detracting from relative returns. In our view,
because of the tentative nature of the Korean recovery and the political
upheaval in Indonesia, the inherent risks outweighed the potential rewards.
A much more benign investment environment for most of the latter half of the
financial year proved more favorable to the Funds performance. Our strategy
maintains its slight bias toward small- and mid-cap companies. We believe that
by identifying smaller, well-managed, fundamentally sound and attractively
valued companies before the rest of the market recognizes their potential we can
add value to the Fund. Interest in such stocks is beginning to improve,
especially in Asia, where market liquidity has improved considerably in recent
months. In addition, the Funds overweight position in the outperforming Pacific
Rim markets, specifically in South Korea and Thailand in the three months ended
June 30, 1999, contributed to strong returns and a considerable improvement in
the Funds relative performance against both its benchmark and its peers.
Q: You mentioned the recovery in Asian markets as a contributing factor to
improved performance. Were there any other trends that increased returns over
the period?
A: The recovery in commodity prices during the final three months of the
financial year proved beneficial to the emerging markets in general -- which
tend to be large exporters of primary products such as metals and oil -- and to
the Funds performance. Recognizing the potential for a rebound in this sector at
the end of March, we increased the Funds exposure to companies that would profit
from such a recovery. As a result, 57% of the Funds holdings were in countries
likely to benefit from this trend by June 30, 1999.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Josephine Jimenez, CFA... Sr. Portfolio Manager
Bryan Sudweeks, Ph.D., CFA ...... Sr. Portfolio
Manager
Frank Chiang ................ Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/99
- --------------------------------------------------------------------------------
Montgomery Variable Series:
Emerging Markets Fund
Since inception (2/2/96) ............................... (3.98)%
One year ............................................... 10.83%
Three years ............................................ (6.23)%
- --------------------------------------------------------------------------------
MSCI Emerging Markets Free Index
Since 1/31/96 .......................................... (2.60)%
One year ............................................... 28.71%
Three years ............................................ (4.00)%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value,
investment return and principal value will fluctuate, so shares, when
redeemed, may be worth more or less than their original cost.
Growth of $10,000 Investment
[LINE GRAPH APPEARS HERE]
Montgomery Series MSCI Emerging Lipper Emerging
Emerging Markets Markets Free Markets Funds
Fund Index Average
----------------- ------------- ---------------
2-Feb-96 10,000 10,000 10,000
Mar-96 10,100 9,918 9,955
Apr-96 10,330 10,314 10,350
May-96 10,580 10,268 10,454
Jun-96 10,560 10,332 10,489
Jul-96 10,050 9,626 9,845
Aug-96 10,500 9,872 10,086
Sep-96 10,510 9,958 10,162
Oct-96 10,310 9,692 9,898
Nov-96 10,470 9,855 10,121
Dec-96 10,679 9,899 10,281
Jan-97 11,532 10,575 11,058
Feb-97 11,782 11,028 11,449
Mar-97 11,592 10,738 11,188
Apr-97 11,542 10,757 11,242
May-97 12,023 11,065 11,673
Jun-97 12,915 11,657 12,305
Jul-97 13,337 11,831 12,699
Aug-97 12,003 10,325 11,439
Sep-97 12,514 10,611 11,900
Oct-97 10,499 8,870 10,043
Nov-97 10,188 8,547 9,719
Dec-97 10,617 8,753 9,863
Jan-98 9,382 8,066 9,211
Feb-98 9,914 8,908 9,970
Mar-98 10,105 9,295 10,373
Apr-98 10,236 9,193 10,480
May-98 8,860 7,933 9,146
Jun-98 7,855 7,101 8,302
Jul-98 8,267 7,326 8,583
Aug-98 5,756 5,208 6,202
Sep-98 6,047 5,538 6,360
Oct-98 6,449 6,122 6,859
Nov-98 6,981 6,631 7,233
Dec-98 6,633 6,535 7,177
Jan-99 6,402 6,429 7,035
Feb-99 6,231 6,492 6,993
Mar-99 7,106 7,347 7,772
Apr-99 7,962 8,256 8,794
May-99 7,751 8,208 8,688
Jun-99 8,707 9,140 9,546
(1) The Morgan Stanley Capital International Emerging Markets Free Index Fund
is an unmanaged, capitalization-weighted composite index that covers
individual securities within the equity markets of approximately 25
emerging markets countries.
(2) The Lipper Emerging Markets Funds Average universe consists of 86 funds.
1
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Montgomery
Variable Series
- ---------------------
Emerging Markets Fund
- ---------------------
Portfolio Highlights
(Unaudited)
========================================
TOP TEN HOLDINGS
- ----------------------------------------
(as a percentage of total net assets)
Telefonos de Mexico ............... 4.4%
Samsung Electronics Company ....... 2.8%
Korea Electric Power Corporation .. 2.6%
Videsh Sanchar Nigam Ltd. ......... 2.2%
Samsung Display Devices Company 2.2%
Hon Hai Precison Industry ......... 2.1%
Korea Telecom Corporation ......... 1.9%
Synnex Technology
International Corporation ....... 1.8%
Pohang Iron & Steel Company Ltd ... 1.8%
Petroleo Brasileiro S.A. Ltd. ..... 1.8%
- ----------------------------------------
TOP FIVE COUNTRIES
- ----------------------------------------
(as a percentage of total net assets)
Korea .............................15.9%
Mexico ............................12.6%
Brazil ............................10.5%
South Africa ...................... 8.1%
Taiwan ............................ 7.5%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
There were a number of stocks across the emerging markets regions that boosted
performance. These included low-cost copper producer Grupo Mexico (0.7% of net
assets as of 6/30/99) and South Africas Anglo American Platinum Corporation
(0.7% of net assets as of 6/30/99).
Q: Where do you believe that the best opportunities are likely to be in the
emerging markets in the coming year?
A: We are confident that the recovery we have seen in the emerging markets since
the beginning of 1999 is likely to continue. We are especially optimistic about
the prospects for Asia. The economic fundamentals of the region continue to
improve, and significant progress has been made in bank reform and corporate
restructuring. Although Asian markets appreciated rapidly during the second
quarter, we believe that there are still some attractively valued companies
whose potential has yet to be widely recognized. We particularly like the
prospects for India and China. We believe that the combination of strong
economic growth and a possible resolution of its conflict with Pakistan over
Kashmir may boost the Indian market. Selected Chinese stocks are likely to
benefit from that countrys possible entry into the World Trade Organization
(WTO).
Elsewhere, in Latin America we are optimistic about the outlook for the
Brazilian market. Interest rates in Brazil have fallen, and inflation is running
at a rate lower than even the most optimistic analysts had predicted at the
beginning of the year. In view of such rapidly improving fundamentals, we
believe Brazil will outperform. We also like the prospects for selected stocks
in Egypt and South Africa.
Q: How is the Fund currently positioned to take advantage of opportunities?
A: The Fund remains overweighted in Asia, specifically in South Korea and
Thailand, but we are also researching opportunities in India and have begun to
build positions in Chinese stocks that we believe may benefit from WTO
membership.
In Latin America the Fund has an overweight position in Brazil, and we are
looking for interesting opportunities in Chile. In the Middle East and Africa,
we continue to like the prospects for the Funds existing holdings in commodities
stocks and Egyptian cellular phone services. We are optimistic that if we
maintain our strong focus on asset allocation and good stock selection, we
should continue to improve our relative performance against the benchmark.
2
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---------------------
Montgomery
Variable Series
---------------------
Emerging Markets Fund
---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1999 (Unaudited)
Shares Value (Note 1)
COMMON STOCKS -- 82.4%
Argentina -- 0.4%
14,300 Telefonica de Argentina ADR
(Other Telephone/Communication) ........$ 448,663
Brazil -- 2.2%
48,900 Cia Cervejaria Brahma ADR
(Non-U.S. Utilities) ................... 553,181
73,200 Embratel Participacoes ADR
(Other Telephone/Communication) ........ 1,015,650
48,200 Pao de Acucar ADR
(Food Chains) .......................... 900,738
20,220,000 Telecomunicacoes Brasileiras ADR
(Other Telephone/Communication) ........ 571
500,000 Telerj Celular S.A., Series C
(Cellular Telephone) ................... 9,681
-----------
2,479,821
Chile -- 0.3%
15,400 Cia de Telecom Chile de S.A. ADR
(Other Telephone/Communication) ........ 381,150
China/Hong Kong -- 1.7%
65,000 Cheung Kong (Holdings)Ltd.(Real Estate) 578,090
5,400 China Telecom Ltd. ADR +
(Other Telephone/Communication) ........ 307,800
732,000 Cosco Pacific Ltd. (Marine Transportation) 608,561
13,400 HSBC Holdings PLC (Non-U.S. Banks) ..... 488,793
-----------
1,983,244
Czech Republic -- 0.6%
18,090 Ceske Radiokomunikace, GDR +
(Other Telephone/Communication) ........ 624,105
Egypt -- 2.6%
3,000 Al-Ahram Beverages Company, GDR +
(Alcoholic Beverages) .................. 167,497
28,300 Al-Ahram Beverages Company +
(Alcoholic Beverages) .................. 804,428
86,666 Egyptian Mobile Phone Network
(Cellular Telephone) ................... 1,953,076
-----------
2,925,001
Greece -- 3.0%
25,311 Alpha Credit Bank (Non-U.S. Banks) ..... 1,633,695
78,900 Hellas Telecommunications S.A. ADR +
(Other Telephone/Communication) ........ 1,765,387
-----------
3,399,082
Hungary -- 1.5%
10,500 Borsodchem Rt. (Paints/Coatings) ....... 256,304
16,500 EGIS Rt. (Other Pharmaceuticals) ....... 395,254
34,000 Mol Magyar Olaj-es Gazipari Rt.
(Integrated Oil Companies) ............. 818,558
Shares Value (Note 1)
Hungary -- continued
6,670 OTP Bank Rt. (Non-U.S. Banks) ..........$ 278,440
-----------
1,748,556
India -- 7.3%
67,400 Bajaj Aoto Ltd., GDR (Motor Vehicles) .. 1,105,360
56,700 Hindalco Industries Ltd., GDR
(Aluminum) ............................. 1,102,815
66,200 ITC Ltd., GDR
(Tobacco) .............................. 1,863,530
75,000 Mahanagar Telephone Nigam Ltd., GDR
(Other Telephone/Communication) ........ 742,500
75,000 State Bank of India, GDR
(Non-U.S. Banks) ....................... 920,625
197,100 Videsh Sanchar Nigam Ltd., GDR
(Other Telephone/Communication) ........ 2,525,344
-----------
8,260,174
Indonesia -- 2.2%
47,200 Gulf Indonesia Resources Ltd. +
(Oil & Gas Production) ................. 542,800
1,466,000 PT Indah Kiat Pulp & Paper Corporation
(Paper) ................................ 677,430
579,000 PT Indofood Sukses Makmur Tbk +
(Food Distributors) .................... 785,935
885,600 PT Telekomunikasi Indonesia
(Other Telephone/Communication) ........ 511,538
-----------
2,517,703
Israel -- 2.8%
635,000 Bank Leumi Le-Israel (Non-U.S. Banks) .. 1,200,578
123,500 Bezeq Israeli Telecommunication
Corporation Ltd. +
(Other Telephone/Communication) ........ 497,545
9,700 Koor Industries Ltd.
(Multi-Sector Companies) ............... 1,118,902
139,190 Supersol Ltd. (Food Chains) ............ 409,061
-----------
3,226,086
Korea -- 15.9%
43,200 Hyundai Motor Company
(Automotive Aftermarket) ............... 1,024,484
28,000 Kookmin Bank (Non-U.S. Banks) .......... 568,467
144,300 Korea Electric Power Corporation ADR
(Non-U.S. Utilities) ................... 2,958,150
31,900 Korea Telecom Corporation
(Other Telephone/Communication) ........ 2,116,562
21,100 Korea Telecom Corporation ADR +
(Other Telephone/Communication) ........ 844,000
34,300 LG Chemical Ltd. (Major Chemicals) ..... 933,434
16,610 Pohang Iron & Steel Company Ltd.
(Steel/Iron Ore) ....................... 2,000,339
The accompanying notes are an integral part of these financial statements.
3
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Montgomery
Variable Series
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
Shares Value (Note 1)
COMMON STOCKS -- continued
Korea -- continued
21,900 Pohang Iron & Steel Company Ltd. ADR
(Steel/Iron Ore) .......................$ 736,387
45,400 Samsung Display Devices Company
(Industrial Specialties) ............... 2,471,015
29,426 Samsung Electronics Company
(Diversified Electronic Products) ...... 3,228,598
22,072 Sindo Ricoh Company
(Office Equipment/Supplies) ............ 1,182,258
-----------
18,063,694
Malaysia -- 2.2%
1,545,000 Public Bank Berhad (Non-U.S. Banks) .... 998,758
513,000 TenagaNasionalBerhad(Non-U.S.Utilities) 1,004,060
143,000 YTL Corporation Berhad
(Engineering and Construction) ......... 255,894
330,000 YTL Power International Berhad
(Non-U.S. Utilities) ................... 268,689
-----------
2,527,401
Mexico -- 12.6%
305,000 Carso Global Telecom, Series A1+
(Other Telephone/Communication) ........ 1,932,346
331,720 Corporacion Interamericana
Entertainment S.A.+
(Movies/Entertainment) ................. 1,078,979
48,900 Fomento Economico Mexicano S.A. de
C.V. (Soft Drinks) ..................... 1,949,887
293,000 Grupo Carso S.A., Series A+(Textiles) .. 1,358,814
520,000 Grupo Financiero Banamex Accival S.A. de
C.V., Series B, Banacci+(Non-U.S. Banks) 1,313,382
284,535 Grupo Industrial Bimbo S.A. de C.V.
(Specialty Foods/Candy) ................ 631,092
194,000 Grupo Mexico S.A., Series B
(Other Metals/Minerals) ................ 825,576
38,000 Grupo Radio Central S.A. de C.V. ADR
(Broadcasting) ......................... 199,500
61,900 Telefonos de Mexico S.A. ADR
(Other Telephone/Communication) ........ 5,002,294
-----------
14,291,870
Peru -- 0.8%
20,100 Compania de Minas Buenaventura S.A.
ADR (Precious Metals) .................. 307,781
12,400 Credicorp Ltd. (Non-U.S. Banks) ........ 136,400
15,171 Ferreyros Enrique S.A. ADR
(Construction/Agriculture
Equipment/Trucks) ...................... 199,120
16,000 Telefonica del Peru S.A. ADR
(Other Telephone/Communication) ........ 242,000
-----------
885,301
Philippines -- 2.4%
1,302,000 Ayala Corporation
(Multi-Sector Companies) ............... 428,571
125,000 Bank of the Philippine Islands
(Non-U.S. Banks) ....................... 447,663
600,000 Benpres Holdings Corporation+
(Broadcasting) .........................$ 142,199
323,000 Manila Electric Company, Series B
(Non-U.S. Utilities) ................... 1,165,267
17,700 Philippine Long Distance Telephone ADR
(Other Telephone/Communication) ........ 533,212
-----------
2,716,912
Poland -- 1.3%
10,500 Agora S.A., GDR+(Broadcasting) ......... 122,325
21,700 Elektrim Spolka Akcyjna S.A.
(Wholesale Distributors) ............... 306,450
34,000 Prokom Software, GDR (EDP Services) .... 557,600
63,500 Telekomunikacja Polska S.A., GDR+
(Other Telephone/Communication) ........ 447,675
-----------
1,434,050
Singapore -- 0.6%
13,800 Asia Pulp & Paper Company Ltd. ADR
(Paper) 132,825
5,800 Pacific Internet Ltd.+(Internet Services) 276,769
19,000 SingaporePressHoldingsLtd.(Newspapers) . 323,670
-----------
733,264
South Africa -- 8.1%
50,000 ABSA Group Ltd. (Finance Companies) .... 282,956
34,000 Anglo American Platium Corporation Ltd.
(Precious Metals) ...................... 793,305
13,500 AngloGold Ltd. (Precious Metals) ....... 581,656
1,211,355 B.O.E. Corporation Ltd., "N" Shares
(Investment Managers) .................. 963,544
200,737 Barlow Ltd. (Multi-Sector Companies) ... 1,157,618
56,100 De Beers Centenary AG
(Other Metals/Minerals) ................ 1,344,281
38,545 LibertyInternationalPLC(Non-U.S.Banks) . 255,178
82,673 Liberty Life Association of Africa Ltd.
(Life Insurance) ....................... 1,059,015
342,100 Molope Group Ltd.+ (Diversified
Commercial Services) ................... 223,928
50,000 Molope Group Ltd., N Shares+
(Diversified Commercial Services) ...... 28,171
104,800 Nasionale Pers Beperk (Newspapers) ..... 629,547
12,000 Nedcor Bank Ltd. (Non-U.S. Banks) ...... 271,638
156,100 Sasol Ltd. (Coal Mining) ............... 1,113,614
265,794 Wooltru Ltd.,"N" Shares (Food Chains)... 431,648
-----------
9,136,099
Taiwan -- 7.5%
13,117 Bank Sinopac (Non-U.S. Banks) .......... 9,137
1,685,200 China Steel Corporation (Steel/Iron Ore) 1,273,030
865,000 Far East Textiles Ltd.+(Textiles) ...... 1,285,449
258,000 Hon Hai Precision Industry+
(Electronic Data Processing) ........... 2,332,384
396,010 Synnex Technology International Corpora-
tion (Diversified Electronic Products).. 2,059,742
397,536 Taiwan Semiconductor Company
(Electronic Production Equipment) ...... 1,519,991
-----------
8,479,733
The accompanying notes are an integral part of these financial statements.
4
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---------------------
Montgomery
Variable Series
---------------------
Emerging Markets Fund
---------------------
Investments
Shares Value (Note 1)
COMMON STOCKS -- continued
Thailand -- 2.9%
595,000 Bank of Ayudhya Public Company Ltd.
(Non-U.S. Banks) ....................... $ 407,313
819,000 Industrial Finance of Thailand
(Finance Companies) .................... 521,798
293,000 Krung Thai Bank Public Company Ltd.
(F) (Non-U.S. Banks) ................... 194,618
249,000 National Finance Public Company Ltd.
(F) (Non-U.S. Banks) ................... 150,203
82,100 PTT Exploration and Production Public
Company Ltd. (F) (Oil & Gas
Production) ............................ 627,686
466,200 Thai Farmers Bank Public Company Ltd.
(Non-U.S. Banks) ....................... 1,440,879
------------
3,342,497
Turkey -- 3.0%
24,947,500 Haci Omer Sebanci Holdings A.S.
(Real Estate Investment Trusts) ........ 556,151
712,000 Migros Turk T.A.S. (Food Chains) ....... 886,496
7,498,000 Tupras-Turkie Petrol Rafinerileri Ltd.
(F) (Oil Refining/Marketing) ........... 497,899
32,560,000 Turkiye Is Bankasi, Class C
(Non-U.S. Banks) ....................... 579,139
58,230,835 YapiVeKrediBankasiA.S.(Non-U.S.Banks) .. 842,404
------------
3,362,089
United Kingdom -- 0.5%
13,180 Anglo American PLC+
(Finance Companies) .................... 615,918
TOTAL COMMON STOCKS
(Cost $78,295,112) ..................................... 93,582,413
------------
PREFERRED STOCK -- 9.0%
Brazil -- 8.3%
85,700,000 Banco do Brasil S.A.(Non-U.S. Banks)... 449,447
10,700,000 Banco do Estado de Sao Paulo S.A.
Banespa Ltd. (Non-U.S. Banks) ......... 455,332
14,562 Cia Energetica de Minas Gerais ADR
(Non-U.S. Utilities) .................. 305,802
25,059,247 Cia Energetica de Minas Gerias
(Non-U.S. Utilities) .................. 526,818
121,483,000 Cia Paranaense de Energi
(Non-U.S. Utilities) .................. 988,616
887,000 Itausa Investimentos Itau
(Multi-Sector Companies) .............. 466,183
12,855,000 Petroleo Brasileiro S.A. Ltd.
(Integrated Oil Companies) ............ 1,990,545
9,989,295 Telec de Sao Paulo S.A. Telesp
(Other Telephone/Communication) ....... 1,179,860
500,000 Telec do Rio Janeriro S.A.+
(Other Telephone/Communication) ....... 5,425
6,990,000 Telecomunicacoes Brasileiras
S.A. Telebras ADR+
(Other Telephone/Communication) ....... 329,847
Shares Value (Note 1)
Brazil -- Continued
16,550,000 Telesp Celular S.A., Series B
(Cellular Telephone) ................. $860,469
288,800 Usinas Siderurgicas de Minas Gerais,
GDR (Steel/Iron Ore) .................. 972,731
44,500 Vale do Rio Doce, Series "A"
(Other Metals/Minerals) ............... 880,192
20,000 Vale do Rio Doce, Series "B"
(Other Metals/Minerals) ............... --
------------
9,411,267
Russia -- 0.5%
80,600 LukOil Company ADR
(Integrated Oil Companies) ............ 584,350
Thailand -- 0.2%
188,000 SiamCommercialBank+ (Non-U.S.Banks) ... 267,589
TOTAL PREFERRED STOCKS
(Cost $11,451,869) .................................... 10,263,206
------------
WARRANTS -- 0.5%
Philippines -- 0.5%
1,013,000 Jollibee Food Company, Warrants,
Expire 03/24/03+ (Restaurants)
(Cost $558,708) ....................... 520,172
Principal Amount
REPURCHASE AGREEMENT -- 4.9%
$5,534,000 Agreement with Paine Webber, Tri-Party,
5.100% dated 06/30/99, to be repurchased
at $5,534,773, collateralized by
$5,644,689 market value of U.S.
government and mortgage-backed
securities, having various maturities
and interest rates.
(Cost $5,534,000) ..................... 5,534,000
------------
TOTAL INVESTMENTS -- 96.8%
(Cost $95,839,689*) ................................... 109,899,791
OTHER ASSETS AND LIABILITIES -- 3.2%
(Net) ................................................. 3,647,368
------------
NET ASSETS -- 100.0% .................................. $113,547,159
============
* Aggragate cost for federal tax purposes is substantially the same.
+ Non-income-producing security.
Abbreviations
ADR American Depositary Receipt
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- ---------------------
Montgomery
Variable Series
- ---------------------
Statement of Assets
and Liabilities
- ---------------------
June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Assets: Emerging Markets Fund
- --------------------------------------------------------------------------------
Investments in securities, at value (Note 1)
Securities.............................................. $104,365,791
Repurchase agreements................................... 5,534,000
------------
Total Investments 109,899,791
Cash...................................................... 3,280,122
Foreign currency, at value (Cost $1,980,856) (Note 1)..... 1,976,999
Receivables:
Shares of beneficial interest sold...................... 3,025,211
Investment securities sold.............................. 1,875,462
Dividends............................................... 280,521
Interest................................................ 693
Deferred organization costs (Note 1)...................... 19,712
------------
Total Assets.............................................. 120,358,511
------------
Liabilities:
- --------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency
exchange contracts (note 4)............................. 7,038
Payables:
Investment securities purchased......................... 6,500,502
Management fees (Note 2)................................ 141,916
Custodian fees.......................................... 105,977
Accounting fees......................................... 31,739
Other accrued liabilities and expenses.................. 20,689
Trustees, fees and expenses (Note 2).................... 3,267
Dividends............................................... 224
Total Liabilities......................................... 6,811,352
------------
Net Assets................................................ $113,547,159
------------
Investments at identified cost............................ $ 95,839,689
Net Assets Consist of:
- --------------------------------------------------------------------------------
Undistributed net investment income....................... $ 209,938
Accumulated net realized gain/(loss) on securities sold,
forward foreign-currency exchange contracts, futures
contracts and foreign-currency transactions............. (43,270,218)
Net unrealized appreciation of investments, forward
foreign-currency exchange contracts, foreign-currency
transactions, and other assets.......................... 14,027,054
Shares of beneficial interest............................. 131,352
Additional paid-in capital................................ 142,449,033
------------
Net Assets................................................ $113,547,159
Net Assets:
- --------------------------------------------------------------------------------
Net assets................................................ $113,547,159
Number of Fund shares outstanding......................... 13,135,236
Net asset value, offering and redemption
price per share outstanding............................. $ 8.64
------------
6
The accompanying notes are an integral part of these financial statements.
<PAGE>
-----------------------------
Montgomery
Variable Series
------------------------------
Statement of Operations
------------------------------
Six Months Ended June 30, 1999
(Unaudited)
Net Investment Income: Emerging Markets Fund
- --------------------------------------------------------------------------------
Investment Income:
Interest ................................................... $ 110,104
Dividends (net of foreign withholding taxes of $69,327) .... 883,889
-----------
Total Income 993,993
-----------
Expenses:
Management fee (Note 2) .................................... 524,421
Custodian fee .............................................. 100,311
Legal and audit fees ....................................... 37,925
Accounting expenses ........................................ 27,032
Amortization of organization expenses (Note 1) ............. 6,162
Interest expense ........................................... 4,238
Trustees' fees (Note 2) .................................... 2,568
Registration fees .......................................... 2,327
Transfer agency and servicing fees ......................... 2,246
Printing fees .............................................. 1,885
Other ...................................................... 13,681
-----------
Total Expenses 722,796
Fees deferred and/or expenses absorbed by Manager (note 2).. --
-----------
Net Expenses 722,796
-----------
Net Investment Income 271,197
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
- --------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions ................................ (4,650,671)
Foreign-currency transactions and other assets ......... (743,983)
-----------
Net Realized Gain/(Loss) on Investments (5,394 ,654)
Net change in unrealized appreciation/(depreciation) on:
Securities .............................................. 28,160,702
Foreign-currency transactions and other assets .......... (51,338)
----------
Net Unrealized Appreciation/(Depreciation) of Investments 28,109,364
----------
Net Realized and Unrealized Gain/(Loss) on Investments 22,714,710
----------
Net Increase/(Decrease) in Net Assets Resulting from Operations $22,985,907
7
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------
Montgomery
Variable Series
- --------------------------
Statement of
Changes in Net Assets
- --------------------------
(Unaudited)
Emerging Markets Fund
- --------------------------------------------------------------------------------
Six Months
Ended Year Ended
Increase/(Decrease) in Net Assets from Operations: 6/30/99 12/31/98
- --------------------------------------------------------------------------------
Net investment income .............................. $ 271,197 $ 586,481
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, foreign-currency transactions and other
assets during the period ......................... (5,394,654) (28,454,568)
Net unrealized appreciation/(depreciation) of
securities, forward foreign-currency exchange
contracts, foreign-currency transactions and other
assets during the period ......................... 28,109,364 (13,755,951)
------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from
Operations ....................................... 22,985,907 (41,624,038)
Distributions to Shareholders:
- --------------------------------------------------------------------------------
Distributions to shareholders from net investment -- (139,238)
income ...........................................
Beneficial Interest Transactions:
- --------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest
transactions (note 4) ............................ 18,238,729 (750,809)
------------ ------------
Net Increase/(Decrease) in Net Assets .............. 41,224,636 (42,514,085)
Net Assets:
- --------------------------------------------------------------------------------
Beginning of Period ................................ 72,322,523 114,836,608
End of Period ...................................... $113,547,159 $ 72,322,523
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ................ $ 209,938 $ (61,259)
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
---------------------
Montgomery
Variable Series
---------------------
Financial Highlights
---------------------
<TABLE>
<CAPTION>
Emerging Markets Fund
Selected Per-Share Data for the Year or Period Ended: 6/30/99 Fiscal Year Ended December 31,
(Unaudited) 1998 1997 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $ 6.59 $ 10.57 $ 10.65 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.03 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on investments 2.02 (3.98) (0.08) 0.65
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from investment
operations 2.05 (3.97) (0.06) 0.68
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.01) (0.02) (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 8.64 $ 6.59 $ 10.57 $ 10.65
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return* 31.26% (37.53)% (0.58)% 6.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) 113,547 72,323 114,837 26,966
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.67% 0.67% 0.63% 0.81%
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.02 $ 0.01 $ 0.02 $ (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 69% 112% 71% 43%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.95% 1.80% 1.76% 1.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including interest
and tax expense 1.95% -- 1.81% 2.47%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.75% 1.75% 1.75% 1.44%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
- ------------------------
The Montgomery Funds III
- ------------------------
Notes
- ------------------------
to Financial Statements
(Unaudited)
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 and was organized as a Delaware business trust on
August 24, 1994. As of June 30, 1999, the Trust had three series: the Montgomery
Variable Series: Growth Fund, Montgomery Variable Series: Emerging Markets Fund,
and Montgomery Variable Series: Small Cap Opportunities Fund. 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: Small Cap Opportunities Fund are
presented under separate cover.
1. SIGNIFICANT ACCOUNTING POLICIES:
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. The following is a summary of
significant accounting policies.
a. Portfolio Valuation
Portfolio securities are valued using current market valuations: either the last
reported sale price or, in the case of securities for which there is no reported
last sale, the mean of the closing bid and ask prices.
Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sale price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the NASDAQ national market are valued at the mean between the last
available bid and ask prices prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that 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 Trusts officers in accordance with methods authorized by the Trust's Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. Dividends and Distributions
Dividends from net investment income, if any, are declared and paid at least
annually. Distributions of net realized capital gains (including net short-term
capital gains) 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% nondeductible 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.
c. Forward Foreign-Currency Exchange Contracts
The Fund may engage in forward foreign-currency exchange contracts ("forward
contracts") as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. A forward contract is a commitment
to purchase or sell a foreign currency at the settlement date at a negotiated
rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain (loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the value
of the forward contract to buy and the forward contract to sell are included in
net realized and unrealized gain (loss) from foreign-currency related
transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
d. Foreign Currency
The accounting records of the Fund are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Fund denominated in a
foreign currency are translated into U.S. dollars at the exchange rate each day.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the exchange rate in effect on the date of the
respective transactions.
The Fund does not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain (loss) and unrealized appreciation (depreciation) from
investments.
e. Repurchase Agreements
The Fund may engage in repurchase agreement 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 takes possession of a government debt obligation as collateral. The Fund
also agrees with the counterparty to allow the counterparty to repurchase, and
the Fund to resell, the obligation at a specified date and price, thereby
determining the yield during the Funds 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
10
<PAGE>
-------------------------
The Montgomery Funds III
-------------------------
Notes
-------------------------
to Financial Statements
(Unaudited)
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 during the period in which the Fund seeks to assert its
rights. The Fund's 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 that 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 are computed on the specific identified cost
basis of the securities sold. Dividend income is recognized on the ex-dividend
date. Dividend income on foreign securities is recognized as soon as the Fund is
informed of the ex-dividend date. Interest income, including
accretion/amortization of premium/discount on short-term investments, is
recognized on the accrual basis.
g. Federal Income Taxes
The Fund has elected and qualified, and it is the intention of the Fund to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), by complying with the
applicable requirements of the Code and by making distributions of taxable
income to shareholders sufficient to relieve the Fund of all or substantially
all federal income taxes. Accordingly, no provision for federal income taxes is
required.
The Fund may be subject to foreign taxes on income, gains on investment or
currency repatriation, a portion of which may be recoverable. The Fund will
accrue such taxes and recoveries as applicable, based on their current
interpretation of tax rules and regulations that exist in the markets in which
they invest.
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.
i. Expenses
General expenses of the Trust are allocated to the Fund and other series of the
Trust based on relative net assets. Operating expenses directly attributable to
the Fund are charged to the Fund's operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS
WITH AFFILIATES:
a. Montgomery Asset Management, LLC, is the Fund's Manager (the "Manager"). The
Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. The Manager is a subsidiary of Commerz-bank
AG.
Pursuant to the Investment Management Agreement (the "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
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 the Agreement. As compensation, the Fund pays
the Manager a monthly management fee (accrued daily) at the following annual
rates based on the average daily net assets of the Fund:
First $250 Million Over $250 Million
------------------ -----------------
1.25% 1.00%
Under an Operating Expense Agreement with the Trust, the Manager has agreed to
reduce some or all of its management fee or absorb Fund expenses if necessary to
keep the Fund's annual operating expenses, exclusive of any Rule 12b-1 fees,
interest, extraordinary expenses or taxes, at or below 1.75% of the average
daily net assets of the Fund. Any reductions or absorptions made to the Fund by
the Manager are subject to recovery within the following three years, provided
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Operating Expense Agreement has a rolling
10-year term.
The Manager recouped previously deferred fees and/or absorbed expenses during
the year ended June 30, 1999. These amounts have been included with current
annual management fees in the Statement of Operations and are part of the
effective management fee shown.
b. Certain officers and Trustees of the Trust are, with respect to the Trust's
Manager, "affiliated persons" as defined in the 1940 Act. Each Trustee who is
not an affiliated person receives an annual retainer and quarterly meeting fee
totaling $55,000 per annum, as well as reimbursement for expenses, for services
as Trustee of all three Trusts advised by the Manager ($5,000 of which is
allocated to The Montgomery Funds III).
<PAGE>
- -------------------------
The Montgomery Funds III
- -------------------------
Notes
- -------------------------
to Financial Statements
(Unaudited)
3. SECURITIES TRANSACTIONS:
a. The aggregate amounts of purchases and sales of investment securities, other
than short-term securities, for the six-month period ended June 30, 1999, were
$69,065,467 and $54,351,391, respectively.
b. At June 30, 1999, 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 $18,888,042 and $4,827,940,
respectively.
c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the Montgomery Variable Series: Emerging Markets Fund, along with other Funds of
The Montgomery Funds, The Montgomery Funds II and The Montgomery Funds III, may
for one year starting August 13, 1998, 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 $175,000,000. The Fund pays its pro rata share of the quarterly
commitment fee of 0.08% per annum of the unutilized credit line balance. For the
six-month period ended June 30, 1999, borrowings under this agreement were as
follows:
<TABLE>
<CAPTION>
Average Amount Maximum Average Average Debt
Fund Outstanding Debt Outstanding Interest Rate Average Shares per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Emerging Markets Fund $2,288,888 $9,700,000 5.50% 12,057,793 $0.19
</TABLE>
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 years indicated below were:
<TABLE>
<CAPTION>
Six-Month Period Ended
Ended 6/30/99 Year Ended 12/31/98
(Unaudited)
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 9,980,386 $ 78,012,722 8,125,454 $ 62,925,477
Issued as reinvestment of dividends -- -- 21,354 139,014
Redeemed (7,825,499) (59,773,993) (8,035,427) (63,815,300)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 2,154,887 $ 18,238,729 111,381 $ (750,809)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, shareholders of the Fund with ownership of 10% or greater
included one shareholder, comprising ownership of 90.77% of the total aggregate
shares outstanding.
5. FOREIGN SECURITIES
The Fund purchases securities in emerging markets countries. Securities of
foreign companies and foreign governments involve risks and considerations not
typically associated with investing in U.S. companies and the U.S. government.
These risks include revaluation 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 markets countries. Moreover,
securities of many foreign companies and foreign governments and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies and the U.S. government.
12
<PAGE>
[LOGO OF THE MONTGOMERY FUNDS APPEARS HERE]
101 California Street
San Francisco, CA 94111-9361
