<PAGE>
The Montgomery Funds(SM)
SEMIANNUAL REPORT
December 31, 1998
Invest wisely:
<PAGE>
The Montgomery Funds represent a growing family of no-load mutual funds
providing a comprehensive range of equity, fixed-income and global investment
opportunities.
We currently manage more than $4.5 billion in the Funds on behalf of over
250,000 individual investors, helping them meet their financial goals through a
combination of professional portfolio management and high-quality customer
service.
--------------------
THE MONTGOMERY FUNDS
--------------------
Semiannual Report
December 31, 1998
(Unaudited)
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS AND INVESTMENTS
MONTGOMERY U.S. EQUITY FUNDS
- --------------------------------------------------------------------------------
Growth Fund ................................................................ 5
U.S. Emerging Growth Fund .................................................. 9
Small Cap Fund ............................................................. 13
Small Cap Opportunities Fund ............................................... 17
Equity Income Fund ......................................................... 20
MONTGOMERY INTERNATIONAL
AND GLOBAL EQUITY FUNDS
- --------------------------------------------------------------------------------
International Growth Fund .................................................. 23
International Small Cap Fund ............................................... 27
Global Opportunities Fund .................................................. 31
Global Communications Fund ................................................. 35
Emerging Markets Fund ...................................................... 39
Emerging Asia Fund ......................................................... 45
Latin America Fund ......................................................... 48
MONTGOMERY MULTI-STRATEGY FUNDS
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Select 50 Fund ............................................................. 51
U.S. Asset Allocation Fund ................................................. 54
MONTGOMERY U.S. FIXED-INCOME
AND MONEY MARKET FUNDS
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Total Return Bond Fund ..................................................... 56
Short Duration Government Bond Fund ........................................ 60
California Tax-Free Intermediate Bond Fund ................................. 64
Government Reserve Fund .................................................... 69
Federal Tax-Free Money Fund ................................................ 69
California Tax-Free Money Fund ............................................. 69
FINANCIAL STATEMENTS
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Statements of Assets and Liabilities ....................................... 80
Statements of Operations ................................................... 86
Statements of Changes in Net Assets ........................................ 90
Statements of Cash Flows ................................................... 94
Financial Highlights ....................................................... 96
Notes to Financial Statements .............................................. 106
[LOGO OF THE MONTGOMERY FUNDS(SM) APPEARS HERE]
<PAGE>
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THE MONTGOMERY FUNDS
- --------------------------------------------------------------------------------
Semiannual Report
- --------------------------------------------------------------------------------
D e c e m b e r 3 1 , 1 9 9 8
(Unaudited)
S T O C K A N D B O N D M A R K E T S O V E R V I E W
U.S. STOCKS
The second half of the year proved exceptionally challenging for investors in
the U.S. stock market. The large-cap benchmark, the S&P 500 Index, registered a
record high in mid-July, but just over a month later a sharp correction had
pulled valuations down significantly. And the roller-coaster ride did not stop
there. By the end of the fourth quarter, stocks had not only rallied strongly
off their third-quarter lows, but the S&P 500 was again posting record highs.
Although the U.S. economy continued to grow, U.S. equity markets could not avoid
the negative investor sentiment that swept global financial markets during the
third quarter. Global economic uncertainty was fueled by the severe recession
affecting most of Asia, the August devaluation of the Russian ruble, fear of a
possible currency crisis in Latin America and the near collapse of the Long-Term
Capital Management hedge fund. Domestic stocks of all sizes declined as a
result, with small-caps dropping the most. The S&P 500 fell by more than 10%,
while small-cap stocks as measured by the Russell 2000 Index declined by more
than 20%. Even the 50 largest stocks in the S&P 500, commonly known as the
"nifty fifty," suffered a meaningful decline during the third quarter. These
stocks had previously been a haven from global instability and were largely
responsible for driving the S&P 500 to its peak in mid-July.
Following these difficult market conditions, U.S. equity markets benefited from
an abrupt change in the fourth quarter. A series of interest rate cuts in the
United States demonstrated that the Federal Reserve was indeed concerned about
the developing global environment and its potential negative impact on the U.S.
economy. These interest rate cuts coupled with easing by other central banks
created a more favorable backdrop for equities. By the end of the quarter, many
of the U.S. market indices had
------------------------------------------
THE S&P 500 INDEX
PERFORMANCE:
July 1to December 31, 1998
[GRAPH APPEARS HERE]
------------------------------------------
THE S&P 500 WAS BESET BY VOLATILITY. Having reached an all-time high as the
beginning of the period, the index lost nearly 20% of its value at its low point
but recovered to a new high by the end of December.
returned to valuations near to or greater than those reached prior to the third-
quarter correction. Only the small-cap sector, represented by the Russell 2000,
failed to match its April peak despite a strong rally off its October lows.
The market's internal characteristics followed a pattern that has become all too
familiar to investors of late. Large-caps outperformed midsized stocks, and the
outperformance of a relatively small number of large-cap and Internet issues
masked much weaker returns in small-caps and cyclicals. In fact, just seven
stocks--including Microsoft, Intel, Cisco and Dell--accounted for 77% of market
growth for the year.
The primary driving force behind continued investor confidence in the U.S.
equity markets is the strength of the U.S. economy. Low levels of unemployment,
inflation and interest rates continue to fuel domestic consumption, the main
engine of economic growth. December payroll employment was significantly
stronger than expected, new home sales reached record highs and retail sales
continued to be robust. At the same time, the negative combination of zero
pricing power and the tight labor market's upward pressure on costs is slowing
corporate earnings growth. This suggests that the valuations of 1998's top-
performing stocks may not be sustainable in the long run and that we may see a
period of lower returns for the companies composing the S&P 500 as a result.
This may mean a shift away from an "indexer's market" to a "stock picker's"
market in the future.
U.S. BONDS
Economic events around the world led investors to favor the most liquid, high-
quality U.S. bond issues. The yield on the 30-year Treasury bond finished the
third quarter at 4.95%, the lowest yield on any long-term U.S. government bond
since 1967, as investors eschewed credit and liquidity risk. The Federal Reserve
responded by reducing the federal funds rate by a quarter of a percentage point
to 5.25% on September 29, citing global economic weakness and deteriorating
conditions at home.
As investors chose to pay a premium for more-liquid assets and deflation fears
continued, the Fed addressed market concerns by following its September move
with two more cuts during the fourth quarter. By the end of the year, its target
for the overnight bank-lending rate was a mere 4.75%, in spite of a strong
economy and 4.5% unemployment. This represented a significant policy shift, as
the Fed declared victory in the 30-year war against inflation and vowed to fight
deflation and inflation equally.
Although the Fed's maneuvering halted the rally in Treasuries and reassured the
investment community that it was taking the threat of deflation seriously,
credit-quality spreads remained historically high by quarter end. The bond
market was volatile and
<PAGE>
liquidity poor in many sectors of the market, as dealers kept positions to a
minimum.
The discontinuity between the world's economies and markets makes forecasting
the fixed-income market in 1999 extremely difficult. The slowdown in worldwide
growth and a pause in the U.S. equity market may lead to a more conservative
U.S. consumer. In the worst case, this may result in a recession and
dramatically lower rates. The U.S. economy is equally as capable, however, of
surprising with stronger growth than generally anticipated. Under this scenario,
recovering emerging markets could combine with an accommodating European Central
Bank (ECB) to stoke the already hot U.S. economy. This may start to produce
inflationary pressures and force the Fed to begin to raise rates. We do not
expect to be able to judge which scenario is the most likely in the first
quarter, as the underlying dynamics may take longer to unfold.
INTERNATIONAL EQUITIES
The fortunes of the international equities markets were decidedly mixed over the
second half of the year. All suffered from the volatility that plagued the
markets in the third quarter. The August collapse of the Russian ruble and the
country's subsequent debt default led to capital flight from the emerging
markets as investors worried about possible devaluation in other markets.
Developed markets were not immune to this shift in investor sentiment. In Europe
the negative impact of recession in the Asian economies on economic growth and
corporate earnings began to surface after a near 12-month lag. As a result,
analysts and economists downgraded their expectations for both economic growth
and corporate earnings for this year and next, causing investors to sell
equities in preference for bonds. In the developed markets of Asia, both Hong
Kong and Singapore lost ground, and the benchmark Nikkei 225 Index in Japan
tested a 12-year low.
Markets in Europe and Asia bounced back in the fourth quarter, however.
Performance of developed and emerging markets in Europe was boosted by the
coordinated interest rate cut orchestrated by the central banks for the
countries participating in the Economic and Monetary Union on January 1, 1999.
Directly following three consecutive rate cuts by the U.S. Federal Reserve as
well as rate cuts in the United Kingdom, the move signaled to the markets that
Europe's central banks were taking the threat of deflation seriously. As a
result, in spite of the strong third-quarter correction, European markets ended
the year registering a very healthy average gain of 19% in local-currency terms
and 26% in dollar terms.
The stabilizing impact of interest rate cuts in the United States and Europe on
the value of the yen also helped Asia's developed
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THE MONTOGMERY FUNDS
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Semiannual Report
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D e c e m b e r 3 1 , 1 9 9 8
------------------------------------------
U.S.TREASURY 30-YEAR
BOND YIELD:
July 1to December 31, 1998
[GRAPH APPEARS HERE]
------------------------------------------
THE BOND MARKET SUFFERED MIXED FORTUNES from July through December, Treasury
Bonds benefited from the flight to equality in the third quarter. Other issues
suffered, in spite of a reduction in interest rates, credit quality spreads
remained historically high by year end.
markets. In addition, Japan announced both a definitive plan to sort out its
banking crisis and a further economic stimulus package, which helped lift market
sentiment. This impetus eroded by year end, however, as it became clear that
Japan's economic prospects would worsen considerably before they began to
improve.
In the emerging economies, many Asian markets enjoyed strong rallies off third-
quarter lows. The feeling that the worst of the crisis had passed as interest
rates began to decline and a measure of stability began to return to regional
currencies led to an inflow of capital. This trend was not repeated across all
emerging markets, however. Many of the Latin American bourses never really
regained their lost footing. Although Brazil managed to obtain a financing
package from the International Monetary Fund (IMF) that staved off currency
devaluation, it paid the price through high interest rates and declining growth.
This also served to dampen the fortunes of the markets of Brazil's major trading
partners in the region.
In spite of the more encouraging investment environment in the fourth quarter,
it is very difficult to forecast the direction of global equity markets in 1999,
due to a number of risk factors. First, in our opinion, 1999 is likely to be a
year of decelerating aggregate growth. This makes forecasting business momentum
and earnings growth very difficult. Second, in 1998 the markets benefited from
decelerating inflation and falling interest rates. The direction of both of
these variables is also hard to determine. Third, the risk factors that
contributed to volatility in the emerging markets throughout third-quarter 1998
are still present--namely Brazil's economic problems, the precarious situation
in Russia and China's economic restructuring challenges. We will continue to
keep a very close eye on these events as they develop.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Performance Summary
December 31, 1998
(Unaudited)
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
Fund name (Fund number) Inception date One year Three years Five years Since inception
MONTGOMERY U.S EQUITY FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Fund (284) 9/30/93 2.10% 15.07% 17.90% 20.78%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Emerging Growth Fund (294) 12/30/94 7.94% 17.77% --- 20.39%
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund (276) 7/13/90 (7.93%) 10.62% 10.49% 17.55%
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund (645) 12/29/95 (9.54%) 13.06% --- 13.06%
- --------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund (293) 9/30/94 10.74% 18.23 --- 20.54%
- --------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY INTERNATIONAL AND GLOBAL EQUITY FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund (296) 7/3/95 28.69% 19.69% --- 20.34%
- --------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund (283) 9/30/93 10.58% 8.05% 4.09% 6.41%
- --------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund (285) 9/30/93 32.76% 21.00% 13.70% 16.71%
- --------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund (280) 6/1/93 54.97% 24.70% 14.43% 19.04%
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund (277) 3/1/92 (38.28%) (12.43%) (10.84%) (1.58%)
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Asia Funds (648) 9/30/96 (14.72%) --- --- (12.51%)
- --------------------------------------------------------------------------------------------------------------------------------
Latin America Fund (652) 6/30/97 (52.79%) --- --- (41.92%)
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MONTGOMERY MULTI-STRATEGY FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund (295) 10/2/95 9.40% 19.43% --- 23.26%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund (291) 3/31/94 6.18% 12.56% --- 18.77%
- --------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY U.S. FIXED-INCOME AND MONEY MARKET FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund (650) 6/30/97 8.72% --- --- 10.21%
- --------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund (279) 12/18/92 7.38% 6.49% 6.37% 6.69%
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California Tax-Free Intermediate Bond Fund (281) 7/1/93 6.06% 6.02% 5.84% 5.74%
- --------------------------------------------------------------------------------------------------------------------------------
As of 12/31/98 One-day yield Seven-day yield
- --------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund (278) 9/14/92 4.72% 4.65%
- --------------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund (647) 7/15/96 3.61% 3.34%
- --------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Market Fund (292) 9/30/94 3.69% 3.18%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Net asset value, investment
return and principal value of an investment will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than their original cost.
Performance information is for Class R (Retail) shares only. The Performance
figures provided do not reflect the effect of (i) any securities purchased or
sold by the Funds after 12/31/98 but that were effective on 12/31/98 or (ii) any
purchases or redemptions of Fund shares completed after 12/31/98 that were
effective on 12/31/98. The performance figures for the Class R shares shown
above do not reflect the 0.25% Rule 12b-1 fees paid by the Class P shares that
would reduce performance.
Income from tax-free funds may be subject to the alternative minimum tax and/or
state and local taxes.
An investment in one of our money market funds is neither insured nor guaranteed
by the government. There can be no assurance that the money market funds will
be able to maintain a stable net asset value of $1 per share. Yields may
fluctuate.
There are certain risks associated with investing in foreign markets, such as
currency fluctuations and political and economic instability. There are also
additional risks associated with investing in small-cap companies. Investors are
encouraged to read the prospectus carefully before investing.
4
<PAGE>
I N V E S T M E N T R E V I E W
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: Although the Fund enjoyed strong performance over the final three months of
the year, returning 17%, it underperformed the S&P 500 Index, which returned
21.3%. Disappointingly, the Fund's fourth-quarter gain was also not enough to
offset its third-quarter loss. As a result, for the six months ended December
31, 1998, the Fund returned -5.6% versus a return of 9.4% for the S&P 500.
Q: WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A: The narrowness of the U.S. market in both the third and fourth quarters did
not favor the Growth Fund's strategy. Our investment strategy considers not only
expected growth potential but also attractive valuations. We continued to focus
on this disciplined approach, seeking companies in the midst of positive
fundamental change, with both improving earnings growth and reasonable
valuations. This resulted in a portfolio that was concentrated in more cycle-
sensitive and smaller-cap names than the benchmark. Over the second half of the
year, the market's large-cap stocks outperformed midsized issues. This was
especially true during the steep third-quarter market correction, when small and
midsized stocks lost value disproportionately to large-caps. In the fourth
quarter, the outperformance of a relatively small number of large-cap and
Internet stocks masked much weaker returns in small-caps and cyclicals. In fact,
the stocks of just seven companies--including Microsoft, Intel, Dell and Cisco--
accounted for 77% of S&P 500 gains in 1998.
Q: DID YOU MAKE ANY CHANGES TO THE GROWTH FUND'S PORTFOLIO OVER THE SECOND HALF
OF THE YEAR?
A: During the third-quarter market correction, we added a number of companies
because we saw positive long-term fundamentals and attractive valuations.
Capital One Financial (1.9% of assets as of 12/31/98) and Nokia (1.4% of assets
as of 12/31/98) are two good examples of companies that fit this criteria and
represent the strategy of the Fund. Capital One Financial is a technology-based
credit-card issuer which, in our opinion, is well positioned to deliver
favorable future growth. Nokia is best known for cellular phones and related
transmission equipment. The company is gaining market share in an industry
already experiencing impressive growth rates. We see a bright future for Nokia
based on its management's ability to exploit the tremendous growth potential in
the wireless communications market. Both of these companies were sold down
heavily during the third quarter.
Our discipline also dictates that we trim portfolio holdings when they reach the
upper levels of the growth and valuation characteristics we look for. This
resulted in a decision to sell our holdings in both Ascend and Texas Instruments
during the fourth quarter. We continue to see opportunities in smaller and
cycle-sensitive names, where the valuations are more reasonable.
--------------------
THE MONTGOMERY FUNDS
--------------------
Growth Fund
PORTFOLIO HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honour......................................... Senior Portfolio Manager
Kathryn Peters....................................... Portfolio Manager
Andrew Pratt, CFA.................................... Director of Research
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY GROWTH FUND
Since inception 9/30/93................................................ 20.78%
One year............................................................... 2.10%
Five years............................................................. 17.90%
- --------------------------------------------------------------------------------
S&P 500 INDEX
Since 9/31/93.......................................................... 23.34%
One Year............................................................... 28.75%
Five years............................................................. 24.07%
- --------------------------------------------------------------------------------
Past performances 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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GROWTH(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $ 10,000 $ 0 $ 10,000
09/93 12.00 $ 10,000 $ 0 $ 10,000
10/93 12.48 $ 10,400 $ 0 $ 10,400
11/93 13.18 $ 10,983 $ 0 $ 10,983
12/93 14.12 $ 11,767 $ 67 $ 11,834
01/94 14.90 $ 12,417 $ 71 $ 12,488
02/94 15.09 $ 12,575 $ 72 $ 12,647
03/94 14.95 $ 12,458 $ 72 $ 12,530
04/94 15.49 $ 12,908 $ 74 $ 12,982
05/93 15.65 $ 13,042 $ 74 $ 13,116
06/94 15.27 $ 12,725 $ 73 $ 12,798
07/94 15.82 $ 13,183 $ 76 $ 13,259
08/94 16.62 $ 13,850 $ 79 $ 13,929
09/94 16.52 $ 13,767 $ 79 $ 13,846
10/94 17.12 $ 14,267 $ 81 $ 14,348
11/94 16.48 $ 13,733 $ 186 $ 13,919
12/94 16.93 $ 14,108 $ 201 $ 14,309
01/95 16.56 $ 13,800 $ 196 $ 13,996
02/95 17.20 $ 14,333 $ 204 $ 14,537
03/95 17.90 $ 14,917 $ 211 $ 15,128
04/95 18.02 $ 15,017 $ 213 $ 15,230
05/95 18.42 $ 15,350 $ 218 $ 15,568
06/95 19.16 $ 15,967 $ 226 $ 16,193
07/95 19.96 $ 16,633 $ 236 $ 16,869
08/95 20.02 $ 16,683 $ 237 $ 16,920
09/95 20.54 $ 17,117 $ 243 $ 17,360
10/95 20.21 $ 16,842 $ 239 $ 17,081
11/95 19.17 $ 15,975 $ 1,689 $ 17,664
12/95 19.20 $ 16,000 $ 1,692 $ 17,692
01/96 19.46 $ 16,217 $ 1,715 $ 17,932
02/96 20.43 $ 16,858 $ 1,783 $ 18,641
03/96 20.79 $ 17,325 $ 1,832 $ 19,157
04/96 21.60 $ 18,000 $ 1,904 $ 19,904
05/96 22.43 $ 18,692 $ 1,976 $ 20,668
06/96 21.94 $ 18,283 $ 1,934 $ 20,217
07/96 20.94 $ 17,450 $ 1,845 $ 19,295
08/96 21.75 $ 18,125 $ 1,917 $ 20,042
09/96 22.37 $ 18,642 $ 1,971 $ 20,613
10/96 20.51 $ 17,092 $ 3,885 $ 20,977
11/96 21.39 $ 17,825 $ 4,053 $ 21,878
12/96 20.15 $ 16,792 $ 4,475 $ 21,267
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GROWTH(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
01/97 20.70 $ 17,250 $ 4,597 $ 21,847
02/97 20.50 $ 17,083 $ 4,553 $ 21,636
03/97 19.94 $ 16,617 $ 4,428 $ 21,045
04/97 20.77 $ 17,308 $ 4,613 $ 21,921
05/97 22.46 $ 18,717 $ 4,987 $ 23,704
06/97 23.07 $ 19,225 $ 5,123 $ 24,348
07/97 25.50 $ 21,250 $ 5,663 $ 26,913
08/97 25.19 $ 20,992 $ 5,594 $ 26,586
09/97 26.55 $ 22,125 $ 5,896 $ 28,021
10/97 25.34 $ 21,117 $ 5,627 $ 26,744
11/97 25.38 $ 21,150 $ 5,636 $ 26,786
12/97 21.89 $ 18,242 $ 8,163 $ 26,405
01/98 21.41 $ 17,842 $ 7,984 $ 25,826
02/98 23.29 $ 19,408 $ 8,686 $ 28,094
03/98 24.30 $ 20,250 $ 9,062 $ 29,312
04/98 24.67 $ 20,558 $ 9,200 $ 29,758
05/98 23.88 $ 19,900 $ 8,905 $ 28,805
06/98 23.68 $ 19,733 $ 8,831 $ 28,564
07/98 22.51 $ 18,758 $ 8,395 $ 27,153
08/98 18.67 $ 15,558 $ 6,963 $ 22,521
09/98 19.11 $ 15,925 $ 7,127 $ 23,052
10/98 20.77 $ 17,308 $ 7,746 $ 25,054
11/98 21.99 $ 18,325 $ 8,201 $ 26,526
12/98 20.62 $ 17,183 $ 9,776 $ 26,959
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
01/13/1999 S&P 500 Index Growth $10,000
<TABLE>
<CAPTION>
09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994 06/30/1994
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 10206.72 10109.44 10231.66 10579.18 10292.19 9844.34 9970.46 10133.44 9885.47
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 10209.84 10627.48 10367.81 10600.40 10214.82 10366.06 10634.69 11048.74 11374.25
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/3011995 10/31/1995 11/30/1995
04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1997 10/31/1995 11/30/1995 12/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 11708.92 12176.20 12458.53 12871.49 12903.62 13447.87 13399.83 13987.39 14256.82
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1995 O1/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 14741.50 14878.64 15021.89 15243.16 15635.60 15695.21 15002.18 15319.10 16180.53
</TABLE>
Source: Lipper Ananlytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 16626.63 17882.29 17528.06 18622.54 18768.74 17999.00 19072.56 20238.61 21138.34
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/29/1998 03/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 22819.87 21542.41 22721.55 21963.56 22979.47 23373.83 23632.11 25335.56 26631.92
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 26904.64 26442.82 27516.13 27225.32 23291.91 24785.29 26798.24 28421.76 30058.49
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
09/30/1993 10/31/1993 11/31/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------ --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 10139.37 9959.69 10239.89 10575.60 10402.23 9920.03 9960.78 10017.46
</TABLE>
Source: Lipper Analytical Servicse, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 9683.76 9940.11 10405.78 10200.56 10361.77 9974.14 10063.45 10144.96 10535.34
</TABLE>
Source: Lipper Analytical Servicse, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 12/31/1995 10/31/1995 11/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 10835.75 11075.81 11423.18 11900.44 12460.36 12550.78 12929.31 12757.07 13211.84
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 13261.63 13566.40 13870.83 13982.55 14401.10 14761.16 14575.40 13742.15 14200.75
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 15009.89 15159.76 16114.83 15874.26 16716.22 16540.12 15802.65 16445.99 17606.16
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 18286.91 19819.45 19125.61 20186.46 19421.00 19791.78 20015.95 20138.93 21659.69
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Funds
Average/Total 22600.36 22858.19 22211.90 23002.25 22499.86 18810.98 19917.80 21393.30 22694.80
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Growth Fund Growth $10,000
01/12/99 SUMMARY
<TABLE>
<CAPTION>
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------
<S> <C>
Growth Funds
Average/Total 24445.48
</TABLE>
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NYSE,AMEX, and OTC markets.
/2/ The Lipper Growth Funds Average universe consists of 345 funds.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Growth Fund
Portfolio Highlights
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<TABLE>
<S> <C>
Golden West Financial Corporation......................................... 3.1%
Dow Chemical Company...................................................... 3.1%
General Motors Corporation................................................ 3.1%
Nordstrom, Inc............................................................ 3.0%
Converse Technology, Inc.................................................. 3.0%
Donnelley (R.R.) & Sons Company........................................... 2.9%
Avid Technology Inc....................................................... 2.8%
Canadian National Railway Company......................................... 2.8%
FDX Corporation........................................................... 2.8%
Aspect Telecommunications Corporation..................................... 2.6%
</TABLE>
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<TABLE>
<S> <C>
Telecommunications Equipment.............................................. 8.6%
Paper..................................................................... 7.3%
Railroads................................................................. 4.9%
Clothing/Shoe/Accessory Stores............................................ 4.3%
Major Chemicals........................................................... 4.0%
</TABLE>
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
Q: HOW WAS THE FUND POSITIONED AT THE END OF THE FOURTH QUARTER?
A: At the end of the year, the Fund remained fully invested and well diversified
across a broad spectrum of industries. Bearing in mind that we follow a
bottom-up investment approach, our company selections resulted in the Fund being
overweighted versus the S&P 500 Index in basic industries, business services,
capital goods and transportation. We are currently underweighted versus the
index in consumer nondurables, financial services, health care and public
utilities.
Q: WHAT IS YOUR OUTLOOK FOR THE U.S. STOCK MARKET IN 1999?
A: Looking forward, economic data continues to forecast strength. Low levels of
unemployment, benign inflation and stable to falling interest rates continue to
fuel consumption, the main engine of economic growth. In view of this, we
anticipate continued, albeit more moderate, economic expansion through 1999.
Expectations are for 2.5 to 3% growth with modest inflation. At the same time,
consensus expectations are for modest corporate earnings growth of approximately
4% in 1999. The implication of these earnings growth expectations is
price-to-earnings multiples of 26 times 1999 earnings if the S&P 500 Index
reaches a level of 1,250.
We believe that these numbers suggest that we are overdue for a period when
rates of return from stocks regress to the average. After an extraordinary
16-year period of 18% annualized returns, we expect several years in which stock
returns come in somewhat below the historical average.
Q: IS THIS LIKELY TO PRESENT THE FUND WITH SOME INTERESTING OPPORTUNITIES?
A: In our view the market outlook for the coming year favors the Fund's
fundamental approach to investment, over the indexing approach that has been so
successful in the 1998 market. We expect to see a broadening interest in the
market, and the Fund may benefit from this trend. Our stock-selection approach
has identified some very interesting companies that we believe offer promising
long-term growth prospects that are currently trading at attractive valuations.
The Fund is well positioned to take advantage of the returns that these may
generate should the market recognize their potential.
6
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Growth Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 92.2%
Shares Value (Note 1)
Advertising - 2.2%
680,000 Snyder Communications Inc.**......... $22,950,000
Air Freight/Delivery Services - 2.8%
325,000 FDX Corporation...................... 28,925,000
Aluminum - 2.4%
340,000 Aluminum Company of America (Alcoa).. 25,351,250
Apparel - 1.1%
240,000 VF Corporation....................... 11.250,000
Building Products - 1.0%
380,000 Masco Corporation.................... 10,925,000
Clothing/Shoe/Accessory Stores - 4.3%
920,000 Nordstrom, Inc. ..................... 31,970,000
440,000 TJX Companies, Inc. ................. 12,760,000
------------
44,730,000
Computer Software - 3.8%
1,240,000 Avid Technology Inc. ................ 29,062,500
1,420,000 Sybase, Inc. ........................ 10,494,688
------------
39,557,188
Construction/Agriculture Equipment/Trucks - 0.9%
239,100 PACCAR, INC. ........................ 9,803,100
Consumer Electronics/Appliances - 1.3%
250,000 Whirlpool Corporation................ 13,843,750
Discount Stores - 1.3%
250,000 Dayton-Hudson Corporation**.......... 13,562,500
Diversified Electronic Products - 1.7%
100,000 Matsushita Electric Industrial Company,
Ltd., ADR............................ 17,450,000
Diversified Manufacture - 1.4%
200,000 Tyco International Ltd. ............. 15,087,500
Electrical Products - 2.3%
744,300 Raychem Corporation.................. 24,050,193
Electronic Data Processing - 1.2%
740300 Data General Corporation............. 12,163,750
Electronic Data Processing Services - 3.1%
155,000 Computer Sciences Corporation........ 9,987,813
440,000 Electronic Data Systems Corporation.. 22,110,000
------------
32,097,813
Environmental Services - 1.0%
598,400 Republic Services, Inc., Class A+.... 11,033,000
Finance Companies - 2.0%
170,000 Capital One Financial Corporation.... 19,550,000
59,400 Heller Financial Inc.+............... 1,744,874
------------
21,294,874
Food Distributors - 1.2%
1,200,000 Fleming Companies, Inc. ............. 12,450,000
Hotels/Resorts - 1.1%
839,300 Host Marriott Corporation............ 11,592,831
Integrated Oil Companies - 2.5%
524,000 Amerada Hess Corporation............. 26,069,000
Major Banks - 1.3%
215,004 BankAmerica Corporation.............. 12,927,000
Major Chemicals - 4.0%
360,000 Dow Chemical Company**............... 32,737,500
200,000 Eastman Chemical Company............. 8,950,000
------------
41,687,500
Managed Health Care - 1.6%
1,000,000 First Health Group Corporation+..... 16,331,250
Medical Specialties - 1.5%
271,300 Bausch & Lomb Inc. ................. 16,278,000
Motor Vehicles - 3.1%
456,000 General Motors Corporation.......... 32,661,000
Movies/Entertainment - 3.0%
740,000 Fox Entertainment Group, Inc.,
Class A+.......................... 18,638,750
200,000 Time Warner, Inc. .................. 12,412,500
-------------
Multi-Sector Companies - 1.6%
170,000 Loews Corporation................... 16,702,500
Oil and Gas Production - 1.8%
2,100,000 Union Pacific Resources Group, Inc. 19,031,250
Oilfield Services/Equipment - 1.0%
320,000 Schlumberger Ltd. .................. 14,760,000
Other Consumer Services - 0.7%
375,000 Cendant Corporation................. 7,148,438
Other Metals/Minerals - 1.0%
225,000 Rio Tinto Plc. Sponsored ADR........ 10,195,313
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Growth Fund
Investments
COMMON STOCK -- continued
Shares
Packaged Foods -- 1.2%
436,700 Dole Foods Company. Inc........................ $ 13,101,000
Packaged Goods/Cosmetics - 1.4%
175,000 Unilever N.V., ADR............................. 14,514,062
Paper - 7.5%
787,000 Boise Cascade Corporation...................... 24.397,000
425,000 Chesapeake Corporation......................... 15,671.875
580,000 International Paper Company**.................. 25,991,250
380,000 Westhaco Corporation........................... 10,188,750
------------
76,248,875
Printing/Forms - 3.8%
700,000 Donnelley (R.R.) & Sons Company................ 30,668,750
300,000 World Color Press Inc. ........................ 9,131,750
------------
Railroads - 4.9%
360,000 Canadian National Railway Company.............. 29,050,000
500,000 Union Pacific Corporation...................... 22,531,290
------------
Real Estate Investment Trust - 0.1%
83,930 Crestline Capital Corporation*................. 1,227,476
Savings and Loan Associations - 3.1%
360,000 Golden West Financial Corporation.............. 33,007,500
Specialty Chemicals - 1.3%
425,000 Nalco Chemical Company......................... 13,175,000
Specialty Steels - 3.0%
320,000 Carpenter Technology Corporation............... 10,360,000
Telecommunications Equipment - 9.5%
1,580,000 Aspect Telecommunications Corporation.......... 27,551,250
440,000 Converse Technology, Inc.+**................... 31,226,250
260,000 Motorola, Inc. ................................ 15,876,250
125,000 Nokla Corporation, Sponsored ADR............... 15,054,688
------------
89,708,438
TOTAL COMMON STOCKS
(Cost $823,713,155)............................................. 965,383,967
------------
REPURCHASE AGREEMENTS - 7.4%
Principal Amount
$13,000,000 Agreement with Bear Stearns, Tri-Party,
5.150% dated 12/31/98, to be repurchased
at $13,007,439 on 01/04/99, collateralized
by $13,260,000 market value of U.S.
government securities, having various
maturities and various interest rates.......... 13,000,000
13,357,000 Agreement with Greenwich Capital Markets,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $13,364,643 on 01/03/99,
collateralized by $13,624,140 market value
of U.S. government securities, having various
maturities and various interest rates.......... 13,357,000
19,915,000 Agreement with Paine Webber Group,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $19,926,396 on 01/04/99,
collateralized by $20,313,300 market value
of U.S. government securities, having various
maturities and various interest rates.......... 19,915,000
31,402,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $31,429,969 on 01/04/99,
collateralized by $32,030,040 market value
of U.S. government securities, having various
maturities and various interest rates.......... 31,402,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $77,674,000).............................................. 77,674,000
------------
TOTAL INVESTMENTS - 99.6%
(Cost $901,387,155*)........................................... 1,044,057,967
OTHER ASSETS AND LIABILITIES - 0.4%
(Net)........................................................... 4,360,293
-------------
NET ASSETS - 100.0%........................................... $1,048,418,260
--------------
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $25,527,809, represent 2.79% of the total net assets of the
Fund (see note 4 to Financial Statements).
+ Non-income-producing security.
Abbreviation.
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM FOR THE SIX MONTHS ENDED DECEMBER 31, 1998, AND FOR
THE 1998 CALENDAR YEAR?
A: For the six-month period, the Fund was up 0.2%, surpassing the returns for
both the Russell 2000 Index and the Russell 2000 Growth Index, which were down-
7.1% and -4%, respectively. For the 1998 calendar year, the Fund was up 7.9%,
again outpacing the Russell 2000 and the Russell 2000 Growth, which returned-
2.6% and 1.2%, respectively.
Q: WHAT LED TO THE FUND'S OUTPERFORMANCE OVER THE SMALL-CAP INDICES?
A: We believe that our disciplined stock selection process drove the Fund's
outperformance relative to its benchmark. Our stock selection strategy is to
identify small- and micro-cap growth companies with improving business
fundamentals that are trading at reasonable valuations before their potential is
recognized by the market. We seek companies that we believe could become large,
successful growth companies that will provide superior returns. Two good
examples of the kind of stocks the Fund's strategy identifies and which
performed particularly well over the period are Dominick's Supermarkets, Inc.
(which was acquired by Safeway for cash) and Elcor Corporation (3.9% of assets
as of 12/31/98).
Dominick's Supermarkets, Inc., a stock we began purchasing in March 1997, is a
leading grocery store chain in the Chicago area, a region dominated by two
supermarket chains. Eighty percent of the company's store base was new or had
been remodeled during the past seven years, and the company was opening new
locations. This industry has been undergoing consolidation over the past few
years, and Dominick's operates in a very attractive market. On October 13, 1998,
Safeway announced that it would acquire Dominick's.
We began investing in Elcor Corporation in August 1997. Elcor is a leading
manufacturer of low-cost, high-quality, premium laminated asphalt roofing
shingles. Over the years, Elcor has developed and introduced the majority of
laminated-product innovations. The company has been able to consistently command
premium prices for its products due to their high quality and superior features.
Eighty percent of asphalt shingles are used for roofing and remodeling. During
the past five years, industry demand for such shingles has grown at an
accelerating rate from 10 to 14% per year, and demand continues to be strong.
Elcor also has an industrial products business, which includes a rapidly growing
conductive coatings division. This business is a leading provider of shielding
technologies for cellular phones. Elcor's conductive coating prevents signals
emitted from cell phones from interfering with electronic devices like
pacemakers. The digital cellular phone market is rapidly growing, and Elcor's
customers include the leading telecommunications companies, such as Nokia,
Motorola and Lucent.
--------------------
THE MONTGOMERY FUNDS
--------------------
U.S. Emerging
Growth Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honour .......................................... Senior Portfolio Manager
Kathryn Peters ........................................ Portfolio Manager
Andrew Pratt, CFA ..................................... Director of Research
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY U.S.
EMERGING GROWTH FUND
Since inception (12/30/94) ............................................. 20.39%
One Year ............................................................... 7.94%
Three Years ............................................................ 17.77%
- --------------------------------------------------------------------------------
RUSSELL 2000 INDEX
Since 12/30/94 ......................................................... 15.57%
One Year ............................................................... (2.54)%
Three Years ............................................................ 11.56%
- --------------------------------------------------------------------------------
Past performance is not 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.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
01/09/99
MONTGOMERY US EMERGING GROWTH(R)
Initial Investment: $10,000 Period: 12/30/94 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distributions Reiinvested
<S> <C> <C> <C> <C>
12/30/94 12.00 $10,000 $ 0 $10,000
12/94 12.00 $10,000 $ 0 $10,000
01/95 12.10 $10,083 $ 0 $10,083
02/95 12.25 $10,208 $ 0 $10,208
03/95 12.67 $10,558 $ 0 $10,558
04/95 12.82 $10,683 $ 0 $10,683
05/95 12.95 $10,792 $ 0 $10,792
06/95 13.75 $11,458 $ 0 $11,458
07/95 14.50 $12,083 $ 0 $12,083
08/95 14.75 $12,292 $ 0 $12,292
09/95 14.97 $12,475 $ 0 $12,475
10/95 14.47 $12,058 $ 0 $12,058
11/95 14.93 $12,442 $ 129 $12,571
12/95 15.28 $12,733 $ 133 $12,866
01/96 15.19 $12,658 $ 132 $12,790
02/96 15.63 $13,025 $ 136 $13,161
03/96 16.14 $13,450 $ 140 $13,590
04/96 17.52 $14,600 $ 152 $14,752
05/96 18.81 $15,675 $ 163 $15,838
06/96 17.82 $14,850 $ 155 $15,005
07/96 15.99 $13,325 $ 139 $13,464
08/96 16.72 $13,933 $ 146 $14,079
09/96 17.32 $14,433 $ 151 $14,584
10/96 16.26 $13,550 $ 994 $14,544
11/96 16.62 $13,850 $1,016 $14,866
12/96 16.91 $14,092 $1,234 $15,326
01/97 17.67 $14,725 $1,290 $16,015
02/97 16.64 $13,867 $1,215 $15,082
03/97 15.99 $13,325 $1,168 $14,493
04/97 15.93 $13,275 $1,163 $14,438
05/97 17.73 $14,775 $1,295 $16,070
06/97 19.00 $15,833 $1,388 $17,221
07/97 20.06 $16,717 $1,464 $18,181
08/97 21.04 $17,533 $1,537 $19,070
09/97 22.53 $18,775 $1,645 $20,420
10/97 21.80 $18,167 $1,591 $19,758
11/97 21.42 $17,850 $1,564 $19,414
12/97 20.31 $16,925 $2,547 $19,472
01/98 20.37 $16,975 $2,555 $19,530
02/98 21.95 $18,282 $2,753 $21,045
03/98 22.88 $19,067 $2,869 $21,936
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
01/09/99
MONTGOMERY US EMERGING GROWTH(R)
Initial Investment: $10,000 Period: 12/30/94 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distributions Reiinvested
<S> <C> <C> <C> <C>
04/98 22.87 $19,058 $2,869 $21,927
05/98 21.97 $18,308 $2,756 $21,064
06/98 21.87 $18,225 $2,743 $20,968
07/98 20.36 $16,967 $2,553 $19,520
08/98 17.30 $14,417 $2,017 $16,587
09/98 18.10 $15,083 $2,271 $17,354
10/98 19.29 $16,075 $2,419 $18,494
11/98 20.40 $17,000 $2,559 $19,559
12/98 20.70 $17,250 $3,768 $21,018
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Russell 2000 Index /1/ Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1994 01/31/1995 02/20/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 9873.83 10284.57 10461.69 10694.31 10878.20 11442.51 12101.62 12351.96 12572.55
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 12010.28 12514.88 12845.08 12831.26 13231.21 13500.53 14222.42 14782.93 14175.90
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 12937.78 13688.94 14223.91 14004.72 14581.77 14963.96 15262.94 14892.86 14190.13
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 14229.86 15812.93 16490.60 17257.93 17652.82 18944.89 18112.67 17995.51 18310.49
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 18021.18 19353.72 20151.92 20263.42 19172.09 19212.42 17657.10 14228.45 15341.93
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1998 10/31/1998 11/31/1998
10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return
----------- ----------- ----------
<S> <C> <C> <C>
Securities
Indices
Russell 2000
IX Tr 15967.59 16804.16 17844.03
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
<TABLE>
<CAPTION>
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ----- ------------ ------------ ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap
Funds
Average/Total 9897.15 10300.98 10580.81 10724.75 10897.60 11543.39 12409.43 12608.54
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap
Funds
Average/Total 12928.95 12521.45 13010.66 13210.65 13116.00 13652.18 14005.77 15049.34 15668.06
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap
Funds
Average/Total 15047.37 13737.34 14570.38 15324.80 15005.54 15455.85 15659.48 16045.25 15331.97
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap
Funds
Average/Total 14532.99 14445.24 16159.27 16991.53 18033.56 18343.50 19724.27 18837.26 18567.54
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
------------ ------------ ----------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap
Funds
Average/Total 18709.52 18380.88 19802.31 20705.52 20852.29 19651.07 19838.51 18395.67 14667.09
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper/2/ Small Cap Fund Growth $10,000
01/15/1999 SUMMARY
08/31/1998 09/30/1998 10/31/1998 11/30/1998
09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return
------------ ------------ ----------- ------------
Small-Cap
Funds
Average/Total 15559.86 16200.01 17251.38 18548.25
Source: Lipper Analytical Services, Inc.
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index.
/2/ The Lipper Small Cap Funds Average Universe consists of 288 funds.
9
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
U.S. Emerging Growth Funds
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as percentage of total net assets)
Duane Reade, Inc. ........................................................ 4.0%
HA-LO Industries, Inc. ................................................... 3.9%
Elcor Corporation......................................................... 3.9%
Manitowoc Company, Inc. .................................................. 3.6%
On Assignment Inc......................................................... 3.3%
Linens 'N Things, Inc. ................................................... 3.1%
TMP WorldWide, Inc. ...................................................... 3.0%
Moog, Inc., Class A....................................................... 3.0%
Metro Networks, Inc. ..................................................... 2.7%
Applied Power, Inc., Class A.............................................. 2.5%
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Diversified Commercial Services........................................... 18.7%
Advertising............................................................... 5.1%
Building Products......................................................... 4.7%
Computer Software......................................................... 4.0%
Drug Store Chains......................................................... 4.0%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risks of price fluctuations.
Q: PLEASE GIVE AN EXAMPLE OF A NEW PURCHASE DURING THE PAST SIX MONTHS.
A: A new purchase was AnnTaylor Stores (2.3% of assets as of 12/31/98). A
retailer of women's apparel, AnnTaylor was initially identified through our
quantitative screen as much improved merchandise was leading to higher sales
with lower markdowns and therefore improved margins and earnings growth. We
accumulated our position during the market turmoil at the end of September and
early October, and the company's financial performance has continued to exceed
Wall Street expectations.
Q: HOW DID YOU MANAGE THE FUND DURING LATE SEPTEMBER AND EARLY OCTOBER?
A: We used the market turmoil to our advantage, adding to existing positions
where we knew the fundamentals of the companies were strong. We also initiated
some new positions in stocks we had liked for some time but whose valuations had
been too expensive prior to the market decline. As a result, the Fund was well
positioned to take advantage of the small-cap rally that began in October.
Q: WHY IS NOW A GOOD TIME TO BE INVESTED IN THE U.S. EMERGING GROWTH FUND?
A: Over the past few years, the returns of large-cap stocks have far exceeded
those of the smaller-cap issues, causing a significant valuation disparity
between the two groups. We consider the valuations of many large-cap companies
to be expensive, particularly given a slowdown in corporate earnings. In
contrast, we believe that small-cap stocks, such as those held in the Montgomery
U.S. Emerging Growth Fund, will offer the best combination of growth and value
in the market, and therefore provide an opportunity for tremendous upside
potential.
10
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
U.S Emerging
Growth Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS -- 92.7%
Shares Value (Note 1)
ADVERTISING -- 5.1%
100,000 Ackerley Group Inc. ............................. $ 1,825,000
200,000 Snyder Communications Inc.** .................... 6,750,000
287,500 TMP Worldwide, Inc.** ........................... 12,236,719
----------
20,811,719
AEROSPACE -- 3.0%
310,100 Moog, Inc., Class A+ ............................ 12,132,663
AUTO PARTS: ORIGINAL EQUIPMENT MANUFACTURER -- 0.6%
200,000 Donnelly Corporation............................. 2,600,000
BROADCASTING -- 2.7%
260,000 Metro Networks, Inc.+ ........................... 11,066,250
BUILDING MATERIALS -- 0.7%
135,000 Republic Group Inc. ............................. 2,708,437
BUILDING PRODUCTS -- 4.7%
491,000 Elcor Corporation................................ 15,865,436
350,000 Interface, Inc. ................................. 3,248,438
----------
19,113,874
CATALOG/SPECIALTY DISTRIBUTION -- 0.7%
200,500 Coldwater Creek, Inc. ........................... 2,781,938
CLOTHING/SHOE/ACCESSORY STORES -- 2.3%
240,000 Ann Taylor Stores Corporation**+.................. 9,465,000
COMPUTER SOFTWARE -- 4.0%
317,500 Indus International, Inc. ....................... 2,212,578
310,000 Micros Systems, Inc.+ ........................... 10,075,000
325,000 Platinum Software Corporation+................... 4,143,750
----------
16,431,328
CONSTRUCTION/AGRICULTURE EQUIPMENT/TRUCKS -- 3.6%
335,000 Manitowoc Company, Inc. ......................... 14,865,625
CONTRACT DRILLING -- 0.3%
144,800 R&B Falcon Corporation+ ......................... 1,104,100
DIVERSIFIED COMMERCIAL SERVICES -- 18.7%
100,000 Acxiom Corporation+ ............................. 3,093,750
290,000 Administaff, Inc.**+ ............................ 7,250,000
140,000 AptarGroup, Inc. ................................ 3,928,750
101,500 Bell & Howell Company+ .......................... 3,837,969
234,000 Caribiner International, Inc.** ................. 2,135,250
425,000 HA-LO Industries, Inc.+ ......................... 15,990,625
400,000 Intelligroup, Inc.** ............................ 7,125,000
250,000 Maximus,Inc.+ ................................... 9,250,000
396,000 On Assignment Inc.+ ............................. 13,525,874
200,000 Personnel Group of America Inc.+ ................ 3,500,000
320,000 Romac International, Inc.+ ...................... 7,100,000
----------
76,737,218
DRUG STORE CHAINS -- 4.0%
425,000 Duane Reade, Inc. ............................... $ 16,362,500
Share Value (Note 1)
ELECTRICAL PRODUCTS -- 1.5%
120,000 ITI Technologies, Inc.+ ......................... 3,735,000
160,000 Kollmorgen Corporation........................... 2,440,000
---------
6,175,000
ELECTRONIC COMPONENTS -- 2.0%
240,000 Plexus Corporation+ ............................. 8,085,000
ENGINEERING AND CONSTRUCTION -- 1.9%
232,000 Granite Construction, Inc. ...................... 7,786,500
ENVIRONMENTAL SERVICES -- 2.2%
240,000 Casella Waste Systems, Inc., Class A ............ 8,895,000
FOOD DISTRIBUTORS -- 0.9%
343,000 Fleming Companies, Inc. ......................... 3,561,738
HOME FURNISHINGS -- 1.7%
75,000 Ethan Allen Interiors, Inc. ..................... 3,075,000
150,730 Pillowtex Corporation............................ 4,032,028
---------
7,107,028
HOMEBUILDING -- 2.0%
180,000 Champion Enterprises, Inc.+ ..................... 4,927,500
120,000 Kaufman & Broad Home Corporation** .............. 3,450,000
---------
8,377,500
INDUSTRIAL MACHINERY/COMPONENTS -- 2.5%
275,000 Applied Power, Inc., Class A..................... 10,381,250
INVESTMENT MANAGERS -- 1.7%
300,000 Waddell & Reed Financial, Inc., Class A.......... 7,106,250
MAJOR PHARMACEUTICALS -- 2.1%
485,000 Catalytica, Inc. ................................ 8,760,312
MEDICAL SPECIALTIES -- 1.0%
190,000 Cooper Companies, Inc.+ ......................... 3,930,625
METAL FABRICATIONS -- 0.5%
220,000 Encore Wire Corporation+ ........................ 2,035,000
MILITARY/GOVERNMENT/TECHNICAL -- 0.4%
84,300 Cubic Corporation................................ 1,580,625
NEWSPAPERS -- 1.0%
290,000 Hollinger International Inc. .................... 4,041,875
OFFICE/PLANT AUTOMATION -- 0.7%
62,000 Kronos, Inc.+ ................................... 2,757,062
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
U.S Emerging
Growth Fund
Investments
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
OIL AND GAS PRODUCTION -- 0.5%
350,000 Belco Oil & Gas Corporation...................... $ 1,946,875
OILFIELD SERVICES/EQUIPMENT -- 0.6%
290,000 Varco International Inc.+ ....................... 2,247,500
OTHER CONSUMER SERVICES -- 1.4%
140,000 Regis Corporation................................ 5,595,625
OTHER SPECIALTY STORES -- 3.1%
325,000 Linens 'N Things, Inc.+ ......................... 12,878,125
PACKAGE GOODS/COSMETICS -- 1.4%
370,000 Playtex Products, Inc.+ ......................... 5,943,125
RESTAURANTS -- 2.2%
145,000 CEC Entertainment Inc.+ ......................... 4,023,750
250,000 Consolidated Products, Inc. ..................... 5,156,250
---------
9,180,000
SAVINGS AND LOAN ASSOCIATIONS -- 1.8%
190,000 Bank United Corporation, Class A................. 7,439,688
SPECIALTY CHEMICALS -- 0.5%
203,500 Tetra Technologies, Inc.+ ....................... 2,213,063
SPECIALTY FOODS/CANDY -- 3.0%
200,000 Celestial Seasonings, Inc. ...................... 5,531,250
155,000 Nature's Sunshine Products, Inc. ................ 2,344,375
90,000 Suiza Foods Corporation+ ........................ 4,584,374
----------
12,459,999
SPECIALTY INSURERS -- 0.8%
138,000 American Corporation+ ........................... 3,372,375
TELECOMMUNICATIONS EQUIPMENT -- 2.8%
270,000 Aspect Telecommunications Corporation............ 4,708,125
55,000 Comverse Technology, Inc.+ ...................... 3,903,281
153,000 Harmonic Lightwaves, Inc.+ ...................... 2,883,094
----------
11,494,500
TRUCKING -- 2.1%
315,000 Swift Transportation Company, Inc.+ ............. 8,760,938
TOTAL COMMON STOCKS
(Cost $269,790,527)............................................ 380,293,230
-----------
REPURCHASE AGREEMENTS -- 7.4%
Principal Amount Value (Note)1
$15,541,000 Agreement with Paine Webber Group, Tri-Party,
5.150% dated 12/31/98, to be repurchased at
$15,549,893 on 01/04/99, collateralized by
$15,851,820 market value of U.S. government
securities, having various maturities and
various interest rates........................ $ 15,541,000
15,000,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $15,008,583 on 01/04/99,
collateralized by $15,300,000 market value of
U.S. government securities, having various
maturities and various interest rates......... 15,000,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $30,541,000)............................................. 30,541,000
----------
TOTAL INVESTMENTS -- 100.1%
(Cost $300,331,527*)........................................... 410,834,230
OTHER ASSETS AND LIABILITIES -- (0.1)%
(Net).......................................................... (493,486)
NET ASSETS -- 100.0% .......................................... $ 410,340,744
===========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31,1998, which have an aggregate market
value of $30,865,762, represent 7.5% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM OVER THE SECOND HALF OF 1998?
A: After a disappointing third quarter, the Fund realized a dramatic turnaround
in the fourth quarter, returning 29% against its small-cap benchmark, the
Russell 2000 Index, which returned 16.3%. This was not enough to offset
third-quarter losses, however. As a result, the Fund returned -12.8% for the
six-month period ended December 31, 1998, versus the benchmark return of -7.1%.
Q: WHAT FACTORS AFFECTED PERFORMANCE MOST OVER THIS PERIOD?
A: The Montgomery Small Cap Fund's performance over the second half of the year
was hurt by the extreme volatility of the U.S. stock market during the third
quarter. Fears of global recession spurred a general flight to the perceived
safety of the U.S. Treasury market. Small-cap issues suffered disproportionately
as investors who remained in the market signaled a preference for highly liquid,
lower-risk brand-name stocks. Poor liquidity compounded the effects of negative
sentiment toward small-caps. While the large-cap benchmark S&P 500 Index
suffered a 9.9% loss during the quarter, the Russell 2000 was down by 20.2%. The
Fund was caught up in this general negative reaction to small-cap issues, and
some of its holdings, such as ICG Communications (4% of assets as of 12/31/98),
were sold down more than others, detracting from the portfolio's overall
performance.
The Fund also benefited from the turnaround in sentiment in the fourth quarter
as small-caps concluded a difficult year with a strong resurgence. The rally in
small-cap growth stocks since early October can only be described as explosive.
While the Dow Jones Industrial Average rose 23% from the lows of October 8 and
the S&P 500 rose a dramatic 33%, smaller stocks posted an even greater rise.
Measured from the early-October lows, the Russell 2000 was up 39%. Further, the
growth component of the Russell 2000 was up 54%, versus a rise of 24% in the
Russell 2000 Value Index. Since the October 8 low, the Fund is up by 60%.
Q: DID THE COMPOSITION OF THE FUND CHANGE MUCH IN
RESPONSE TO VOLATILE MARKET CONDITIONS?
A: There were no material changes in the positioning of the Fund. Most of the
returns both relative and absolute came from the unrealized gains and losses of
the stocks in the portfolio. Bearing in mind that our investment process focuses
on bottom-up stock selection, it is interesting to note that the sector
allocations that resulted from our stock selection worked to the Fund's
advantage relative to the Russell 2000 Value and the Russell 2000 Growth Indices
in the fourth quarter.
Relative to the Russell 2000 Index, the largest overweights in the Fund during
the quarter were in consumer services, health care, business services and
communications (telecom). While the Russell 2000 Index as a whole returned 16%
for the quarter, these sectors returned 24%, 25%, 18% and 22%, respectively.
----------------------
THE MONTGOMERY FUNDS
----------------------
Small Cap Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Stuart Roberts......................................... Senior Portfolio Manager
Brad Kidwell........................................... Portfolio Manager
Cam Philpott, CFA...................................... Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended April 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY SMALL CAP FUND
Since inception (7/13/90)............................................... 17.55%
One year................................................................ (7.93)%
Five years.............................................................. 10.49%
- --------------------------------------------------------------------------------
RUSSELL 2000 INDEX
Since 7/31/90........................................................... 13.11%
One year................................................................ (2.54)%
Five years.............................................................. 11.87%
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SMALL CAP(R)
Initial Investment: $10,000 Period: 07/13/90 - 12/98
This is no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/13/90 10.62 $10,000 $ 0 $10,000
07/90 10.13 $ 9,539 $ 0 $ 9,539
08/90 9.10 $ 8,569 $ 0 $ 8,569
09/90 8.34 $ 7,853 $ 0 $ 7,853
10/90 8.02 $ 7,552 $ 0 $ 7,552
11/90 8.66 $ 8,154 $ 0 $ 8,154
12/90 9.35 $ 8,804 $ 16 $ 8,820
01/91 10.66 $10,038 $ 17 $10,055
02/91 12.00 $11,299 $ 20 $11,319
03/91 13.05 $12,288 $ 22 $12,310
04/91 12.81 $12,062 $ 21 $12,083
05/91 13.76 $12,957 $ 22 $12,979
06/91 13.24 $12,467 $ 22 $12,489
07/91 11.82 $11,130 $ 2,634 $13,764
08/97 12.81 $12,062 $ 2,855 $14,917
09/91 13.20 $12,429 $ 2,962 $15,371
10/91 14.07 $13,249 $ 3,135 $16,384
11/91 13.15 $12,382 $ 2,931 $15,313
12/91 14.18 $13,352 $ 4,177 $17,529
01/92 14.89 $14,021 $ 4,386 $18,607
02/92 14.86 $13,992 $ 4,378 $18,370
03/92 14.19 $13,362 $ 4,179 $17,541
04/92 13.43 $12,646 $ 3,956 $16,602
05/92 13.41 $12,627 $ 3,950 $16,577
06/92 12.90 $12,147 $ 3,800 $15,947
07/92 13.25 $12,476 $ 3,903 $16,379
08/92 12.76 $11,996 $ 3,753 $15,749
09/92 13.13 $12,363 $ 3,868 $16,231
10/92 13.58 $12,787 $ 4,000 $16,787
11/92 15.16 $14,275 $ 4,465 $18,740
12/92 15.54 $14,633 $ 4,577 $19,210
01/93 15.77 $14,849 $ 4,646 $19,495
02/93 15.01 $14,134 $ 4,421 $18,555
03/93 15.69 $14,774 $ 4,622 $19,396
04/93 15.27 $14,379 $ 4,497 $18,876
05/93 16.44 $15,480 $ 4,843 $20,323
06/93 16.83 $15,847 $ 4,958 $20,805
07/93 16.94 $15,951 $ 4,990 $20,941
08/93 17.67 $16,638 $ 5,755 $22,393
09/93 18.49 $17,411 $ 6,021 $23,432
10/93 19.23 $18,107 $ 6,262 $24,369
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SMALL CAP(R)
Initial Investment: $10,000 Period: 07/13/90 - 12/98
This is no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
11/93 16.74 $15,763 $ 6,861 $22,624
12/93 17.67 $16,638 $ 7,243 $23,881
01/94 18.24 $17,175 $ 7,476 $24,651
02/94 17.99 $16,940 $ 7,373 $24,313
03/94 16.87 $15,885 $ 6,915 $22,800
04/94 16.87 $15,885 $ 6,915 $22,800
05/94 16.02 $15,085 $ 6,566 $21,651
06/94 15.15 $14,266 $ 6,209 $20,475
07/94 15.61 $14,699 $ 6,398 $21,097
08/94 17.02 $16,026 $ 6,976 $23,002
09/94 16.81 $15,829 $ 6,889 $22,718
10/94 16.64 $15,669 $ 6,820 $22,489
11/94 14.94 $14,068 $ 7,407 $21,475
12/94 14.96 $14,087 $ 7,416 $21,503
01/95 14.96 $14,068 $ 7,407 $21,475
02/95 15.47 $14,567 $ 7,669 $22,236
03/95 15.87 $14,944 $ 7,867 $22,811
04/95 15.84 $14,915 $ 7,853 $22,768
05/95 16.15 $15,207 $ 8,007 $23,214
06/95 17.11 $16,111 $ 8,483 $24,594
07/95 18.16 $17,100 $ 9,003 $26,103
08/95 19.00 $17,891 $ 9,419 $27,310
09/95 19.36 $18,230 $ 9,598 $27,828
10/95 18.37 $17,298 $ 9,107 $26,405
11/95 17.16 $16,158 $11,118 $27,276
12/95 18.28 $17,213 $11,843 $29,056
01/96 18.25 $17,185 $11,823 $29,008
02/96 18.96 $17,853 $12,284 $30,137
03/96 19.83 $18,672 $12,847 $31,519
04/96 21.05 $19,821 $13,638 $33,459
05/96 22.26 $20,960 $14,422 $35,382
06/96 21.55 $20,292 $13,961 $34,253
07/96 20.03 $18,861 $12,976 $31,837
08/96 20.79 $19,576 $13,469 $33,045
09/96 21.89 $20,612 $14,182 $34,794
10/96 19.07 $17,957 $16,079 $34,036
11/96 19.57 $18,427 $16,502 $34,929
12/96 18.40 $17,326 $17,161 $34,487
01/97 18.75 $17,655 $17,488 $35,143
02/97 17.68 $16,648 $16,490 $33,138
03/97 16.25 $15,301 $15,156 $30,457
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
01/09/99
MONTGOMERY SMALL CAP(R)
Initial Investment: $10,000 Period: 07/13/90 - 12/98
This is no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
04/97 15.85 $14,925 $14,783 $29,708
05/97 18.31 $17,241 $17,077 $34,318
06/97 19.52 $18,380 $18,206 $36,586
07/97 20.61 $19,407 $19,222 $38,629
08/97 20.74 $19,529 $19,344 $38,873
09/97 22.89 $21,554 $21,349 $42,903
10/97 22.21 $20,913 $20,715 $41,628
11/97 22.06 $20,772 $20,575 $41,347
12/97 19.64 $18,493 $24,223 $42,716
01/98 18.74 $17,646 $23,113 $40,759
02/98 20.78 $19,567 $25,628 $45,195
03/98 21.95 $20,669 $27,071 $47,740
04/98 21.69 $20,424 $26,751 $47,175
05/98 20.16 $18,983 $24,864 $43,847
06/98 20.73 $19,520 $25,567 $45,087
07/98 18.89 $17,787 $23,298 $41,085
08/98 13.78 $12,976 $16,995 $29,971
09/98 14.02 $13,202 $17,291 $30,493
10/98 14.93 $14,058 $18,414 $32,472
11/98 16.32 $15,367 $20,128 $35,495
12/98 15.07 $14,190 $25,140 $39,330
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
06/30/1990 07/31/1990 08/31/1990 09/30/1990 10/31/1990 11/30/1990 12/31/1990 01/31/1991 02/28/1991
07/31/1990 08/31/1990 09/30/1990 10/31/1990 11/30/1990 12/31/1990 01/31/1991 02/28/1991 03/31/1991
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 2000 IX Tr 9560.16 8286.94 7553.63 7092.49 7633.29 7936.16 8653.86 9618.89 10295.95
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
03/31/1991 04/30/1991 05/31/1991 06/30/1991 07/31/1991 08/31/1991 09/30/1991 10/31/1991 11/30/1991
04/30/1991 05/31/1991 06/30/1991 07/31/1991 08/31/1991 09/30/1991 10/31/1991 11/30/1991 12/31/1991
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 10270.05 10759.57 10132.54 10488.11 10876.32 10961.48 11251.40 10731.00 11590.29
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
12/31/1991 01/31/1992 02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992
01/31/1992 02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992 09/30/1992
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 12529.41 12894.91 12458.44 12021.97 12181.83 11605.72 12009.55 11670.66 11939.82
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
09/30/1992 10/31/1992 11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993
10/31/1992 11/30/1992 12/31/1992 01/31/1992 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 12319.34 13262.01 13724.03 14188.54 13860.83 14310.61 13917.79 14533.64 14624.30
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994
07/31/1993 08/31/1993 09/31/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 14826.22 15466.73 15903.20 16312.53 15775.63 16315.01 16826.54 16765.68 15880.49
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 15974.88 15795.50 15259.14 15509.84 16374.09 16319.27 16254.86 15598.38 16017.46
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 15815.37 16473.28 16756.98 17129.58 17424.11 18328.00 19383.73 19784.71 20130.04
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 19237.42 20045.66 20574.55 20552.43 21193.05 21624.43 22780.71 23678.51 22706.21
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 20723.04 21926.21 22783.10 22432.01 23356.30 23968.46 24447.35 23854.59 22728.98
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 22792.63 25328.30 26413.75 27642.82 28275.34 30344.91 29011.89 28824.24 29328.76
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 28865.35 30999.74 32278.26 32456.85 30708.82 30773.43 28282.20 22790.36 24573.88
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
01/15/1999
<TABLE>
<CAPTION>
09/30/1998 10/31/1998 11/30/1998
10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return
---------- ---------- ----------
<S> <C> <C> <C>
Securities Indices
Russell 200 IX Tr 25576.02 26916.00 28581.61
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
06/30/1990 07/31/1990 08/31/1990 09/30/1990 10/31/1990 11/30/1990 12/31/1990 01/31/1991
07/31/1990 08/31/1990 09/30/1990 10/31/1990 11/30/1990 12/31/1990 01/31/1991 02/28/1991
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- -------------------- ------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 9641.42 8439.82 7742.45 7443.32 8026.90 8463.57 9184.70 9972.39
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1991 03/31/1991 04/30/1991 05/31/1991 06/30/1991 07/31/1991 08/31/1991 09/30/1991 10/31/1991
03/31/1991 04/30/1991 05/31/1991 06/30/1991 07/31/1991 08/31/1991 09/30/1991 10/31/1991 11/30/1991
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 10596.61 10536.60 11016.92 10443.59 11045.01 11518.31 11585.41 11962.56 11484.61
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1991 12/31/1991 01/31/1992 02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992
12/31/1991 01/31/1992 02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 12788.01 13399.23 13649.10 13099.81 12534.65 12531.98 11982.81 12396.83 12140.31
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1992 09/30/1992 10/31/1991 11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993
09/30/1992 10/31/1992 11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 12419.48 12925.47 13943.17 14408.70 14715.40 14165.26 14665.39 14193.30 14963.88
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1993 06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994
06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 15069.49 15174.65 15938.14 16480.58 16723.13 16164.30 16842.15 17262.00 17250.53
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1994 03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 16331.11 16360.59 16064.01 15493.85 15745.40 16691.21 16798.53 17044.23 16431.69
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 16759.27 16609.11 17284.34 17753.82 17979.90 18255.44 19370.53 20835.37 21183.61
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 21747.49 21103.65 21879.87 22151.08 21952.65 22848.63 23355.13 25102.94 26121.58
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 25100.60 22825.14 24213.18 25510.31 24905.65 25599.83 25933.69 26634.98 25472.38
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 24116.36 23961.16 26753.33 28101.34 29801.37 30263.36 32533.99 31107.44 30710.95
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 30987.69 30506.58 32819.12 34339.46 34567.10 32667.84 33140.41 30870.01 24724.36
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Sm Co Gwth Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1998 09/30/1998 10/31/1998 11/30/1998
09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 26225.65 27357.18 29132.33 31464.29
</TABLE>
Source: Lipper Analytical Services, Inc.
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index Fund
performance presented is for Class R shares.
/2/ The Lipper Small Cap Funds Average universe consists of 82 funds.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
---------------------
Small Cap Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
USA Networks Inc........................................................... 4.5%
Smithfield Foods, Inc...................................................... 4.5%
ICG Communications, Inc.................................................... 4.0%
CSG Systems International, Inc............................................. 3.8%
Echostar Communications.................................................... 3.3%
Steris Corporation......................................................... 3.0%
Tele-Communications TCI Ventures Group..................................... 2.8%
AmeriCredit Corporation.................................................... 2.8%
Canandaigua Wine Company, Inc.............................................. 2.7%
Renters Choice, Inc........................................................ 2.6%
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Other Telephone/Communications............................................ 12.7%
Cable Television.......................................................... 8.8%
Diversified Commercial Services........................................... 6.1%
Electronic Data Processing Services....................................... 6.0%
Biotechnology............................................................. 4.8%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
The largest underweights in the Fund during the quarter were in the finance,
technology, capital goods, materials and processing, and utilities (non-telecom)
sectors. These sectors returned 5%, 39%, 15%, 9% and 6%, respectively, during
the fourth quarter. With the exception of our allocation to the technology
sector, our underweight position in these sectors worked to the Fund's
advantage. Even though we were underweighted in technology, however, our stock
selection added value: Our technology stocks returned 55% for the quarter versus
39% for that sector of the index.
Q: DO YOU BELIEVE THAT WE HAVE NOW SEEN THE END OF THE BEAR MARKET FOR SMALL-CAP
STOCKS?
A: As we move into 1999, the same variables remain in place that should have
favorably positioned small-caps in the past year. In our opinion small-cap
growth stocks may be able to deliver strong earnings growth in 1999 versus the
slower growth of large-caps. We expected this to be the case a year ago, and it
was, as the earnings growth of the S&P 500 slowed to 1% for the year. Small-cap
stocks were favorably valued versus large-caps at the end of 1997, and they are
exhibiting even lower valuations as we enter 1999.
Because small-cap stocks fared so poorly in 1998 despite good fundamentals and
favorable valuations, we need to look carefully at how they will be affected in
1999. The past year could certainly be viewed as a bear market in small-cap
stocks, with the majority of small-caps falling 30 to 50% from their highs. We
believe that lows in the bear market decline seen in October 1998 were extremely
dramatic and represent the purging of small-caps from many portfolios. With the
selling believed to be complete, we expect that small-caps may experience a
resurgence over the coming year. Some of the more significant factors that are
likely to contribute include: strong relative and absolute earnings growth;
compelling relative and absolute valuations; under-representation of small-cap
stocks in individual and institutional portfolios; companies and management
actively buying shares in their own undervalued small companies; and improved
trading liquidity in small-caps as brokerage firms increase their trading
capital allocated to the group.
Q: WHAT DO YOU REGARD AS THE MOST EXCITING OPPORTUNITIES FOR SMALL-CAP INVESTORS
IN 1999?
A: We continue to see opportunities in fundamentally attractive companies in the
consumer services, health care, business services, and communications sectors.
But what is most evident to us is that investors are now aware of the startling
valuation discount of small-cap growth stocks versus the mid- and larger-cap
sectors, and they are beginning to commit capital to these less liquid
securities in order to uncover earnings growth opportunities. This should
benefit the entire small-cap sector into 1999.
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
14
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Small Cap Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS - 97.2%
Shares Value (Note 1)
<S> <C>
ADVERTISING - 1.5%
72,800 Snyder Communications, Inc.**+..................$ 2,457,000
AEROSPACE - 1.2%
43,000 Orbital Sciences Corporation.................... 1,902,750
ALCOHOLIC BEVERAGES - 2.7%
75,300 Canandaigua Wine Company, Inc., Class A+........ 4,353,281
APPAREL - 0.9%
72,400 Novel Denim Holdings Ltd. ...................... 1,531,713
BIOTECHNOLOGY - 4.8%
47,000 Gilead Sciences Inc............................. 1,928,468
70,400 IDEC Pharmaceuricals Corporation................ 3,313,200
18,600 Medimmune, Inc. ................................ 1,854,188
25,500 Vertex Pharmaceuticals Inc.**................... 758,625
---------
7,854,481
BROADCASTING - 4.5%
224,000 USA Networks Inc................................ 7,413,000
BUILDING PRODUCTS - 0.4%
73,100 Interface, Inc.................................. 678,459
CABLE TELEVISION - 8.8%
112,900 Echostar Communications......................... 5,479,178
93,900 Telecommunications Liberty Media Group,
Class A+........................................ 4,328,203
195,600 Tele-Communications TCI Ventures Group,
Class A+........................................ 4,627,163
---------
14,434,544
COMPUTER COMMUNICATIONS - 0.7%
35,300 Applied Micro Circuits Corporation.............. 1,200,200
COMPUTER SOFTWARE - 1.7%
15,000 Check Point Software Technologies Ltd.+......... 687,188
113,500 Platinum Technology............................. 2,181,327
---------
2,868,515
COMPUTER/VIDEO CHAINS - 1.5%
129,100 Trans World Entertainment Corporation........... 2,456,934
DIVERSIFIED COMMERCIAL SERVICES - 6.1%
163,100 Billing Information Concepts+................... 1,799,196
66,500 Metamor Worldwide, Inc.......................... 1,650,031
74,300 Nova Corporation Georgia........................ 2,577,281
125,200 Personnel Group of America Inc.+................ 2,191,000
93,900 Saville Systems Ireland, ADR.................... 1,781,166
---------
9,998,674
ELECTRONIC COMPONENTS - 3.1%
42,200 Flextronic International, Ltd................... 3,621,288
52,800 Smart Modular Technologies, Inc................. 1,461,900
---------
5,083,188
Shares Value (Note 1)
ELECTRONIC DATA PROCESSING SERVICES - 6.0%
78,300 CSG Systems International, Inc.+................$ 6,175,913
53,000 Complete Business Solutions..................... 1,792,063
39,100 National Data Corporation....................... 1,903,681
---------
9,871,657
ELECTRONIC PRODUCTION EQUIPMENT - 1.0%
5,500 Advanced Energy Industries...................... 141,797
35,200 Teradyne........................................ 1,491,600
---------
1,633,397
FINANCE COMPANIES - 3.8%
328,700 AmeriCredit Corporation+........................ 4,540,169
54,800 Heller Financial, Inc........................... 1,609,750
---------
6,149,919
HOME FURNISHINGS - 0.8%
48,900 Pillowtex Corporation........................... 1,308,075
HOMEBUILDING - 2.6%
156,500 Champion Enterprises, Inc.+..................... 4,284,188
INTERNET SERVICES - 2.3%
19,900 Earthlink Network Inc........................... 1,132,434
35,200 Geocities**..................................... 1,170,400
25,400 Lycos Inc.**.................................... 1,410,494
---------
3,713,328
INVESTMENT MANAGERS - 2.4%
61,700 Affiliated Managers Group, Inc.+................ 1,843,288
35,200 DST Systems, Inc.+.............................. 2,008,600
---------
3,851,888
LIFE INSURANCE - 1.3%
78,300 Annuity and Life Re (Holdings), Ltd............. 2,094,525
MANAGED HEALTH CARE - 1.4%
62,600 Trigon Healthcare, Inc.+........................ 2,335,763
MEAT/POULTRY/FISH -4.5%
215,200 Smithfield Foods, Inc.+......................... 7,289,900
MEDICAL/DENTAL DISTRIBUTORS - 1.6%
39,100 Amerisource Health Corporation, Class A......... 2,541,500
MEDICAL SPECIALTIES - 3.5%
43,000 Cooper Companies................................ 889,563
172,200 Steris Corporation+............................. 4,891,555
---------
5,781,118
MOVIES/ENTERTAINMENT - 1.3%
39,100 SFX Entertainment Inc........................... 2,146,834
OFFICE EQUIPMENT/SUPPLIES - 0.9%
50,900 Knoll, Inc.+.................................... 1,507,913
OTHER PHARMACEUTICALS - 1.0%
27,600 Pathogenesis Corporation........................ 1,585,275
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Small Cap Fund
Investments
<TABLE>
<CAPTION>
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
<S> <C>
RECREATIONAL PRODUCTS/TOYS - 1.4%
9,600 Action Performance Companies, Inc.**............$ 339,000
35,200 Electronic Arts, Inc.+.......................... 1,973,400
---------
2,312,400
RENTAL/LEASING COMPANIES - 0.4%
27,400 Rent-Way Inc.................................... 666,163
SAVINGS AND LOAN ASSOCIATIONS - 2.3%
45,700 Bank United Corporation, Class A................ 1,789,441
86,100 Commercial Federal Corporation.................. 1,996,443
---------
3,785,884
SEMICONDUCTORS - 0.3%
11,500 Vitesse Semiconductor Corporation............... 523,969
SERVICES TO THE HEALTH INDUSTRY - 3.4%
58,700 Cerner Corporation**............................ 1,573,894
39,100 Quadramed Corporation**......................... 811,325
110,000 United Payors & United Providers, Inc........... 3,190,000
---------
5,575,219
SPECIALTY INSURERS - 1.8%
62,600 CMAC Investment Corporation**.................... 2,875,687
SPECIALTY STORES - 2.6%
137,100 Renters Choice, Inc.+........................... 4,331,503
TELEPHONE/COMMUNICATIONS - 12.7%
300,100 ICG Communications, Inc.+....................... 6,470,905
97,800 Intermedia Communications of Florida, Inc.+..... 1,693,163
78,300 McLeod USA, Inc.+............................... 2,437,088
41,100 Pacific Gateway Exchange, Inc................... 1,976,653
78,300 RCN Corporation+................................ 1,392,272
52,800 SkyTel Communications, Inc...................... 1,159,950
78,300 Viatel Inc...................................... 1,798,453
97,800 Winstar Communications, Inc..................... 3,811,144
---------
20,739,628
TOTAL COMMON STOCKS
(Cost $120,141,008)............................................ 159,138,472
-----------
Principal Amount Value (Note 1)
REPURCHASE AGREEMENT - 2.5%
(Cost $4,174,000)
Principal Amount Value (Note 1)
$4,174,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $4,176,388 on 01/04/99,
collateralized by $4,257,480 market
value of U.S. government securities,
having various maturities and various
interest rates.................................$ 4,174,000
---------
TOTAL INVESTMENTS - 99.7%
(Cost $124,315,008*)........................................... 163,312,472
OTHER ASSETS AND LIABILITIES - 0.3%
(Net).......................................................... 503,655
-------
NET ASSETS - 100.0%............................................$ 163,816,127
-----------
</TABLE>
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $6,127,479, represent 3.7% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: As investors tended to shy away from investments they perceived to be too
risky, the roller-coaster market fluctuations of the second half of 1998
afforded a very poor environment for the small-cap market. The effect of
negative investor sentiment was magnified considerably, as small-cap issues
tended to be relatively illiquid.
Against this difficult market backdrop, the Montgomery Small Cap Opportunities
Fund was up 18.1% in comparison to the benchmark Russell 2000 Index gain of
16.3% for the fourth quarter. This end-of-year outperformance was not enough,
however, to offset losses experienced during the third quarter. For the volatile
six-month period ended December 31, 1998, both the Small Cap Opportunities Fund
and the benchmark Russell 2000 reported negative figures: -11.5% and -7.1%,
respectively.
Q: DID THE COMPOSITION OF THE FUND CHANGE IN RESPONSE TO THE VOLATILE
MARKET CONDITIONS?
A: The Fund's strategy does not involve market timing or making sector bets. Our
focus is on fundamentally sound companies trading at what we consider to be
attractive valuations. Nevertheless, because deteriorating business conditions
in certain small-cap market segments resulted in a shrinking set of attractive
companies with improving fundamentals, the composition of the Fund did change
somewhat over the second half of the year. As a result of our individual company
analysis, the Fund's portfolio allocations to energy, technology, consumer
services and health care were reduced, and we increased portfolio weightings in
consumer nondurables, transportation, and materials and processing. Relative to
the Russell 2000, the Fund ended the year overweighted in materials and business
services and underweighted in finance, health care and capital goods. Most of
the portfolio revisions were minor.
Q: WHAT DO YOU CONSIDER TO BE THE MOST INTERESTING OPPORTUNITIES FOR SMALL-CAP
INVESTORS IN 1999?
A: Current fundamentals favor specific small-cap technology companies that serve
fast-growing markets. For example, fundamentals in the wireless communications
and data networking areas remain solid, driven in large part by new cellular
subscriber growth and the expansion of the Internet. As plays on these trends,
the Fund owns positions in Actel Corp. (2.9% of assets as of 12/31/98) and
Comverse Technology (4.1% of assets as of 12/31/98). Actel sells specialty
semiconductors to a variety of markets including data communications; Comverse
Technology makes equipment to provide network-based voice-mail and other
services to both the wireless and wireline markets.
At the same time, we are keeping a close watch on the energy sector, which is
extremely depressed right now. In particular, an imbalance of supply versus
demand has resulted in low prices for
--------------------
THE MONTGOMERY FUNDS
--------------------
Small Cap Opportunities Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honour .......................................... Senior Portfolio Manager
Kathryn Peters ........................................ Portfolio Manager
Andrew Pratt, CFA ..................................... Director of Research
- -------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY
SMALL CAP OPPORTUNITIES FUND
Since inception 12/29/95 .............................................. 13.06%
One Year .............................................................. (9.54)%
Three Years............................................................ 13.06%
- --------------------------------------------------------------------------------
RUSSELL 2000 INDEX
Since 12/29/95 ........................................................ 11.58%
One Year .............................................................. (2.55)%
Three Years ........................................................... 11.58%
- --------------------------------------------------------------------------------
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. Fund performance presented
is for Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
01/09/99
<TABLE>
<CAPTION>
MONTGOMERY SMALL CAP OPP(R)
Initial Investment: $10,000 Period: 12/29/95 - 12/98
This is a no load fund.
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/29/95 12.00 $10,000 $0 $10,000
12/95 12.00 $10,000 $0 $10,000
01/96 13.19 $10,992 $0 $10,992
02/96 14.03 $11,692 $0 $11,692
03/96 14.75 $12,292 $0 $12,292
04/96 15.72 $13,100 $0 $13,100
05/96 16.47 $13,725 $0 $13,725
06/96 15.80 $13,167 $0 $13,167
07/96 14.35 $11,958 $0 $11,958
08/96 15.30 $12,750 $0 $12,750
09/96 16.41 $13,675 $0 $13,675
10/96 15.13 $12,608 $0 $12,608
11/96 15.41 $12,842 $0 $12,842
12/96 16.47 $13,725 $3 $13,728
01/97 16.94 $14,117 $3 $14,120
02/97 16.08 $13,400 $3 $13,403
03/97 14.77 $12,308 $3 $12,311
04/97 14.56 $12,133 $3 $12,136
05/97 16.56 $13,800 $3 $13,803
06/97 17.53 $14,608 $4 $14,612
07/97 18.43 $15,358 $4 $15,362
08/97 18.56 $15,467 $3 $15,470
09/97 20.27 $16,892 $3 $16,895
10/97 19.34 $16,117 $3 $16,120
11/97 19.00 $15,833 $4 $15,837
12/97 18.74 $15,617 $370 $15,987
01/98 18.23 $15,192 $360 $15,552
02/98 19.77 $16,475 $390 $16,865
03/98 20.31 $16,925 $401 $17,326
04/98 19.93 $16,608 $394 $17,002
05/98 18.75 $15,625 $370 $15,995
06/98 19.16 $15,967 $378 $16,345
07/98 16.96 $14,133 $335 $14,468
08/98 13.33 $11,108 $263 $11,371
09/98 14.37 $11,975 $284 $12,259
10/98 14.39 $11,992 $284 $12,276
11/98 15.53 $12,942 $306 $13,248
12/98 16.32 $13,600 $861 $14,461
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
01/09/99
<TABLE>
<CAPTION>
MONTGOMERY SMALL CAP OPP(R)
Initial Investment: $10,000 Period: 07/29/96 - 12/98
This is a no load fund.
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/29/96 14.37 $10,000 $0 $10,000
07/96 14.35 $9,986 $0 $9,986
08/96 15.30 $10,647 $0 $10,647
09/96 16.41 $11,420 $0 $11,420
10/96 15.14 $10,536 $0 $10,536
11/96 15.41 $10,724 $0 $10,724
12/96 16.47 $11,461 $3 $11,464
01/97 16.97 $11,809 $3 $11,812
02/97 16.10 $11,204 $2 $11,206
03/97 14.79 $10,292 $3 $10,295
04/97 14.58 $10,146 $2 $10,148
05/97 16.58 $11,538 $2 $11,540
06/97 17.54 $12,206 $3 $12,209
07/97 18.44 $12,832 $3 $12,835
08/97 18.57 $12,923 $3 $12,926
09/97 20.06 $13,960 $3 $13,963
10/97 19.13 $13,312 $3 $13,315
11/97 18.74 $13,041 $3 $13,044
12/97 18.48 $12,860 $309 $13,169
01/98 17.97 $12,505 $301 $12,806
02/98 19.51 $13,577 $326 $13,903
03/98 20.05 $13,953 $335 $14,288
04/98 19.67 $13,688 $329 $14,017
05/98 18.49 $12,867 $309 $13,176
06/98 18.89 $13,145 $316 $13,461
07/98 16.68 $11,608 $279 $11,887
08/98 13.05 $9,081 $219 $9,300
09/98 14.10 $9,812 $236 $l0,048
10/98 14.12 $9,826 $236 $10,062
11/98 15.23 $10,598 $255 $10,853
12/98 15.95 $11,100 $715 $11,815
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Russell 2000 Index /1/ growth $10,000
<TABLE>
<CAPTION>
01/13/1999
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 2000 IX Tr 9989.25 10300.61 10510.28 11072.27 11508.64 11036.06 10072.17 10656.96 11073.44
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
<TABLE>
<CAPTION>
01/13/1999
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 2000 IX Tr 10902.79 11352.03 11649.57 11882.33 11594.22 11047.14 11078.07 12310.50 12838.07
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
<TABLE>
<CAPTION>
01/13/1999
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 2000 IX Tr 13435.45 13742.87 14748.76 14100.87 14009.66 14254.88 14029.64 15067.04 15688.44
</TABLE>
Source: Lipper Analytical Services, Inc.
Russell 2000 Index growth $10,000
<TABLE>
<CAPTION>
01/13/1999
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
Russell 2000 IX Tr 15775.25 14925.64 14957.04 13746.20 11076.97 11943.83 12430.90 13082.18 13891.73
</TABLE>
Source: Lipper /2/ Sm Co Gwth Fund growth $10,000
<TABLE>
<CAPTION>
01/12/1999 SUMMARY
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 9963.08 10373.09 10653.36 11454.92 11942.95 11480.50 10502.45 11129.28
</TABLE>
Source: Lipper /2/ Analytical Services,Inc.
Lipper 2 Sm Co Gwth Fund growth $10,000
<TABLE>
<CAPTION>
01/12/1999 SUMMARY
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv SyS Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 11695.88 11488.00 11838.61 12013.00 12318.93 11823.35 11238.93 11170.49 12477.53
</TABLE>
Source: Lipper /2/ Analytical Services, Inc.
Lipper 2 Sm Co Gwth Fund growth $10,000
<TABLE>
<CAPTION>
01/12/1999 SUMMARY
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 13135.06 13963.64 14212.19 15282.35 14626.33 14409.70 14516.46 14267.17 15367.28
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper 2 Sm Co Gwth Fund growth $10,000
<TABLE>
<CAPTION>
01/12/1999 SUMMARY
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small-Cap Funds
Average/Total 16091.97 16218.12 15297.00 15424.36 14316.33 11454.05 12123.31 12614.90 13427.94
</TABLE>
Source: Lipper/2/ Analytical Services, Inc.
Lipper /2/ Sm Co Gwth Fund growth $10,000
<TABLE>
<CAPTION>
01/12/1999 SUMMARY
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------------- ----------
<S> <C>
Small-Cap Funds
Average/Total 14422.60
</TABLE>
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index.
/2/ The Lipper Small Cap Funds Average universe consists of 370 funds.
17
<PAGE>
the oil industry. We believe that if global economies start to improve in 1999,
oil stocks could recover, piquing investor interest once again. Given the
depressed nature of oil stocks in general, even a small improvement in
fundamentals could lead to some big returns. In anticipation of opportunities
going forward, we are vigilantly monitoring this area.
--------------------
THE MONTGOMERY FUNDS
--------------------
Small Cap
Opportunities Fund
Investments
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Acxiom Corporation....................................................... 4.4%
Catalina Marketing Corporation........................................... 4.3%
Synopsis, Inc............................................................ 4.2%
Education Management Corporation......................................... 4.2%
Comverse Technology, Inc................................................. 4.1%
HA-LO Industries, Inc.................................................... 4.0%
Waters Corporation....................................................... 3.9%
Kronos, Inc.............................................................. 3.9%
Tetra Tech, Inc.......................................................... 3.8%
Orthodontic Centers of America, Inc...................................... 3.7%
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Diversified Commercial Services.......................................... 24.7%
Computer Software........................................................ 5.9%
Consumer Services........................................................ 5.8%
Telecommunications Equipment............................................. 5.3%
Precision Instruments.................................................... 3.9%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risks of price fluctuations.
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 98.7%
Shares Value (Note 1)
ADVERTISING - 3.4%
72,500 TMP Worldwide, Inc.**..............................$ 3,085,781
APPAREL - 1.3%
52,000 Jones Apparel Group, Inc.+......................... 1,147,250
BUILDING PRODUCTS - 2.8%
109,100 Interface Inc...................................... 1,012,584
57,500 TJ International, Inc.............................. 1,477,031
---------
2,489,615
CATALOG/SPECIALTY DISTRIBUTION - 0.8%
51,300 Coldwater Creek Inc.+.............................. 711,788
CLOTHING/SHOE/ACCESSORY STORES - 2.3%
65,100 The Men's Wearhouse Inc.+.......................... 2,050,650
COMPUTER SOFTWARE - 5.9%
33,300 Fair Isaac & Company, Inc. ........................ 1,538,044
70,000 Synopsis, Inc.+ ................................... 3,793,125
---------
5,331,169
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Small Cap
Opportunities Fund
Investments
<TABLE>
<S> <C>
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
CONSUMER SERVICES - 5.8%
160,000 Education Management Corporation+............................. $ 3,765,000
35,500 Regis Corporation............................................. 1,418,891
----------
5,183,891
CONTAINERS/PACKAGING - 2.5%
98,650 Ivex Packaging Corporation+................................... 2,293,613
DIVERSIFIED COMMERCIAL SERVICES - 24.7%
129,200 Acxiom Corporation**+......................................... 3,997,125
57,050 Analysts International Corporation............................ 1,101,778
32,000 AptarGroup, Inc............................................... 898,000
103,275 BA Merchant Services, Inc.+................................... 2,078,408
59,600 Caribiner International Inc.**+............................... 543,850
57,000 Catalina Marketing Corporation+............................... 3,897,375
96,125 Computer Task Group, Inc...................................... 2,607,391
92,225 HA-LO Industries, Inc.+....................................... 3,582,841
105,000 Interim Servicves, Inc.+...................................... 2,454,375
31,500 NOVA Corporation+............................................. 1,092,656
----------
22,253,799
ELECTRONICS COMPONENT - 2.1%
106,900 SBS Technologies, Inc.+....................................... 1,940,903
ENVIRONMENTAL SERVICES - 3.8%
128,000 Tetra Tech, Inc.+............................................. 3,452,000
HOMEBUILDING - 3.7%
45,000 Champion Enterprises, Inc.+................................... 1,231,875
71,625 Kaufman & Broad Home Corporation**............................ 2,059,219
----------
3,291,094
INVESTMENT MANAGERS - 1.7%
63,000 Waddell & Reed Financial, Inc., Class A....................... 1,492,313
MEDICAL/NURSING SERVICS - 3.7%
170,725 Orthodontic Centers of America, Inc.+......................... 3,318,467
MEDICAL SPECIALTIES - 1.0%
44,500 Cooper Companies, Inc.+....................................... 920,594
OFFICE/PLANT AUTOMATION - 3.9%
78,100 Kronos, Inc.+................................................. 3,473,009
PACKAGE GOODS/COSMETICS - 1.5%
87,800 Playtex Products, Inc.+....................................... 1,410,288
PAINTS/COATINGS - 2.4%
82,763 Ferro Corporation............................................. 2,151,838
PRECISION INSTRUMENTS - 3.9%
40,000 Waters Corporation+........................................... 3,490,000
PRINTING/FORMS - 3.4%
75,000 Big Flower Holdings, Inc.**+.................................. 1,654,687
45,250 World Color Press Inc.+....................................... 1,377,297
----------
3,031,984
Shares Value (Note 1)
PROPERTY-CASUALTY INSURERS - 1.6%
43,600 W.R. Berkley Corporation..................................... $ 1,471,500
RECREATIONAL PRODUCTS/TOYS - 2.5%
65,200 Action Performance Companies, Inc.**+........................ 2,302,375
SAVINGS AND LOAN ASSOCIATIONS - 2.1%
80,000 Commercial Federal Corporation............................... 1,855,000
SEMICONDUCTORS - 2.9%
129,000 Actel Corporation+........................................... 2,596,125
SPECIALTY STEELS - 1.1%
29,800 Carpenter Technology Corporation............................. 1,011,338
TELECOMMUNICATIONS EQUIPMENT - 5.3%
66,500 Aspect Telecommunications Corporation+....................... 1,159,593
51,350 Comverse Technology, Inc.+................................... 3,644,245
----------
4,803,838
TRUCKING - 2.5%
77,700 U.S. Freightways Corporation................................. 2,263,013
TOTAL COMMON STOCKS
(Cost $68,964,363).......................................................... 88,823,235
----------
REPURCHASE AGREEMENT - 3.0%
(Cost $2,692,000)
Principal Amount
$2,692,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $2,693,540 on 01/04/99,
collateralized by $2,745,840 market value
of U.S. government securities, having various
maturities and various interest rates........................ 2,692,000
----------
TOTAL INVESTMENTS - 101.7%
(Cost $7,656,363*).......................................................... 91,515,235
OTHER ASSETS AND LIABILITIES - (1.7)%
(Net)....................................................................... (1,563,076)
----------
NET ASSETS - 100.0%......................................................... $ 89,952,159
----------
</TABLE>
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $12,470,661, represent 13.9% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
EQUITY INCOME FUND
PORTFOLIO HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William King, CFA............................................. Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
MONTGOMERY EQUITY INCOME FUND
Since inception (9/30/94)............................................... 20.54%
One year................................................................ 10.74%
Three years............................................................. 18.23%
- --------------------------------------------------------------------------------
S&P 500 INDEX
Since 9/30/94........................................................... 28.49%
One year................................................................ 28.75%
Three years............................................................. 28.29%
- --------------------------------------------------------------------------------
</TABLE>
Past performance is no guarantee of future results. Net assets value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EQUITY INCOME(R)
Initial Investment: $10,000 Period: 09/30/96 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/94 12.00 $10,000 $ 0 $10,000
09/94 12.00 $10,000 $ 0 $10,000
10/94 12.10 $10,083 $ 0 $10,083
11/94 11.79 $ 9,825 $ 0 $ 9,825
12/94 11.77 $ 9,808 $ 99 $ 9,907
01/95 12.28 $10,233 $ 103 $10,336
02/95 12.59 $10,492 $ 105 $10,597
03/95 12.78 $10,650 $ 174 $10,824
04/95 13.02 $10,850 $ 178 $11.028
05/95 13.45 $11,208 $ 184 $11,392
06/95 13.38 $11,150 $ 276 $11,426
07/95 13.54 $11,283 $ 279 $11,562
08/95 13.75 $11,458 $ 284 $11,742
09/95 14.28 $11,900 $ 380 $12,280
10/95 14.28 $11,900 $ 380 $12,280
11/95 15.00 $12,500 $ 399 $12,899
12/95 15.36 $12,800 $ 592 $13,392
01/96 15.61 $13,008 $ 602 $13,610
02/96 15.72 $13,100 $ 605 $13,705
03/96 15.70 $13,083 $ 701 $13,784
04/96 15.75 $13,125 $ 703 $13,828
05/96 16.02 $13,350 $ 715 $14,065
06/96 16.09 $13,408 $ 824 $14,232
07/96 15.64 $13,033 $ 801 $13,834
08/96 15.95 $13,292 $ 816 $14,108
09/96 16.44 $13,700 $ 939 $14,639
10/96 15.59 $12,992 $2,134 $15,126
11/96 16.52 $13,767 $2,261 $16,028
12/96 16.04 $13,367 $2,481 $15,848
01/97 16.37 $13,642 $2,532 $16,174
02/97 16.87 $14,058 $2,610 $16,668
03/97 16.33 $13,608 $2,624 $16,232
04/97 16.61 $13,842 $2,669 $16,511
05/97 17.46 $14,550 $2,806 $17,356
06/97 17.91 $14,925 $3,010 $17,935
07/97 18.91 $15,758 $3,178 $18,936
08/97 18.26 $15,217 $3,068 $18,285
09/97 19.01 $15,842 $3,306 $19,148
10/97 18.28 $15,233 $3,179 $18,412
11/97 19.29 $16,075 $3,355 $19,430
12/97 17.78 $14,817 $5,167 $19,984
</TABLE>
Prepared by the Performance Measurements and Analytics Department.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
01/98 17.66 $14,700 $5,127 $19,827
02/98 18.49 $15,408 $5,373 $20,783
03/98 19.22 $16,017 $5,694 $21,711
04/98 18.81 $15,675 $5,573 $21,248
05/98 18.43 $15,358 $5,461 $20,819
06/98 18.27 $15,225 $5,549 $20,774
07/98 17.70 $14,750 $5,376 $20,126
08/98 16.19 $13,492 $4,917 $18,409
09/98 17.16 $14,300 $5,323 $19,623
10/98 18.44 $15,367 $5,720 $21,087
11/98 19.06 $15,883 $5,913 $21,796
12/98 17.74 $14,783 $7,347 $22,130
</TABLE>
Prepared by the Performance Measurements and Analytics Department.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 04/31/1995
10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 05/30/1995
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 10224.34 9852.45 9998.31 10257.42 10656.78 10970.74 11293.54 11744.24 12016.55
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996
07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 12414.87 12445.86 12970.80 12924.46 13491.18 13751.06 14218.53 14350.81 14488.98
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1996 04/30/1996 05/31/1997 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996
04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 14702.40 15080.92 15138.41 14469.97 14775.65 15606.52 16036.79 17247.91 16906.24
Source: Lipper Analytical Services, Inc.
</TABLE>
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1996 04/30/1996 05/31/1997 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996
04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 17961.90 18102.91 17360.48 18393.96 19520.64 20388.46 22010.33 20778.19 21915.50
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998
10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 21184.40 22164.27 22544.64 22793.76 24436.78 25687.15 25950.20 25504.76 26539.99
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 26259.50 22465.63 23906.03 25847.57 27413.50 28992.16
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995
10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 10061.03 9687.36 9764.84 9954.51 10286.68 10533.98 10779.82 11108.59
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1996 12/31/1995 01/31/1996
06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 11238.70 11535.35 11652.72 12037.71 11920.92 12452.72 12766.42 13074.35 13184.18
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/31/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996
03/31/1996 04/30/1997 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 13356.10 13495.62 13703.55 13732.34 13252.77 13599.74 14117.15 14443.57 15250.80
</TABLE>
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997
12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 15170.61 15719.63 15921.18 15445.67 15907.56 16817.03 17441.98 18557.43 17994.26
Source: Lipper Analytical Services, Inc.
</TABLE>
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998
09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 18881.09 18306.90 18879.01 19334.30 19303.94 20390.12 21331.57 21331.37 21001.95
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Equity Income Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1998 06/30/1998 07/31/1998 08/30/1998 09/30/1998 10/31/1998 11/30/1998
06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity Income Funds
Average/Total 21143.49 20526.97 17983.66 18937.59 20038.18 20902.12 21453.60
</TABLE>
Source: Lipper Analytical Services, Inc.
/1/ developed market countries in Europe, Australasia and the Far East. The
returns are presented net of dividend withholding taxes.
/2/ The Lipper International Funds Average universe consists of 279 funds.
INVESTMENT REVIEW
Q: How did the Fund perform during the six months ended December 31, 1998?
A: The Fund posted a return of 6.5% during the period, compared with 9.4% for
the Standard & Poor's 500 Index. The Fund's results relative to the benchmark
can be split into two distinct halves.
During the broad correction in the third quarter of 1998, the Fund outperformed
the S&P 500 due to its defensive positioning. Specifically, we had focused on
high-quality, blue chip companies that were trading at attractive valuations,
and had invested about 15% of the Fund in electric and gas utilities. These
stocks are seen as defensive because they have very steady earnings and also
provide significant yields--two important traits in an uncertain investment
environment. On the other hand, many of the stocks that had driven the
performance of the S&P 500 had been selling at historically high valuations, and
consequently suffered sharp price declines.
The fourth quarter of 1998 presented a different story. After the correction we
realigned the Fund to be more aggressively positioned, by selling a number of
the companies that had done extremely well, including reducing our holdings in
utilities. The Fund moved into some cheaper issues, and this benefited our
performance; the S&P 500, however, rebounded even more strongly. The strength of
a group of large growth stocks within the S&P 500 drove it to a new all-time
high, ultimately detracting from the Fund's relative performance. Nevertheless,
the significant volatility over the six-month period created opportunities to
sell stocks that had outperformed and to buy some that had underperformed but
that offered attractive prospects and valuations.
Q: Were there other issues that affected the Fund over the period?
A: There was a notable amount of merger and acquisition activity that affected
the stocks in the Fund. This consolidation is not unusual in the kind of
economic environment we've seen, characterized by weak pricing power, slowing
worldwide economic growth, increased global competition, and deflation.
Companies look to make acquisitions or merge in order to stay competitive and
lower their cost structures. Among the Fund's investments involved in
consolidation activity were Mobil (1.5% of assets) and Exxon (0.7% of assets)
which announced a merger in the fourth quarter. Also, in forest products two of
our holdings announced a merger: Union Camp (sold during the fourth quarter) and
International Paper (1.1% of assets). A number of other holdings that were
involved in mergers announced before the fourth quarter include Rubbermaid (2.3%
of assets), Bell Atlantic (1.9% of assets), GTE (2.1% of assets), Ameritech
(2.5% of assets) and Amoco (0.9% of assets).
By the end of the period, the Fund's industry weightings were more in line with
the S&P 500 than they were at the start, partly because of the reduction in
electric utility stocks. We redeployed assets across a wide range of industries.
Q: Was there a common thread among the Fund's new investments?
A: The Fund's new investments all share a combination of positive fundamentals
and relatively low price-to-earnings (P/E) ratios. For example, General Motors
(2.7%
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Equity Income Fund
Investments
assets as of 12/31/98) saw its stock price plummet in the third quarter, but we
added it to the portfolio due to its solid prospects longer term. VF Corporation
(2.1% of assets as of 12/31/98), the manufacturer of Lee and Wrangler jeans as
well as Jansport packs, was also added. This company boasts sales of about $5
billion and enjoys favorable revenue and earnings growth. The company's balance
sheet is strong, and its P/E ratio is about half that of the market. Household
International (2.4% of assets as of 12/31/98), a leading consumer loan company
with good prospects, was another addition to the portfolio.
Q: We understand that there was an important modification to the Fund's
investment strategy. Could you explain what this was and what impact it will
have on the Fund?
A: At the end of the fourth quarter, the Fund's Investment Committee gave
authorization to the Fund to invest up to 20% of assets in companies that offer
a dividend yield below our traditional benchmark--which is to identify companies
yielding 40% above the average dividend yield of the S&P 500. We believe that
this change, implemented on January 1, 1999, will help improve the short- and
long-term performance of the Fund by allowing us to invest in a broader range of
dividend-paying companies, and to allow for better diversification. For example,
the Fund had been unable to invest in many attractive companies in the health
care and technology sectors--which constitute almost 30% of the S&P 500--because
their dividend yields were too low, even though many of those investments have
been appealing candidates for the Montgomery Equity Income Fund. This change
will allow us to leverage investment research with some of our other strategies
and still look at solid companies that might boost performance. We intend to
look to a company's historical yield when determining its fitness for the Fund,
even though its present relative yield may be below the previous benchmark. All
stocks purchased under this modification, of course, must meet all of our other
stock selection criteria.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Kimberly-Clark Corporation...................................... 3.7%
American Home Products Corporation.............................. 3.6%
Anheuser-Busch Companies, Inc. ................................. 3.2%
Pitney-Bowes, Inc. ............................................. 3.1%
BankAmerica Corporation......................................... 3.0%
First Union Corporation......................................... 2.9%
General Motors Corporation...................................... 2.7%
du Pont (E.I.) de Nemours and Company........................... 2.7%
Donnelly (R.R.) & Sons Company.................................. 2.7%
McCormick & Company, Inc. Nonvoting shares...................... 2.6%
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Banks........................................................... 10.4%
Pharmaceuticals................................................. 7.7%
U.S. Telecommunications......................................... 6.6%
Integrated Oil Companies........................................ 5.3%
Insurance Brokers/Services...................................... 4.8%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS -- 97.0%
Shares Value (Note 1)
ALCOHOLIC BEVERAGES -- 97.0%
19,500 Anheuser-Busch Companies, Inc....................$ 1,279,688
APPAREL -- 2.1%
18,000 VF Corporation................................... 843,750
BANKS -- 10.4%
20,000 BankAmerica Corporation.......................... 1,202,500
19,000 First Union Corporation.......................... 1,155,438
13,000 National City Corporation........................ 936,000
9,500 Wachovia Corporation............................. 830,656
---------
4,124,594
BUILDING PRODUCTS -- 2.5%
34,000 Masco Corporation................................ 977,500
CHEMICALS -- 2.7%
19,000 du Pont (E.I.) de Nemours and Company............$ 1,069,938
DEPARTMENT STORES -- 3.6%
13,000 May Department Stores Company.................... 784,874
14,000 Penney (J.C.) Company, Inc. ..................... 656,250
---------
1,441,124
DIVERSIFIED MANUFACTURE -- 1.3%
7,000 Minnesota Mining & Manufacturing................. 511,000
ELECTRIC UTILITIES -- 4.4%
8,500 Florida Progress Corporation..................... 380,906
13,000 SCANA Corporation................................ 419,250
5,000 Texas Utilities Company.......................... 233,438
22,000 Wisconsin Energy Corporation..................... 691,625
---------
1,725,219
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Equity Income Fund
Investments
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
ELECTRICAL PRODUCTS -- 2.5%
16,500 Emerson Electric Company............................. $ 998,250
FINANCIAL PUBLISHING/SERVICES -- 2.3%
9,000 McGraw-Hill Companies, Inc........................... 916,875
FOREST PRODUCTS -- 3.1%
10,000 International Paper Company**........................ 448,125
15,000 Weyerhaeuser Company................................. 762,187
---------
1,210,312
HOME FURNISHINGS -- 2.3%
29,000 Rubbermaid, Inc. .................................... 911,688
INSURANCE BROKERS/SERVICES -- 4.8%
24,000 Household International, Inc......................... 951,000
16,000 Marsh & McLennan Companies........................... 935,000
---------
1,886,000
INTEGRATED OIL COMPANIES -- 5.3%
6,000 Amoco Corporation.................................... 354,000
10,000 Chevron Corporation.................................. 829,375
4,000 Exxon Corporation.................................... 292,500
7,000 Mobil Corporation.................................... 609,874
---------
2,085,749
LIFE INSURANCE -- 3.1%
11,000 American General Corporation......................... 858,000
8,000 ReliaStar Financial Corporation...................... 369,000
---------
1,227,000
MEDICAL SPECIALITIES -- 0.9%
12,000 Mallinckrodt Inc..................................... 369,750
MOTOR VEHICLES -- 2.7%
15,000 General Motors Corporation........................... 1,074,375
MULTI-LINE INSURANCE -- 0.9%
8,500 SAFECO Corporation................................... 365,234
NATURAL GAS DISTRIBUTION -- 1.7%
34,000 Questar Corporation.................................. 658,750
OFFICE EQUIPMENT/SUPPLIES -- 3.1%
18,500 Pitney-Bowes, Inc.................................... 1,222,155
OILFIELD SERVICES/EQUIPMENT -- 2.7%
16,000 Baker Hughes Inc..................................... 283,000
26,500 Halliburton Company.................................. 785,063
---------
1,068,063
PACKAGED FOODS -- 3.0%
8,000 General Mills Inc.................................... 622,000
10,000 Heinz (H.J.) Company................................. 566,250
---------
1,188,250
PACKAGED GOODS/COSMETICS -- 3.7%
27,000 Kimberly-Clark Corporation........................... 1,471,500
Shares Value (Note 1)
PHARMACEUTICALS -- 7.7%
25,000 American Home Products Corporation................... $ 1,407,813
4,500 Merck & Company, Inc................................. 664,594
17,000 Pharmacia & Upjohn, Inc.............................. 962,625
---------
3,035,032
PRINTING/FORMS -- 2.6%
24,000 Donnelley (R.R.) & Sons Company...................... 1,051,500
RAILROADS -- 20%
24,500 Norfolk Southern Corporation......................... 776,344
SPECIALTY CHEMICALS -- 0.8%
11,000 Nalco Chemical Company............................... 341,000
SPECIALTY FOODS/CANDY -- 2.5%
30,000 McCormick & Company, Inc.,
Nonvoting Shares..................................... 1,013,438
TABACCO -- 2.5%
28,000 UST Inc.............................................. 976,500
U.S. TELECOMMUNICATIONS -- 6.6%
15,500 Ameritech Corporation................................ 982,313
14,500 Bell Atlantic Corporation............................ 768,500
13,000 GTE Corporation...................................... 845,000
---------
2,595,813
TOTAL COMMON STOCKS
(Cost $32,892,654)........................................... 38,416,391
----------
REPURCHASE AGREEMENT -- 4.1%
(Cost $1,622,000)
Principal Amount
$1,622,000 Agreement with Greenwich Capital Markets,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $1,622,928 on 01/04/99,
collateralized by $1,654,440 market value
of U.S. government securities, having various
maturities and various interest rates............. 1,622,000
---------
TOTAL INVESTMENTS -- 101.1%
(Cost $34,514,654*).......................................... 40,038,391
OTHER ASSETS AND LIABILITIES -- (1.1)%
(Net)........................................................... (448,367)
-------
NET ASSETS -- 100.0%............................................ $ 39,590,024
==========
</TABLE>
* Aggregate cost for federal tax purposes.
** Security on loan at December 31, 1998, which has an aggregate market value
of $153,035, represents 0.4% of the total net assets of the Fund (see note 4
to Financial Statements).
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International Growth Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
John Boich, CFA.....Senior Portfolio Manager
Oscar Castro, CFA...Senior Portfolio Manager
- -------------------------------------------------------------------------------
FUND PERFORMANCE
- -------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- -------------------------------------------------------------------------------
MONTGOMERY
INTERNATIONAL GROWTH FUND
Since inception (7/3/95)................................................ 20.34%
One year................................................................ 28.69%
Three years............................................................. 19.69%
MSCI EAFE INDEX
Since 6/30/95........................................................... 10.18%
One year................................................................ 20.00%
Three years............................................................. 9.00%
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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L GROWTH(R)
INITIAL INVESTMENT: $10,000 Period: 06/30/95 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/95 12.00 $10,000 $0 $10,000
06/95 12.00 $10,000 $0 $10,000
07/95 12.10 $10,083 $0 $10,083
08/95 12.07 $10,058 $0 $10,058
09/95 12.50 $10,417 $0 $10,417
10/95 12.81 $10,675 $0 $10,675
11/95 12.94 $10,783 $0 $10,783
12/95 13.37 $11,142 $0 $11,142
01/96 13.67 $11,392 $0 $11,392
02/96 13.94 $11,617 $0 $11,617
03/96 14.21 $11,842 $0 $11,842
04/96 15.12 $12,600 $0 $12,600
05/96 15.51 $12,925 $0 $12,925
06/96 15.31 $12,758 $0 $12,758
07/96 14.62 $12,183 $0 $12,183
08/96 15.00 $12,500 $0 $12,500
09/96 15.26 $12,717 $0 $12,717
10/96 13.61 $11,342 $1,395 $12,737
11/96 14.34 $11,950 $1,470 $13,420
12/96 14.40 $12,000 $1,477 $13,477
01/97 14.69 $12,242 $1,506 $13,748
02/97 14.62 $12,183 $1,500 $13,683
03/97 14.67 $12,225 $1,505 $13,730
04/97 14.68 $12,233 $1,506 $13,739
05/97 15.57 $12,975 $1,597 $14,572
06/97 16.25 $13,542 $1,666 $15,208
07/97 16.78 $13,983 $1,721 $15,704
08/97 15.92 $13,267 $1,632 $14,899
09/97 16.87 $14,058 $1,731 $15,789
10/97 15.57 $12,975 $1,597 $14,572
11/97 15.76 $13,133 $1,617 $14,750
12/98 14.76 $12,300 $2,545 $14,845
01/98 15.39 $12,825 $2,653 $15,478
02/98 16.84 $14,033 $2,904 $16,937
03/98 17.76 $14,800 $3,062 $17,862
04/98 18.40 $15,333 $3,173 $18,506
05/98 18.61 $15,508 $3,209 $18,717
06/98 18.64 $15,533 $3,214 $18,747
07/98 19.02 $15,850 $3,279 $19,129
08/98 16.19 $13,492 $2,791 $16,283
09/98 15.44 $12,867 $2,662 $15,529
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L GROWTH(R)
Initial Investment: $10,000 Period: 06/30/95 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
DATE NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
10/98 16.98 $14,15O $2,928 $17,078
11/98 18.04 $15,033 $3,111 $18,144
12/98 18.89 $15,742 $3,363 $19,105
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
MSCI EAFE Index growth $10,000
01/12/1999
<TABLE>
<CAPTION>
02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996
03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EAFE IX ND 11151.90 11476.12 11264.94 11328.34 10997.25 11021.34 11314.13 11198.36 11643.92
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI EAFE Index growth $10,000
01/12/1999
<TABLE>
<CAPTION>
Fund Inv 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/12/1995 01/31/1996
Name Obj 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------ --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EAFE IX ND XI 10622.56 10217.35 10416.90 10136.89 10418.93 10838.72 10883.21 10920.00
</TABLE>
Source: Lipper Analytical Services, Inc,
01/12/1999 MSCI EAFE Index growth $10,000
<TABLE>
<CAPTION>
11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1994 01/30/1997 05/31/1997 06/30/1997 07/31/1997
12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 00/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EAFE IX ND 11494.13 11091.87 11273.29 11314.11 11374.14 12114.30 12782.37 12989.16 12019.08
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI EAFE Index growth $10,000
01/12/1999 Page: 1-D
<TABLE>
<CAPTION>
08/31/1997 O9/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998
09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EAFE IX ND 12692.37 11716.78 11597.33 11698.49 12233.50 13018.47 13419.33 13525.55 13459.90
</TABLE>
Source: Lipper Analytical Services,Inc.
MSCI EAFE Index Growth $10,000
01/12/1999 Page 1-E
<TABLE>
<CAPTION>
05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities Indices 13561.80 13699.30 12002.10 11634.14 12846.89 13505.05 14037.82
MSCI EAFE IX ND
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Funds/2/ growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996
07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Funds
Average/Total 10535.91 10339.11 10495.93 10286.61 10396.57 10708.01 10949.63 10995.95
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Funds growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996
03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Funds
Average/Total 11186.91 11540.05 11508.20 11585.43 11150.67 11278.40 11521.57 114444.71 11933.52
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Funds growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 05/31/1997 06/30/1997 07/31/1997
12/31/1996 01/31/1997 02/31/1997 03/31/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Internatioal Funds
Average/Total 11976.28 11932.77 12085.45 12118.03 12136.05 12853.97 13453.37 12815.77
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Funds growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998
09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Internatioal Funds
Average/Total 13615.29 12571.16 12453.90 12552.73 12862.04 13712.55 14414.36 14615.61 14632.53
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Funds growth $10,000
01/12/1999 SUMMARY Page: 1-E
<TABLE>
<CAPTION>
05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
International Funds
Average/Total 14527.51 14763.50 12643.20 12174.74 13087.66 13759.60 14192.05
</TABLE>
Source: Lipper Analytical Services, Inc.
/1/ The Morgan Stanley Capital International EAFE Index is composed of 21
developed market countries in Europe, Australasia and the Far East. The
returns are presented net of dividend withholding taxes.
/2/ The Lipper International Funds Average universe consists of 279 funds.
INVESTMENT REVIEW
Q: How did the Fund perform during the six months ended December 31, 1998?
A: In spite of an outperformance of more than 230 basis points during the
fourth quarter, a challenging third quarter resulted in the Fund's
underperforming its benchmark, the Morgan Stanley Capital International Europe,
Australasia and Far East (MSCI EAFE) Index in the second half of the year. We
are pleased to report, however, that a strong first half more than offset this
disappointment, resulting in an outperformance by a considerable margin for
1998 as a whole. The Fund returned 1.9% between July 1 and December 31, and
28.7% for the year, versus 3.5% and 20%, respectively, for the benchmark. In
recognition of these results, the Fund has earned an overall five-star rating
from Morningstar for its risk-adjusted returns over the three-year period ended
December 31, 1998. The Fund was rated among 862 international equity funds.* Q:
Q: Were there any changes in investment strategy that helped Fund performance
during this volatile period?
A: In spite of disconcerting market volatility, especially during the third
quarter, there were no changes to the strategy of the Montgomery International
Growth Fund. We remain committed to our fundamental approach to investing, and
portfolio performance over the second half of the year benefited most from
strong stock selection. For example, the portion of our portfolio allocated to
Japan returned 38% for the quarter versus 27% for the benchmark. Our investments
in well-run companies such as Kirin Brewery Company (2.8% of assets as of
12/31/98) contributed to this positive performance.
Nonetheless, we did make compensating adjustments to the portfolio over the last
six months of the period, resulting from our bottom-up approach to investment
analysis that favors primary research at the country, sector and company levels.
In the third quarter, this approach reinforced our view that undue investor
pessimism had caused many international stocks and markets to become oversold
relative to their economic fundamentals. Falling long-term interest rates that
might ordinarily rally the market were overlooked. Because of this the Fund
remained fully invested. Thus, as investors' fears began to subside in the
fourth quarter, the portfolio was well positioned to take full advantage of the
market rebound.
Q: Were there any changes to your main sector preferences over the last six
months of the year?
A: As a result of our stock selection process, there were some changes to the
Fund's sector allocations during the second half of the year. The Fund's
exposure to the financial services sector declined from 26.2% to 20.7%. This was
largely the result of the sale of some Japanese convertible bonds, but we also
sold stocks such as AXA Corporation, which had simply reached their price
targets. Financial services remains the largest sector exposure in the
portfolio, but we are underweighted relative to the benchmark.
23
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International Growth Funds
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
KAO Corporation........................................................... 2.9%
NTT Mobile Communications................................................. 2.9%
Kirin Brewery Company..................................................... 2.8%
Cap Gemini S.A. .......................................................... 2.8%
Vivendi................................................................... 2.6%
Swisscom AG............................................................... 2.6%
Mannesmann AG............................................................. 2.5%
Union Electrica Fenosa S.A. .............................................. 2.4%
Novartis AG............................................................... 2.4%
Koninklijke KPN, N.V. .................................................... 2.4%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United Kingdom............................................................ 18.1%
Japan..................................................................... 12.1%
Germany................................................................... 8.6%
France.................................................................... 8.4%
Netherlands............................................................... 7.9%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
*Past performance is no guarantee of future results, Morningstar proprietary
ratings reflect historical risk-adjusted performance as of 12/31/98. The ratings
are subject to change every month. The ratings are calculated from the Fund's
three-, five-, and 10-year average annual returns (if applicable) in excess of
90-day Treasury bill returns, with appropriate fee adjustments and a risk factor
that reflects Fund performance below 90-day T-bill returns. The top 10% of funds
in an investment class receive five stars. Ratings are for Class R shares only:
other classes may vary.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
Our exposure to the utilities sector also changed over the period. The Fund's
allocation to this sector increased due to capital appreciation and our purchase
of Docamo, (2.9% of assets as of 12/31/98). Docamo is the mobile communications
arm of NTT Mobile Communications, which is the main provider of
telecommunications services in Japan.
One of the most significant changes to the Fund since July 1 has been our
reduced exposure to more-cyclical sectors of the market. Our concentration in
capital goods, technology and consumer cyclicals declined from an aggregate 28%
to 16.9% as of December 31. These decisions reflected our satisfaction with the
upside returns that had been achieved, as well as a forward-looking emphasis on
earnings visibility.
Q: JANUARY 1, 1999, MARKED THE LAUNCH OF A SINGLE EUROPEAN CURRENCY. WHAT IMPACT
IS THE EURO LIKELY TO HAVE ON EUROPEAN MARKETS?
A: We are optimistic about the impact that the euro may have on the European
markets. A single European currency should spark increased cross-border
competition throughout the European Union and act as a strong catalyst for
business consolidation and restructuring. This should result in balance-sheet
efficiencies and cost reductions that will favorably impact corporate earnings.
One area that has already generated significant merger-related interest and
which stands to benefit further from the euro's introduction is the financial
services sector. In our opinion this sector may undergo additional consolidation
as the euro begins to remove the remaining obstacles to pan-European financial
services. We see this as a positive development that could add value to the
finance segment of our portfolio in 1999.
Q: TURNING TO ASIA, WHAT DO YOU CONSIDER THE PROSPECTS OF THESE MARKETS TO BE IN
1999?
A: The Asian markets are positioning themselves for recovery, but significant
hurdles must still be overcome. Japan's economy remains plagued by structural
problems, including insufficient domestic demand, reduced capital spending and
limited credit availability. Japan's announcement of a $195 billion economic
stimulus initiative in November and professed commitment to economic expansion
in 1999 have bolstered the Nikkei 225 Index and the yen. The government's
history of failed economic incentive programs, however, forces us to consider
the possibility that this will again result in little more than a seasonal
change in investor perception. We will remain cautious until we see further
evidence of improvement.
Q: HOW IS THE FUND POSITIONED TO TAKE ADVANTAGE OF THE TRENDS IN BOTH EUROPE AND
ASIA OVER THE COMING YEAR?
A: In our opinion 1999 is likely to be a year of decelerating aggregate growth.
Consensus forecasts for economic growth in the developed economies have been
revised downward from 1.7% to 1.5% and could undergo further revision. In this
uncertain environment, we are focusing on companies that provide strong earnings
visibility and the potential to grow earnings without revenue growth. In such an
environment, the restructuring that we expect within the Economic and Monetary
Union (EMU) is particularly appealing, because it should help drive down costs
and positively impact corporate earnings even if revenue growth decelerates.
24
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International Growth Fund
Investments
In addition, the Fund's investments are concentrated in what we see as
fundamentally sound companies in sectors that may provide some insulation from
an economic downturn and give us exposure to upside gains if the economy
improves. These include consumer staples and financial services. We believe that
the primary consumer demand that supports these sectors is less sensitive to
economic movements than the product demand that supports more-cyclical
industries. In addition, the retail segment of the financial services sector
typically enjoys wider margins than its wholesale counterpart. In Europe the
capital flows generated by the deregulation of the pension fund system could
further benefit this sector.
Finally, we favor utilities that demonstrate earnings resilience and strong
business momentum. We believe that the telecom names in our portfolio can
continue to grow earnings through the current year and will continue adding
value to the Fund. Through strong stock selection resulting from our primary
original fundamental research, our expert industry knowledge and the advantage
of good insight, we hope to continue to provide our shareholders with positive
returns.
Portfolio Investments
December 31, 1998 (Unaudited)
COMMON STOCKS -- 89.1%
Shares Value (Note 1)
AUSTRALIA -- 3.4%
574,397 Australia & New Zealand Bank Group,
ORD (Banks)..................................... $ 3,759,258
1,443,400 Cable & Wireless Optus Ltd.
(Telephone/Wireless)............................ 3,033,888
---------
6,793,146
CHINA/HONG KONG -- 0.8%
934,000 China Telecom (Hong Kong) Ltd.**+
(Telephone/Wireless)............................ 1,614,416
FINLAND -- 2.2%
35,960 Nokia Corporation AB, Series A
(Telecommunications Equipment).................. 4,360,519
FRANCE -- 8.4%
124,700 Alstom+ (Machinery and Tools)................... 2,921,785
2,400 Alstom, ADR+ (Machinery and Tools).............. 55,800
34,600 Cap Gemini S.A. (Business Services)............. 5,551,100
69,450 Renault S.A. (Auto/Auto Parts).................. 3,117,859
20,333 Vivendi (Conglomerates)......................... 5,273,270
----------
16,919,814
GERMANY -- 7.3%
42,500 Bayerische Vereinsbank AG (Banks)............... 3,328,382
43,500 Mannesmann AG (Machinery and Tools)............. 4,986,047
8,475 Muenchener Rueckver AG (Insurance).............. 4,104,375
23,500 Vebs AG (Electric Utilities).................... 1,406,037
10,420 Volkswagon AG (Auto/Auto Parts)................. 831,674
----------
14,656,515
GREECE -- 4.0%
150,077 Hellenic Telecommunication Organization S.A.+
(Telephone/Networks)............................ 3,994,832
17,960 National Bank of Greece (Banks)................. 4,042,733
---------
8,037,565
IRELAND -- 3.6%
146,524 Bank of Ireland (Banks)......................... 3,257,982
56,500 Elan Corporation PLC, ADR*** (Pharmacy/Drugs)... 3,930,281
---------
7,188,263
ITALY -- 3.9%
450,000 Saipem SpA+ (Oilfield Equipment)................ 1,899,664
212,700 Telecom Italia SpA+ (Telephone/Networks)........ 1,813,826
176,800 Telecom Italia di Risp (Telephone/Networks)..... 1,112,050
416,500 Telecom Italia Mobile SpA (Telephone/Wireless).. 3,073,150
---------
7,898,690
JAPAN -- 12.1%
143,000 Bridgestone Corporation (Auto/Auto Parts)....... 3,245,830
261,000 KAO Corporation (Cosmetics and Personal Care)... 5,889,562
447,000 Kirin Brewery Company (Food and Beverage)....... 5,696,031
140 NTT Mobile Communications
(Telecommunications/Other)...................... 5,760,807
41,000 TDK Corporation (Electronics)................... 3,747,887
----------
24,340,117
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International Growth Fund
Investments
<TABLE>
<CAPTION>
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
<S> <C>
NETHERLANDS -- 7.9%
50,300 Equant N.V.** (Software Systems)................. $ 3,410,969
47,600 International Nederlanden Groep N.V. (Banks)..... 2,901,049
96,700 Koninklijke KPN, N.V.
(Telecommunications/Other)....................... 4,839,345
56,700 Unilever N.V., ADR
(Cosmetics and Personal Care).................... 4,702,556
-----------
15,853,919
NORWAY -- 1.3%
779,300 Christiana Bank OG (Banks)....................... 2,707,594
PORTUGAL -- 1.8%
80,330 Portugal Telecom S.A. (Telephone/Networks)....... 3,684,763
SPAIN -- 6.3%
186,780 Argentaria, Caja Postal y Ban (Banks)............ 4,829,837
65,298 Telefonica de Espana, ORD
(Telephone/Networks)............................. 2,899,172
279,600 Union Electrica Fenosa S.A.+
(Electric Utilities)............................. 4,869,195
-----------
12,598,204
SWEDEN -- 1.1%
90,950 Ericsson (L.M.) Telephone Company, Class A,
(Telecommunications Equipment)................... 2,160,479
SWITZERLAND -- 6.9%
1,166 Baer (Julius) Holdings AG-B
(Diversified Financial Services)................. 3,875,348
2,463 Novartis AG** (Pharmacy/Drugs)................... 4,841,718
12,490 Swisscom AG (Telephone/Networks)................. 5,228,795
-----------
13,945,861
UNITED KINGDOM -- 18.1%
72,000 Abbey National PLC (Banks)....................... 2,477,927
217,500 Allied Zurich PLC
(Diversified Financial Services)................. 3,252,833
362,548 Amvescap PLC (Investment Management)............. 2,802,979
174,700 Colt Telecom Group PLC
(Telephone/Regional-Local)....................... 2,556,094
138,103 Glaxo Wellcome PLC (Pharmacy/Drugs).............. 4,746,186
387,454 Orange PLC (Telephone/Wireless).................. 4,470,754
169,118 Railtrack Group PLC (Railroad)................... 4,420,217
181,963 Reckitt and Coleman PLC
(Cosmetics and Personal Care).................... 2,402,176
413,500 Sainsbury PLC (Food and Beverage)................ 3,215,811
550,900 Somerfield PLC (Food and Beverage)............... 3,668,398
223,000 The Great Universal Stores PLC
(Retail Trade)................................... 2,334,005
-----------
36,347,380
Shares Value (Note 1)
TOTAL COMMON STOCKS
(Cost $157,744,633)............................................. 179,107,245
-----------
PREFERRED STOCKS -- 2.0%
BRAZIL -- 0.74%
5,800,000 Telemig (Telephone/Networks)..................... $ 169,452
15,800,000 Telemig Celular S.A. (Telephone/Wireless)........ 309,919
22,500,000 Telesp Celular S.A. (Telephone/Wireless)......... 988,827
-----------
1,468,198
GERMANY -- 1.3%
1,106 Porsche AG (Auto/Auto Parts)..................... 2,522,159
TOTAL PREFERRED STOCKS
(Cost $6,135,043)............................................... 3,990,357
-----------
RIGHTS -- 0.0%#
(Cost $0)
SPAIN -- 0.0%#
65,298 Telefonica S.A., Rights, Expire 01/30/99+
(Telephone/Networks)............................. 57,892
-----------
TOTAL SECURITIES
(Cost $163,879,676)............................................. 183,155,494
-----------
REPURCHASE AGREEMENTS -- 10.3%
Principal Amount
$10,000,000 Agreement with Greenwich Capital Markets,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $10,005,722 on 01/04/99,
collateralized by $10,200,000 market value
of U.S. government securities, having various
maturities and various interest rates............ 10,000,000
10,796,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $10,802,178 on 01/04/99,
collateralized by $11,011,920 market value
of U.S. government securities, having various
maturities and various interest rates............ 10,796,000
-----------
TOTAL REPURCHASE AGREEMENTS
(Cost $20,796,000).............................................. 20,796,000
-----------
TOTAL INVESTMENTS -- 101.4%
(Cost $184,675,676*)............................................ 203,951,494
OTHER ASSETS AND LIABILITIES -- (1.4)%
(Net)........................................................... (2,902,888)
------------
NET ASSETS -- 100%.............................................. $ 201,048,606
------------
</TABLE>
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $9,902,524, represent 4.9% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: The Fund registered a disappointing performance in the latter half of the
year, resulting from very difficult conditions in the international small-cap
arena. For the six-month period ended December 31, the Fund returned -7.4%
versus -4% for its benchmark, the Salomon Smith Barney Extended Market (ex-U.S.)
Index.
Q: WHAT EFFECT DID MARKET VOLATILITY HAVE ON THE FUND'S PERFORMANCE OVER
THIS PERIOD?
A: As we expected, following the severe declines of the third quarter, most
international markets rebounded in the final quarter of 1998. A series of
interest rate cuts in the developed economies helped reassure investors that
central banks were taking the threat of recession seriously and helped boost
investor confidence. Declining interest rates in the developed economies led to
a more optimistic economic outlook for some emerging markets. As the investment
environment appeared to improve, there was a realization that the developed
markets had become oversold relative to their broader economic fundamentals.
This helped fuel the recovery of both international markets and the Montgomery
International Small Cap Fund.
What we did not fully expect, however, was the strong appreciation of the yen
versus the dollar. The yen rose 20.8% against the dollar late in the year,
buoyed by the $195 billion stimulus initiative announced by the Japanese
government in November. Although we remain underweighted in Japan (8.1% of
assets as of 12/31/98), in the three months prior to that announcement we had
begun exploring selected investment opportunities to position the Fund to take
advantage of any firming of the Japanese economy. Fast Retailing (1.1% of assets
as of 12/31/98) is a good example of a stock that was added to the Fund because
we saw strong fundamentals together with good value. Fast Retailing is an
apparel merchandiser in Japan similar to The Gap in the United States. At the
end of the first half of 1998, we believed the stock to be significantly
undervalued. In the third quarter, at a time when many investors were leaving
the market, Fast Retailing rose nicely and extended its run through the fourth
quarter.
At the time of the yen's appreciation, however, the Fund's exposure to Japan was
approximately half that of the benchmark. This relative underweighting
contributed to the Fund's underperformance against the benchmark. We remain
cautiously positioned in Japan, as it is uncertain whether the strong yen is
sustainable beyond the near term.
Q: DID YOUR STRATEGY CHANGE AT ALL IN RESPONSE TO MARKET SWINGS?
A: Anticipating slower growth in the second half of 1998, we adjusted our
strategy slightly to emphasize greater earnings visibility in the companies we
hold in the portfolio. In addition, we looked for companies that would be able
to grow their earnings below the revenue line. This led to an intense review of
companies that were either recently restructured or currently undergoing
restructuring. Restructured businesses can achieve immediate earnings expansion
that is
--------------------
THE MONTGOMERY FUNDS
--------------------
INTERNATIONAL
SMALL CAP FUND
Portfolio Highlights
(unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
John Boich, CFA........................................ Senior Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY
INTERNATIONAL SMALL CAP FUND
Since inception (9/30/93)............................................. 6.41%
One year.............................................................. 10.58%
Five years............................................................ 4.09%
- --------------------------------------------------------------------------------
SALOMON SMITH BARNEY
EXTENDED MARKET (EX-U.S.) INDEX
Since 9/30/93......................................................... 3.68%
Once year............................................................. 12.15%
Five years............................................................ 4.46%
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L SMALL CAP(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $10,000 $ 0 $10,000
09/93 12.00 $10,000 $ 0 $10,000
10/93 12.52 $10,433 $ 0 $10,433
11/93 12.59 $10,492 $ 0 $10,492
12/93 13.61 $11,342 $ 0 $11,342
01/94 14.54 $12,117 $ 0 $12,117
02/94 14.50 $12,083 $ 0 $12,083
03/94 13.39 $11,158 $ 0 $11,158
04/94 12.98 $10,817 $ 0 $10,817
05/94 12.75 $10,625 $ 0 $10,625
06/94 12.02 $10,017 $ 0 $10,017
07/94 12.54 $10,450 $ 0 $10,450
08/94 12.99 $10,825 $ 0 $10,825
09/94 12.62 $10,517 $ 0 $10,517
10/94 12.77 $10,642 $ 0 $10,642
11/94 11.94 $ 9,950 $ 1 $ 9,951
12/94 11.80 $ 9,833 $ 2 $ 9,835
01/95 11.18 $ 9,317 $ 1 $ 9,318
02/95 11.29 $ 9,408 $ 1 $ 9,409
03/95 11.16 $ 9,300 $ 1 $ 9,301
04/95 11.45 $ 9,542 $ 1 $ 9,543
05/95 11.56 $ 9,633 $ 2 $ 9,635
06/95 11.75 $ 9,792 $ 1 $ 9,793
07/95 12.34 $10,283 $ 2 $10,285
08/95 12.31 $10,258 $ 2 $10,260
09/95 12.90 $10,750 $ 1 $10,751
10/95 12.78 $10,650 $ 1 $10,651
11/95 12.68 $10,567 $19 $10,586
12/95 13.16 $10,967 $20 $10,987
01/96 13.67 $11,392 $21 $11,413
02/96 13.69 $11,408 $21 $11,429
03/96 13.98 $11,650 $21 $11,671
04/96 14.57 $12,142 $22 $12,164
05/96 14.96 $12,467 $23 $12,490
06/96 14.86 $12,383 $23 $12,406
07/96 14.37 $11,975 $22 $11,997
08/96 14.79 $12,325 $23 $12,348
09/96 14.88 $12,400 $23 $12,423
10/96 14.71 $12,258 $23 $12,281
11/96 15.30 $12,750 $23 $12,773
12/96 15.13 $12,608 $23 $12,631
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L SMALL CAP(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
01/97 15.62 $13,017 $ 24 $13,041
02/97 15.81 $13,175 $ 24 $13,199
03/97 15.61 $13,008 $ 24 $13,032
04/97 15.48 $12,900 $ 24 $12,924
05/97 16.72 $13,933 $ 26 $13,959
06/97 17.16 $14,300 $ 26 $14,326
07/97 17.00 $14,167 $ 26 $14,193
08/97 16.64 $13,867 $ 25 $13,892
09/97 16.91 $14,092 $ 26 $14,118
10/97 15.86 $13,217 $ 24 $13,241
11/97 14.99 $12,492 $ 23 $12,515
12/97 12.68 $10,567 $1,966 $12,533
01/98 13.11 $10,925 $2,033 $12,958
02/98 14.18 $11,817 $2,199 $14,016
03/98 15.17 $12,642 $2,353 $14,995
04/98 15.39 $12,825 $2,387 $15,212
05/98 15.36 $12,800 $2,382 $15,182
06/98 15.14 $12,617 $2,348 $14,965
07/98 15.51 $12,925 $2,406 $15,331
08/98 12.67 $10,558 $1,968 $12,524
09/98 12.65 $10,542 $1,962 $12,504
10/98 12.98 $10,817 $2,013 $12,830
11/98 13.46 $11,217 $2,087 $13,304
12/98 14.01 $11,675 $2,184 $13,859
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
FUND Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
NAME Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------------- ------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 10492.44 10254.07 11222.30 12132.78 12134.62 11585.28 11706.52 11611.83
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 11370.82 11628.65 11935.75 11639.84 11749.61 11076.17 10927.22 10476.14 10512.67
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
02/28/1995 03/31/1995 04/30/1995 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/31/1995 04/30/1995 05/31/1995 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 11370.82 11628.65 11935.75 11639.84 11749.61 11076.17 10927.22 10476.14 10512.67
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 11554.35 11946.28 12203.36 12419.20 12853.14 13075.09 13140.47 12682.47 12895.08
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1996 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1996 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 12973.36 13010.08 13395.03 13507.89 13658.66 13856.64 13811.36 13646.41 14353.95
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 14737.35 14725.38 14313.31 14750.80 13937.77 13519.26 13378.46 13567.51 14580.09
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1997 08/31/1997 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1997 09/30/1997 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Small-Cap Funds
Average/Total 15489.03 15802.43 15927.92 15433.99 15442.28 13304.22 12864.69 13375.34 13849.71
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Intnal Sm Cap Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
11/30/1998
12/31/1998
Sys Inv
Tot Return
-----------
<S> <C>
International Small-Cap Funds
Average/Total 14175.85
</TABLE>
Source: Lipper Analytical Services, Inc.
/1/ The Lipper International Small Cap Funds Average universe consists of six
funds.
/2/ The Salomon Smith Barney Extended Market (ex-U.S.) Index is a comprehensive
float-weighted equity index consisting of every company with an average
market capitalization of over $100 million in developed countries. Within
this index, the Extended (ex-U.S.) Market Index defines the small-
capitalization stock universe.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International
Small Cap Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total assets)
Global TeleSystems Group Inc., ADR........................................ 3.4%
National Express Group PLC................................................ 3.3%
Avis Europe PLC........................................................... 3.2%
Credito Agrario Bresciano................................................. 3.2%
Metronet Communications ADR............................................... 3.2%
Esat Telecom Group PLC, ADR............................................... 3.2%
Stet Hellas Telecommunications S.A., ADR.................................. 3.0%
Anglo Irish Bank Corporation.............................................. 3.0%
Vossloh AG ............................................................... 3.0%
Scandic Hotels AB ........................................................ 3.0%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United Kingdom............................................................ 18.5%
Germany................................................................... 14.3%
Japan..................................................................... 8.1%
Ireland................................................................... 7.6%
Spain..................................................................... 7.2%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
independent of revenue growth by eliminating costs. These incremental earnings
can materially improve Fund performance in a low-interest, low-inflation, slow-
growth environment. Apparel merchandisers Hugo Boss (1.6% of assets as of
12/31/98) and Esprit Asia (0.3% of assets as of 12/31/98) are good examples of
this, having both emerged from corporate restructuring.
Q: HOW WILL THE FUND POSITION ITSELF TO DEAL WITH THE UNCERTAIN MARKET
ENVIRONMENT FORECAST FOR 1999?
A: We believe that 1999 may be a year of aggregate decelerating growth. In such
an environment, selectivity is extremely important. In a general economic
slowdown, the small-cap markets are often more volatile than large-cap markets.
They rely on smaller, less diversified distribution and supply networks and are
keenly sensitive to changes within the domestic and local economies. We could
therefore see a greater disparity in the fortunes of small-cap businesses than
we would expect to see in the large-cap markets. This underscores the constant
need for high-quality research and selectivity when contemplating any potential
investment.
We will continue to emphasize earnings visibility and superior business momentum
in our stock selection process and will increasingly favor those industries and
names in which we have the greatest confidence. This may result in a
concentrated portfolio with an acyclical bias. Companies in less cyclical or
acyclical sectors of the market should fare better and, in fact, could
outperform their large-cap peers.
We believe that the consumer staples and retail finance sectors of the market
will demonstrate the greatest earnings resilience, because of their moderate
capital requirements and their product alignment with primary consumer needs.
Within all of our target industries, we hope to continue to capitalize on the
margin expansion and improved earnings expression that can be achieved through
business restructuring. Through good stock selection resulting from our primary
original research, our expert industry knowledge and our team of analysts'
insights, we hope to continue providing our shareholders with solid returns.
28
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
International
Small Cap Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
<TABLE>
<S> <C>
COMMON STOCKS -- 94.9%
Shares Value (Note 1)
AUSTRALIA -- 0.8%
251,104 Tyndall Australia Ltd.
(Diversified Financial Services)................ $ 384,691
CANADA -- 3.4%
51,640 InMedia Presentations Inc.+
(Software Systems).............................. 88,951
44,200 Metronet Communications, Class B, ADR+
(Telephone/Networks)............................ 1,480,700
---------
1,569,651
CHINA/HONG KONG -- 4.3%
362,000 Esprit Holdings Ltd. (Apparel and Textiles)...... 156,526
320,000 Smartone Telecommunications
(Telephone/Wireless)............................ 888,017
220,000 V-Tech Holdings Ltd. (Electronics)............... 959,781
---------
2,004,324
FINLAND -- 1.8%
100,100 Rapalla Normark Corporation (Retail Trade)....... 834,338
FRANCE -- 1.4%
13,200 Etam Development S.A. (Retail Trade)............. 672,867
GERMANY -- 8.5%
445 Hugo Boss AG (Apparel and Textiles).............. 747,742
22,100 Kiekart AG (Auto/Auto Parts)..................... 981,426
47,320 Vossloh AG (Building Materials).................. 1,391,472
30,390 Winkler & Duennebler AG+
(Machinery and Tools)........................... 893,636
---------
4,014,276
GREECE -- 3.0%
43,900 Hellas Telecommunications S.A., ADR+
(Telecommunications/Other)...................... 1,402,056
IRELAND -- 7.6%
481,295 Anglo Irish Bank Corporation (Banks)............. 1,392,290
10,400 Elan Corporation, Sponsored ADR**
(Pharmacy/Drugs)................................ 723,450
37,600 Esat Telecom Group PLC, ADR+
(Telecommunications/Other)...................... 1,431,150
---------
3,546,890
ISRAEL -- 0.4%
39,000 Paradigm Geophysical Ltd.+
(Oilfield Equipment)............................ 202,313
ITALY -- 6.8%
116,800 Credito Agrario Bresciano (Banks)................ 1,483,444
36,800 Industrie Natuzzi SpA, Sponsored ADR
(Home Appliance)................................ 915,400
213,500 Manuli Rubber Industries SpA
(Auto/Auto Parts)............................... 787,656
---------
3,186,500
JAPAN -- 8.1%
29,500 Fast Retailing Company Ltd.
(Apparel and Textiles).......................... $ 521,579
23,000 H.I.S. Company Ltd. (Leisure Time)............... 474,227
56,000 Laox (Retail Trade).............................. 411,309
13,000 Nichii Gakkan Company (Business Services)........ 540,684
17,900 Otsuka Kagu Ltd. (Home Appliance)................ 1,235,521
111,000 Sawako Corporation** (Real Estate)............... 618,822
---------
3,802,142
NETHERLANDS -- 1.9%
34,100 Ordina Beheer N.V.+ (Business Services).......... 909,357
NEW ZEALAND -- 1.4%
433,900 Air New Zealand Ltd. (Airlines).................. 680,338
NORWAY -- 2.5%
64,900 Aker Maritime ASA (Oil).......................... 482,579
97,800 CN Selmer A.S. (Heavy Construction).............. 707,907
---------
1,190,486
POLAND -- 1.8%
44,700 Prokom Software, ADR (Business Services)......... 842,595
PORTUGAL -- 1.5%
62,500 Banco Mello S.A. (Banks)......................... 695,848
RUSSIA -- 3.4%
28,400 Global TeleSystems Group Inc., ADR**+
(Telephone/Networks)............................ 1,581,525
SINGAPORE -- 1.4%
260,800 Nasteel Electronics Ltd.+ (Electronics).......... 663,452
SPAIN -- 7.2%
32,075 Azkoyen S.A. (Consumer Services)................. 1,151,016
16,000 Banco Pastor S.A. (Banks)........................ 1,001,970
37,950 Baron de Ley S.A.+ (Food and Beverage)........... 1,241,679
---------
3,394,665
SWEDEN -- 4.6%
90,350 Munters AB (Machinery and Tools)................. 778,424
37,400 Scandic Hotels AB (Lodging)...................... 1,371,759
---------
2,150,183
SWITZERLAND -- 4.6%
1,305 Banca Del Gottardo (Banks)...................... 1,184,809
3,850 SAIA-Burgess Electronics AG (Electronics)....... 953,039
---------
2,137,848
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
--------------------
The Montgomery Funds
--------------------
International
Small Cap Fund
Investments
<TABLE>
<S> <C>
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
UNITED KINGDOM -- 18.5%
362,100 Avis Europe PLC Leisure Time)..................... $ 1,520,166
11,800 Colt Telecom Group, ADR**
(Telephone/Regional-Local......................... 708,738
1,529,000 Freepages Group PLC+
(Broadcasting/Advertising)........................ 489,372
170,174 Henlys Group PLC (Auto/Auto Parts)................ 1,174,201
103,000 Jarvis PLC (Heavy Construction)................... 1,141,402
82,750 National Express Group PLC (Railroad)............. 1,535,442
158,100 Virgin Express Holdings, Sponsored ADR
(Airlines)....................................... 1,254,919
211,000 Wickers PLC (Retain Trade)........................ 871,840
----------
8,696,080
TOTAL COMMON STOCKS
(Cost $41,702,018)............................................... 44,562,425
----------
PREFERRED STOCKS -- 5.8%
(Cost $1,716,643)
GERMANY - 5.8%
27,000 Fielmaann AG (Health Care)........................ 1,296,246
19,300 Moebel Walther AG (Home Furnishings).............. 747,052
304 Porsche AG (Auto/Auto Parts)...................... 693,252
----------
2,736,550
TOTAL SECURITIES
(Cost $43,418,661)............................................... 47,298,975
----------
REPURCHASE AGREEMENT -- 0.1%
(Cost $26,000)
Principal Amount Value (Note 1)
$26,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $26,015 on 01/04/99,
collateralized by $26,520 market value of
U.S. government securities, having various
maturities and various interest rates............. $ 26,000
----------
TOTAL INVESTMENTS -- 100.8%
(Cost $43,444,661*).............................................. 47,324,975
OTHER ASSETS AND LIABILITIES -- (0.8)%
(Net)............................................................ (359,166)
----------
NET ASSETS -- 100.0%............................................. $ 46,965,809
==========
</TABLE>
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $3,617,075, represent 7.7% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM FROM JULY 1 TO DECEMBER 31 1998?
A: Given a very strong performance for the final three months of the year, when
the Fund returned 27.1% compared with a 21.1% gain for its benchmark, the Morgan
Stanley Capital International (MSCI) World Index, we were a little disappointed
with the Fund's semiannual returns. Given the third-quarter global market
volatility, the Fund returned 1.2% for the six-month period ended December 31,
1998, versus a 6.6% return for its benchmark index. We are pleased to report
that the third-quarter performance did little to detract from the Fund's return
for the year as a whole, however. For 1998 the Fund returned a very encouraging
32.8% versus a return of 24.3% for the index. In view of this superior
performance, the Fund garnered a five-star rating from Morningstar for its risk-
adjusted returns over the three-year period ended December 31, 1998, and a four-
star rating for its five-year performance ended December 31, 1998. The Fund was
rated among 862 international equity funds over the three-year period and 407
international equity funds over the five-year period ended December 31, 1998.*
Q: THE FUND HAD TO COPE WITH VERY VOLATILE MARKETS OVER THE PERIOD. HOW DID YOU
RESPOND TO THIS TYPE OF INVESTMENT ENVIRONMENT?
A: Although the third quarter proved extremely challenging for the Fund, we make
it our policy not to try to time the market. Our strategy is to look for
attractively valued companies with good fundamentals and management; companies
that we believe will demonstrate good capital appreciation in the long run
regardless of market conditions. As a result, we remained fully invested through
the very different market conditions of both the third and fourth quarters.
Although this position initially hurt performance, we didn't panic and remained
focused on the Fund's objectives. In view of this, we were able to take full
advantage of the fourth-quarter rebound in global markets. Indeed, by the end of
the year we had reached a position where we began to take profits in holdings
that had exceeded their price targets.
Q: WHAT OPPORTUNITIES DID GLOBAL MARKET VOLATILITY SUPPLY THE FUND?
A: We were able to reap plenty of opportunities by building the portfolio as the
markets were weakening in the third quarter. Two sectors in particular
contributed to the Fund's performance: telecommunications service and
technology. The telecommunications service sector was hard hit by the
third-quarter volatility, not for fundamental reasons, but largely because this
sector had done exceptionally well in the first half of the year and many
investors decided to take profits. As sentiment gave way, however, fundamentals
became the driving force of market movements, and the sector rebounded strongly.
Companies held in the Fund that have performed particularly well include Global
Crossing (1.8% of assets as of 12/31/98) and Swisscom (2.9% of assets as of
12/31/98).
The technology sector also lost a lot of ground in the third quarter, but during
the fourth quarter these stocks rebounded strongly off their lows. As valuations
for
--------------------
THE MONTGOMERY FUNDS
--------------------
Global Opportunities Fund
PORTFOLIO HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
John Boich, CFA....................................... Senior Portfolio Manager
Oscar Castro, CFA..................................... Senior Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY
GLOBAL OPPORTUNITIES FUND
Since inception (9/30/93)............................................. 16.71%
One year.............................................................. 32.76%
Five years............................................................ 13.70%
- --------------------------------------------------------------------------------
MSCI WORLD INDEX
Since 9/30/93........................................................ 15.23%
One year............................................................. 24.34%
Five years........................................................... 15.68%
- --------------------------------------------------------------------------------
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.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL OPPORTUNITIES(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $ 10,000 $ 0 $10,000
09/93 12.00 $ 10,000 $ 0 $10,000
10/93 12.83 $ 10,692 $ 0 $10,692
11/93 12.85 $ 10,708 $ 0 $10,708
12/93 14.22 $ 11,850 $ 0 $11,850
01/94 15.04 $ 12,533 $ 0 $12,533
02/94 14.82 $ 12,350 $ 0 $12,350
03/94 13.81 $ 11,508 $ 0 $11,508
04/94 13.98 $ 11,650 $ 0 $11,650
05/94 13.82 $ 11,517 $ 0 $11,517
06/94 12.92 $ 10,767 $ 0 $10,767
07/94 13.46 $ 11,217 $ 0 $11,217
08/94 14.23 $ 11,858 $ 0 $11,858
09/94 13.93 $ 11,608 $ 0 $11,608
10/94 14.26 $ 11,883 $ 0 $11,883
11/94 12.83 $ 10,692 $ 404 $11,096
12/94 12.53 $ 10,442 $ 394 $10,836
01/95 11.90 $ 9,917 $ 375 $10,292
02/95 12.05 $ 10,042 $ 379 $10,421
03/95 11.96 $ 9,967 $ 376 $10,343
04/95 12.33 $ 10,275 $ 388 $10,663
05/95 12.70 $ 10,583 $ 400 $10,983
06/95 13.25 $ 11,042 $ 417 $11,459
07/95 13.97 $ 11,642 $ 440 $12,082
08/95 13.72 $ 11,433 $ 433 $11,866
09/95 14.24 $ 11,867 $ 448 $12,315
10/95 13.91 $ 11,592 $ 438 $12,030
11/95 14.27 $ 11,892 $ 511 $12,403
12/95 14.62 $ 12,183 $ 524 $12,707
01/96 14.94 $ 12,450 $ 535 $12,985
02/96 15.29 $ 12,742 $ 547 $13,289
03/96 15.80 $ 13,167 $ 566 $13,733
04/96 16.74 $ 13,950 $ 600 $14,550
05/96 17.17 $ 14,308 $ 615 $14,923
06/96 16.96 $ 14,133 $ 608 $14,741
07/96 15.84 $ 13,200 $ 568 $13,768
08/96 16.43 $ 13,692 $ 588 $14,280
09/96 17.12 $ 14,267 $ 613 $14,880
10/96 16.43 $ 13,692 $1,130 $14,822
11/96 17.13 $ 14,275 $1,178 $15,453
12/96 16.73 $ 13,942 $1,329 $15,271
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL OPPORTUNITIES(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributors Distributions Reinvested
<S> <C> <C> <C> <C>
01/97 17.48 $ 14,567 $1,389 $15,956
02/97 17.20 $ 14,333 $1,367 $15,700
03/97 16.99 $ 14,158 $1,350 $15,508
06/97 17.05 $ 14,208 $1,355 $15,563
05/97 18.30 $ 15,250 $1,454 $16,704
06/97 19.17 $ 15,975 $1,523 $17,498
07/97 20.04 $ 16,700 $1,592 $18,292
08/97 19.15 $ 15,958 $1,522 $17,480
09/97 20.18 $ 16,817 $1,603 $18,420
10/97 18.35 $ 15,292 $1,458 $16,750
11/97 18.56 $ 15,467 $1,474 $16,941
12/97 14.63 $ 12,192 $4,767 $16,959
01/98 15.23 $ 12,692 $4,962 $17,654
02/98 16.95 $ 14,125 $5,523 $19,648
03/98 18.19 $ 15,158 $5,927 $21,085
04/98 19.04 $ 15,867 $6,203 $22,070
05/98 18.95 $ 15,792 $6,174 $21,966
06/98 19.19 $ 15,992 $6,252 $22,244
07/98 19.81 $ 16,508 $6,455 $22,963
08/98 15.94 $ 13,283 $5,194 $18,477
09/98 15.28 $ 12,733 $4,979 $17,712
10/98 16.76 $ 13,967 $5,461 $19,428
11/98 18.02 $ 15,017 $5,871 $20,888
12/98 16.79 $ 13,992 $8,522 $22,514
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- ------ ----------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND XL 10273.16 9689.62 10161.38 10829.21 10686.68 10223.56 10537.20 10561.93
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/30/1994 07/31/1994 06/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 10530.18 10727.96 11048.59 10755.85 11059.33 10577.23 10677.17 10514.34 10665.08
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 11176.54 11563.46 11659.76 11653.55 12234.00 11958.82 12304.54 12108.17 12525.95
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 12889.52 13120.03 13197.24 13414.11 13726.78 13735.90 13802.60 13312.04 13462.28
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 13986.58 14081.45 14867.78 14626.88 14800.42 14967.87 14669.01 15145.70 16077.79
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 16876.91 17651.45 16467.87 17359.75 16443.28 16731.46 16932.57 17401.64 18575.94
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI World IX ND 19357.49 19543.74 19295.89 19750.91 19716.29 17084.11 17383.32 18951.79 20075.87
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI World Index Growth $10,000
0l/12/1999
11/30/1998
12/31/1998
Sys Inv
Tot Return
-----------
Securities Indices
MSCI World IX ND 21053.62
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION> 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------- --- ---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 10414.67 10134.58 10926.79 11441.64 11195.61 10708.24 10886.60 10867.98
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 10647.50 10970.54 11368.42 11154.33 11336.46 10834.02 10735.18 10430.83 10615.97
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 10880.26 11232.46 11475.98 11664.75 12257.59 12080.26 12321.30 12077.59 12289.57
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
12/31/1995 01/31/1995 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 12520.65 12848.58 12984.70 13209.46 13614.50 13738.61 13725.60 13144.73 13459.75
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 13867.65 13898.98 14590.42 14614.76 14936.98 15014.54 14823.53 15047.95 15921.76
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 16621.20 17462.06 16440.17 17445.45 16321.21 16402.20 16607.58 16819.89 18019.92
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Svs Inv Svs Inv Svs Inv Svs Inv Svs Inv Svs Inv Svs Inv Svs Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 18928.31 19263.60 19137.64 19227.15 19269.87 16350.26 16323.32 17414.88 18422.84
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/12/1999 SUMMARY
11/30/1998
12/31/1998
Sys Inv
Tot Return
-----------
Global Funds
Average/Total 19258.84
Source: Lipper Analytical Services, Inc.
31
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Global Opportunities Fund
Investments
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Global Telesystems Group, Inc........................................... 3.0%
Swisscom AG............................................................. 2.9%
MCI WorldCom, Inc....................................................... 2.7%
Mannesmann AG........................................................... 2.5%
Metronet Communication Corporation, Class B............................. 2.4%
Koninklijke N.V......................................................... 2.4%
Nokia Corporation A.B, Series A......................................... 2.4%
NTT Mobile Communications............................................... 2.3%
For Entertainment Group, Inc............................................ 2.3%
Cisco Systems, Inc...................................................... 2.3%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United Kingdom.......................................................... 14.0%
United States........................................................... 14.0%
Germany................................................................. 7.8%
Switzerland............................................................. 6.2%
Greece.................................................................. 5.7%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individuals securities.
* Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of 12/31/98. The
ratings are subject to change every month. The ratings are calculated from the
Fund's three-, five- and 10-year average annual returns (if applicable) in
excess of 90-day Treasury bill returns, with appropriate fee adjustments and a
risk factor that reflects Fund performance below 90-day T-bill returns. The top
10% of funds in an investment class receive five stars, the next 22.5%
receive four stars. Ratings are for Class R shares only; other classes may vary.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
some companies rapidly became very expensive in relation to fundamentals, we
took the opportunity to take profits in companies we believed to be overpriced.
Q: THE FUND'S HIGHEST REGIONAL WEIGHTING IS IN EUROPE, AND NEARLY A QUARTER OF
ITS EUROPEAN INVESTMENT IS IN THE NON-EURO-ZONE U.K. MARKET. DO YOU SEE ANY
CHALLENGES IN INVESTING IN COUNTRIES WITH NON-EURO CURRENCIES AFTER JANUARY 1,
1999?
A: The European countries in the non-euro zone will be unable to escape their
association with countries that have adopted the single European currency. In
addition, they are unlikely to pass up any opportunities that arise in the euro
zone. For example, Avis (1.8% of assets as of 12/31/98), a car-rental company,
is based in England but derives most of its income from its operations in
continental Europe. In view of this, we anticipate that companies domiciled in
the countries that have chosen not to adopt the euro for the time being may
start to use the euro as the primary currency of trade. Furthermore, in our
opinion central banks outside the European Central Bank (ECB), such as the Bank
of England, are likely to maintain a close relationship with the ECB in spite of
their de facto independence. Therefore we do not think that any significant
challenges should arise because certain countries decide to retain their own
currencies.
The use of the euro as the preferred currency of trade is likely to be made
easier by its smooth introduction. In our opinion the initial launch of the euro
has been relatively problem free. Although there are some risks to the Economic
and Monetary Union, we remain cautiously optimistic about the euro's future.
Q: WHICH MARKETS DO YOU EXPECT TO OFFER THE MOST INTERESTING OPPORTUNITIES IN
THE YEAR AHEAD, AND HOW IS THE FUND POSITIONED TO TAKE ADVANTAGE OF THEM?
A: We continue to favor Europe. We anticipate a wealth of opportunities arising
from the trend toward an equity culture in these markets and the corporate
restructuring and deregulation resulting from the introduction of the euro.
Outside Europe the Fund holds a 16.5% weighting in the U.S. market, but we are
concerned about current valuations. In view of this, we are paying close
attention to Asia. We have recently been encouraged by the strength of the yen,
the increase in exports, and the low-inflation, low-interest-rate environment.
Although we are not rushing in to buy securities in the Asia Pacific region, we
continue to look for interesting opportunities where they may arise. We remain
committed to keeping one step ahead of market trends.
32
<PAGE>
-------------------------
THE MONTGOMERY FUNDS
-------------------------
Global Opportunities Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS -- 87.8%
Shares Value (Note 1)
CANADA -- 2.4%
38,700 Metronet Communications Corporation, Class B+
(Telephone/Networks)............................. $ 1,296,450
CHINA/HONG KONG -- 0.8%
23,000 China Telecom (Hong Kong) Ltd.+
(Telephone/Wireless)............................. 411,637
FINLAND -- 2.4%
10,660 Nokia Corporation AB, Series A
(Telecommunications Equipment)................... 1,292,634
FRANCE -- 5.3%
6,440 Cap Gemini S.A. (Business Services).............. 1,033,210
17,300 Renault (Auto/Auto Parts)........................ 776,659
4,256 Vivendi (Conglomerates).......................... 1,103,774
---------
2,913,643
GERMANY -- 6.6%
585 Axel Springer Verlag, Class A
(Newspapers/Publishing).......................... 491,493
10,700 Bayerische Vereinsbank AG (Banks)................ 837,969
11,800 Mannesmann AG (Machinery and Tools).............. 1,352,537
2,025 Muenchener Rueckver AG (Insurance)............... 980,691
---------
3,662,690
GREECE -- 5.7%
41,757 Hellenic Telecommunication Organization S.A.+
(Telephone/Networks)............................. 1,111,511
3,805 National Bank of Greece (Banks).................. 856,492
42,400 Panafon S.A. (Telephone/Long Distance)........... 1,136,201
---------
3,104,204
IRELAND -- 3.3%
39,554 Bank of Ireland (Banks).......................... 879,489
13,000 Elan Corporation, ADR** (Pharmacy/Drugs)......... 904,313
---------
1,783,802
ITALY -- 5.2%
84,800 Credito Agrario Bresciano (Banks)................ 1,077,021
62,100 Telecom Italia di Risp (Telephone/Networks)...... 529,565
89,900 Telecom Italia Mobile di Risp
(Telephone/Wireless)............................. 423,008
72,900 Telecom Italia Mobile Spa (Telephone/Wireless)... 537,894
44,500 Telecom Italia Spa+ (Telephone/Networks)......... 279,899
---------
2,847,387
JAPAN -- 4.5%
97,000 Kirin Brewery Company, Ltd. (Food and Beverage).. 1,236,052
31 NTT Mobile Communications
(Telecommunications/Other)....................... 1,275,607
---------
2,511,659
Shares Value (Note 1)
NETHERLANDS -- 5.5%
15,200 International Nederlanden Groep N.V. (Banks)..... $ 926,385
25,900 Koninklijke N.V. (Telecommunications/Other)...... 1,295,896
30,050 Ordina Beheer N.V. (Business Services)........... 801,355
---------
3,023,636
NORWAY -- 1.2%
188,000 Christiania Bank OG (Banks)...................... 653,186
PORTUGAL -- 1.8%
21,500 Portugal Telecom S.A. (Telephone/Networks)....... 986,212
RUSSIA -- 3.0%
30,000 Global Telesystems Group, Inc.**
(Telephone/Networks)............................. 1,670,625
SPAIN -- 4.8%
47,100 Argentaria S.A. (Banks).......................... 1,217,932
22,500 Baron de Ley S.A.+ (Food and Beverage)........... 735,382
15,281 Telefonica S.A. (Telephone/Networks)............. 678,463
---------
2,631,777
SWEDEN -- 1.1%
25,296 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications Equipment)................... 600,896
SWITZERLAND -- 6.2%
347 Julius Baer Holdings AG
(Diversified Financial Services)................. 1,153,298
313 Novartis AG (Pharmacy/Drugs)..................... 615,289
3,830 Swisscom AG (Telephone/Networks)................. 1,603,386
---------
3,371,973
UNITED KINGDOM -- 14.0%
105,900 Amvescap PLC (Investment Management)............. 818,748
239,000 Avis Europe PLC (Leisure Time)................... 1,003,368
33,000 Glaxo Wellcome PLC, ORD (Pharmacy/Drugs)......... 1,134,111
52,630 National Express Group PLC (Railroad)............ 976,560
105,100 Orange PLC+ (Telephone/Wireless)................. 1,212,728
43,000 Railtrack Group PLC+ (Railroad).................. 1,123,886
92,500 Sainsbury PLC (Food and Beverage)................ 719,377
63,470 The Great Universal Stores PLC (Retail Trade).... 664,302
---------
7,653,080
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
-------------------------
THE MONTGOMERY FUNDS
-------------------------
Global Opportunities Fund
Investments
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
UNITED STATES -- 14.0%
15,700 Air Touch Communications, Inc.+
(Telephone/Wireless)............................. $ 1,132,363
13,350 Cisco Systems, Inc.+ (Telephone/Networks)........ 1,239,464
11,200 Estee Lauder Companies Inc.
(Cosmetics and Personel Care).................... 957,600
50,300 Fox Entertainment Group, Inc.
(Broadcasting/Advertising)....................... 1,266,931
13,400 Galileo International Inc. (Business Services)... 582,900
22,400 Global Crossing Ltd. (Telecommunications/Other).. 1,009,400
20,700 MCI WorldCom, Inc.**+ (Telephone/Long Distance).. 1,485,872
---------
7,674,530
TOTAL COMMON STOCKS
(Cost $38,923,949)............................................. 48,090,021
----------
PREFERRED STOCKS -- 2.6%
Brazil -- 1.4%
4,570,000 Telecomunicacoes de Minas Gerais-Telemig,
Series B+ (Telephone/Regional-Local)............. 133,516
6,970,000 Telemig Celular S.A., Series C
(Telephone/Wireless)............................. 136,718
10,900,000 Telesep Celular S.A., Series B
(Telephone/Wireless)............................. 479,031
-------
749,265
GERMANY -- 1.2%
304 Porsche AG (Auto/Auto Parts)..................... 693,252
-------
TOTAL PREFERRED STOCKS
(Cost $2,507,885).............................................. 1,442,517
---------
RIGHTS -- 0.0%
(Cost $0)
SPAIN -- 0.0%
15,281 Telefonica S.A., Rights, Expire 01/30/99+
(Telephone/Networks)............................. 13,548
------
TOTAL SECURITIES
(Cost $41,431,834)............................................. 49,546,086
REPURCHASE AGREEMENT -- 8.3%
(Cost $4,544,000)
Principal Amount Value (Note 1)
$4,544,000 Agreement with Paine Webber, Tri-Party,
5.150% dated 12/31/98, to be repurchased at
$4,546,600 on 01/04/99, collateralized by
$4,634,880 market value of U.S. government
securities, having various maturities and
various interest rates....................... $ 4,544,000
---------
TOTAL INVESTMENTS -- 98.7%
(Cost $45,975,834*)............................................ 54,090,086
OTHER ASSETS AND LIABILITIES -- 1.3%
(Net).......................................................... 715,090
----------
NET ASSETS -- 100.0%........................................... $ 54,805,176
==========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1998, which have an aggregate market
value of $3,875,112, represent 7.1% of the total net asset value of the
Fund (see note 4 to Financial Statements).
+ Non-income-producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM IN THE LATTER HALF OF 1998?
A: Although a disappointing third-quarter performance detracted from semiannual
Fund returns, we were generally very pleased with the returns for the year as a
whole. The Fund returned 5.5% for the six months ended December 31, 1998, and
55% for the year versus returns of 21.5% and 50%, respectively, for the
benchmark Morgan Stanley Capital International (MSCI) Telecommunications Index.
After a frustrating third quarter, when the portfolio lost more than 20% of its
value in the severe global market correction, we were very encouraged by a
strong fourth-quarter recovery. The Fund returned 32.1% over the last three
months of the year against a return of 23.8% for the index, allowing us to
recoup our third-quarter losses as well as add additional value.
Q: DID COMMUNICATIONS STOCKS HOLD UP WELL DURING THE GLOBAL MARKET SWINGS OVER
THE LAST SIX MONTHS OF 1998?
A: As the quarterly performance figures suggest, the communications sector
failed to escape the effects of global market volatility in the third quarter,
but certain segments within the sector suffered greater price corrections than
others. Wireless companies in particular experienced a strong sell-off, due to
extensive profit taking as the markets began their slide. Conversely, when
global markets recovered, communications stocks, and the wireless segment in
particular, experienced sharper gains than many other global industries. The
rapid recovery of this sector confirms that its third-quarter rout was based on
negative sentiment toward markets in general, rather than on company-specific
fundamentals. Investors have since reaffirmed that they consider communications
companies to offer some of the most exciting opportunities for future growth.
Q: HOW DID THIS AFFECT THE PERFORMANCE OF THE FUND?
A: The rapidly changing fortunes of the communications sector certainly proved
challenging for the Fund. Our overweight position in wireless companies was a
big contributor to third-quarter underperformance. In addition, our overweight
position in Europe detracted from returns. The European markets corrected more
sharply than the U.S. market, due in part to a previous run-up in valuations and
to the relatively unsophisticated investor base. Europeans have traditionally
preferred less risky fixed-income investments. The rise in an equity culture is
a fairly recent phenomenon. As a result, many European investors became nervous
and sold down their equity holdings in preference of bonds.
In spite of the difficult third-quarter investment environment, we maintained
our focus and tried not to lose sight of what we believed to be the strong
underlying fundamentals of the companies in the portfolio. Because of this, the
Fund was well positioned to take full advantage of the fourth-quarter recovery
in market and sector valuations. We were very pleased with the Fund's relative
performance as a result.
---------------------
THE MONTGOMERY FUNDS
---------------------
Global Communications
Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Oscar Castro, CFA..................................... Senior Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY GLOBAL COMMUNICATIONS FUND
Since inception (6/1/93)................................................ 19.04%
One year................................................................ 54.97%
Five years.............................................................. 14.43%
- --------------------------------------------------------------------------------
MSCI TELECOMMUNICATIONS INDEX
Since 5/31/93........................................................... 17.02%
One year................................................................ 49.78%
Five years.............................................................. 17.30%
- --------------------------------------------------------------------------------
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 A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL COMMUNICATION(R)
Initial Investment: $10,000 Period: 06/01/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/01/93 12.00 $10,000 $ 0 $10,000
06/93 12.45 $10,375 $ 0 $10,375
07/93 12.75 $10,625 $ 0 $10,625
08/93 14.01 $11,675 $ 0 $11,675
09/93 14.42 $12,017 $ 0 $12,017
10/93 15.44 $12,867 $ 0 $12,867
11/93 14.48 $12,067 $ 0 $12,067
12/93 16.18 $13,483 $ 0 $13,483
01/94 16.86 $14,050 $ 0 $14,050
02/94 16.27 $13,558 $ 0 $13,558
03/94 15.07 $12,558 $ 0 $12,558
04/94 15.29 $12,742 $ 0 $12,742
05/94 15.13 $12,608 $ 0 $12,608
06/94 14.20 $11,833 $ 0 $11,833
07/94 14.81 $12,342 $ 0 $12,342
08/94 15.86 $13,217 $ 0 $13,217
09/94 15.54 $12,950 $ 0 $12,950
10/94 15.74 $13,117 $ 0 $13,117
11/94 14.45 $12,042 $ 26 $12,068
12/94 13.98 $11,650 $ 25 $11,675
01/95 13.18 $10,983 $ 24 $11,007
02/95 13.15 $10,958 $ 24 $10,982
03/95 13.46 $11,217 $ 24 $11,241
04/95 14.01 $11,675 $ 25 $11,700
05/95 14.68 $12,233 $ 27 $12,260
06/95 15.42 $12,850 $ 28 $12,878
07/95 16.25 $13,542 $ 29 $13,571
08/95 16.28 $13,567 $ 29 $13,596
09/95 17.12 $14,267 $ 30 $14,297
10/95 16.32 $13,600 $ 29 $13,629
11/95 16.48 $13,733 $ 30 $13,763
12/95 16.34 $13,617 $ 29 $13,646
01/96 16.70 $13,917 $ 30 $13,947
02/96 16.84 $14,033 $ 31 $14,064
03/96 16.98 $14,150 $ 30 $14,180
04/96 18.15 $15,125 $ 33 $15,158
05/96 18.11 $15,092 $ 32 $15,124
06/96 18.05 $15,042 $ 32 $15,074
07/96 16.97 $14,142 $ 30 $14,172
08/96 17.31 $14,425 $ 31 $14,456
09/96 17.88 $14,900 $ 32 $14,932
10/96 16.70 $13,917 $ 582 $14,499
11/96 17.40 $14,500 $ 607 $15,107
12/96 16.74 $13,950 $ 790 $14,740
01/97 17.60 $14,667 $ 830 $15,497
02/97 17.24 $14,367 $ 813 $15,180
03/97 16.88 $14,067 $ 796 $14,863
04/97 17.25 $14,375 $ 814 $15,189
05/97 18.67 $15,558 $ 882 $16,440
06/97 19.59 $16,325 $ 925 $17,250
07/97 20.75 $17,292 $ 979 $18,271
08/97 19.44 $16,200 $ 918 $17,118
09/97 20.78 $17,317 $ 980 $18,297
10/97 19.15 $15,958 $ 904 $16,862
11/97 19.07 $15,892 $ 900 $16,792
12/97 15.57 $12,975 $4,099 $17,074
01/98 16.36 $13,633 $4,307 $17,940
02/98 19.66 $16,383 $5,176 $21,559
03/98 21.59 $17,992 $5,683 $23,675
04/98 22.15 $18,458 $5,831 $24,289
05/98 21.80 $18,167 $5,738 $23,905
06/98 22.88 $19,067 $6,023 $25,090
07/98 24.24 $20,200 $6,381 $26,581
08/98 18.44 $15,367 $4,854 $20,221
09/98 18.26 $15,217 $4,806 $20,023
10/98 20.46 $17,050 $5,386 $22,436
11/98 22.24 $18,533 $5,855 $24,388
12/98 21.41 $17,842 $8,617 $26,459
</TABLE>
Prepared by the Performance Measurements and Analytics Department.
Lipper Telecom Funds growth $10,000
01/12/1999 Summary
<TABLE>
<CAPTION>
05/31/1993 06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993
06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- -------- --- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 10453.97 10754.21 11538.95 11643.76 12034.04 11360.88 11842.93 12245.83
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994
02/28/1994 03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 11789.47 11272.63 11491.94 11457.14 11341.20 11832.70 12191.48 11942.34 12198.77
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995
11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 11645.41 11520.18 11525.91 11426.82 11467.08 11869.62 12005.18 12580.47 13405.51
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996
08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 13770.25 14104.30 13553.11 13831.37 14243.71 14534.61 14410.07 14332.34 15214.74
</TABLE>
ource: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 15517.57 15350.74 14016.27 14326.09 14626.12 14437.30 15068.48 14998.14 15631.18
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 15432.16 14520.67 14949.77 16359.27 17302.49 18236.38 17269.87 19051.34 18227.38
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 18938.50 19079.86 20021.78 21298.62 23465.40 23214.86 22343.53 23381.86 23995.97
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Telecom Funds growth $10,000
<TABLE>
<CAPTION>
07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/31/1998
08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Telecommunication Funds
Average/Total 19752.23 20896.55 22552.31 24084.58 27874.81
</TABLE>
Source: Lipper Analytical Services, Inc.
35
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Global Communications
Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Global Telesystems Group, Inc., ADR ...................................... 4.3%
MCI WorldCom, Inc. ....................................................... 3.0%
Swisscom AG............................................................... 2.8%
Koninklijke N.V. ......................................................... 2.6%
Nokia Corporation AB, Series A............................................ 2.6%
Networks Associates Inc. ................................................. 2.6%
Mannesmann AG ............................................................ 2.6%
Fox Entertainment Group Inc. ............................................. 2.5%
Cisco Systems, Inc. ...................................................... 2.5%
Metronet Communications Corporation, Class B.............................. 2.5%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United States ............................................................ 22.6%
United Kingdom............................................................ 6.9%
Netherlands............................................................... 6.2%
France.................................................................... 4.7%
Japan..................................................................... 4.6%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates. There are
additional risks associated with investing in funds that lack industry
diversification.
Q: WHAT OPPORTUNITIES DO YOU SEE ARISING IN THE SECTOR IN 1999, AND HOW IS THE
FUND POSITIONED TO TAKE ADVANTAGE OF THEM?
A: We anticipate that the industry trends that helped sustain such good returns
for investors both in the fourth quarter and in 1998 as a whole will continue
into the New Year. There are likely to be three main industry themes in 1999.
The first concerns a continuation of the wireless revolution. Wireless is
becoming the preferred method of voice communications because of ease of use.
The resulting increase in demand for wireless products should be beneficial for
both service and equipment providers. Having recognized this trend early, the
Fund is in a position to take advantage of the potential opportunities arising
from it.
The second theme concerns merger and acquisition activity. We believe that plans
for intra-industry mergers are likely to accelerate moving forward, as
communications companies search for potential cost savings and fresh
opportunities. In addition, we anticipate a continuation of the trend in
cross-industry mergers similar to the AT&T and TCI union, as companies seek to
strategically expand into sectors of the industry that they believe will add
value to their business in the future. Although our intent is not to actively
seek out possible acquisition targets, the Fund is well positioned to take
advantage of these trends. Because we seek to invest only in high-quality
companies with good management and products, the Fund already owns several
attractive potential takeover targets.
Finally, we believe that deregulation within the industry is likely to continue
through 1999. We foresee a continuing wave of deregulation in Europe and Japan
over the coming year. In Europe we believe that this will be driven by greater
cross-market efficiency generated by the introduction of the Economic and
Monetary Union. In Japan it is part of a trend toward opening up the Japanese
market to increased competition.
Q: WHY SHOULD INVESTORS CONSIDER INVESTING IN THE FUND OR ADDING TO AN EXISTING
INVESTMENT NOW?
A: The Fund concentrates its investments in one of the strongest-growing
industries in the world. Furthermore, in spite of the gyrations that the
industry experienced over the second half of 1998, the risks are not as great as
in other nascent industries. On the one hand, the communications industry
includes the unpredictable technology sector, but it also includes the
established telecom utility companies, characterized by relatively dependable
earnings streams and established levels of service. This diversity has resulted
in an industry that can supply extraordinary growth as technology and innovation
make products more accessible to a wider market, but one that also offers
investors a very quantifiable degree of risk.
36
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Global Communications
Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 87.7%
Shares Value (Note 1)
BRAZIL - 0.6%
22,200 Telebras, ADR (Holding).............................. $ 1,613,663
CANADA - 2.5%
208,100 Metronet Communications Corporation,
Class B+ (Telephone/Networks)........................ 6,971,350
CHINA/HONG KONG - 2.5%
202,000 CHINA TELECOM Ltd.+ (Telephone/Wireless)............. 349,372
53,000 CHINA TELECOM (Hong Kong) Ltd.,
Sponsored ADR****+(Telephone/Wireless)............... 1,852,175
1,722,500 Smartone Telecommunications
(Telephone/Wireless) ................................ 4,780,029
---------
6,981,576
CZECH REPUBLIC - 0.8%
73,000 Ceske Radiokomunikace, GDR+
(Broadcasting/Advertising)........................... 2,354,250
FINLAND - 2.6%
60,350 Nokia Corporation AB, Series A
(Telecommunications Equipment)....................... 7,318,057
FRANCE - 4.7%
42,430 Cap Gemini S.A. (Business Services).................. 6,807,317
25,019 Vivendi (Conglomerates).............................. 6,488,562
----------
13,295,879
GERMANY - 2.6%
63,400 Mannesmann AG (Machinery and Tools).................. 7,267,021
GREECE - 3.9%
160,300 Hellas Telecommunications S.A., ADR***+
(Telecommunications/Other)........................... 5,119,581
224,766 Hellenic Telecommunication Organization S.A.***+
(Telephone/Networks)................................. 5,982,945
----------
11,102,526
IRELAND - 2.4%
182,100 East Telecom Group PLC, ADR+
(Telecommunications/Other)........................... 6,931,181
ITALY - 3.7%
203,613 Telecom Italia di Risp (Telephone/Networks).......... 1,280,701
659,600 Telecom Italia Mobile di Risp
(Telephone/Wireless)................................. 3,103,625
455,000 Telecom Italia Mobile SpA
(Telephone/Wireless)................................. 3,357,223
311,361 Telecom Italia SpA (Telephone/Networks).............. 2,655,169
----------
10,396,718
Shares Value (Note 1)
JAPAN - 4.6%
169 NTT Mobile Communications
(Telecommunications/Other)........................... $ 6,954,117
67,000 TDK Corporation (Electronics)........................ 6,124,596
----------
13,078,713
MEXICO - 1.2%
465,500 Grupo Iusacell, Series L, ADR+ (Telephone/Wireless).. 3,316,688
NETHERLANDS - 6.2%
85,000 Equant N.V.***+ (Software Systems)................... 5,764,063
146,400 Koninklijke N.V. (Telecommunications/Other).......... 7,325,065
166,300 (Telecommunications/Other)........................... 4,434,785
----------
17,523,913
NEW ZEALAND - 1.6%
2,110,000 Telecommunication Corporation of New Zealand,
Installment Receipts*** (Telephone/Networks)......... 4,609,854
POLAND - 1.4%
211,300 Prokom Software, GDR+ (Business Services)............ 3,983,005
P0RTUGAL - 2.0%
121,300 Portugal Telecom S.A. (Telephone/Networks)........... 5,564,070
RUSSIA - 4.3%
217,780 Global Telesystems Group, Inc., ADR***+
(Telephone/Networks)................................. 12,127,623
200,000 Russian Telecommunications Development
Corporation**+ (Telephone/Networks).................. 123,780
----------
12,251,403
SOUTH AFRICA - 1.7%
1,179,492 Dimension Data Holding Ltd. (Software Systems)....... 5,001,876
SPAIN - 3.4%
86,654 Telefonica de Espana, ORD (Telephone/Networks)....... 3,847,360
329,900 Union Electrica Fenosa S.A.+ (Electric Utilities).... 5,745,163
---------
9,592,523
SWEDEN - 2.8%
141,140 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications Equipment)....................... 3,352,721
47,000 Europolitan Holdings AB (Telephone/Wireless)......... 4,598,911
---------
7,951,632
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
---------------------
THE MONTGOMERY FUNDS
---------------------
Global Communications
Fund
Investments
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
SWITZERLAND - 2.7%
18,660 Swisscom AG (Telephone/Networks)................. $ 7,811,795
UNITED KINGDOM - 6.9%
92,700 Colt Telecom Group PLC, ADR*** (Telephone/
Regional - Local)................................ 5,567,794
285,100 Fox Entertainment Group Inc. (Broadcasting/
Advertising)..................................... 7,180,956
586,600 Orange PLC (Telephone/Wireless).................. 6,768,660
-----------
19,517,410
UNITED STATES - 22.6%
177,500 ADC Telecommunications, Inc. (Telecommunications
Equipment)....................................... 6,145,937
90,300 AirTouch Communications, Inc.+
(Telephone/Wireless)............................. 6,512,888
83,500 Bell Atlantic Corporation (Telephone/Regional
-Local).......................................... 4,425,500
77,350 Celular Comm International, Inc.*** (Telephone/
Wireless)........................................ 5,279,138
76,239 Cisco Systems, Inc.+ (Telephone/Networks)........ 7,078,314
107,300 Galileo International Inc. (Business Services)... 4,667,550
127,500 Global Crossing Ltd.
(Telecommunications/Other)....................... 5,745,469
116,748 MCI WorldCom, Inc.***+ (Telephone/Long
Distance)........................................ 8,380,317
140,100 McLeod, Inc.+ (Telephone/Regional-Local)......... 4,360,612
109,627 Networks Associates Inc. (Software Systems) 7,273,041
79,000 SBC Communications (Business Services) 4,236,375
---------
64,105,141
TOTAL COMMON STOCKS
(Cost $178,433,625)............................................. 248,504,244
-----------
PREFERRED STOCKS - 2.1%
BRAZIL - 2.1%
44,483,077 Telecomunicacoes de Minas Gerais-Telemig,
Series B+ (Telephone/Regional-Local)............. 1,299,609
7,470,660 Telecomunicacoes de Sao Paulo S.A. (Telephone/
Regional - Local)................................ 1,018,347
35,559,562 Telesp Celular S.A., Series B+ (Telephone/
Wireless)........................................ 1,562,776
103,307,077 Telesp Celular S.A., Series C+ (Telephone/
Wireless)........................................ 2,026,383
---------
TOTAL PREFERRED STOCKS
(Cost $13,145,862).............................................. 5,907,115
---------
RIGHTS - 0.0%#
(Cost $0)
SPAIN - 0.0%#
86,654 Telefonica S.A, Rights, Expire 01/30/99+
(Telephone/Networks)............................. 76,825
------
TOTAL SECURITIES Value (Note 1)
(Cost $191,579,487)............................................. $ 254,524,184
-----------
REPURCHASE AGREEMENTS - 10.8%
Principal Amount
$15,000,000 Agreement with Greenwich Capital Markets, Tri-
Party, 5.150% dated 12/31/98, to be repurchased
at $15,008,583 on 01/04/99, collateralized by
$15,300,000 market value of U.S. government
securities, having various maturities and various
interest rates................................... 15,000,000
15,634,000 Agreement with Greenwich Capital Markets, Tri-
Party, 5.150% dated 12/31/98, to be repurchased
at $15,642,946, on 01/04/99, collateralized by
$15,946,680 market value of U.S. government
securities, having various maturities and various
interest rates................................... 15,634,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $30,634,000).............................................. 30,634,000
----------
TOTAL INVESTMENTS - 100.6%
(Cost $222,213,487*)............................................ 285,158,184
OTHER ASSETS AND LIABILITIES - (0.6)%
(Net)........................................................... (1,741,985)
---------
NET ASSETS - 100.0%............................................. $ 283,416,199
-----------
</TABLE>
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
*** Securities on loan at December 31, 1998, which have an aggregate market
value of $36,393,925, represent 12.8% of the total net assets of the Fund
(see note 4 to Financial Statements).
+ Non-income-producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
ORD Ordinary
The Montgomery Global Communications Fund concentrates its investments in the
global communications industry. Because of this concentration, the value of this
Fund's shares may vary in response to factors affecting the global
communications industry, and therefore may be more volatile than those of
investment companies that do not similary concentrate their investments. The
global communications industry may be subject to greater changes in governmental
policies and governmental regulation than many other industries, and regulatory
approval requirements may materially affect the products and services of this
industry.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: After a very challenging six months, the Fund returned -19.1% for the
second half of the year, compared with a return of -7.98% for its benchmark, the
Morgan Stanley Capital International (MSCI) Emerging Markets Free Index.
The losses suffered by both the Fund and the index were concentrated in the
third quarter. During this period all emerging markets were hit by a tide of
extremely negative sentiment which was exacerbated by the collapse of the
Russian ruble and Russia's subsequent default on its debt. This led investors to
reduce their allocation to emerging markets, in preference for what they
perceived to be less risky investments.
By the fourth quarter, however, following interest rate cuts in the United
States and Europe as central banks sought to ease a potential credit crunch and
restore confidence to global markets, the specter of a global financial
depression began to recede. Investors revisited their allocations and
reallocated funds back into the emerging markets. But unlike the bout of selling
that took place a couple of months earlier, investors took a more discriminating
approach, basing their decisions on fundamentals rather than sentiment. The
Asian and European markets benefited most from this trend. It became obvious
that some of the worst hit Asian economies had bottomed out or were showing
signs of a fledgling recovery; and in Europe, investors revisited the benefits
the emerging markets would enjoy from their association with the European Union.
Q: WHICH MARKETS DETRACTED MOST FROM THE FUND'S PERFORMANCE AND WHY?
A: A number of factors detracted from the Fund's performance over the period.
The portfolio was underweighted in Korea and absent from Indonesia. In the
fourth quarter, these markets rebounded rapidly from their third-quarter
sell-off. In our view, because of the tentative nature of Korea's economic
recovery and the uncertain political situation in Indonesia, the risks of
investing in these two countries outweighed the potential rewards.
Our exposure to Brazil also proved a negative contributor to performance
throughout the period, even though our weighting had been progressively reduced
by the fourth quarter from an overweight position to a neutral one. This was
very disappointing given the high hopes we had for this economy at the end of
the first half of the year. At that point the country's fundamentals were
improving, the government appeared committed to reforming its fiscal imbalances,
and we were hopeful of the positive impact on the market of the privatization of
the state-owned telecommunications company, Telebras (3.8% of assets as of
12/31/98).
Unfortunately, this promising picture was changed irrevocably by events
following the collapse of the Russian ruble. After the Russian devaluation,
there was a great deal of speculation about other markets that might have to
devalue their currencies. Because of its large current account deficit, Brazil
was targeted as a country that may have problems, so many investors began to
withdraw their funds. The result could have been a self-fulfilling prophecy, if
the government had not chosen to raise interest rates to just under 50% and
spend a large
--------------------
THE MONTGOMERY FUNDS
--------------------
Emerging Markets Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Josephine Jimenez, CFA.............................. Sr. Portfolio Manager
Bryan Sudweeks, Ph.D., CFA.......................... Senior
Portfolio Manager
Frank Chiang........................................ Portfolio Manager
Jesus Isidoro Duarte................................ Portfolio Manager
Jose Fiuza.......................................... Regional Portfolio Manager
Stuart Quint, CFA................................... Regional Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for
the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY EMERGING MARKETS FUND
Since Inception (3/1/92).............................................. (1.58)%
One year.............................................................. (38.28)%
Five years............................................................ (10.84)%
- --------------------------------------------------------------------------------
MSCI EMERGING MARKETS FREE INDEX
Since 3/1/92.......................................................... (0.73)%
One year.............................................................. (25.34)%
Five years............................................................ (9.27)%
- --------------------------------------------------------------------------------
IFC GLOBAL COMPOSITE INDEX
Since 3/1/92.......................................................... (0.73)%
One year.............................................................. (21.10)%
Five years............................................................ (8.70)%
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING MKTS(R)
INITIAL INVESTMENT: $10,000 Period: 03/01/92 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
03/01/92 10.00 $10,000 $ 0 $10,000
03/92 9.97 $ 9,970 $ 0 $ 9,970
04/92 10.01 $10,010 $ 0 $10,010
05/92 10.14 $10,140 $ 0 $10,140
06/92 9.96 $ 9,960 $ 0 $ 9,960
07/92 9.75 $ 9,750 $ 0 $ 9,750
08/92 9.62 $ 9,620 $ 0 $ 9,620
09/92 9.57 $ 9,570 $ 0 $ 9,570
10/92 9.95 $ 9,950 $ 0 $ 9,950
11/92 9.88 $ 9,880 $ 0 $ 9,880
12/92 10.02 $10,020 $ 11 $10,031
01/93 10.23 $10,230 $ 12 $10,242
02/93 10.33 $10,330 $ 12 $10,342
03/93 10.47 $10,470 $ 12 $10,482
04/93 10.69 $10,690 $ 12 $10,702
05/93 10.91 $10,910 $ 12 $10,922
06/93 11.07 $11,070 $ 13 $11,083
07/93 11.25 $11,250 $ 13 $11,263
08/93 11.92 $11,920 $ 14 $11,934
09/93 12.31 $12,310 $ 14 $12,324
10/93 13.28 $13,280 $ 15 $13,295
11/93 13.40 $13,400 $ 289 $13,689
12/93 15.58 $15,580 $ 336 $15,916
01/94 15.77 $15,770 $ 340 $16,110
02/94 15.28 $15,280 $ 329 $15,609
03/94 14.14 $14,140 $ 305 $14,445
04/94 14.07 $14,070 $ 303 $14,373
05/94 14.42 $14,420 $ 311 $14,731
06/94 13.68 $13,680 $ 295 $13,975
07/94 14.47 $14,470 $ 312 $14,782
08/94 15.87 $15,870 $ 342 $16,212
09/94 16.09 $16,090 $ 347 $16,437
10/94 16.02 $16,020 $ 345 $16,365
11/94 14.49 $14,490 $1,101 $15,591
12/94 13.65 $13,650 $1,037 $14,687
01/95 12.24 $12,240 $ 930 $13,170
02/95 12.26 $12,260 $ 931 $13,191
03/95 12.18 $12,180 $ 925 $13,105
04/95 12.39 $12,390 $ 941 $13,331
05/95 13.16 $13,160 $1,000 $14,160
06/95 13.17 $13,170 $1,000 $14,170
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING MKTS(R)
INITIAL INVESTMENT: $10,000 Period: 03/01/92 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/95 13.54 $13,540 $1,029 $14,569
08/95 13.01 $13,010 $ 988 $13,998
09/95 12.86 $12,860 $ 977 $13,837
10/95 12.38 $12,380 $ 940 $13,320
11/95 12.00 $12,000 $ 912 $12,912
12/95 12.41 $12,410 $ 943 $13,353
01/96 13.23 $13,230 $1,005 $14,235
02/96 12.93 $12,930 $ 982 $13,912
03/96 13.17 $13,170 $1,000 $14,170
04/96 13.84 $13,840 $1,051 $14,891
05/96 14.09 $14,090 $1,070 $15,160
06/96 14.19 $14,190 $1,078 $15,268
07/96 13.31 $13,310 $1,011 $14,321
08/96 13.73 $13,730 $1,043 $14,773
09/96 13.82 $13,820 $1,050 $14,870
10/96 13.46 $13,460 $1,095 $14,555
11/96 13.76 $13,760 $1,119 $14,879
12/96 13.87 $13,870 $1,128 $14,998
01/97 14.94 $14,940 $1,215 $16,155
02/97 15.43 $15,430 $1,255 $16,685
03/97 15.07 $15,070 $1,226 $16,296
04/97 15.08 $15,080 $1,226 $16,306
05/97 15.64 $15,640 $1,272 $16,912
06/97 16.85 $16,850 $1,370 $18,220
07/97 17.45 $17,450 $1,419 $18,869
08/97 15.58 $15,580 $1,267 $16,847
09/97 16.20 $16,200 $1,318 $17,518
10/97 13.38 $13,380 $1,088 $14,468
11/97 12.93 $12,930 $1,052 $13,982
12/97 12.93 $12,930 $1,597 $14,527
01/98 11.44 $11,440 $1,413 $12,853
02/98 12.22 $12,220 $1,509 $13,729
03/98 12.59 $12,590 $1,555 $14,145
04/98 12.73 $12,730 $1,572 $14,302
05/98 11.07 $11,070 $1,367 $12,437
06/98 9.86 $ 9,860 $1,218 $11,078
07/98 10.33 $10,330 $1,276 $11,606
08/98 7.18 $ 7,180 $ 887 $ 8,067
09/98 7.43 $ 7,430 $ 918 $ 8,348
10/98 7.78 $ 7,780 $ 961 $ 8,741
11/98 8.45 $ 8,450 $1,043 $ 9,493
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING MKTS(R)
INITIAL INVESTMENT: $10,000 Period: 03/01/92 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/98 7.98 $ 7,980 $ 985 $ 8,965
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
IFC-GLOBAL COMP INDEX T/R
INITIAL INVESTMENT: $10,000 Period: 02/92 - 12/98
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
02/92 370.28 $10,000 $0 $10,000
03/92 372.97 $10,073 $0 $10,073
04/92 366.88 $ 9,908 $0 $ 9,908
05/92 355.97 $ 9,614 $0 $ 9,614
06/92 342.40 $ 9,247 $0 $ 9,247
07/92 327.86 $ 8,854 $0 $ 8,854
08/92 321.30 $ 8,677 $0 $ 8,677
09/92 314.18 $ 8,485 $0 $ 8,485
10/92 330.09 $ 8,915 $0 $ 8,915
11/92 326.31 $ 8,813 $0 $ 8,813
12/92 331.44 $ 8,951 $0 $ 8,951
01/93 329.20 $ 8,891 $0 $ 8,891
02/93 344.84 $ 9,313 $0 $ 9,313
03/93 351.76 $ 9,500 $0 $ 9,500
04/93 358.02 $ 9,669 $0 $ 9,669
05/93 360.82 $ 9,745 $0 $ 9,745
06/93 368.61 $ 9,955 $0 $ 9,955
07/93 373.85 $10,096 $0 $10,096
08/93 390.94 $10,558 $0 $10,558
09/83 403.89 $10,908 $0 $10,908
10/93 435.27 $11,755 $0 $11,795
11/93 465.51 $12,572 $0 $12,572
12/93 555.15 $14,993 $0 $14,993
01/94 571.69 $15,439 $0 $15,439
02/94 552.20 $14,913 $0 $14,913
03/94 506.31 $13,674 $0 $13,674
04/94 509.18 $13,751 $0 $13,751
05/94 522.59 $14,113 $0 $14,113
06/94 512.95 $13,853 $0 $13,853
07/94 545.52 $14,733 $0 $14,733
08/94 604.90 $16,336 $0 $16,336
09/94 623.87 $16,849 $0 $16,849
10/94 610.66 $16,492 $0 $16,492
11/94 584.52 $15,786 $0 $15,786
12/94 552.23 $14,914 $0 $14,914
01/95 489.45 $13,218 $0 $13,218
02/95 483.33 $13,053 $0 $13,053
03/95 481.38 $13,000 $0 $13,000
04/95 488.94 $13,205 $0 $13,205
05/95 507.45 $13,704 $0 $13,704
06/95 506.46 $13,678 $0 $13,678
07/95 516.09 $13,938 $0 $13,938
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
IFC-GLOBAL COMP INDEX T/R
INITIAL INVESTMENT: $10,000 Period: 02/92 - 12/98
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
08/95 496.00 $13,395 $0 $13,395
09/95 499.02 $13,477 $0 $13,477
10/95 484.30 $13,079 $0 $13,079
11/95 470.52 $12,707 $0 $12,707
12/95 484.17 $13,076 $0 $13,076
01/96 509.11 $13,749 $0 $13,749
02/96 505.91 $13,663 $0 $13,663
03/96 513.93 $13,880 $1 $13,879
04/96 552.19 $14,913 $0 $14,913
05/96 541.57 $14,626 $0 $14,626
06/96 549.50 $14,840 $0 $14,840
07/96 515.22 $13,914 $0 $13,914
08/96 526.68 $14,224 $0 $14,224
09/96 531.38 $14,351 $0 $14,351
10/96 519.53 $14,031 $0 $14,031
11/96 526.98 $14,232 $0 $14,232
12/96 522.36 $14,107 $0 $14,107
01/97 557.50 $15,056 $0 $15,056
02/97 582.83 $15,740 $0 $15,740
03/97 572.49 $15,461 $0 $15,461
04/97 572.59 $15,464 $0 $15,464
05/97 582.02 $15,718 $0 $15,718
06/97 611.77 $16,522 $0 $16,522
07/97 621.39 $16,782 $0 $16,782
08/97 554.12 $14,965 $0 $14,965
09/97 556.77 $15,036 $0 $15,036
10/97 471.98 $12,747 $0 $12,747
11/97 444.78 $12,012 $0 $12,012
12/97 446.37 $12,055 $0 $12,055
01/98 420.94 $11,368 $0 $11,368
02/98 464.29 $12,539 $0 $12,539
03/98 479.24 $12,943 $0 $12,943
04/98 475.41 $12,839 $0 $12,839
05/96 418.82 $11,311 $0 $11,311
06/98 375.68 $10,146 $0 $10,146
07/98 386.47 $10,437 $0 $10,437
08/98 288.24 $ 7,784 $0 $ 7,784
09/98 302.51 $ 8,170 $0 $ 8,170
10/98 333.44 $ 9,005 $0 $ 9,005
11/98 358.37 $ 9,678 $0 $ 9,678
12/98 352.33 $ 9,515 $0 $ 9,515
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992 09/30/1992
03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992 09/30/1992 10/31/1992
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- -------------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD XI 10338.49 10266.75 10229.72 9215.03 9315.26 8880.95 8911.25 9388.03
</TABLE>
Source: Lipper Analytical Service. Inc.
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
10/31/1992 11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993
11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993 07/31/1993
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EAFE IX GD 9286.77 9559.99 9606.09 9767.18 10090.13 10322.17 10609.82 10924.56 11213.06
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994
08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 12159.89 12604.56 13735.53 14343.35 16714.06 17018.36 16715.61 15202.91 14898.87
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 15408.80 14984.07 15915.62 17891.12 18094.42 17768.11 16844.06 15491.41 13843.26
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 13488.10 13573.79 14182.73 14937.25 14981.43 15317.71 14956.90 14885.92 14316.08
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 14060.78 14684.40 15728.20 15478.12 15598.68 16222.36 16149.92 16250.77 15140.13
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 15527.67 15662.18 15244.47 15499.91 15570.01 16632.04 17344.31 16888.71 16918.55
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 17402.76 18334.11 18607.79 16239.97 16689.94 13951.33 13442.28 13766.21 12686.53
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI EMF IX GD 14010.69 14618.70 14459.45 12477.92 11169.03 11523.16 8191.36 8710.98 9628.26
</TABLE>
Source: Lipper Analytical Services, Inc,
MSCI Emq Mkt Free growth $10,000
01/12/1999
<TABLE>
<CAPTION>
10/31/1998 11/30/1998
11/30/1998 12/31/1998
Sys Inv Sys Inv
Tot Return Tot Return
---------- ----------
<S> <C> <C>
Securities Indices
MSCI EMF IX GD 10429.02 10277.88
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/29/1992 03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992 09/30/1992
03/31/1992 04/30/1992 05/31/1992 06/30/1992 07/31/1992 08/31/1992 09/30/1992 10/31/1992
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- -------------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 9964.65 10114.17 10379.93 10184.29 9916.73 9682.22 9570.51 9732.72
</TABLE>
Source: Lipper Analytical Service. Inc.
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
10/31/1992 11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993
11/30/1992 12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993 07/31/1993
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 9589.49 9639.89 9867.28 10313.37 10523.51 10973.89 11292.26 11373.58 11572.56
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994
08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 12490.06 12741.52 13846.67 14420.62 16749.29 17100.33 16634.48 15168.89 14881.64
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 15169.18 14424.52 15280.65 16717.19 16909.57 16530.75 15717.78 14573.25 13170.26
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 13113.58 13162.65 13559.57 14165.12 14196.34 14697.81 14343.77 14357.03 13712.42
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 13467.78 13979.56 15391.52 15197.02 15262.52 15814.51 15920.64 15938.37 14974.68
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 15426.63 15609.46 15191.11 15628.45 15814.98 16944.61 17594.47 16960.72 16838.31
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 17341.59 17922.09 18447.45 16156.64 16771.74 13848.22 13190.43 13297.36 12160.16
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets Funds
Average/Total 13288.30 13763.63 13881.30 12053.34 10967.42 11261.67 8003.58 8309.40 9109.88
</TABLE>
Source: Lipper Analytical Services, Inc,
Lipper Emerg Mkts growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
10/31/1998 11/30/1998
11/30/1998 12/31/1998
Sys Inv Sys Inv
Tot Return Tot Return
---------- ----------
<S> <C> <C>
Emerging Markets Funds
Average/Total 9702.50 9573.32
</TABLE>
Source: Lipper Analytical Services, Inc,
/1/ The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.
/2/ The IFC Global Composite Index comprises more than 1,200 individual stocks
from 33 developing countries in Asia, Latin America, the Middle East,
Africa and Europe.
/3/ The Lipper Emerging Markets Funds Average universe consists of five funds.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Emerging Markets Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telec Brasileiras--Telebras Receipts....................................... 3.8%
Liberty Life Asscociation of Africa Ltd.................................... 2.3%
National Bank of Greece.................................................... 2.0%
Barlow, Ltd................................................................ 2.0%
Alpha Credit Bank.......................................................... 2.0%
Mahanager Telephone Nigam, Ltd............................................. 1.6%
Synnex Technology International Corporation................................ 1.6%
Pusan City Gas Company Ltd................................................. 1.5%
Hon Hai Precision Industry................................................. 1.5%
Housing Development and Finance Corporation................................ 1.4%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
South Africa...............................................................13.6%
Brazil.....................................................................13.3%
Greece..................................................................... 8.2%
India...................................................................... 7.4%
Taiwan..................................................................... 6.7%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
amount of currency reserves defending the value of the real. By the fourth
quarter, even the promise of emergency International Monetary Fund (IMF) funding
and the passage of key reforms could not counteract the recessionary impact of
high rates. The Brazilian Congress's failure to implement a key piece of fiscal
reform legislation also dampened confidence in the market. As a result, while
many other emerging markets experienced strong recoveries in the fourth quarter,
and some registered double- or even triple-digit gains, the Brazilian bolsa
returned less than 1%.
Q: WERE THERE POSITIONS IN THE FUND THAT PERFORMED PARTICULARLY WELL OVER
THE PERIOD?
A: We were very encouraged by the performance of our positions in Greece and
Israel and satisfied with Turkey. In the fourth quarter, these markets
rebounded, and a couple of stocks performed particularly well for us over the
period: National Bank of Greece (2% of assets as of 12/31/98) and Turkey's
Sabanci Holding (0.2% of assets as of 12/31/98). In spite of the strong run-up
in these markets, we still like Greece in particular. We anticipate that
interest rates will continue to drop and fiscal discipline will be strict as
Greece attempts to meet the criteria for entry into the club of euro currencies
in 2001.
Q: GIVEN THE GOOD RETURNS IN DEVELOPED MARKETS IN 1998, WHY SHOULD INVESTORS
CONSIDER BUYING INTO OR INCREASING THEIR ALLOCATIONS IN AN EMERGING MARKETS
PORTFOLIO?
A: The fate of the emerging markets over the past year amply demonstrates that
neither good nor bad returns are guaranteed forever. Investors in emerging Asia
suffered very poor returns for most of the year, but the recovery in the fourth
quarter demonstrated how rapidly this situation can turn around. Indeed, in the
fourth quarter the benchmark MSCI All-Country Asia Free (ex-Japan) Index
returned 34.3%, beating the S&P 500 which returned 21.3% and the benchmark
for the developed international markets, the MSCI EAFE Index, which returned
20.7%. Looking forward, U.S. corporate earnings growth is generally anticipated
to slow in 1999, whereas many emerging markets economies--and therefore
companies--are in a recovery mode. This suggests that these markets could
outperform into the New Year and at the very least should continue to play a
part in a well- diversified portfolio.
40
<PAGE>
----------------------
THE MONTGOMERY FUNDS
----------------------
Emerging Markets Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 89.2%
Shares Value (Note 1)
ARGENTINA - 3.2%
918,375 Cresud S.A.+ (Real Estate)....................... $ 1,103,081
270,642 Inversiones y Representaciones (Real Estate)..... 742,253
49,412 Inversiones y Representaciones, GDR
(Real Estate).................................... 1,374,271
150,949 Telefonica de Argentina, Sponsored ADR
(Telephone/Networks)............................. 4,217,138
113,700 Y.P.F. Sociedad Anonima, ADS (Oil)............... 3,176,494
----------
10,613,237
BRAZIL - 5.8%
156,500,000 Centrais Geradoras do Sul do Brasil S.A.-
Gerasul+ (Electric Utilities).................... 2,694,144
19,103,000 Cia Saneamento Basico Estado
(Water Utilities)................................ 1,446,658
38,730 Electrobras, GDS*** (Electric Utilities)......... 1,781,580
10,300 Souza Cruz S.A. (Tobacco)........................ 66,493
286,530,000 Telec Brasileiras-Telebras, Receipts
(Holding)........................................ 12,805,810
4,556,835 Telecommunicacoes de Ceara**
(Telephone/Regional-Local)....................... 663,772
1,166,225 Telecommunicacoes de Sao Paulo S.A.- Telesp
(Telephone/Regional-Local)....................... 100,383
1,166,225 Telesp Celular S.A.+
(Telephone/Regional-Local)....................... 26,302
----------
19,585,142
CHILE - 2.4%
81,674 Compania de Telefonos de Chile S.A., ADR
(Telephone/Networks)............................. 1,689,631
42,900 Distribucion y Servicio S.A., ADR
(Food and Beverage).............................. 493,350
137,800 Enersis S.A., ADR (Electric Utilities)............ 3,556,963
65,416 Sociedad Quimica y Minera de Chile, ADR
(Chemicals)...................................... 2,203,702
----------
7,943,646
CHINA/HONG KONG - 3.5%
2,350,000 Anhui Conch Cement Company, Ltd.+
(Cement)......................................... 260,854
168,000 Cheung Kong (Holdings) Ltd. (Real Estate)........ 1,208,891
135,000 China Telecom Ltd., ADR+
(Telephone/Wireless)............................. 4,691,250
50,000 HSBC Holdings (Banks)............................ 1,245,547
1,020,000 Shanghai Industrial Holdings Ltd.
(Conglomerates).................................. 2,060,380
774,000 Yanzhou Coal Mining Company Ltd.+ (Coal)......... 129,872
273,000 Yanzhou Coal Mining Company Ltd., ADR+
(Coal)........................................... 2,064,563
----------
11,661,357
Shares Value (Note 1)
CZECH REPUBLIC - 2.5%
4,120 Ceske Radiokomunikace, GDR+
(Broadcasting/Advertising)....................... $ 132,870
99,900 Ceske Radiokomunikace, GDR
(Broadcasting/Advertising)....................... 3,221,775
342,500 The Czech Value Fund**+ (Mutual Funds)........... 1,840,938
643,603 Vseobecny I.E. (Mutual Funds).................... 1,415,101
240,068 Vynosovy I.E.+ (Mutual Funds).................... 1,671,499
----------
8,282,183
EGYPT - 3.4%
102,000 Al-Ahram Beverages Company, GDR***
(Food and Beverage).............................. 2,945,250
31,385 Al-Ahram Pyramid Beverages Company
(Food and Beverage).............................. 1,794,743
91,723 Amreya Cement (Cement)........................... 1,371,810
633,333 Egyptian Mobile Phone Network+
(Telephone/Networks)............................. 3,853,859
89,860 Tourah Portland Cement Company (Cement).......... 1,528,411
----------
11,494,073
GREECE - 8.2%
64,444 Alpha Credit Bank (Banks)........................ 6,728,075
33,600 Commercial Bank of Greece S.A. (Banks)........... 3,306,217
104,688 Hellenic Telecommunication Organization
S.A. (Telephone/Networks) ....................... 2,786,643
125,000 Heracles General Cement S.A. (Cement)............ 3,394,312
30,062 National Bank of Greece (Banks).................. 6,766,850
140,000 STET Hellas Telecommunications S.A., ADR+
(Telecommunications/Other)....................... 4,471,250
----------
27,453,347
HUNGARY - 2.6%
101,220 Borsodehem Rt.+ (Chemicals)...................... 2,633,305
65,000 EGIS Rt.+ (Pharmacy/Drugs)....................... 1,479,640
125,000 Mol Magyar Olaj-es Gazipari Rt. (Oil)............ 3,429,073
78,000 Zalakeramia Rt.+ (Building Materials)............ 945,762
81,700 Zalakeramia Rt., GDR***
(Building Materials)............................. 212,420
----------
8,700,200
INDIA - 7.4%
20,500 Bajaj Auro, Ltd.** (Auto/Auto Parts)............. 251,604
100 Bharat Petroleum Corporation Ltd.** (Oil)........ 549
174,500 BSES Ltd.** (Electric Utilities)................. 580,982
240,000 BSES Ltd., GDR (Electric Utilities).............. 3,060,000
210 Castrol (India) Ltd.** (Chemicals)............... 3,751
200 Cummins India Ltd.**+ (Machinery and Tools)...... 1,448
-13,000 Dr. Reddy's Laboratories Ltd.**
(Pharmacy/Drugs)................................. 148,611
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
----------------------
THE MONTGOMERY FUNDS
----------------------
Emerging Markets Fund
Investments
<TABLE>
<CAPTION>
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
<S> <C>
INDIA - CONTINUED
107,300 Dr. Reddy's Laboratories Ltd., GDR
(Pharmacy/Drugs)............................... $ 1,233,950
350,000 Hindustan Petroleum Corporation Ltd.**
(Oil).......................................... 1,937,485
93,398 Housing Development and Finance
Corporation** (Banks).......................... 4,790,853
240 Indian Hotels Company Ltd.** (Lodging)......... 2,026
19,203 ITC Ltd.**+ (Tobacco).......................... 339,116
180,000 ITC Ltd., GDR (Tobacco)........................ 4,009,500
1,270,000 Mahanagar Telephone Nigam, Ltd.**
(Telecommunications/Other)..................... 5,478,313
150 State Bank of India** (Banks).................. 555
10 Tata Engineering & Locomotive Company,
Ltd.** (Auto/Auto Parts)....................... 38
120,000 Videsh Sanchar Nigam Ltd., GDR
(Telephone/Long Distance)...................... 1,470,000
130,000 Videsh Sanchar Nigam Ltd.,GDR
(Telephone/Long Distance)...................... 1,592,500
---------
24,901,281
ISRAEL - 2.9%
2,250,000 Bank Leumi Le-Israel (Banks)................... 3,177,997
74,300 ECI Telecom Ltd., ADR
(Telecommunications Equipment)................. 2,630,684
58,200 Formula Systems Ltd., ADR+
(Software Systems)............................. 1,471,369
632,332 Makhteshim-Agan Industries Ltd.
(Chemicals).................................... 1,367,040
486,256 Supersol Ltd. (Retail Trade)................... 1,206,588
---------
9,853,678
KAZAKHSTAN - 0.3%
240,806 Central Asia Growth Fund** (Mutual Funds)...... 722,421
42,285 Kazkommerts Bank, GDR** (Banks)................ 147,998
-------
870,419
KOREA - 4.5%
402,830 Hanjin Heavy Industries
(Heavy Construction)........................... 3,080,662
1,300 Korea Telecom Corporation+
(Telephone/Wireless)........................... 41,064
22,170 Pohang Iron & Steel Company Ltd.+ (Steel)...... 1,426,399
40,000 Pohang Iron & Steel Company Ltd., ADS
(Steel)........................................ 675,000
184,000 Pusan City Gas Company Ltd. (Gas Utilities).... 5,047,382
56 Samsung Electronics Ltd., GDR+
(Semiconductor)................................ 2,170
80,000 Sindo Ricoh Company
(Computers and Office Equipment)............... 2,866,168
79,230 Youngone Corporation (Apparel and Textiles).... 2,127,289
---------
15,266,134
MALAYSIA - 1.1%
1,666,000 Berjaya Sports Toto Berhad** (Leisure Time).... $ 1,573,350
3,820,000 YTL Power International Berhad**
(Electric Utilities)........................... 2,278,549
---------
3,853,899
Shares Value (Note 1)
MEXICO - 4.6%
1,287,952 Corporacion Interamericana Entertainment
S.A., Series B+ (Entertainment)................ $ 3,510,823
35,600 Fomento Economico Mexicano, S.A.de C.V.,
ADR (Food and Beverage)........................ 947,850
308,000 Grupo Financiero Banamex Accival S.A.
de C.V., Series B--Banacci+ (Banks)............ 404,240
1,000,600 Grupo Herdez S.A., Series B+
(Food and Beverage)............................ 272,753
144,100 Grupo Industrial Maseca S.A. de C.V.,
Class B, ADR (Agricultural Commodities)........ 1,792,244
263,000 Grupo Mexico S.A., Series B
(Metals and Mining)............................ 584,149
466,600 Grupo Radio Central S.A. de C.V., ADR
(Broadcasting/Advertising)..................... 2,507,975
331,200 Industrias Penoles CPO (Metals and Mining)..... 1,003,130
1 Interamericana Entrenamiento Corporation,
Series L (Entertainment)....................... 2
258,000 San Luis Corporacion S.A. de C.V.
(Auto/Auto Parts).............................. 372,478
84,800 Telefonos de Mexico S.A., ADR
(Telephone/Networks)........................... 4,128,700
---------
15,524,344
MOROCCO - 0.0%#
2 Banque Marocaine du Commerce Exterieur,
GDR*** (Banks)................................. 47
PAKISTAN - 1.1%
278 Engro Chemicals Pakistan** (Chemicals)......... 503
3,249,800 Fauji Fertilizer Company Ltd.**
(Agricultural Commodities)..................... 2,991,776
453,866 Pakistan State Oil** (Oil)..................... 714,779
-------
3,707,058
PERU - 1.6%
18,500 Compania de Minas Buenaventura S.A.,
ADR (Metals and Mining)........................ 240,500
119,400 Credicorp Ltd. (Banks)......................... 1,074,600
1,592,017 Ferreyros Enrique S.A. (Machinery and Tools)... 1,437,202
62,338 Ferreyros Enrique S.A., ADS***
(Machinery and Tools).......................... 1,098,702
111,700 Telefonica del Peru S.A., ADR
(Telephone/Networks)........................... 1,417,194
---------
5,268,198
PHILIPPINES - 4.05%
5,300,000 Ayala Corporation (Conglomerates).............. 1,873,393
5,230,000 Ayala Land, Inc. (Real Estate)................. 1,478,920
500,000 Bank of Philippine Islands (Banks)............. 1,060,411
5,894,000 Benpres Holdings, GDR*** (Holding)............. 954,555
78,038 Keppel Philippines Holdings, Inc.,
Class B**+ (Shipping).......................... 1,505
1,439,000 Manila Electric Company, Series B
(Electric Utilities)........................... 4,624,036
126,837 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance)...................... 3,289,835
---------
13,282,655
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
---------------------
THE MONTGOMERY FUNDS
---------------------
Emerging Market Fund
Investments
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
POLAND - 1.3%
130,000 Bank Handlowy W Warszawie, GDR*** (Banks)....... $ 1,683,500
85,500 Prokom Software, GDR*** (Business Services)..... 1,611,675
186,000 Telekomunikacja Polska S.A., GDR***+
(Telephone/Long Distance)....................... 948,600
-------
4,243,775
PORTUGAL - 3.2%
81,050 Brisa-Auto Estradas+ (Auto/Auto Parts).......... 4,773,095
71,300 Cia de Segros Tranquilidade (Insurance)......... 2,276,603
79,150 Sonae Investimentos (Retail Trade).............. 3,849,550
----------
10,899,248
ROMANIA - 0.1%
2,300,000 Oltchim S.A. (Chemicals)........................ 105,018
168,811 Romania Growth Fund PLC**+ (Mutual Funds)....... 317,365
-------
422,383
RUSSIA - 0.7%
5,100,000 Bashkirenergo**+ (Electric Utilities)........... 102,000
23,583 Global Telesystems Group Inc., ADR
(Telephone/Networks)............................ 1,313,278
116,000 Irkutskenergo, Sponsored ADR**
(Electric Utilities)............................ 174,000
86,825 Krasnoyarskelectrosvyaz, ADR**
(Electric Utilities)............................ 52,095
99,800 Krasny Oktyabr** (Food and Beverage)............ 129,740
20,550 LukOil Company, ADR** (Oil)..................... 349,350
331,775 Murmansk Electrosvyaz, ADR**
(Telecommunications/Other)...................... 33,509
114,425 Nizhnovsvyazinform, Sponsored ADR**
(Telephone/Regional-Local)...................... 34,328
474,375 Orenburg Region Electrosvyaz, ADR**+
(Telecommunications/Other)...................... 23,719
24,725 Uraltelecom, ADR**+ (Telephone/Networks)........ 86,338
---------
2,298,557
Shares Value (Note 1)
SOUTH AFRICA - 13.6%
385,000 Anglo American Investment Trust Ltd.
(Holding)....................................... 4,591,697
90,300 AngloGold Ltd. (Metals and Mining).............. 3,513,732
1 B.O.E. Corporation Ltd. (Holding)............... 1
5,696,794 B.O.E. Corporation Ltd., "N" Shares (Holding)... 3,239,975
1,762,453 Barlow, Ltd. (Conglomerates).................... 6,762,266
23,194,800 Consolidated African Mining Company+
(Metals and Mining)............................. 3,150,264
63 Iscor Ltd. (Steel).............................. 11
46,000 Liberty Holdings Ltd. (Holding)................. 1,607,198
572,506 Liberty Life Association of Africa Ltd.
(Insurance)..................................... 7,872,838
1,427,100 Molope Foods Ltd.+ (Holding).................... 1,278,036
666,300 Molope Group Ltd,. "N" Shares+ (Holding) 528,832
593,500 Nasionale Pers Beperk (Holding)................. 2,317,474
32,000 Pepsi International Bottlers**+
(Food and Beverage)............................. 544,000
1,183,936 Sasol, Ltd. (Oil)............................... 4,472,234
1,391,900 Smith (C.G.) Ltd. ORD+ (Conglomerates).......... 3,154,682
1,255,361 Wooltru Ltd. (Retail Trade)..................... 1,579,258
860,990 Wooltru Ltd., "N" Shares (Retail Trade)......... 1,052,439
---------
45,664,937
TAIWAN - 6.7%
1,306,000 Compal Electronic Inc.+
(Computers and Office Equipment)................ 4,256,052
910,000 Hon Hai Precision Industry (Electronics)........
5,027,312
3,412,500 Kindom Construction (Real Estate)............... 3,283,287
1,197,250 Synnex Technology International Corporation
(Computers and Office Equipment)................ 5,313,679
2,045,109 Taiwan Semiconductor Company+
(Semiconductor)................................. 4,506,603
---------
22,386,933
THAILAND - 3.2%
323,500 BEC World Public Company Ltd. (F)
(Entertainment)................................. 1,779,917
6,604,800 Industrial Finance of Thailand
(Securities Brokerage).......................... 2,725,502
640,400 Krung Thai Bank Public Company Ltd.+
(Banks)......................................... 347,948
326,000 Krung Thai Bank Public Company Ltd. (F)+
(Banks)......................................... 177,125
40,000 PTT Exploration and Production Public
Company Ltd. (F) (Oil).......................... 281,706
276,200 PTT Exploration and Production Public Company 1,945,177
Ltd. (F) (Oil)..................................
2,000,000 Thai Farmers Bank Public Company Ltd.
(F) (Banks)..................................... 3,521,321
---------
10,778,696
TURKEY - 1.3%
38,587,500 Haci Omer Sabanci Holding A.S.+ (Holding)....... 593,259
2,565,000 Migros Turk T.A.S. (Retail Trade)............... 2,561,260
98,818,041 Yapi Ve Kredi Bankasi A.S. (Banks).............. 1,143,365
---------
4,297,884
UKRAINE - 0.0%#
721,000 Ukraine Enterprise Corporation
(Mutual Funds).................................. 82,370
VIETNAM - 0.0%#
37,064 The Vietnam Frontier Fund, ORD
(Mutual Funds).................................. 111,192
VENEZUELA -0.0%#
3 Electricidad de Caracas (Electric Utilities).... 1
TOTAL COMMON STOCKS
(Cost $399,824,086)............................................ 299,446,874
-----------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
---------------------
THE MONTGOMERY FUNDS
---------------------
Emerging Markets Fund
Investments
<TABLE>
<CAPTION>
<S> <C>
PREFERRED STOCKS - 9.7%
Shares Value (Note 1)
BRAZIL - 7.5%
96,200,000 Banco do Estado de Sao Paulo S.A.-
Banespa (Banks).............................. $ 3,980,963
97,320,000 Centrais Geradoras do Sul do Brasil S.A.-
Gerasul+ (Electric Utilities)................ 120,819
419,383,000 Cia Paranaense de Energi (Electric Utilities) 3,021,206
97,320,000 Eletrobras, "B" (Electric Utilties).......... 1,868,673
6,288,000 Itausa Investimentos Itau (Holding).......... 3,486,828
50,500 Kepler Weber S.A. **+ (Machinery and Tools).. 78,994
61,972,000 Renner Participacoes S.A. (Retail Trade)..... 43,597
64,389,988 Telec de Minas Gerais S.A.
(Telephone/Regional-Local)................... 1,881,206
5,422 Teleceara Celular S.A., Series B**+
(Telephone/Wireless)......................... 292
4,556,835 Teleceara Celular S.A., Series D**+
(Telephone/Wireless)......................... 101,829
44,511 Telecomunicacoes Brasileiras S.A.-Telebras,
ADR (Holding)................................ 3,235,393
5,422 Telecomunicacoes de Ceara**
(Telecommunications Equipment)............... 449
66,859,988 Telemig Celular S.A., Series C+
(Telephone/Wireless)......................... 1,311,468
55,126,736 Telerj Celular S.A., Series B
(Telecommunications/Other)................... 1,300,320
58,575,827 Telesp Celular S.A., Series B+
(Telephone/Wireless)......................... 2,574,282
170,900 Vale do Rio Doce, "A" (Metals and Mining) 2,192,386
487,888 Vale do Rio Doce, "B" (Metals and Mining) 0
-
25,198,705
KOREA - 1.4%
145,260 Samsung Electronics Ltd.+ (Electronics)...... 4,781,626
PORTUGAL - 0.8%
226,000 Lusomundo-SGPS, S.A.+ (Entertainment) 2,629,094
RUSSIA - 0.0%#
6,000 Samarasvyazinform**+
(Telephone/Regional-Local)................... 19,200
------
TOTAL PREFERRED STOCKS
(Cost $28,303,309).......................................... 32,628,625
----------
CONVERTIBLE BOND - 0.2%
(Cost $781,779)
Principal Amount
MEXICO - 0.2%
$750,000 Alpha S.A.de C.V., 8,000% due 09/15/00***
(Conglomerates).............................. 675,000
-------
RIGHTS - 0.0%#
(Cost $0)
Shares Value (Note 1)
TAIWAN - 0.0%#
2,612 Compal Electronics Inc., Rights,
Expire 01/22/99+ (Electronics)............... $ 2,027
-----
WARRANTS - 0.7%
(Cost $2,448,305)
PHILIPPINES - 0.7%
5,000,000 Jollibee Food Company, Warrants,
Expire 02/24/03+ (Food and Beverage)......... 2,377,892
---------
TOTAL SECURITIES
(Cost $431,357,479)......................................... 335,130,418
REPURCHASE AGREEMENT - 0.4%
(Cost $1,340,000)
Principal Amount
$1,340,000 Agreement with Prudential Securities.
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $1,340,767 on 01/04/99,
collateralized by $1,366,800 market value
of U.S. government securities, having various
maturities and various interest rates 1,340,000
---------
TOTAL INVESTMENTS -- 100.2%
(Cost $432,697,479*)........................................ 336,470,418
OTHER ASSETS AND LIABILITIES -- (0.2%)
(Net)....................................................... (567,329)
--------
NET ASSETS -- 100.0%........................................ $ 335,903,089
===========
</TABLE>
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 7 to Financial
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.
+ Non-income-producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: The Fund's performance over the second half of the year was very encouraging.
A strong recovery in many of the Asian markets in the fourth quarter helped
boost returns. As a result, the Fund gained 28.3% versus a return of 23.2% for
its bench-mark, the Morgan Stanley Capital International (MSCI) All-Country Asia
Free (ex-Japan) Index, for the six months ended December 31, 1998.
Q: DID THE COMPOSITION OF THE PORTFOLIO CHANGE IN RESPONSE TO THE RALLIES IN
SOME ASIAN MARKETS DURING THE FOURTH QUARTER?
A: The composition of the portfolio changed over the last six months of the
year, but we had already begun to reposition the portfolio in advance of the
improvement in the Southeast Asian and Korean markets. As a result, we were able
to participate in most of the gains, and this contributed to the Fund's
outperformance against its benchmark.
Asian markets began the third quarter on a declining trend and were hurt further
in August after the collapse of the Russian ruble, which prompted a general
flight from any investments perceived to be risky. At this point we were
maintaining a largely defensive strategy in the portfolio. By the end of the
third quarter, however, we recognized a shift in the region's fortunes. In view
of this, we began to build our positions in the markets that we felt had the
best recovery prospects, such as Thailand, and reduce our holdings in less
attractive markets, such as India, Taiwan and Hong Kong.
A more encouraging macroeconomic picture had begun to emerge in the Southeast
Asian countries and Korea. The yen stabilized against the dollar, helping stave
off worries of a further round of competitive currency devaluations. Moreover,
these countries were recording current account surpluses. A strong U.S. economy
helped drive export growth, whereas imports declined due to a collapse in
domestic demand. The consequent rise in foreign exchange reserves and reduced
pressure on local currencies allowed monetary authorities to reduce interest
rates without fear of further currency devaluation. Three consecutive U.S.
interest rate cuts also helped underpin regional rate reductions, which in turn
have laid the foundation for a recovery in domestic demand.
Q: WHAT MARKETS AND SECTORS CONTRIBUTED MOST TO THE FUND'S PERFORMANCE?
A: The markets that we felt to be the best recovery plays were Thailand, Korea,
Singapore and the Philippines. With the exception of Indonesia, where we felt
the political risks outweighed the investment rewards, these four markets proved
to be the best performing in the region. We increased our allocation to
domestically oriented companies that were likely to survive the economic
downturn, were restructuring or would benefit from falling interest rates in
these markets. This helped boost the Fund's relative performance. Two of the
best examples of companies we invested in which fit these criteria are Thai
Farmers Bank (3.2% of assets as of 12/31/98) and Korean Air (1.7% of assets as
of 12/31/98). Although Thai Farmers
---------------------
THE MONTGOMERY FUNDS
---------------------
Emerging Asia Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Frank Chiang.................................................. Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY EMERGING ASIA FUND
Since inception (9/30/96)............................................. (12.51)%
One year.............................................................. (14.72)%
- --------------------------------------------------------------------------------
MSCI ALL-COUNTRY ASIA FREE
(EX-JAPAN) INDEX
Since 9/30/96......................................................... (22.50)%
One year.............................................................. (7.79)%
- --------------------------------------------------------------------------------
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 A 10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING ASIA(R)
Initial Investment: $10,000 Period: 09/30/96 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distribution Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/96 12.00 $10,000 $ 0 $10,000
09/96 12.00 $10,000 $ 0 $10,000
10/96 12.17 $10,142 $ 0 $10,142
11/96 14.10 $11,750 $ 0 $11,750
12/96 14.50 $12,083 $ 23 $12,106
01/97 15.34 $12,783 $ 24 $12,807
02/97 15.78 $13,150 $ 25 $13,175
03/97 15.90 $13,250 $ 25 $13,275
04/97 16.14 $13,450 $ 25 $13,475
05/97 17.37 $14,475 $ 27 $14,502
06/97 18.90 $15,750 $ 30 $15,780
07/97 19.47 $16,225 $ 31 $16,256
08/97 17.88 $14,900 $ 28 $14,928
09/97 16.81 $14,008 $ 27 $14,035
10/97 11.72 $ 9,767 $ 18 $ 9,785
11/97 10.77 $ 8,975 $ 17 $ 8,992
12/97 9.30 $ 7,750 $930 $ 8,680
01/98 7.64 $ 6,367 $763 $ 7,130
02/98 9.66 $ 8,050 $965 $ 9,015
03/98 9.32 $ 7,767 $931 $ 8,698
04/98 8.23 $ 6,858 $823 $ 7,681
05/98 7.11 $ 5,925 $711 $ 6,636
06/98 6.18 $ 5,150 $618 $ 5,768
07/98 5.75 $ 4,792 $574 $ 5,366
08/98 4.91 $ 4,092 $490 $ 4,582
09/98 5.90 $ 4,917 $589 $ 5,506
10/98 7.57 $ 6,308 $757 $ 7,065
11/98 8.06 $ 6,717 $805 $ 7,522
12/98 7.93 $ 6,608 $794 $ 7,402
</TABLE>
Prepared by the Performance Measurements and Analytics Department.
MSCI AC Asia ex-Japan growth $10,000
01/12/1999
<TABLE>
<CAPTION>
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 01/31/1997
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------- --- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI AC Asia Fr-Ja IX GD XI 9810.40 10273.81 10238.21 10449.83 10539.17 9943.77 9795.14 10238.27
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI AC Asia ex-Japan growth $10,000
01/12/1999
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI AC Asia Fr-Ja IX GD 10612.98 10701.75 8803.84 8764.44 6815.87 6348.51 6111.60 5583.20 6767.04
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI AC Asia ex-Japan growth $10,000
01/12/1999
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Indices
MSCI AC Asia Fr-Ja IX GD 6667.43 6083.05 5154.73 4576.20 4460.09 3817.86 4196.41 5108.64 5521.02
</TABLE>
Source: Lipper Analytical Services, Inc.
MSCI AC Asia ex-Japan growth $10,000
01/12/1999
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------
Securities Indices
MSCI AC Asia FR-JA IX GD 5635.80
Source: Lipper Analytical Services, Inc.
Lipper Pacific ex-Japan growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ----------------- --- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific Ex Japan Funds
Average/Total 9857.86 10353.55 10437.75 10581.45 10668.58 10168.77 10012.89 10619.62
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Pacific ex-Japan growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific Ex Japan Funds
Average/Total 10954.03 11115.05 9464.78 9393.41 7364.74 6950.66 6753.05 6111.33 7083.27
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Pacific ex-Japan growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific Ex Japan Funds
Average/Total 6997.09 6596.57 5024.48 5204.71 5096.83 4453.09 4884.74 5635.50 5978.12
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Pacific ex-Japan growth $10,000
01/12/1999 SUMMARY
11/30/1998
12/31/1998
Sys Inv
Tot Return
-----------
Pacific Ex Japan Funds
Average/Total 6057.64
Source: Lipper Analytical Services, Inc.
45
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Emerging Asia Fund
Investments
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
HSBC Holdings.............................................................. 5.2%
Manila Electric Company, Class B........................................... 4.7%
China Resources Enterprises Ltd............................................ 4.5%
Cheung Kong Holdings....................................................... 4.2%
SK Corporation............................................................. 4.0%
Industrial Finance of Thailand............................................. 3.5%
Thai Farmers Bank.......................................................... 3.2%
Singapore Press Holdings Ltd............................................... 3.2%
WEBS-Singapore Equity...................................................... 3.1%
China Shipping Development Company, Ltd.................................... 3.0%
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
China/Hong Kong........................................................... 37.1%
Thailand.................................................................. 13.8%
Philippines............................................................... 13.2%
Singapore................................................................. 11.5%
Korea..................................................................... 10.3%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
Please be aware that foreign investing--particularly in a single geographic area
such as the Asia Pacific region--involves certain risks, including currency
fluctuations and political and economic instability.
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 98.8%
Shares Value (Note 1)
CHINA/HONG KONG - 37.1%
5,000,000 Anhui Conch Cement Company Ltd.+
(Cement)............................................ $ 555,011
4,625,000 Benefun International Holdings Ltd.+
(Apparel and Textiles).............................. 143,270
200,000 Cheung Kong Holdings (Real Estate).................. 1,439,155
2,200,000 China Resources Beijing Land
(Conglomerates)..................................... 548,041
1,000,000 China Resources Enterprises Ltd. (Holding).......... 1,561,774
CHINA/HONG KONG - CONTINUED
12,000,000 China Shipping Development Company, Ltd.+
(Shipping).......................................... $ 1,037,741
4,200,000 Guangzhou Investment Company Ltd.
(Real Estate)....................................... 417,420
3,000,000 Guangnan Holdings (Holding)......................... 689,246
1,100,000 Hengan International Group Company
Ltd.+ (Cosmetics and Personal Care)................. 401,092
1,000,000 HKR International Ltd. (Real Estate)................ 609,866
Bank is still carrying a large proportion of nonperforming loans on its books,
it is one of the best-managed Thai banks and should benefit from an economic
recovery. Likewise, Korean Air is better managed than many of its competitors
and should, therefore, survive the current economic downturn and benefit from a
recovery. Both stocks performed exceptionally well during the fourth quarter.
Q: WHICH MARKETS IN YOUR OPINION OFFER THE BEST PROSPECTS FOR GOOD RETURNS
IN THE COMING YEAR?
A: We continue to like the prospects for Korea, Thailand, Singapore and the
Philippines. Confidence appears to be returning to these markets. In addition,
we believe that interest rates will continue a downward trend and that the
currencies of these countries will remain stable, aiding their recovery. Outside
this group we also believe that Malaysia may offer some positive surprises in
1999. There is a reasonable possibility that the capital controls that the
Malaysian government implemented in early September 1998 may be lifted sooner
rather than later and that the ringgit peg may be reset above its current level.
Other regional currencies have appreciated in recent months, so we believe that
the local currency is relatively undervalued. Moreover, Malaysia has been
implementing structural reform much faster than it has been given credit for.
The government has set up the financial institution Danamodal to take care of
the banking sector's bad-loan problem. Danamodal is modeled on the Bank of
Resolution and Trust in the United States, established to help resolve the bad
debts left over from the savings and loan debacle. In addition, we anticipate a
resolution of the current political difficulties. This suggests the possibility
of some attractive opportunities in the Malaysian market over the coming year.
Q: HOW IS THE FUND POSITIONED TO TAKE ADVANTAGE OF THE OPPORTUNITIES IN
THESE MARKETS?
A: The Fund is positioned to take advantage of domestic recovery plays in both
Korea and the Southeast Asian markets. We are also searching for attractive
opportunities in Malaysia, although currently these comprise dollar investments
that expose the Fund to virtually no currency risk. In carrying out this
strategy, we are hopeful that the Fund will continue to enjoy strong returns
through 1999.
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Emerging Asia Fund
Investments
COMMON STOCKS - CONTINUED
Shares Value (Note 1)
CHINA/HONG KONG - CONTINUED
72,000 HSBC Holdings (Banks) .......................... $ 1,793,587
200,000 Jardine Matheson Holdings Ltd. (Holding)........ 516,000
2,000,000 Lai Sun Development Company Ltd. (Real Estate).. 252,982
500,000 Shanghai Industrial Holdings Ltd.
(Conglomerates) ................................ 1,009,990
100,000 Sun Hung Kai Properties Ltd. (Real Estate)...... 729,258
150,000 Swire Pacific Ltd. (Holding) ................... 671,821
50,000 Yanzhou Coal Mining Company Ltd.,
ADR+ (Coal) .................................... 378,125
-------
12,754,379
INDIA - 5.7%
35,000 Hindalco Industries, Sponsored GDR
(Metals and Mining) ............................ 410,375
200,000 Tata Engineering and Locomotive Company,
Ltd. (Auto/Auto Parts) ......................... 800,000
60,000 Videsh Sanchar Nigam Ltd., GDR
(Telephone/Long Distance) ...................... 735,000
-------
1,945,375
KOREA - 10.3%
100,000 Hanjin Heavy Industries (Heavy Construction).... 764,755
80,000 Korean Air (Airlines) .......................... 590,524
46,856 LG Semiconductor Company+ (Semiconductor)....... 521,921
17,000 Pohang Iron & Steel Company Ltd.
(Metals and Mining) ............................ 286,874
100,000 SK Corporation (Oil) ........................... 1,371,571
---------
3,535,645
PHILIPPINES - 11.8%
2,980,000 Ayala Land, Inc. (Real Estate) ................. 842,674
300,000 Bank of the Philippine Islands (Banks) ......... 636,247
500,000 Manila Electric Company, Series B
(Electric Utilities) ........................... 1,606,683
500,000 San Miguel Corporation, Class B
(Food and Beverage) ............................ 964,010
-------
4,049,614
SINGAPORE - 11.5%
200,000 City Developments Ltd. (Real Estate) ........... 866,142
213,000 Overseas Union Bank Ltd. (Banks) ............... 928,892
100,000 Singapore Press Holdings Ltd.+
(Newspapers/Publishing) ........................ 1,090,248
352 Singapore Press Holdings Ltd.+
(Newspapers/Publishing) ........................ 3,731
307,600 WEBS-Singapore Equity (Mutual Funds)............ 1,057,375
---------
3,946,388
TAIWAN - 8.6%
273,000 Cathay Life Insurance Company, Ltd.
(Insurance) .................................... 881,192
140,000 Hon Hai Precision Industry+ (Electronics)....... 773,433
300,000 Taiwan Semiconductor Manufacturing Company
(Semiconductor) ................................ 661,080
500,000 Yageo Corporation+ (Electronics) ............... 645,562
-------
2,961,267
Shares Value (Note 1)
THAILAND - 13.8%
71,300 BEC World Public Company Ltd.
(Entertainment) ................................ $ 392,297
127,500 BEC World Public Company Ltd. (F)
(Entertainment) ................................ 701,513
2,926,000 Industrial Finance of Thailand (F)
(Securities Brokerage) ......................... 1,207,427
130,000 PTT Exploration and Production Public
Company Ltd.+ (F) (Oil) ........................ 915,543
2,000,000 Securities One Public Company Ltd.
(Investment Management) ........................ 434,663
627,000 Thai Farmers Bank (F) (Banks) .................. 1,103,934
---------
4,755,377
TOTAL COMMON STOCKS
(Cost $34,079,520) ......................................... 33,948,045
----------
WARRANTS - 1.4%
(Cost $215,952)
PHILIPPINES - 1.4%
1,000,000 Jollibee Food Company, Warrants,
Expire 02/24/03+ (Food and Beverage) ........... 475,578
-------
TOTAL INVESTMENTS - 100.2%
(Cost $34,295,472*) ........................................ 34,423,623
OTHER ASSETS AND LIABILITIES - (0.2)%
(Net) ...................................................... (50,125)
------
NET ASSETS - 100.0% ........................................ $ 34,373,498
==========
* Aggregate cost for federal tax purposes.
+ 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.
47
<PAGE>
--------------------
The Montgomery Funds
--------------------
Latin America Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Jesus Isidoro Duarte.......................................... Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY LATIN AMERICA FUND
Since inception (6/30/97).............................................. (41.92)%
One year............................................................... (52.79)%
- --------------------------------------------------------------------------------
IFCG LATIN AMERICA INDEX
Since 6/30/97.......................................................... (29.39)%
One year............................................................... (35.67)%
- --------------------------------------------------------------------------------
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 A $10,000 INVESTMENT
Montgomery Latin America Fund
IFCG Latin America Index/1/
Lipper Latin America Funds Average/2/
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY LATIN AMERICA(R)
Initial Investment: $10,000 Period: 06/30/97 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distribution Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $ 0 $10,000
06/97 12.00 $10,000 $ 0 $10,000
07/97 12.24 $10,200 $ 0 $10,200
08/97 11.69 $ 9,742 $ 0 $ 9,742
09/97 12.85 $10,708 $ 0 $10,708
10/97 10.13 $ 8,442 $ 0 $ 8,442
11/97 10.63 $ 8,858 $ 0 $ 8,858
12/97 11.00 $ 9,167 $187 $ 9,354
01/98 9.72 $ 8,100 $166 $ 8,266
02/98 9.98 $ 8,317 $170 $ 8,487
03/98 11.06 $ 9,217 $188 $ 9,405
04/98 10.97 $ 9,142 $187 $ 9,329
05/98 9.70 $ 8,083 $166 $ 8,249
06/98 8.77 $ 7,308 $150 $ 7,458
07/98 9.27 $ 7,725 $158 $ 7,883
08/98 5.64 $ 4,700 $ 96 $ 4,796
09/98 5.31 $ 4,425 $ 91 $ 4,516
10/98 5.41 $ 4,508 $ 93 $ 4,601
11/98 6.44 $ 5,367 $110 $ 5,477
12/98 4.94 $ 4,117 $299 $ 4,416
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
IFC GLOBAL LATIN AMERICA
Initial Investment: 10,000 Period: 06/97 - 12/98
<TABLE>
<CAPTION>
Growth of Value of Growth of Investment
Initial Reinvested with Distributions
Date NAV Investment Distributions Reinvested
<S> <C> <C> <C> <C>
06/97 1438.68 $10,000 $0 $10,000
07/97 1521.47 $10,575 $0 $10,575
08/97 1394.11 $ 9,690 $0 $ 9,690
09/97 1505.80 $10,467 $0 $10,467
10/97 1220.43 $ 8,483 $0 $ 8,483
11/97 1253.57 $ 8,713 $0 $ 8,713
12/97 1326.94 $ 9,223 $0 $ 9,223
01/98 1174.20 $ 8,162 $0 $ 8,162
02/98 1228.55 $ 8,539 $0 $ 8,539
03/98 1312.19 $ 9,121 $0 $ 9,121
04/98 1298.91 $ 9,028 $0 $ 9,028
05/98 1137.83 $ 7,909 $0 $ 7,909
06/98 1074.94 $ 7,472 $0 $ 7,472
07/98 1115.95 $ 7,754 $0 $ 7,754
08/98 743.73 $ 5,170 $0 $ 5,170
09/98 789.14 $ 5,485 $0 $ 5,485
10/98 845.21 $ 5,875 $0 $ 5,875
11/98 925.48 $ 6,433 $0 $ 6,433
12/98 854.86 $ 5,942 $0 $ 5,942
</TABLE>
Lipper Latin America Fund growth $10,000
01/13/1999 Summary
<TABLE>
<CAPTION>
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Latin America Funds
Average/Total 10666.99 9702.02 10595.01 8521.95 8821.48 9338.41 8329.71 8787.27
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/3/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Latin America Funds
Average/Total 9415.72 9440.50 8133.14 7616.79 7920.39 5028.89 5288.95 5774.95 6203.81
<CAPTION>
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------
<S> <C>
Latin America Funds 5651.78
Average/Total
</TABLE>
/1/ The IFCG Latin America Index measures the performance of selected stocks of
seven countries in Latin America.
/2/ The Lipper Latin America Funds Average universe consist of 38 funds.
Source: Lipper Analytical Services, Inc.
INVESTMENT REVIEW
Q: How did the Fund perform over the second half of 1998?
A: The second half of 1998 proved as difficult for investors in Latin America as
the first half of the year had been. Reflecting this, the benchmark
International Finance Corporation Global (IFCG) Latin America Index returned
- -20.6% over the six-month period. Disappointingly, the Montgomery Latin America
Fund underperformed the index with a -40.8% return.
Q: What factors contributed most to this performance?
A: The Fund's underperformance can be attributed mainly to our large overweight
position in Brazil and our underweighting in the better-performing Mexican
market. Heading into July we were optimistic about the prospects for the
Brazilian market. In addition to being the region's largest, most liquid market,
valuations were attractive and we anticipated a very favorable response to the
privatization of Telebras. The good fundamentals of the Brazilian market proved
no match for the effects of the "Asian contagion," however. Following the August
collapse of the Russian ruble and the default on Russian debt, Brazil became the
next country targeted as a likely candidate for currency devaluation because of
its large current account deficit. The government held firm against the ensuing
capital flight, drawing heavily on its foreign exchange reserves to protect the
value of the real. In addition, it raised interest rates to nearly 50%.
Although the currency was defended successfully, helped by a pledge of emergency
funding by the International Monetary Fund (IMF), the cost of this intervention
to the economy has been dear. High interest rates have dampened economic growth
prospects in the near term. Moreover, we were disappointed by the failure of the
Brazilian Congress to ratify a key fiscal reform measure early in the fourth
quarter. This lead to a much slower turnaround in the market than we had been
expecting, further dampening investor confidence in Brazil. The subsequent slow
recovery rate in the market detracted from the performance of the Fund.
Q: What factors do you think are likely to have the most impact on the outlook
for the Latin American markets in the New Year?
A: There is little doubt that Latin America is heading for slower growth in the
first half of 1999. The high interest rates needed to defend currencies in
countries such as Brazil and Mexico over the second half of 1998 have taken
their toll on economic activity. Nevertheless, we expect volatility in the
region and weak global confidence, which should weigh negatively on Latin
America. The mood toward the region will continue to be largely dictated by
Brazil.
48
<PAGE>
For the most positive outcome, Brazil will need to rapidly pass fiscal reform to
alleviate the country's fiscal imbalances. If it fails to do so, the impact on
the region could be extremely negative, at least in the short term.
Note: This Fund was closed to all investors and liquidated on January 29, 1999.
--------------------
THE MONTGOMERY FUNDS
--------------------
Latin America Fund
Portfolio Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Grupo Financiero Banamex Accival,
S.A. de C.V. (Banacci)............................................ 13.1%
Embraer Empresa................................................... 10.9%
Telephonos de Mexico S.A., ADR.................................... 9.7%
Cia Paranaense de Energi........................................... 9.0%
Telecomunicacoes Brasilerias...................................... 8.6%
Banco do Estado de Sao Paulo S.A.- Banespa........................ 8.6%
CESP-Compania Energetica de Sao Paulo............................. 7.9%
Telefonica de Argentina S.A., ADR................................. 7.0%
Cia de Gas de Sao Paulo........................................... 7.0%
TV Azteca S.A. de. C.V., ADR...................................... 6.3%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOP THREE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Brazil............................................................ 67.8%
Mexico............................................................ 36.6%
Argentina......................................................... 7.0%
</TABLE>
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with investing in funds of this type that invest in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
49
<PAGE>
---------------------
THE MONTGOMERY FUNDS
---------------------
Latin America Funds
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS - 57.3%
Shares Value (Note 1)
<S> <C>
ARGENTINA - 7.0%
4,000 Telefonica de Argentina S.A.,
Sponsored ADR (Telephone/Networks)..............$ 111,750
BRAZIL - 13.7%
3,093,000 Telec Brasileiras-Telebras (Holding)............. 138,235
600,000 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)....................... 51,645
1,300,000 Telesp Celular S.A.
(Telecommunications/Other)....................... 29,319
------
219,199
MEXICO - 36.6%
25,300 Fomento Economico Mexicano S.A. de C.V.
(Food and Beverage)............................. 68,582
7,400 Grupo Casa Autrey S.A. de C.V., ADR
(Retail Trade).................................. 50,413
160,000 Grupo Financiero Banamex Accival,
S.A. de C.V. (Banacci), (Financial Services).... 209,672
3,200 Telephonos de Mexico S.A., ADR
(Telephone/Networks)............................ 155,800
15,000 TV Azteca S.A. de C.V., ADR (Cable Television).. 100,312
-------
TOTAL COMMON STOCKS
(Cost $1,331,793).............................................. 915,728
=======
PREFERRED STOCKS - 54.1%
BRAZIL - 54.1%
3,200,000 Banco do Brasil S.A. (Banks).................... 21,453
3,320,000 Banco do Estado de Sao Paulo S.A.-Banespa
(Banks)......................................... 137,389
5,900,000 CESP-Companhia Energetica de Sao Paulo
(Electric Utilities)............................ 126,960
2,500,000 Cia de Gas de Sao Paulo (Gas)................... 111,732
20,000,000 Cia Paranaense de Energi (Electric Utilities)... 144,010
14,000,000 Embraer Empresa (Airlines)...................... 173,805
7,400,000 Tele Norte Leste Participacoes S.A.
(Telephone/Networks)............................ 92,481
1,800,000 Telemig Celular S.A., Series C
(Telephone/Wireless)............................ 35,307
500,000 Telesp Celular S.A., Series B+
(Telephone/Wireless)............................ 21,974
---------
TOTAL PREFERRED STOCKS
(Cost $929,431)................................................ 865,111
-------
TOTAL INVESTMENTS - 111.4% Value (Note 1)
(Cost $2,261,224*).............................................$ 1,780,839
OTHER ASSETS AND LIABILITIES - (11.4%)
(Net).......................................................... (182,631)
---------
NET ASSETS - 100.0%............................................$ 1,598,208
==========
</TABLE>
. Aggregate cost for federal tax purposes.
+ Non-income-producing security.
Abbreviation
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: Over the last six months of 1998, the Fund declined 1.9%, compared with a
return of 9.4% for the S&P 500 Index. This underperformance was largely due to
the Fund's exposure to markets and sectors that were hard hit during the global
market volatility of the third quarter. The Fund's innovative structure provides
exposure to five different equity disciplines--U.S. growth, emerging growth and
equity income, as well as international developed and emerging markets. Each
portfolio management team selects approximately 10 of its best capital
appreciation ideas to construct a diversified portfolio of approximately 50
stocks. Under normal circumstances the Select 50 Fund will have a portfolio
exposure of 60% to the U.S. market and 40% to international markets. With global
markets led by large-cap U.S. stocks during the last six months of 1998, the
Fund's exposure to international and smaller-cap markets kept it from outpacing
the much more narrowly focused S&P 500 Index.
Q: EMERGING MARKETS WERE MOST AFFECTED BY THE VOLATILITY IN GLOBAL MARKETS OVER
THE SIX-MONTH PERIOD. HOW DID THE EMERGING MARKETS PORTION OF THE FUND PERFORM?
A: As investors fled from risky assets in the third quarter, virtually no
emerging market escaped unscathed. With general global uncertainty regarding
emerging markets, even good companies with strong balance sheets suffered.
Indeed, the larger high-quality blue chip companies were often hurt the most,
because they were the most liquid investments and could therefore be sold more
easily. There was literally no place to hide in the emerging markets region. In
view of this, it is hardly surprising that the emerging markets component of the
Fund acted as a drag on performance.
Although the emerging markets asset class was a disappointment relative to the
developed markets, the emerging markets portion of the Fund achieved success
relative to its asset class for both the third and fourth quarters. During the
fourth quarter, performance of the emerging markets portion of the Fund was
strong on an absolute and a relative basis, as sentiment toward the emerging
markets improved, helped by successive cuts in interest rates in the United
States and a coordinated cut in Europe. The rate cuts stabilized the global
currency markets by restoring investors' confidence that central banks in the
developed world were willing to act to ease the threat of a global recession.
Good stock selection in markets that rebounded strongly from their third-quarter
lows lifted the Fund's overall performance.
Q: WERE THERE ANY OTHER SEGMENTS OF THE PORTFOLIO THAT WERE SIMILARLY AFFECTED?
A: The U.S. growth equity portion of the Fund also suffered disproportionately
in the volatility that hit the markets in late summer. The approach of our
growth strategy is to identify companies undergoing positive fundamental change
and to buy those companies that exhibit a sustainable improvement and are
attractively valued. The opportunities identified by this approach in the latter
half of 1998 tended to reflect small- and mid-cap stocks and economically
sensitive sectors. Small- and mid-cap securities were generally perceived to be
more
--------------------
THE MONTGOMERY FUNDS
--------------------
Select 50 Fund
Investments
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Portfolio Managers from
each equity team representing:
U.S. Growth Equity
U.S. Emerging Growth
U.S. Equity Income
International Equity
Emerging Markets
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY SELECT 50 FUND
Since Inception (10/2/95)................................................ 23.26%
One year................................................................. 9.40%
Three years.............................................................. 19.43%
- --------------------------------------------------------------------------------
MSCI WORLD INDEX
Since 9/30/95............................................................ 17.97%
One year................................................................. 24.34%
Three years.............................................................. 17.77%
- --------------------------------------------------------------------------------
S&P 500 INDEX
Since 9/30/95............................................................ 28.11%
One year................................................................. 28.75%
Three years.............................................................. 28.29%
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
GROWTH OF A 10,000INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SELECT 50(R)
Initial Investment: $10,000 Period: 10/02/95 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distribution Reinvested
<S> <C> <C> <C> <C>
10/02/95 12.00 $ 10,000 $ 0 $10,000
10/95 12.50 $ 10,417 $ 0 $10,417
11/95 13.24 $ 11,033 $ 47 $11,080
12/95 13.83 $ 11,525 $ 49 $11,574
01/96 14.28 $ 11,900 $ 51 $11,951
02/96 14.53 $ 12,108 $ 52 $12,160
03/96 14.96 $ 12,467 $ 53 $12,520
04/96 15.87 $ 13,225 $ 56 $13,281
05/96 16.81 $ 14,008 $ 60 $14,068
06/96 16.46 $ 13,717 $ 58 $13,775
07/96 15.18 $ 12,650 $ 54 $12,704
08/96 15.89 $ 13,242 $ 56 $13,298
09/96 16.37 $ 13,642 $ 58 $13,700
10/96 15.67 $ 13,058 $ 571 $13,629
11/96 16.26 $ 13,550 $ 592 $14,142
12/96 16.03 $ 13,358 $ 584 $13,942
01/97 17.20 $ 14,333 $ 627 $14,960
02/97 17.39 $ 14,492 $ 633 $15,125
03/97 16.84 $ 14,033 $ 614 $14,647
04/97 17.21 $ 14,342 $ 627 $14,969
05/97 19.00 $ 15,833 $ 693 $16,526
06/97 20.01 $ 16,675 $ 729 $17,404
07/97 21.54 $ 17,950 $ 785 $18,735
08/97 21.37 $ 17,808 $ 779 $18,587
09/97 22.60 $ 18,833 $ 824 $19,657
10/97 21.15 $ 17,625 $ 771 $18,396
11/97 20.79 $ 17,325 $ 757 $18,082
12/97 18.83 $ 15,692 $2,331 $18,023
01/98 18.42 $ 15,350 $2,281 $17,631
02/98 19.79 $ 16,492 $2,450 $18,942
03/98 21.06 $ 17,550 $2,608 $20,158
04,98 21.72 $ 18,100 $2,689 $20,789
05/98 21.21 $ 17,675 $2,626 $20,301
06/98 20.99 $ 17,192 $2,599 $20,091
07/98 20.56 $ 17,133 $2,546 $19,679
08/98 16.86 $ 14,050 $2,088 $16,138
09/98 17.40 $ 14,500 $2,154 $16,654
10/98 18.46 $ 15,383 $2,286 $17,669
11/98 19.80 $ 16,500 $2,452 $18,952
12/98 19.13 $ 15,942 $3,775 $19,717
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
01/09/99
MONTGOMERY SELECT 50(P)
Initial Investment: $10,000 Period: 12/12/96 - 12/92
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/12/96 15.89 $10,000 $ 0 $10,000
12/96 16.03 $10,088 $ 0 $10,088
01/97 17.19 $10,818 $ 0 $10,818
02/97 17.38 $10,938 $ 0 $10,938
03/97 16.82 $10,585 $ 0 $10,585
04/97 17.19 $10,818 $ 0 $10,818
05/97 18.98 $11,945 $ 0 $11,945
06/97 19.98 $12.574 $ 0 $12,574
07/97 21.50 $13,531 $ 0 $13,531
08/97 21.34 $13,430 $ 0 $13,430
09/97 22.56 $14,198 $ 0 $14,198
10/97 20.98 $13,203 $ 0 $13,203
11/97 20.51 $12,907 $ 0 $12,907
12/97 18.55 $11,674 $1,191 $12,865
01/98 18.14 $11,416 $1,165 $12,581
02/98 19.51 $12,278 $1,253 $13,531
03/98 20.78 $13,077 $1,335 $14,412
04/98 21.43 $13,486 $1,376 $14,862
05/98 20.91 $13,159 $1,343 $14,502
06/98 20.69 $13,021 $1,328 $14,349
07/98 20.25 $12,744 $1,300 $14,044
08/98 16.55 $10,415 $1,063 $11,478
09/98 17.09 $10,755 $1,097 $11,852
10/98 18.11 $11,397 $1,163 $12,560
11/98 19.45 $12,240 $1,249 $13,489
12/98 18.83 $11,850 $2,194 $14,044
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- --------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Monthly Reinv 9964.27 10401.19 10601.55 10961.95 11063.93 11170.46 11334.99 11626.82 11671.15
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
0/13/1999
<TABLE>
<CAPTION>
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Monthly Reinv 11155.80 11391.47 12032.04 12363.76 13297.49 13034.08 13847.94 13956.66 13384.27
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
1/13/1999
<TABLE>
<CAPTION>
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Monthly Reinv 14182.59 15049.68 15718.73 16969.13 16019.20 16896.02 16332.38 17087.82 17381.07
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Monthly Reinv 17573.13 18839.84 19803.82 20006.62 19663.21 20461.33 20245.08 17320.15 18430.65
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index Growth $10,000
01/13/1999
09/30/1998 10/31/1998 11/30/1998
10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv SyS Inv
Tot Return Tot Return Tot Return
---------- ---------- ----------
No Objective Assigned
S & P 500 Monthly Reinv 19927.50 21134.78 22351.87
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/15/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------------- ------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 9804.26 9979.30 10176.36 10446.06 10563.78 10728.28 11101.71 11230.04
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/15/1999
<TABLE>
<CAPTION>
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 11215.00 10716.94 10993.91 11330.87 11337.68 11892.06 11904.28 12184.20 12218.01
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/15/1999
<TABLE>
<CAPTION>
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 12024.76 12182.09 12939.45 13478.45 14165.16 13416.36 14238.96 13314.70 13341.45
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/15/1999
<TABLE>
<CAPTION>
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Funds
Average/Total 13505.32 13602.78 14560.76 15299.41 15523.08 15326.86 15396.90 15394.52 13037.89
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Global Funds Growth $10,000
01/15/1999
08/31/1998 09/30/1998 10/31/1998 11/30/1998
09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ----------
Global Funds
Average/Total 13105.76 13965.75 14725.76 15439.87
Source: Lipper Analytical Services, Inc.
51
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Select 50 Fund
Investments
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS
- -------------------------------------------------------------------------------
(as a percentage of total net assets)
MetroNet Communications
Corporation, Class B..................................................... 3.6%
Overseas Union Bank Ltd.................................................. 3.6%
Duane Reade Inc. ........................................................ 3.3%
Linens'N Things, Inc. .................................................... 3.1%
Manitowoc Company, Inc. ................................................. 3.1%
Dow Chemical Company..................................................... 3.0%
General Motors Corporation............................................... 2.9%
Brisa-Auto Estradas de Portugal S.A. .................................... 2.7%
HA-LO Industries, Inc. .................................................. 2.7%
Hongkong Land Holdings, Ltd. ............................................ 2.6%
- -------------------------------------------------------------------------------
TOP FIVE INDUSTRIES
- -------------------------------------------------------------------------------
(as a percentage of total assets)
Banks.................................................................... 12.6%
Retail Trade............................................................. 9.9%
Telecommunications Equipment............................................. 7.7%
Auto/Auto Parts.......................................................... 5.7%
Machinery and Tools...................................................... 5.5%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
COMMON STOCKS - 98.5%
Shares Value (Note 1)
AGRICULTURAL COMMODITIES - 0.1%
276,000 PPB Oil Palms Berhad** (Malaysia)............ $ 211,358
AUTO/AUTO PARTS - 5.7%
81,200 Brisa-Auto Estradas de Portugal S.A+
(Portugal).................................. 4,781,928
71,900 General Motors Corporation
(United States)............................. 5,149,838
----------
9,931,766
BANKS - 12.6%
1,342,500 Bank Leumi Le-Israel (Israel)................ 1,896,205
43,000 Bayerische Vereinsbank AG (Germany).......... 3,367,540
63,000 First Union Corporation (United States)...... 3,831,188
55,000 National City Corporation (United States) 3,960,000
1,426,000 Overseas Union Bank Ltd. (F) (Singapore) 6,218,777
369,248 Shinhan Bank (Korea) ........................ 2,823,841
----------
22,097,551
BROADCASTING/ADVERTISING - 4.3%
125,112 HA-LO Industries, Inc.+ (United States)..$ 4,707,338
85,000 Snyder Communications, Inc. (United States) 2,868,750
----------
7,576,088
BUILDING MATERIALS - 2.4%
145,000 Masco Corporation (United States)........... 4,168,750
BUSINESS SERVICES - 3.1%
52,000 Administaff, Inc.+ (United States).......... 1,300,000
119,000 On Assignment, Inc.+ (United States)........ 4,064,593
----------
5,364,593
CHEMICAL - 4.7%
57,000 Dow Chemical Company (United States)........ 5,183,438
55,000 du Pont (E.I.) de Nemours and Company
(United States)............................ 3,097,188
----------
8,280,626
CONSUMER SERVICES - 2.1%
104,210 Azkoyen S.A. (Spain)........................ 3,739,593
The accompanying notes are an integral part of these financial statements.
risky during the third quarter, and investors sold these issues
disproportionately, choosing the perceived earnings sustainability of large-cap
growth stocks over the less visible growth of small- and mid-caps. Although
broadening interest in the small- and mid-cap sectors sparked a strong rally at
the beginning of the fourth quarter, during December investors returned their
attention to a narrow group of large-caps. This narrow focus drove up S&P 500
returns but left the rest of the market languishing in its wake.
Q: What opportunities do you see for the Fund moving forward?
A: We believe that the Fund's strategy is perfectly suited to the kind of global
market environment we expect in 1999. On the home front, a broadening of the
U.S. market should favor Montgomery's fundamentally based bottom-up approach to
investing. Furthermore, an outperformance by the developed European countries
and some emerging markets in Asia and Europe relative to the S&P 500 Index may
lead to an improvement in the Fund's relative performance as our stock
selections in these markets help to boost the Fund's returns. We are optimistic
that the global diversification the Select 50 Fund offers will prove beneficial
to our shareholders in the year ahead.
52
<PAGE>
---------------------
THE MONTGOMERY FUNDS
---------------------
Select 50 Fund
Investments
COMMON STOCKS -- CONTINUED
Shares Value (Note 1)
DIVERSIFIED FINANCIAL SERVICES -- 0.8%
33,000 Household International, Inc.
(United States).................................... $ 1,307,625
ELECTRICAL EQUIPMENT -- 1.9%
56,000 Emerson Electric Company
(United States).................................... 3,388,000
ELECTRONICS -- 1.2%
52,200 Moog Inc., Class A+ (United States)................ 2,042,324
HEALTH CARE -- 0.4%
39,400 HealthCare COMPARE Corporation+
(United States).................................... 651,331
HEAVY CONSTRUCTION -- 2.1%
111,300 Elcor Corporation (United States).................. 3,596,381
MACHINERY AND TOOLS -- 5.5%
111,900 Elevadores Atlas S.A. (Brazil)..................... 1,203,973
120,550 Manitowoc Company, Inc. (United States)............ 5,349,406
27,260 Mannesman AG (Germany)............................. 3,124,590
----------
9,677,969
METALS AND MINING -- 2.2%
100,000 AngloGold Ltd. (South Africa)...................... 3,891,176
OFFICE EQUIPMENT/SUPPLIES -- 2.5%
67,000 Pitney-Bowes, Inc. (United States)................. 4,426,188
OIL -- 3.5%
72,200 Amerada Hess Corporation (United States)........... 3,591,950
85,000 Halliburton Company (United States)................ 2,518,125
----------
6,110,075
PHARMACY/DRUGS -- 4.3%
52,000 Glaxo Wellcome PLC, ADR (United Kingdom)........... 3,614,000
27,000 Merck & Company, Inc. (United States).............. 3,987,563
----------
7,601,563
PULP AND PAPER -- 2.8%
38,000 Georgia-Pacific Group (United States).............. 2,225,375
60,000 International Paper Company (United States)........ 2,688,750
----------
4,914,125
REAL ESTATE -- 4.2%
1,885,000 DBS Land Ltd. (Singapore).......................... 2,774,408
3,873,000 Hongkong Land Holdings, Ltd. (China/Hong Kong)..... 4,570,140
----------
7,344,548
RETAIL TRADE -- 9.9%
3,650 Carrefour S.A. (France)............................ 2,754,311
148,000 Duane Reade Inc.+ (United States).................. 5,698,000
136,000 Linens 'N Things, Inc.+ (United States)............ 5,389,000
98,200 Nordstrom Inc, (United States)..................... 3,412,450
----------
17,253,761
SOFTWARE SYSTEMS -- 2.4%
150,000 Avid Technology Inc.+ (United States).............. 3,515,625
22,000 MICROS Systems, Inc.+ (United States).............. 715,000
----------
4,230,625
Shares Value (Note 1)
TELECOMMUNICATIONS EQUIPMENT -- 7.7%
250,000 Aspect Telecommunications Corporation+
(United States).................................... $ 4,312,500
48,000 Converse Technology, Inc.+ (United States)......... 3,406,500
91,500 Ericsson (L.M.) Telephone Company,
Class B, ADR (Sweden).............................. 2,187,422
22,300 Matav Rt., ADR (Hungary)........................... 664,818
23,600 Nokia Corporation, ADR (Finland)................... 2,842,325
----------
13,413,565
TELECOMMUNICATIONS/NETWORKING -- 3.6%
189,600 MetroNet Communications Corporation,
Class B+ (Canada).................................. 6,351,600
TELECOMMUNICATIONS/OTHER -- 0.6%
178,500 Matav Rt. (Hungary)................................ 1,020,806
TELEPHONE/NETWORKS -- 3.3%
58,500 Global TeleSystems Group, Inc.+ (United States).... 3,257,719
95,150 Hellenic Telecommunication Organization
S.A. (Greece)...................................... 2,532,755
----------
5,790,474
TELEPHONE/WIRELESS -- 2.5%
373,000 Orange PLC+ (United Kingdom)....................... 4,303,973
TRUCKING -- 2.1%
129,000 Swift Transportation Company, Inc.+
(United States).................................... 3,287,813
TOTAL COMMON STOCKS
(Cost $142,778,298).............................................. 172,274,247
-----------
REPURCHASE AGREEMENT -- 2.6%
(Cost $4,564,000)
Principal Amount
$4,564,000 Agreement with Prudential Securities,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $4,566,612 on 01/04/99,
collateralized by $4,655,280 market
value of U.S government securities,
having various maturities and various
interest rates.......................... 4,564,000
----------
TOTAL INVESTMENTS -- 101.1%
(Cost $147,342,298*)............................................. 176,838,247
OTHER ASSETS AND LIABILITIES -- (1.1)%
(Net)............................................................ (1,931,624)
-----------
NET ASSETS -- 100.0% ............................................ $ 174,906,623
-----------
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
+ Non-income-producing security.
Abbreviations:
ADR American Depositary Receipt
(F) Foreign or Alien Shares
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
----------------------
The Montgomery Funds
----------------------
U.S. Asset Allocation Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Fund of Funds, including:
Montgomery Growth Fund
Montgomery Total Return Bond Fund
Montgomery Government Reserve Fund
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY U.S.
ASSET ALLOCATION FUND
<TABLE>
<S> <C>
Since inception (3/31/94)................................................ 18.77%
One year................................................................. 6.18%
Three years.............................................................. 12.56%
- --------------------------------------------------------------------------------
S&P 500 INDEX
Since 3/31/94............................................................ 26.52%
One year................................................................. 28.75%
Three years.............................................................. 28.29%
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
AGGREGATE BOND INDEX
Since 3/31/94............................................................ 8.33%
One year................................................................. 8.69%
Three years.............................................................. 7.29%
</TABLE>
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY U.S. ASSET ALLOCATION(R)
Initial Investment: $10,000 Period: 03/31/94 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
03/31/94 12.00 $10,000 $ 0 $10,000
03/94 12.00 $10,000 $ 0 $10,000
04/94 12.19 $10,158 $ 0 $10,158
05/94 12.45 $10,375 $ 0 $10,375
06/94 12.24 $10,200 $ 0 $10,200
07/94 12.89 $10,742 $ 0 $10,742
08/94 13.25 $11,042 $ 0 $11,042
09/94 13.37 $11,142 $ 0 $11,142
10/94 13.84 $11,533 $ 0 $11,533
11/94 14.05 $11,708 $ 226 $11,934
12/94 14.10 $11,750 $ 226 $11,976
01/95 14.24 $11,867 $ 228 $12,095
02/95 14.71 $12,258 $ 237 $12,495
03/95 15.16 $12,633 $ 244 $12,877
04/95 15.25 $12,708 $ 245 $12,953
05/95 15.82 $13,183 $ 254 $13,437
06/95 16.33 $13,608 $ 263 $13,871
07/95 16.83 $14,025 $ 270 $14,295
08/95 17.06 $14,217 $ 274 $14,491
09/95 17.41 $14,508 $ 280 $14,788
10/95 17.41 $14,508 $ 280 $14,788
11/95 17.49 $14,575 $ 978 $15,553
12/95 17.86 $14,883 $ 999 $15,882
01/96 17.84 $14,867 $ 997 $15,864
02/96 18.29 $15,242 $1,022 $16,264
03/96 18.54 $15,450 $1,036 $16,486
04/96 19.09 $15,908 $1,068 $16,976
05/96 19.51 $16,258 $1,091 $17,349
06/96 19.33 $16,108 $1,081 $17,189
07/96 18.74 $15,617 $1,047 $16,664
08/96 19.17 $15,975 $1,072 $17,047
09/96 19.64 $16,367 $1,098 $17,465
10/96 18.50 $15,417 $2,330 $17,747
11/96 19.11 $15,925 $2,407 $18,332
12/96 18.09 $15,075 $2,848 $17,923
01/97 18.37 $15,308 $2,893 $18,201
02/97 18.23 $15,192 $2,870 $18,062
03/97 17.84 $14,867 $2,808 $17,675
04/97 18.41 $15,342 $2,898 $18,240
05/97 19.45 $16,208 $3,063 $19,271
06/97 19.89 $16,575 $3,132 $19,707
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY U.S. ASSET ALLOCATION(R)
Initial Investment: $10,000 Period: 03/31/94 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/97 12.35 $14,025 $ 270 $14,295
08/97 21.12 $14,217 $ 274 $14,491
09/97 21.86 $14,508 $ 280 $14,788
10/97 21.54 $14,508 $ 280 $14,788
11/97 21.59 $14,575 $ 978 $15,553
12/97 18.01 $14,883 $ 999 $15,882
01/98 17.94 $14,867 $ 997 $15,864
02/98 18.68 $15,242 $ 1,022 $16,264
03/98 19.12 $15,450 $ 1,036 $16,486
04/98 19.30 $15,908 $ 1,068 $16,976
05/98 19.08 $16,258 $ 1,091 $17,349
06/98 19.08 $16,108 $ 1,081 $17,189
07/98 18.67 $15,617 $ 1,047 $16,664
08/98 17.49 $15,975 $ 1,072 $17,047
09/98 17.88 $16,367 $ 1,098 $17,465
10/98 18.48 $15,417 $ 2,330 $17,747
11/98 19.02 $15,925 $ 2,407 $18,332
12/98 15.06 $12,550 $10,098 $22,648
</TABLE>
Prepared by The Performance Measurements and Analytics Department
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 10128.12 10293.68 10041.78 10371.29 10795.52 10531.75 10768.02 10376.35 10529.97
</TABLE>
Source: Lipper Analytical Service, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 10802.85 11223.45 11554.10 11894.07 12368.74 12655.53 13075.02 13107.66 13660.52
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 13611.11 14205.57 14482.26 14974.60 15113.91 15259.42 15481.19 15882.04 15943.39
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/ 13/1999
<TABLE>
<CAPTION>
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 15239.40 15561.34 16436.39 16899.54 18165.06 17805.22 18917.01 19065.52 18283.61
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 19374.15 20558.64 21472.60 23180.71 21883.06 23080.84 22310.87 23342.84 23743.44
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 24005.80 25736.19 27053.05 27330.08 26860.96 27951.24 27655.83 23660.22 25177.22
</TABLE>
Source: Lipper Analytical Services, Inc.
S&P 500 Index growth $10,000
01/13/1999
<TABLE>
<CAPTION>
09/30/1998 10/31/1998 11/30/1998
10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return
---------- ---------- ----------
<S> <C> <C> <C>
No Objective Assigned
S & P 500 Mnthly Reinv 27222.00 28871.20 30533.80
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 9920.15 9918.76 9896.84 10093.42 10105.95 9957.20 9948.33 9926.24 9994.78
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 10192.58 10434.92 10498.94 10645.59 11057.55 11138.62 11113.74 11247.87 11357.29
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/199
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 11504.99 11677.39 11841.27 11919.91 11712.71 11631.29 11565.88 11542.40 11697.40
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 11729.41 11709.75 11913.82 12177.72 12386.71 12271.14 12308.72 12339.34 12202.60
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
03/31/1997 04/30/1997 06/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 12385.27 12502.35 12650.74 12991.89 12881.08 13071.05 13260.67 13321.74 13455.86
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 13628.61 13618.35 13665.15 13736.47 13866.78 13984.38 14014.13 14242.20 14575.69
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate End growth $10,000
01/15/1999
<TABLE>
<CAPTION>
09/30/1995 10/31/1995 11/30/1995
10/31/1995 11/30/1995 12/31/1995
Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return
---------- ---------- ----------
<S> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Ed Tr 14498.63 14580.91 14624.75
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994
04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------------ --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 10023.71 10071.35 9905.52 10110.38 10355.87 10190.12 10257.92 10020.23
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 10087.66 10197.28 10493.49 10704.09 10922.85 11303.10 11540.45 11838.41 11918.02
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/30/1995 02/29/1996 03/31/1996 04/30/1996 05/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 12191.77 12127.57 12506.87 12694.27 12953.46 13018.39 130087.23 13249.23 13416.59
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 13418.81 13042.92 13270.41 13745.16 13989.62 14656.57 14517.00 15010.08 15000.84
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
03/31/1997 04/30/1997 05/31/1997 03/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 14580.67 14986.60 15648.20 16135.32 17063.19 16542.42 17244.65 16856.47 17146.37
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
12/31/1994 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 17368.57 17476.69 18329.99 18941.99 19123.24 18885.52 19230.40 18973.30 17078.24
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Flexible Portfolio growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1998 09/30/1998 10/31/1998 11/30/1998
09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Flexible Portfolio Funds
Average/Total 17753.97 18642.71 19412.08 20160.82
</TABLE>
Source: Lipper Analytical Services, Inc.
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM FROM JULY 1 THROUGH DECEMBER 31, 1998?
A: The Fund returned 0.2% over the second half of 1998, underperforming its
benchmark, a blend of 60% S&P 500 Index and 40% Lehman Brothers Aggregate Bond
Index, which returned 8%.
Q: HOW WAS PERFORMANCE AFFECTED BY THE STEEP CORRECTION IN THE EQUITIES MARKET
IN THE THIRD QUARTER AND THE STRONG RALLY IN THE FOURTH QUARTER?
A: The Montgomery U.S. Asset Allocation Fund's positioning going into the third
quarter helped smooth returns as the U.S. equity markets corrected sharply. The
Fund was positioned with target weightings of 40% equities and 60% bonds, a
cautious stance relative to the Fund's neutral weighting of 60% equities and 40%
bonds. During the market turmoil of the third quarter, the Fund benefited from
its overweight position in fixed-income securities, which rallied on the back of
the "flight to quality" prompted by investor aversion to risk. As a result,
while the S&P 500 returned -9.9% for the quarter, the Fund was down by 6.3%, and
the Fund's benchmark declined by 4.1%.
At the beginning of October, the Fund was still conservatively positioned. As
the Federal Reserve began to reduce interest rates to combat deflationary
pressures and ease the credit crunch that had become evident in the fixed-income
markets, it became clear that equities were oversold. We began to gradually
increase the equity allocation with the intention of moving to a neutral
weighting during the quarter. Because the equity markets rallied far more
quickly than we anticipated, the transition to a neutral weighting was not
completed in time to take full advantage of this rapid recovery. Consequently,
the Fund underperformed both its benchmark and the S&P 500 during the fourth
quarter.
Q: WHAT IMPACT DID STOCK SELECTION PLAY IN THE FUND'S PERFORMANCE?
A: Both asset allocation and stock selection contributed to the Fund's
third-quarter showing and its fourth-quarter underperformance. Good stock
selection in the fixed-income portfolio added 10 basis points (0.1%) to
performance over the benchmark, despite the Fund's overweight position in the
troubled corporate bond market.
In contrast, the equity portion of the Fund (represented by the Montgomery
Growth Fund) underperformed its benchmark, largely due to the unusual
characteristics of the equity markets in 1998. Our emphasis continues to be on
growth stocks trading at reasonable valuations. The most attractive
opportunities identified by our investment process tended to be companies
outside the "nifty-fifty" large-cap stocks that were the strongest performers
for much of 1998. Although investor interest became more broadly based at times
during the second half of 1998, the majority of S&P 500 returns continued to be
generated by the 50 largest-capitalization stocks. Thus, while the S&P 500
rallied by 21.3% during the fourth quarter, the majority of stocks failed to
realize similar gains.
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
U.S. Asset Allocation
Fund
Investments
Q: What is the current positioning of the Fund?
A: Because of the wealth of intangibles facing investors in the coming year, on
balance we have decided to maintain a neutral asset allocation--60% equity
holdings and 40% fixed-income holdings--moving into the first quarter. On the
equity side, we will continue to pursue our careful and thorough stock selection
process in our effort to add value to the Fund.
On the fixed-income side, our strategy has altered slightly. We have long
believed that many of the "traps" in the bond market are yield traps. We have
found that by purchasing bonds with lower yields, we have still been able to
enjoy significant outperformance relative to the Lehman Brothers Aggregate Bond
Index. In our opinion we may need to pursue a different strategy in 1999 and
invest in higher-yielding bonds while keeping a watchful eye on the risk
factors. Because corporate bond spreads have already discounted a recession, the
corporate sector now appears to offer good value in relation to risk. Similarly,
mortgage-backed securities continue to discount significant volatility in the
market, whereas we believe that the bond markets are likely to be less volatile
over the coming year.
Q: Why is the Fund a valuable addition to an investor's portfolio today?
A: Two words sum up why we believe that the Montgomery U.S. Asset Allocation
Fund would make a valuable addition to any investor's portfolio in 1999:
volatility and uncertainty. The Fund's performance in the third quarter proved
that it can help smooth investors' returns during a difficult and volatile
period. Against such an unpredictable global backdrop, the equities market could
experience the kind of turbulence that it suffered in August and September 1998
in the coming year.
Moreover, such a diversified Fund lowers risk and therefore offers peace of
mind in an uncertain investment environment. After the difficulties experienced
in the third quarter of 1998, we have found this to be particularly important.
We have also found that if investors are comfortable with their risk exposure,
they are less likely to panic in a market correction and make investment
decisions they may later regret.
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
INVESTMENT COMPANY SECURITIES -- 101.3%
Shares value (Note 1)
BOND MUTUAL FUND-TAXABLE -- 40.4%
3,564,997 Montgomery Total Return Bond Fund............. $ 43,457,315
EQUITY MUTUAL FUND -- 60.9%
3,181,843 Montgomery Growth Fund........................ 65,609,606
----------
TOTAL INVESTMENTS -- 101.3%
(Cost $116,468,751).......................................... $ 109,066,921
OTHER ASSETS AND LIABILITIES -- (1.3)%
(Net)........................................................ (1,404,373
-----------
NET ASSETS -- 100.0%......................................... $ 107,662,548
===========
*Aggregate cost for federal tax purposes.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Total Return Bond Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens.........................................Senior Portfolio Manager
- -------------------------------------------------------------------------------
FUND PERFORMANCE
- -------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY
TOTAL RETURN BOND FUND
Since inception (6/30/97).................................................10.21%
One year...................................................................8.72%
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
AGGREGATE BOND INDEX
Since 6/30/97............................................................10.15%
One year..................................................................8.69%
- --------------------------------------------------------------------------------
Performance is cumulative and for a limited period of time. 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.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE
01/09/99
MONTGOMERY TOTAL RETURN BOND(R)
Initial Investment: $10,000 Period: 06/30/97 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment With
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $ 0 $10,000
06/97 12.00 $10,000 $ 0 $10,000
07/97 12.27 $10,225 $ 51 $10,276
08/97 12.09 $10,075 $ 101 $10,176
09/97 12.22 $10,183 $ 150 $10,333
10/97 12.35 $10,292 $ 201 $10,493
11/97 12.35 $10,292 $ 251 $10,543
12/97 12.29 $10,242 $ 404 $10,646
01/98 12.40 $10,333 $ 459 $10,792
02/98 12.33 $10,275 $ 504 $10,779
03/98 12.32 $10,267 $ 557 $10,824
04/98 12.30 $10,250 $ 610 $10,860
05/98 12.38 $10,317 $ 668 $10,985
06/98 12.44 $10,367 $ 725 $11,092
07/98 12.40 $10,333 $ 777 $11,110
08/98 12.58 $10,483 $ 843 $11,326
09/98 12.79 $10,658 $ 911 $11,569
10/98 12.63 $10,525 $ 954 $11,479
11/98 12.60 $10,500 $1,006 $11,506
12/98 12.19 $10,158 $1,417 $11,575
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Lehman Bros Aggregate Bnd Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/29/1998
07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998
Fund Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Bd Tr 10269.67 10182.07 10332.24 10482.13 10530.40 10636.42 10772.97 10764.86 10801.85
</TABLE>
Source: Lipper Analytical Services, Inc.
Lehman Bros Aggregate Bnd Growth $10,000
01/13/1999
<TABLE>
<CAPTION>
03/31/1998 04/30/1998 05/13/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No Objective Assigned
Lehman Aggregate Bd Tr 10858.23 10961.23 11054.19 11077.71 11257.99 11521.61 11460.69 11525.74 11560.39
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Interm Inv Gr Debt Growth $10 000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
06/30/1997 07/31/1997 08/31/1997 09/30/1991 10/31/1997 11/30/1997 12/31/1997 01/31/1998
07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
----------------------- ----- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate Investment Grade Debt Funds
Average/Total 10261.46 10170.54 10316.37 10434.05 10464.53 10559.13 10696.33 10681.51
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Interm Inv Gr Debt Growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate Investment Grade Debt Funds
Average/Total 10720.30 10766.05 10859.99 10937.90 10957.49 11085.45 11324.79 11235.09 11288.92
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Interm Inv Gr Debt Growth $10.000
01/12/1999 SUMMARY
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------
Intermediate Investment Grade Debt Funds
Average/Total 11327.14
Source: Lipper Analytical Services, Inc.
INVESTMENT REVIEW
Q: HOW DID THE MONTGOMERY TOTAL RETURN BOND FUND PERFORM OVER THE SECOND HALF OF
1998?
A: For the six months ended December 31, 1998, the Fund's total return was 4.4%.
This was marginally below its benchmark, the Lehman Brothers Aggregate Bond
Index, which returned 4.6%, but 65 basis points ahead of the average
intermediate investment-grade fund, which returned 3.7% according to Lipper
Analytical Services. The Fund enjoyed strong performance for the year as a
whole, however, returning 8.7% compared with an 8.7% return for the benchmark
and 7.3% for the average investment-grade fund.
Q: WHAT FACTORS CONTRIBUTED MOST TO THE FUND'S PERFORMANCE?
A: In the third quarter, the Fund increased its position in U.S. Treasury
securities and other liquid investments and extended its duration slightly to
take advantage of rising bond prices. During the third quarter, disruptive
events around the world--including Russia's default on some of its short-term
debt and ongoing financial problems in the emerging markets--continued to send
investors scurrying toward the most liquid, high-quality U.S. investments,
pushing bond yields to historic lows. The yield on the 30-year Treasury bond
finished the third quarter at a remarkable 5%, the lowest yield on any long-term
U.S. government bond since 1967.
The bond market rally, concentrated in Treasuries, lost some steam in the fourth
quarter. At the beginning of the quarter, the bond market experienced
significant turmoil. A credit crunch developed as the market became greatly
concerned about the effects of the near collapse of Long-Term Capital
Management, a highly leveraged hedge fund. The Montgomery Total Return Bond Fund
managed to steer clear of the major turmoil caused by this development and the
subsequent bailout of Long-Term Capital Management by several Wall Street firms
under the sponsorship of the Federal Reserve Bank of New York. Stability
returned to the global markets as the Fed stepped into the breach by lowering
the federal funds rate from 5.5% to 4.75% in a series of three moves from the
end of September through mid-November. In addition, a strong economy, a revival
in interest in the stock market and a weakening dollar all made Treasury bonds
less attractive.
Q: WERE THERE ANY DISAPPOINTMENTS?
A: The Fund underperformed the Lehman Brothers Aggregate Bond Index by a small
margin in the fourth quarter. Although the Fund avoided the major disasters that
were developing in the market, a number of small factors played against it. Even
though the Fund's interest rate risk was reduced, its duration was still
slightly longer than the benchmark's as rates rose. In addition, the Fund
maintained a position in REIT (Real Estate Investment Trust) debt. Although the
long-term credit quality of these investments is strong, they were some of the
worst performers in the corporate bond sector. Likewise, mortgage-backed issues
generally don't perform well in periods of volatility. Given the high volatility
of the bond market, the Fund's return was reduced because of its overexposure to
the mortgage market compared with the index. Further, the Fund's
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Total Return Bond Fund
Portfolio Highlights
overweighting in the agency market was no safe haven, because interest rate swap
spreads exploded, raising the rates at which agencies were able to issue new
debt. Finally, because the market's volatility encouraged bond dealers to reduce
the number of their safest positions, liquidity became very poor in the bond
market. As a result, it was difficult to add to returns through relative-value
trading. Nevertheless, the Fund's underperformance was negligible, and its
overall performance for 1998 was ahead of the benchmark's.
Q: THERE IS CURRENTLY MUCH TALK IN THE BOND MARKET ABOUT INVESTING IN BONDS WITH
HIGHER YIELDS THAN U.S. TREASURIES IN 1999. WHAT IS YOUR VIEW ABOUT THIS
STRATEGY GIVEN AN EXPECTED DECLINE IN CORPORATE PROFITABILITY?
A: We have avoided higher-yielding bonds in the past, as often their performance
fails to live up to expectations. Concurrent with the view of many other market
participants, however, we believe that higher-yielding instruments are likely to
offer a better return in 1999, because in our opinion Treasury bonds are
unlikely to repeat their 1998 performance. Corporate bond spreads have already
discounted a recession, and therefore look like they offer excellent reward for
their added risk. Similarly, mortgage-backed security spreads continue to
discount substantial volatility in the bond market, volatility that we expect to
decline this year.
Q: WHAT CHALLENGES DO YOU SEE ARISING IN 1999, AND HOW IS THE FUND POSITIONED TO
MEET THEM?
A: Because of the discontinuity between the world's markets and economies, and
therefore the uncertainty over the direction in which the U.S. economy is
headed, forecasting the outlook for the 1999 fixed-income market is extremely
difficult. In the past the Fund has had relatively lower yields that we made up
for by investing in higher-quality issues offering strong price performance that
helped bolster performance. Given the current pricing of spread products in the
market, however, we believe that strategically it may be better to invest in
securities that offer higher yields than usual. Given our belief that the
worst-case scenarios are reflected in these prices, this appears to be the right
approach for 1999. Of course, that plan brings with it the need for close
attention to the added risks, and we will be diligent to do so as we strive
foremost for consistent, predictable returns.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
FNMA, 6.500% due TBA..................................................... 13.8%
FHLMC, 9.000% Pass-through Pool
due 09/01/05........................................................ 11.4%
U.S. Treasury Bonds,
8.875% due 02/15/19................................................. 8.2%
FHLMC, 6.000% due TBA.................................................... 7.6%
FNMA, 9.000% Pass-through Pool
due 09/01/07........................................................ 7.2%
FHLB, 4.025% (FLTR) due 03/23/00......................................... 6.8%
FHLMC, 2098VA (PAC),
6.OOO% due 10/15/05................................................ 4.0%
FHLB, 4.625% (FLTR) due 03/22/00......................................... 3.7%
FNMA, 6.000% due TBA..................................................... 3.6%
Premier Trust, Series B1,
10.500% due 12/20/05............................................... 3.5%
- --------------------------------------------------------------------------------
ASSET MIX
- --------------------------------------------------------------------------------
(as a percentage of total investments)
Agencies................................................................. 35.2%
Corporate Bonds and Notes................................................ 20.5%
Mortgage Pass-throughs................................................... 14.9%
Collateralized Mortgage Obligations...................................... 10.7%
Asset-Backed Securities.................................................. 8.4%
Treasuries............................................................... 8.4%
Other.................................................................... 1.9%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
57
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Total Return Bond Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
ASSET-BACKED SECURITIES - 10.6%
Principal Amount Value (Note 1)
$ 1,300,000 Chase Manhattan Auto Owner Trust,
Series 1997-BA5, 6.600% due 03/15/02........... $ 1,332,747
176,907 Green Tree Home Improvement Loan
Trust, Series 1997-AHEA3,
6.620% due 03/15/28............................ 181,216
2,000,000 Master Financial Asset Securitization
Trust, Series 1998-IA2,
6.220% due 08/20/11............................ 1,997,180
600,000 Morgan Stanley Capital I Trust,
Series 1998-HF2A2,
6.480% due 11/15/30............................ 624,234
2,034,773 Premier Trust, Series BI,
10.500% due 12/20/05........................... 2,022,565
2,202,448 Union Acceptance Corporation (UAC),
Series 1995-DI (PAC),
3.000% due 02/02/99............................ 3,805
---------
TOTAL ASSET-BACKED SECURITIES
(Cost $6,132,014)............................................... 6,161,747
-----------
CORPORATE BONDS AND NOTES - 25.7%
1,200,000 Bristol-Myers Squibb Company, Deb.,
6.800% due 11/15/26............................ 1,323,000
1,400,000 Ford Motor Credit Company, Notes,
6.750% due 08/15/08............................ 1,515,500
200,000 Franchise Finance Corporation, MTN,
6.780% due 02/20/02............................ 194,750
1,205,000 Hunt (J.B.) Transport Services, Inc., Notes,
6.250% due 09/01/03............................ 1,191,444
875,000 IRT Property Company, Notes,
7.450% due 04/01/01............................ 875,000
950,000 Irvine Apartment Communities, Notes,
7.000% due 10/01/07............................ 906,063
650,000 Kimco Realty Corporation, Senior Notes,
6.500% due 10/01/03............................ 650,000
950,000 Lockheed Martin Corporation, Notes,
7.200% due 05/01/36............................ 1,064,000
625,000 Merck and Company, Inc., Deb.,
5.950% due 12/01/28............................ 628,125
1,250,000 Merrill Lynch and Company, Inc., Bond,
6.000% due 07/15/05............................ 1,260,938
CORPORATE BONDS AND NOTES -- Continued
Principal Amount Value (Note 1)
110,000 Occidental Petroleum Corporation, MTN,
9.750% due 06/15/01............................ $ 119,350
550,000 Price Reit Inc., Senior Notes,
7.250% due 11/01/00............................ 557,563
650,000 Raytheon Company, Notes,
6.750% due 08/15/07............................ 684,125
375,000 Security Capital Industrial Trust, Notes,
7.875% due 05/15/09............................ 383,906
1,000,000 Security Capital Pacific Trust, Notes,
7.550% due 08/01/08............................ 1,003,750
700,000 Tele-Communications Inc., Senior Notes,
7.250% due 08/01/05............................ 757,750
122,000 U S West Communications Corporation,
MTN, 5.000% due 03/15/99**..................... 122,114
645,000 Vastar Resources, MTN,
6.960% due 02/26/07............................ 676,444
1,000,000 Viacom Inc., Notes,
7.750% due 06/01/05............................ 1,091,250
-----------
TOTAL CORPORATE BONDS AND NOTES
(Cost $14,773,622).............................................. 15,005,072
-----------
FEDERAL HOME LOAN BANK (FHLB) - 18.5%
Agencies:
1,550,000 6.400% (FLTR) due 07/30/99**................... 1,566,953
2,150,000 4.625% (FLTR) due 03/22/00**................... 2,137,772
4,000,000 4.025% (FLTR) due 03/23/00**................... 3,941,250
2,000,000 4.210% (FLTR) due 04/05/00**................... 1,968,275
1,150,000 5.000% (FLTR) due 04/14/00**................... 1,154,039
-----------
TOTAL FEDERAL HOME LOAN BANK
(Cost $10,688,325).............................................. 10,768,289
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - 27.4%
4,500,000 6.000% due TBA................................. 4,446,540
CMOs:
1,480,000 1676KD (AD) 6.250% due 03/15/06................ 1,516,653
1,050,000 1604IA (PAC) 6.000% due 09/15/08............... 1,064,133
2,277,331 2098VA (PAC) 6.000% due 10/15/05............... 2,318,252
Pass-throughs:
6,415,172 POOL #B00688 9.000% due 09/01/05............... 6,677,292
---------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $15,920,126).............................................. 16,022,870
-----------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
--------------------
The Montgomery Funds
--------------------
Total Return Bond Fund
Investments
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 29.7%
Principal Amount Value (Note 1)
$ 2,100,000 6.000% due TBA.................................... $ 2,114,438
8,000,000 6.500% due TBA.................................... 8,052,480
CMOs:
1,100,000 1993-234PB (PAC), 5.500% due 10/25/07............. 1,095,789
700,000 1994-12PH (PAC), 6.250% due 01/25/09.............. 711,592
623,176 1988-16B (PAC), 9.500% due 06/25/18............... 666,798
478,111 1993-159PA (PAC), Zero Coupon
due 01/25/21...................................... 462,720
Pass-Throughs:
4,055,751 Pool #323193 9.000% due 09/01/07.................. 4,321,606
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $17,228,924)............................................... 17,335,423
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) - 0.5%
(Cost $291,812)
Pass-throughs:
280,891 8.500% Pass-through Pools due
01/15/23-07/15/23................................. 298,357
MUNICIPAL BOND - 2.3%
(Cost $1,298,190)
1,300,000 Chicago, Illinois, Tax Increment Bonds,
Central Loop, Series B,
6.375% due 06/01/03............................... 1,348,750
U.S. TREASURY BONDS - 9.5%
3,350,000 U.S. Treasury Bonds, 8.875% due 02/15/19.......... 4,771,137
660,000 U.S. Treasury Bonds, 6.500% due 11/15/26.......... 767,455
------------
TOTAL U.S. TREASURY BONDS
(Cost $4,749,472)................................................ 5,538,592
------------
U.S. TREASURY NOTES - 1.0%
(Cost $600,091)
Principal Amount Value (Note 1)
$ 580,000 U.S. Treasury Notes, 6.625% due 06/30/01.......... $ 606,732
TOTAL INVESTMENTS - 125.2%
(Cost $7,682,576*)............................................... 73,085,832
OTHER ASSETS AND LIABILITIES - (25.2)%
(Net)............................................................ (14,698,124)
------------
NET ASSETS - 100.00%............................................. $ 58,387,708
=============
* Aggregate cost for federal tax purposes.
** Floating-rate note reflects the rate in effect at December 31, 1998.
Abbreviations:
AD Accretion Directed: These bonds receive, as principal, the negative
amortization from the accrual tranche(s) in a deal. These securities
often have guaranteed final maturities.
CMO Collateralized Mortgage Obligation
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in
proportion to an index.
MTN Medium-Term Note.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TAB To-Be-Announced Security.
The accompanying note are an integral part of these financial statements.
59
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Short Duration
Government Bond Fund
Portfolio Highlights
(unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens........................................ Senior Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY SHORT DURATION
GOVERNMENT BOND FUND
Since inception (12/31/92)............................................. 6.69%
One year.............................................................. 7.38%
Five years............................................................ 6.37%
- --------------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT
BOND 1-3 YEAR INDEX
Since 12/31/92......................................................... 5.86%
Once year............................................................. 6.97%
Five years............................................................ 5.96%
- --------------------------------------------------------------------------------
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. Fund performance presented is for
Class R shares.
GROWTH OF A $10,000 INVESTMENT
GRAPH APPEARS HERE
/1/ The Lehman Brothers Government Bond 1-3 Year Index comprises all U.S.
government issues with maturities of one to three years.
/2/ The Lipper Short U.S. Government Funds Average universe consists of 32
funds.
GROWTH OF A $10.000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SHORT DURATION GOVT 30(R)
Initial Investment: $10,000 Period: 12/18/92 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/18/92 10.00 $ 10,000 $ 0 $ 10,000
12/92 10.02 $ 10,020 $ 23 $ 10,043
01/93 10.10 $$10,100 $ 75 $ 10,175
02/93 10.14 $ 10,140 $ 128 $ 10,268
03/93 10.17 $ 10,170 $ 180 $ 10,350
04/93 10.19 $ 10,190 $ 235 $ 10,425
05/93 10.16 $ 10,160 $ 282 $ 10,442
06/93 10.23 $ 10,230 $ 335 $ 10,363
07/93 10.23 $ 10,230 $ 393 $ 10,623
08/93 10.25 $ 10,250 $ 449 $ 10,699
09/93 10.25 $ 10,250 $ 508 $ 10,758
10/93 10.23 $ 10,230 $ 566 $ 10,796
11/93 10.18 $ 10,180 $ 617 $ 10,797
12/93 10.10 $ 10,100 $ 756 $ 10,356
01/94 10.13 $ 10,130 $ 810 $ 10,940
02/94 10.03 $ 10,030 $ 850 $ 10,880
03/94 9.94 $ 9,940 $ 891 $ 10,831
04/94 9.86 $ 9,860 $ 931 $ 10,791
05/94 9.82 $ 9,820 $ 979 $ 10,799
06/94 9.80 $ 9,800 $ 1,029 $ 10,829
07/94 9.85 $ 9,850 $ 1,088 $ 10,938
08/94 9.83 $ 9,830 $ 1,141 $ 10,971
09/94 9.75 $ 9,750 $ 1,188 $ 10,931
10/94 9.72 $ 9,720 $ 1,241 $ 10,961
11/94 9.65 $ 9,630 $ 1,290 $ 10,940
12/94 9.63 $ 9,630 $ 1,349 $ 10,979
01/95 9.71 $ 9,710 $ 1,423 $ 11,133
02/95 9.79 $ 9,790 $ 1,497 $ 11,287
03/95 9.79 $ 9,790 $ 1,561 $ 11,351
04/95 9.82 $ 9,520 $ 1,628 $ 11,461
05/95 9.94 $ 9,940 $ 1,711 $ 11,651
06/95 9.95 $ 9,950 $ 1,775 $ 11,725
07/95 9.92 $ 9,920 $ 1,532 $ 11,732
08/95 9.94 $ 9,960 $ 1,895 $ 11,835
09/95 9.96 $ 9,960 $ 1,958 $ 11,918
10/95 9.98 $ 9,980 $ 2,024 $ 12,004
11/95 10.04 $ 10,040 $ 2,095 $ 12,133
12/95 10.08 $ 10,080 $ 2,762 $ 12,262
01/96 10.11 $ 10,110 $ 2,226 $ 12,336
02/96 10.02 $ 10,020 $ 2,261 $ 12,281
03/96 9.97 $ 9,970 $ 2,310 $ 12,210
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SHORT DURATION GOVT BD(R)
Initial Investment $10,000 Period: 12/18/92 - 12/98
This is a no Load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distribution Reinvested
<S> <C> <C> <C> <C>
04/96 9.92 $ 9,920 $ 2,357 $12,277
05/96 9.88 $ 9,880 $ 2,408 $12,288
06/96 9.92 $ 9,920 $ 2,478 $12,398
07/96 9.91 $ 9,910 $ 2,538 $12,448
08/96 9.89 $ 9,890 $ 2,595 $12,485
09/96 9.93 $ 9,930 $ 2,668 $12,598
10/96 10.01 $10,010 $ 2,750 $12,760
11/96 10.06 $10,060 $ 2,827 $12,887
12/96 10.00 $10,000 $ 2,872 $12,872
01/97 10.00 $10,000 $ 2,936 $12.936
02/97 9.97 $ 9,970 $ 2,987 $12,957
03/97 9.90 $ 9,900 $ 3,030 $12,930
04/97 9.94 $ 9,940 $ 3,105 $13,045
05/97 9.96 $ 9,960 $ 3,176 $13,136
06/97 9.99 $ 9,990 $ 3,250 $13,210
07/97 10.07 $10,070 $ 3,340 $13,410
08/97 10.02 $10,020 $ 3,388 $13,408
09/97 10.06 $10,060 $ 3,464 $13,524
10/97 10.10 $10,100 $ 3,542 $13,642
11/97 10.08 $10,080 $ 3,598 $13,678
12/97 10.10 $10,100 $ 3,669 $13,769
01/98 10.16 $10,160 $ 3,757 $13,917
02/96 10.12 $10,120 $ 3,807 $13,927
03/98 10.11 $10,110 $ 3,875 $13,985
04/98 10.11 $10,710 $ 3,946 $14,058
05/98 10.13 $10,130 $ 4,026 $14,156
06/98 10.14 $10,140 $ 4,102 $14,242
07/98 10.15 $10,150 $ 4,170 $14,320
08/98 10.24 $10,240 $ 4,270 $14,510
09/98 10.33 $10,330 $ 4,368 $14,698
10/98 10.32 $10,320 $ 4,425 $14,745
11/91 10.26 $10,260 $ 4,658 $14,718
12/98 10.21 $10,210 $ 4,575 $14,785
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
- --------------------------------------------------------------------------------
Lehman Brothers 1-3 Year Government Bond Index
----------------------------------------------
Source: Bloomberg(LEHM)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Since Since
Inception Inception 1 Month 3 Month 6 Month
Date Value Aggregate Aggregate Return Return Return YTD Return
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/92 10,000.00
1/31/93 10,105.00 1.0500% 1.050%
2/28/93 10,185.84 1.8584% 0.800%
3/31/93 10,217.42 2.1742% 0.310% 2.1742%
4/30/93 10,279.74 2.7974% 0.610% 1.7293%
5/31/93 10,255.07 2.5507% -0.240% 0.6767%
6/30/93 10,331.98 3.3198% 0.750% 1.1213% 3.3198%
7/31/93 10,354.71 3.5471% 0.220% 0.7293% 2.4712%
8/31/93 10,440.66 4.4066% 0.830% 1.8097% 2.5012%
9/30/93 10,474.07 4.7407% 0.320% 1.3752% 2.5119%
10/31/93 10,497.11 4.9711% 0.220% 1.3752% 2.1145%
11/30/93 10,499.21 4.9921% 0.020% 4.5608% 2.3807%
12/31/93 10,541.21 5.4121% 0.400% 4.6400% 2.0250%
1/31/94 10,606.56 6.0656% 6.0656% 0.620% 1.0427% 2.4122%
2/28/94 10,548.86 5.4186% 5.0230% -0.610% 0.4062% 0.9694%
3/31/94 10,488.10 4.8810% 4.1878% -0.510% -0.5038% 0.1340%
4/30/94 10,448.24 4.4824% 3.5882% -0.300% -1.4926% -0.4655%
5/31/94 10,462.87 4.6287% 3.4639% 0.140% -0.7493% -0.1461%
6/30/94 10,489.03 4.8903% 3.4418% 0.250% 0.00895 -0.4950%
7/31/94 10,583.43 5.8343% 3.8635% 0.900% 1.2939% -0.2181%
8/31/94 10,618.36 6.1836% 3.8684% 0.330% 1.4861% 0.7250%
9/30/94 10,593.93 5.9393% 3.5303% -0.230% 1.0001% 1.0091%
10/31/94 10,618.30 6.1830% 3.4918% 0.230% 0.3295% 1.6276%
11/30/94 10,573.70 5.7370% 3.0951% -0.420% -0.4205% 1.0593%
12/31/94 10,593.79 5.9379% 3.0579% 0.190% -0.0013% 0.9988%
1/31/95 10,737.87 7.3787% 3.6237% 1.360% 1.1261% 1.4592%
2/28/95 10,883.98 8.8390% 4.1629% 1.360% 2.9337% 2.5008%
3/31/95 10,944.85 9.4485% 4.2651% 0.560% 3.3138% 3.3125%
4/30/95 11,042.26 10.4226% 4.5176% 0.890% 2.8348% 3.9928%
5/31/95 11,231.09 12.3109% 5.1119% 1.710% 3.1899% 6.2171%
6/30/95 11,291.73 12.9173% 5.1680% 0.510% 3.1693% 6.5882%
7/31/95 11,291.73 13.3690% 5.1559% 0.400% 2.6683% 5.5787%
8/31/95 11,336,90 14.0492% 5.2257% 0.600% 1.5478% 4.7871%
9/30/95 11,460.81 14.6081% 5.2534% 0.490% 1.4973% 4.7141%
10/31/95 11,555,93 15.5593% 5.4035% 0.830% 1.9320% 4.6518%
11/30/95 11,654.16 16.5416% 5.5578% 0.850% 2.1853% 3.7670%
12/31/95 11,741.56 17.4156% 5.6621% 0.750% 2.4497% 3.9837%
1/31/96 11,841.37 18.4137% 5.7955% 0.850% 2.4700% 4.4498%
2/29/96 11,795.18 17.9518% 5.5234% -0.390% 1.2101% 3.4219%
3/31/96 11,786.93 17.8691% 5.3478% -0.070% 0.3864% 2.8455%
4/30/96 11,798.71 17.9871% 5.2415% 0.100% 0.3602% 2.1009%
5/31/96 11,824.67 18.2467% 5.1740% 0.220% 0.2500% 1.4631%
6/30/96 11,910.99 19.1099% 5.2710% 0.730% 1.0526% 1.4430%
7/31/96 11,957.44 19.5744% 5.2572% 0.390% 1.1451% 0.9801%
8/31/96 12,001.69 20.0169% 5.2382% 0.370% 1.4970% 1.7507%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
2 Year 2 Year 3 Year 3 Year 4 Year 4 Year 5 Year 5 Year
Date 1 Year Aggregate Aggregate Aggregate Annualized Aggregate Annualized Aggregate Annualized
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/92
1/31/93
2/28/93
3/31/93
4/30/93
5/31/93
6/30/93
7/31/93
8/31/93
9/30/93
10/31/93
11/30/93
12/31/93 5.4121%
1/31/94 4.9635%
2/28/94 3.4953%
3/31/94 2.6492%
4/30/94 1.6392%
5/31/94 2.0263%
6/30/94 1.5200%
7/31/94 2.2088%
8/31/94 1.7020%
9/30/94 1.1444%
10/31/94 1.1545%
11/30/94 0.2095%
12/31/94 0.4989% 5.9379% 2.9262%
1/31/95 1.2380% 6.2629% 3.0839%
2/28/95 3.2446% 6.8533% 3.3699%
3/31/95 4.3550% 7.1196% 3.4988%
4/30/95 5.6853% 7.4177% 3.6425%
5/31/95 7.3423% 9.5174% 4.6506%
6/30/95 7.6528% 9.2891% 4.5414%
7/31/95 7.1193% 9.4854% 4.6353%
8/31/95 7.4076% 9.2357% 4.5159%
9/30/95 8.1827% 9.4208% 4.6044%
10/31/95 8.8303% 10.0868% 4.9222%
11/30/95 10.2183% 11.0001% 5.1567%
12/31/95 10.8344% 11.18755 5.5402% 17.4156% 5.4974%
1/31/96 10.2767% 11.6419% 5.6607% 17.1832% 5.4278%
2/29/96 8.3727% 11.8890% 5.7857% 15.7998% 5.0207%
3/31/96 7.6938% 12.3838% 6.0197% 15.3611% 4.8876%
4/30/96 6.8505% 12.9253% 6.2752% 14.7764% 4.7098%
5/31/96 5.2852% 13.0155% 6.1177% 15.3056% 4.8708%
6/30/96 5.4842% 13.5567% 6.5722% 15.2827% 4.8678%
7/31/96 5.4737% 12.9827% 6.3022% 15.4783% 4.9232%
8/31/96 5.2125% 13.0277% 6.3234% 14.9514% 4.7631%
</TABLE>
- --------------------------------------------------------------------------------
LEHMAN BROTHERS 1-3 YEAR GOVERNMENT BOND INDEX
----------------------------------------------
Source: Bloomberg (LEHM)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Since Since
Inception Inception 1 Month 3 Month 6 Month 2 Year 2 Year 3 Year
Date Value Aggregate Annualized Return Return Return YTD Return 1 Year Aggregate Annualized Aggregate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/96 12,110.90 21.1090% 5.3786% 0.910% 1.6784% 2.7486% 5.6723% 14.3192% 6.9300% 15.6275%
10/31/96 12,247.76 22.4776% 5.5703% 1.130% 2.4279% 3.8058% 5.9868% 15.3457% 7.4096% 16.6774%
11/30/96 12,338.39 23.3839% 5.6512% 0.740% 2.8055% 4.3445% 5.8712% 16.6894% 8.0343% 17.5173%
12/31/96 12,340.86 23.4086% 5.5308% 0.020% 1.8987% 3.6090% 5.1040% 16.4914% 7.9424% 17.0725%
1/31/97 12,400.09 24.0009% 5.5369% 0.480% 1.2438% 3.7019% 4.7184% 15.4800% 7.4722% 16.9096%
2/28/97 12,429.85 24.2985% 5.4767% 0.240% 0.7413% 3.5675% 5.3807% 14.2040% 6.8566% 17.9095%
3/31/97 12,419.91 24.1991% 5.3418% 0.080% 0.6406% 2.5515% 5.3702% 13.4772% 6.5164% 18.4191%
4/30/97 12,521.75 25.2175% 5.4383% 0.820% 0.9811% 2.2371% 6.1281% 13.3984% 6.4795% 19.8455%
5/31/97 12,609.40 26.0940% 5.4987% 0.700% 1.4445% 2.1965% 6.6364% 12.2724% 5.9503% 20.5157%
6/30/97 12,696.41 26.9641% 5.5579% 0.690% 2.2263% 2.8811% 6.5941% 12.4199% 6.0292% 21.0447%
7/31/97 12,834.80 28.3480% 5.7046% 1.090% 2.5000% 3.5057% 7.3373% 13.2126% 6.3924% 21.2726%
8/31/97 12,847.64 28.476?% 5.6190% 0.100% 1.8893% 3.3611% 7.0486% 12.6499% 6.1280% 20.9946%
9/30/97 12,945.28 29.4528% 5.6887% 0.760% 1.9601% 4.2300% 6.8895% 12.9526% 6.2703% 22.1952%
10/31/97 13,041.07 30.4107% 5.7482% 0.740% 1.6071% 4.147?% 6.4772% 12.8518% 6.2229% 22.8170%
11/30/97 13,073.68 30.7368% 5.7023% 0.250% 1.7594% 3.6819% 5.9593% 12.1801% 5.9069% 23.6433%
12/31/97 13,161.27 31.6127% 5.7446% 0.670% 1.6685% 3.6613% 6.6479% 12.0913% 5.86?9% 24.2357%
1/31/98 13,287.62 32.8762% 5.8464% 0.960% 1.8905% 3.5280% 0.9600% 7.1574% 12.2136% 5.9225% 23.7454%
2/28/98 13,299.58 32.9958% 5.7743% 0.090% 1.7279% 3.5177% 1.0509% 6.9970% 12.7543% 6.1858% 22.1949%
3/31/98 13,351.44 33.5144% 5.7564% 0.390% 1.4450% 3.1376% 1.445?% 7.5003% 13.2733% 6.4299% 21.9883%
4/30/98 13,415.53 34.1553% 5.7602% 0.480% 0.9627% 2.8714% 1.9?19% 7.1378% 13.7033% 6.6318% 21.4926%
5/31/98 13,486.63 34.8663% 5.7707% 0.530% 1.4065% 3.1587% 2.4721% 6.9569% 14.0550% 6.7966% 20.0831%
6/30/98 13,556.76 35.5676% 5.7819% 0.520% 1.5378% 3.0050% 3.0050% 6.7764% 13.8173% 6.6852% 20.0592%
7/31/98 13,620.48 36.2048% 5.7803% 0.470% 1.5277% 2.5051% 3.4891% 6.1215% 13.9080% 6.7277% 20.1429%
8/31/98 13,786.65 37.8665% 5.9197% 1.220% 2.2246% 3.6623% 4.7517% 7.?089% 14.8726% 7.1786% 20.8833%
9/30/98 13,972.77 39.7277% 6.0821% 1.350% 3.0686% 4.6536% 6.1658% 7.9372% 15.3735% 7.4120% 21.9179%
10/31/98 14,041.24 40.4124% 6.0798% 0.490% 3.0891% 4.6640% 6.6860% 7.6693% 14.6433% 7.0716% 21.5068%
11/30/98 14,027.20 40.2720% 5.9734% 0.100% 1.7448% 4.0081% 6.5794% 7.29?4% 13.6874% 6.6243% 20.3622%
12/31/98 14,080.50 40.8050% 5.8665% 0.380% 0.7710% 3.863?% 6.9844% 6.9844% 14.0966% 6.8160% 19.9201%
<CAPTION>
- -------------------------------------------------------------------------
3 Year 4 Year 4 Year 5 Year 5 Year
Date Annualized Aggregate Annualized Aggregate Annualized
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/30/96 4.9684%
10/31/96 5.2858%
11/30/96 5.5383%
12/31/96 5.4047% 2?.4086% 5.4103%
1/31/97 5.3557% 22.7124% 5.2611%
2/28/97 5.6399% 22.0307% 5.0999%
3/31/97 5.7917% 21.5563% 4.9977%
4/30/97 6.2144% 21.8100% 5.0524%
5/31/97 6.4118% 22.9578% 5.2988%
6/30/97 6.?671% 22.8845% 5.28?2%
7/31/97 6.6339% 21.9513% 5.5108%
8/31/97 6.5525% 23.0539% 5.3194%
9/30/97 6.9034% 23.5936% 5.4346%
10/31/97 7.0843% 24.2349% 5.5710%
11/30/97 7.3237% 24.5205% 5.6316%
12/31/97 7.4946% 24.8554% 5.7025% 31.6127% 5.6444%
1/31/98 7.3532% 25.2773% 5.7916% 31.4955% 5.6256%
2/28/98 6.9033% 26.1596% 5.9773% 30.?693% 5.4764%
3/31/98 6.8431% 27.3009% 6.2160% 30.?734% 5.4933%
4/30/98 6.6983% 28.3999% 6.4443% 30.5045% 5.4660%
5/31/98 6.2845% 28.8999% 6.5478% 31.5118% 5.6282%
6/30/98 6.2774% 29.2471% 6.6194% 31.2116% 5.5800%
7/31/98 6.3021% 28.6963% 6.5057% 31.5389% 5.6326%
8/31/98 6.5198% 29.8379% 6.7409% 32.0477% 5.7141%
9/30/98 6.8226% 31.8941% 7.1607% 33.4035% 5.9302%
10/31/98 6.7025% 32.2362% 7.2301% 33.7629% 5.9872%
11/30/98 6.3667% 32.6611% 7.3161% 33.6024% 5.9617%
12/31/98 6.2364% 32.9127% 7.3669% 33.5758% 5.9575%
</TABLE>
Page 2
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
12/31/1992 01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993 07/31/1993
01/31/1993 02/28/1993 03/31/1993 04/30/1993 05/31/1993 06/30/1993 07/31/1993 08/31/1993
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- --------------------------- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S. Government Funds
Average/Total 10098.78 10178.11 10206.23 10262.52 10253.07 10328.65 10356.66 10431.17
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994
09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994 03/31/1994 04/30/1994 05/31/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 10457.86 10474.49 10464.46 10502.64 10568.70 10507.61 10436.78 10398.17 10408.92
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995
06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994 12/31/1994 01/31/1995 02/28/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 10423.47 10500.62 10527.26 10508.78 10527.93 10496.02 10520.71 10642.57 10773.41
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995
03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995 09/30/1995 10/31/1995 11/30/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 10830.68 10915.15 11083.52 11137.20 11165.68 11234.46 11289.84 11373.52 11464.88
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996
12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996 06/30/1996 07/31/1996 08/31/1996
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 11547.94 11627.25 11585.12 11576.12 11587.47 11602.60 11679.44 11722.78 11752.78
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997
09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997 03/31/1997 04/30/1997 05/31/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 11851.28 11968.91 12057.55 12052.58 12109.27 12140.15 12129.21 12221.30 12295.01
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998
06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997 12/31/1997 01/31/1998 02/28/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 12372.88 12501.68 12509.12 12599.68 12683.54 12708.43 12776.02 12886.12 12897.23
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998
03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998 09/30/1998 10/31/1998 11/30/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short U.S.
Government Funds
Average/Total 12943.03 12994.70 13063.85 13123.56 13175.82 13317.60 13466.82 13488.11 13491.91
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper Short US Govt Fund growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1998
12/31/1998
Sys Inv
Tot Return
----------
<S> <C>
Short U.S. Government Funds
Average/Total 13538.85
</TABLE>
Source: Lipper Analytical Services, Inc.
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM FROM JULY 1 THROUGH DECEMBER 31, 1998?
A: The Fund performed roughly in line with its benchmark, the Lehman Brothers
Government Bond 1-3 Year Index, over the final six months of the year, returning
3.8% for the period and 7.4% for 1998 as a whole, versus a return for its
benchmark of 3.9% and 7%, respectively. This outperformance garnered the Fund an
overall five-star rating from Morningstar for its risk-adjusted returns over the
three- and five-year periods ended December 31, 1998. The Montgomery Short
Duration Government Bond Fund was rated among 1,488 taxable bond funds over the
three-year period and 987 taxable bond funds over the five-year period ended
12/31/98.
Q: WHAT FACTORS CONTRIBUTED TO THE FUND'S GOOD PERFORMANCE DURING THE SECOND
half of the year?
A: The Fund's broad diversity of holdings contributed to performance relative to
the benchmark. This enabled us to maintain a relatively low-risk profile in a
difficult market environment and keep the Fund one step ahead of its
competitors.
Our positioning in the mortgage sector also helped returns. We made the decision
to reduce the Fund's mortgage exposure in late July in favor of U.S. Treasury
notes. This helped shield us from the underperformance of the mortgage market as
the "flight to quality" made Treasuries the only game in town. In October,
sensing the renewed opportunities in the mortgage sector, we increased our
weighting in this sector and reduced our holdings in Treasury bonds. This proved
fortuitous. Our purchases of collateralized mortgage obligations (CMOs) and
older mortgages, which originated in the 1970s and are therefore less prone to
prepayment, added moderately to fourth-quarter performance and represent
excellent value.
Q: DID YOU MAKE ANY MAJOR CHANGES TO THE PORTFOLIO?
A: We actively manage the Short Duration Government Bond Fund. This means that
the composition of the portfolio can change relatively frequently as we seek out
securities that we believe will offer the best returns. We will trade out of a
security if we believe that there are better opportunities to be had elsewhere.
Over the course of the second half of the year, this has resulted in a couple of
notable changes in the portfolio's makeup. These included our switch out of and
then back into mortgage-backed securities, and our shift from an overweight
position in Treasuries during the third quarter to an underweight position by
the end of the fourth.
By the end of the year, the Fund's highest weightings were in low-risk CMOs (31%
of assets as of 12/31/98, primarily in prepayment protected "PAC" bonds),
agencies (36% of assets as of 12/31/98) and mortgage pass-throughs (21% of
assets as of 12/31/98). Throughout the turmoil and the fireworks, we maintained
the portfolio's duration at close to two years.
60
<PAGE>
Q: Treasuries were the place to be in 1998. Do you think that this will
remain the case in 1999?
A: As the rally in the U.S. Treasuries market faded at the beginning of the
fourth quarter of 1998, we had already begun to look for opportunities
elsewhere. The fourth-quarter rally in the equity markets combined with lower
interest rates and a weaker dollar reduced demand for these issues.
Looking forward there are plenty of factors that favor Treasuries. It is
extremely difficult to forecast the economic outlook moving into 1999; however,
although the U.S. economic juggernaut could feasibly continue to plow forward,
on balance we believe that the economy is likely to slow. The extent of the
slowdown is still open to question. If the Fed continues to be successful in its
fine interest-rate balancing act, the slowdown may be moderate. But it is also
possible that a rapid deceleration in worldwide growth and a pause in the U.S.
equity market may result in a more conservative U.S. consumer. The likely
outcome of this more negative scenario would be recession, much lower corporate
earnings, dramatically lower interest rates and renewed interest in Treasuries.
Strange as it may initially seem, this does not automatically mean that
Treasuries are likely to be the best investment in 1999. Normally, such
conditions cause deterioration in credit quality and send corporate bond prices
lower. Corporate bond spreads have already discounted a recession, however, and
could therefore represent excellent reward for the risk. Similarly, mortgage-
backed security spreads continue to discount substantial volatility in the bond
market, volatility that we expect to decline this year.
Q: What is your strategy for the Fund moving forward into 1999?
A: Our traditional strategy has been to hold a portfolio of relatively lower-
yielding bonds and compensate for this through superior total returns. We
believe that a slightly different strategy is needed in 1999. Keeping a watchful
eye on their risk, we intend to invest in higher-yielding securities. Because of
market uncertainty, however, our shareholders may rest assured that we will be
wary of events as they unfold and maintain the Fund's diversity, as always,
valuing consistency over fireworks.
*Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of 12/31/98. The ratings
are subject to change every month. The ratings are calculated from the Fund's
three-, five- and 10-year average annual returns (if applicable) in excess of
90-day Treasury bill returns, with appropriate fee adjustments and a risk factor
that reflects Fund performance below 90-day T-bill returns. The top 10% of funds
in an investment class receive five stars. Ratings are for Class R shares only;
other classes may vary.
--------------------
THE MONTGOMERY FUNDS
--------------------
Short Duration
Government Bond Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
FNMA, 8.500% Pass-through Pools
due 05/01/07-04/01/10.................................................. 8.5%
U.S. Treasury Note,
6.500% due 05/15/05.................................................... 6.7%
FHLB, 7.381% (FLTR) due 08/31/99.......................................... 5.7%
FHLMC, 5.000% (FLTR) due 03/10/00......................................... 5.2%
FMNA, 6.500% due 06/01/28................................................. 4.9%
FHLB, 4.025% (FLTR) due 03/23/00.......................................... 4.8%
FHLB, 4.210% (FLTR) due 04/05/00.......................................... 4.0%
U.S. Treasury Note,
4.750% due 11/15/08.................................................... 3.4%
FHMLC, Pool #1615E,
5.300% (PAC) due 08/15/06.............................................. 3.3%
FHMLC, 8.750% Pass through Pools
due 10/01/10........................................................... 3.3%
- --------------------------------------------------------------------------------
ASSET MIX
- --------------------------------------------------------------------------------
(as a percentage of total investments)
Agencies................................................................. 35.6%
Collateralized Mortgage Obligations...................................... 31.0%
Mortgage Pass throughs................................................... 20.8%
Treasuries............................................................... 9.1%
Other.................................................................... 3.5%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
61
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Short Duration
Government Bond Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
ASSET-BACKED SECURITIES -- 1.5%
Principal Amount Value (Note 1)
$ 2,050,000 Master Financial Asset Securitization Trust,
Series 1998-1A2, 6.220% due 08/20/11...........$ 2,047,110
641,362 Union Acceptance Corporation (UAC),
95-D1(ABS), 3.000% due 02/07/99................ 1,278
-----
TOTAL ASSET-BACKED SECURITIES
(Cost $2,050,161)............................................. 2,048,388
---------
CORPORATE NOTE -- 0.8%
(Cost $1,000,000)
1,000,000 Countrywide Home Loans, Inc., MTN,
5.620% due 10/16/00............................ 997,050
FEDERAL HOME LOAN BANK (FHLB) -- 24.6%
AGENCIES:
908,246 Zero Coupon due 02/25/99....................... 899,302
7,550,000 7.381% (FLTR) due 08/31/99**................... 7,673,631
2,000,000 4.875% (FLTR) due 03/17/00**................... 1,993,425
4,000,000 4.500% (FLTR) due 03/22/00**................... 3,966,450
1,500,000 4.625% (FLTR) due 03/22/00**................... 1,491,469
6,600,000 4.025% (FLTR) due 03/23/00**................... 6,503,063
4,065,000 5.050% (FLTR) due 03/29/00**................... 4,060,173
5,500,000 4.210% (FLTR) due 04/05/00**................... 5,412,756
1,000,000 3.730% (FLTR) due 04/12/00**................... 979,938
-------
TOTAL FEDERAL HOME LOAN BANK
(Cost $32,950,980)............................................ 32,980,207
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 37.3%
1,000,000 2.950% (FLTR) due 05/21/99**................... 995,370
7,050,000 5.000% (FLTR) due 03/10/00**................... 7,038,103
3,000,000 6.000% due TBA................................. 2,964,360
CMOS:
665,403 1329SA 10.280% due 08/15/99.................... 676,216
2,698,454 1521C 5.800% (PAC) due 07/15/00................ 2,693,380
4,299,205 2098VA 6.000% (PAC) due 10/15/05............... 4,376,457
4,471,408 1615E 5.300% (PAC) due 08/15/06................ 4,454,640
3,837,010 1639PL 5.900% (PAC) due 08/15/06............... 3,837,010
2,132,614 1659PE 5.750% (PAC) due 05/15/07............... 2,136,111
1,800,000 1429G 7.000% (PAC) due 11/15/07................ 1,860,961
466,260 1673C 5.350% (PAC) due 03/15/12................ 465,234
267 1680PC 5.800% (PAC) due 02/15/14............... 266
2,775,441 1727D 6.500% (PAC) due 08/15/14................ 2,771,084
164,518 32TD 7.000% (PAC) due 03/25/15................. 163,893
3,206,596 1499PE 6.000% (PAC) due 02/15/19............... 3,207,590
1,000,000 1694PE 5.750% (PAC) due 03/15/19............... 999,680
3,437,468 1643PE 5.500% (PAC) due 10/15/19............... 3,432,483
29,607 1384B 7.000% (PAC) due 11/20/20................ 29,532
FEDERAL HOME LOAN MORTGAGE CORPORATION -- CONTINUED
Principal Amount Value (Note 1)
PASS-THROUGHS:
$ 3,211,052 8.500% Pass-through Pools
due 03/01/06-06/01/07..........................$ 3,353,670
4,184,195 Pool #GA01841 8.750% due 10/01/10.............. 4,420,210
81,510 9.000% Pass-throughs
due 10/01/16-05/01/20.......................... 86,552
TIERED PAYMENTS:
13,583 Pool #730223 9.500% due 01/01/06............... 14,037
------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $45,472,233)............................................ 49,976,839
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 31.7%
6,500,000 6.500% due 06/01/28............................ 6,542,641
2,000,000 Zero Coupon due 01/01/29, TBA.................. 2,013,750
CMOS:
169,036 X-91 6.500% (PAC) due 04/25/99................. 168,622
650,000 1993-99D 6.700% (AD) due 03/25/04.............. 673,461
3,962,894 X-109A 6.000% (PAC) due 08/25/05............... 3,956,672
75,401 X-225C 5.200% (PAC) due 09/25/15............... 75,120
2,022,351 1993-25 5.000% (PAC) due 01/25/17.............. 2,011,592
1,757,141 1994-23 5.125% (PAC) due 07/25/17.............. 1,744,507
2,500,000 1994-39 6.150% (PAC) due 06/25/20.............. 2,518,555
PASS-THROUGHS:
4,243,144 Pool #199217 8.6109% due 10/25/99.............. 4,275,964
1,659,810 Pool #420599 5.000% due 03/01/27............... 1,569,752
1,693,461 5.500% Pass-through Pools due 10/01/00......... 1,688,235
10,898,152 8.500% Pass-through Pools
due 05/01/07-04/01/10.......................... 11,357,507
3,721,244 9.000% Pass-through Pools
due 09/01/07-06/01/08.......................... 3,897,930
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $46,681,267)............................................ 42,494,308
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 2.6%
11,212 GNMA II, 10.500% Pool #1123
due 01/20/22................................... 12,172
3,427,785 CMOs, 1998-18VL 6.500% (AD)
due 07/20/05................................... 3,516,693
---------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $3,563,078)............................................. 3,528,865
---------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Short Duration
Government Bond Fund
Investments
MUNICIPAL BONDS - 1.5%
(Cost $2,019,893)
Principal Amount Value (Note 1)
$2,000,000 Greater Orlando Aviation Authority,
Orlando, Florida, Airport Facilities,
Revenue Bonds, Series E, TBA,
7.100% due 10/01/99............................. $ 2,030,000
U.S. TREASURY NOTES - 10.0%
8,150,000 U.S. Treasury Note, 6.500% due 05/15/05......... 8,931,911
4,500,000 U.S. Treasury Note, 4.750% due 11/15/08......... 4,535,010
---------
TOTAL U.S. TREASURY NOTES
(Costs $13,236,558)............................................ 13,466,921
TOTAL INVESTMENTS - 110.0%
(Costs $146,974,170*).......................................... 147,522,578
OTHER ASSETS AND LIABILITIES - (10.0)%
(Net).......................................................... (13,429,090)
----------
NET ASSETS - 100.0%............................................ $ 134,093,488
===========
* Aggregate cost for federal tax purposes.
** Floating-rate note reflects the rate in effect at December 31, 1998.
Abbreviations:
ABS Asset-Backed Securities.
AD Accretion Directed: These bonds receive, as principal, the negative
amortization from the accrual tranche(s) in a deal. These securities often
have guaranteed final maturities.
CMO Collateralized Mortgage Obligation.
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in proportion
to an index.
MTN Medium Term Note.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TBA To-Be-Announced Security.
The accompanying notes are an integral of these financial statements.
63
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
California Tax-Free
Intermediate Bond Fund
Portfolio Highlights
(Unaudited)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Williams Stevens........................................Senior Portfolio Manager
Monica Wong....................................................Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 12/31/98
- --------------------------------------------------------------------------------
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Since inception (7/1/93)...................................................5.74%
One year...................................................................6.06%
Five years.................................................................5.84%
- --------------------------------------------------------------------------------
Merrill Lynch California
Intermediate Municipal Bond Index
Since inception (7/30/93)..................................................5.02%
One year...................................................................6.31%
Five years.................................................................4.99%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net assets value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
GROWTH OF A $10,000 INVESTMENT
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY CA TAX FREE INTERM BD(R)
Initial Investment: $10,000 PERIOD: 06/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/93 12.00 $10,000 $ 0 $10,000
06/93 12.00 $10,000 $ 0 $10,000
07/93 11.95 $ 9,958 $ 33 $ 9,991
08/93 12.02 $10,017 $ 60 $10,077
09/93 12.04 $10,033 $ 88 $10,121
10/93 12.04 $10,033 $ 117 $10,150
11/93 12.00 $10,000 $ 144 $10,144
12/93 12.07 $10,058 $ 175 $10,233
01/94 12.11 $10,092 $ 203 $10,295
02/94 11.95 $ 9,958 $ 227 $10,185
03/94 11.80 $ 9,833 $ 253 $10,086
04/94 11.80 $ 9,833 $ 284 $10,117
05/94 11.83 $ 9,858 $ 317 $10,175
06/94 11.79 $ 9,825 $ 346 $10,171
07/94 11.86 $ 9,883 $ 381 $10,264
08/94 11.85 $ 9,875 $ 410 $10,285
09/94 11.80 $ 9,833 $ 438 $10,271
10/94 11.72 $ 9,767 $ 466 $10,233
11/94 11.63 $ 9,692 $ 495 $10,187
12/94 11.65 $ 9,708 $ 530 $10,238
01/95 11.74 $ 9,783 $ 569 $10,352
02/95 11.86 $ 9,883 $ 603 $10,486
03/95 11.93 $ 9,942 $ 641 $10,583
04/95 11.96 $ 9,967 $ 678 $10,645
05/95 12.07 $10,058 $ 719 $10,777
06/95 12.04 $10,033 $ 731 $10,784
07/95 12.07 $10,058 $ 791 $10,849
08/95 12.16 $10,133 $ 837 $10,970
09/95 12.21 $10,175 $ 879 $11,054
10/95 12.31 $10,258 $ 929 $11,187
11/95 12.42 $10,350 $ 977 $11,327
12/95 12.46 $10,383 $1,023 $11,406
01/96 12.51 $10,425 $1,070 $11,495
02/96 12.44 $10,367 $1,103 $11,470
03/96 12.29 $10,242 $1,131 $11,373
04/96 12.24 $10,200 $1,168 $11,368
05/96 12.18 $10,150 $1,205 $11,355
06/96 12.23 $10,192 $1,250 $11,442
07/96 12.28 $10,233 $1,298 $11,531
08/96 12.24 $10,200 $1,336 $11,536
09/96 12.30 $10,250 $1,384 $11,634
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY CA TAX FREE INTERM BD(R)
Initial Investment: $10,000 Period: 06/30/93 - 12/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
10/96 12.39 $10,325 $1,436 $11,761
11/96 12.56 $10,467 $1,497 $11,964
12/96 12.47 $10,392 $1,529 $11,921
01/97 12.47 $10,392 $1,572 $11,964
02/97 12.51 $10,425 $1,617 $12,042
03/97 12.32 $10,267 $1,634 $11,901
04/97 12.34 $10,283 $1,679 $11,962
05/97 12.45 $10,375 $1,737 $12,112
06/97 12.53 $10,442 $1,791 $12,233
07/97 12.80 $10,667 $1,872 $12,539
08/97 12.65 $10,542 $1,893 $12,435
09/97 12.74 $10,617 $1,949 $12,566
10/97 12.75 $10,625 $1,994 $12,619
11/97 12.76 $10,633 $2,039 $12,672
12/97 12.86 $10,717 $2,098 $12,815
01/98 12.97 $10,808 $2,160 $12,968
02/98 12.94 $10,783 $2,194 $12,977
03/98 12.84 $10,700 $2,220 $12,920
04/98 12.73 $10,608 $2,244 $12,852
05/98 12.87 $10,725 $2,313 $13,038
06/98 12.86 $10,717 $2,354 $13,071
07/98 12.84 $10,700 $2,395 $13,095
08/98 13.02 $10,850 $2,473 $13,323
09/98 13.19 $10,992 $2,548 $13,540
10/98 13.14 $10,950 $2,583 $13,533
11/98 13.14 $10,950 $2,627 $13,577
12/98 13.08 $10,900 $2,691 $13,591
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
06/30/1993 07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994
07/31/1993 08/31/1993 09/30/1993 10/31/1993 11/30/1993 12/31/1993 01/31/1994 02/28/1994
Fund Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Name Obj Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
- ------------------ ----- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 10001.60 10194.69 10324.67 10341.38 10266.17 10452.83 10563.18 10319.30
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1994 03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994
03/31/1994 04/30/1994 05/31/1994 06/30/1994 07/31/1994 08/31/1994 09/30/1994 10/31/1994 11/30/1994
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 10022.46 10063.48 10132.82 10099.52 10247.66 10278.64 10168.57 10043.85 9885.06
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1994 12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995
12/31/1994 01/31/1995 02/28/1995 03/31/1995 04/30/1995 05/31/1995 06/30/1995 07/31/1995 08/31/1995
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 9995.36 10185.84 10430.75 10534.22 10552.28 10817.35 10739.24 10851.33 10974.42
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1995 09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996
09/30/1995 10/31/1995 11/30/1995 12/31/1995 01/31/1996 02/29/1996 03/31/1996 04/30/1996 05/31/1996
Sys Inv Svy Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 11042.08 11174.97 11303.09 11366.44 11473.03 11428.23 11297.33 11286.58 11287.77
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
05/31/1996 06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997
06/30/1996 07/31/1996 08/31/1996 09/30/1996 10/31/1996 11/30/1996 12/31/1996 01/31/1997 02/28/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 11366.10 11471.97 11470.63 11572.15 11687.78 11877.09 11830.78 11851.99 11933.52
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
02/28/1997 03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997
03/31/1997 04/30/1997 05/31/1997 06/30/1997 07/31/1997 08/31/1997 09/30/1997 10/31/1997 11/30/1997
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 11816.73 11875.66 12034.06 12135.77 12412.11 12312.56 12440.14 12477.72 12530.16
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
11/30/1997 12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998
12/31/1997 01/31/1998 02/28/1998 03/31/1998 04/30/1998 05/31/1998 06/30/1998 07/31/1998 08/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 12680.67 12802.45 12813.31 12799.12 12722.09 12900.76 12934.24 12975.62 13161.50
</TABLE>
Source: Lipper Analytical Services, Inc.
Lipper CA Int Muni Debt growth $10,000
01/12/1999 SUMMARY
<TABLE>
<CAPTION>
08/31/1998 09/30/1998 10/31/1998 11/30/1998
09/30/1998 10/31/1998 11/30/1998 12/31/1998
Sys Inv Sys Inv Sys Inv Sys Inv
Tot Return Tot Return Tot Return Tot Return
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
California Intermdt Municipal Debt Funds
Average/Total 13349.08 13328.47 13367.96 13379.19
</TABLE>
Source: Lipper Analytical Services, Inc.
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM OVER THE SECOND HALF OF 1998?
A: The Fund returned 4% over the last six months of the year and 6.1% for the
calendar year, underperforming one of its benchmarks, the Merrill Lynch
California Intermediate Municipal Bond Index (which returned 4.1% and 6.3%,
respectively), but outperforming the Lipper California Intermediate Municipal
Debt Funds Average (which returned 3.5% and 5.5%, respectively). The Fund's
consistent long-term results garnered it a four-star rating from Morningstar for
its risk-adjusted returns over the three-year period ended 12/31/98 and a five-
star rating for its five-year performance ended 12/31/98. The Montgomery
California Tax-Free Intermediate Bond Fund was rated among 1,577 municipal bond
funds over the three-year period and 1,040 municipal bond funds over the five-
year period ended 12/31/98.*
Q: HOW DID THE TRENDS IN THE TREASURY BOND MARKET DIFFER FROM THOSE IN THE
MUNICIPAL BOND MARKET OVER THE LAST SIX MONTHS OF THE YEAR, AND HOW DID THESE
DIFFERENCES CONTRIBUTE TO PERFORMANCE?
A: The Federal Reserve lowered interest rates three times during the second half
of 1998 by a total of 0.75%, when it cut the overnight bank-lending rate to
4.75% in three quarter-point moves on September 29, October 15 and November 17.
Whereas long-term Treasury rates dropped more than 0.5% during this period,
rates did not fall as much in the municipal bond market. In fact, rate
volatility in the municipal market for 1998 was lower than that of the past five
years. This was because the continued heavy supply of new municipal bond
issuance ($280 billion in 1998) limited gains in this sector. In contrast, the
federal budget surplus allowed for a reduction in the supply of Treasuries,
which pushed prices up. In addition, municipals did not benefit from the "flight
to quality" demand for Treasury securities. As a result, the prices of
municipals relative to Treasuries are now at more-attractive levels, averaging
more than 90% for 1998. At one point municipals yielded 104% over Treasuries, as
yields on municipal bonds held steady while Treasury rates continued falling.
Q: DOES CALIFORNIA'S MUNICIPAL BOND MARKET DIFFER MUCH FROM THOSE OF OTHER
STATES?
A: California's economy is the largest among the 50 states and is one of the
biggest in the world. Although in the early 1990s, the state suffered from a
deep recession along with the rest of the country, since 1994 the state's
economy has been performing strongly and has grown at a faster pace than the
national average. This is mainly due to the dynamism of the high-technology
sector in the Silicon Valley, southern California's media industry and the
strong manufacturing and tourism industries.
These economic trends have inevitably had an impact on the state's municipal
bond market. As the economy has improved, bond ratings downgraded during the
recession have been upgraded again, boosted by higher tax revenues. As recently
as October 1998, Moody's upgraded the credit rating of California's state
general obligation bonds from A1 to Aa3. Previously, the state's ratings were
also upgraded by Fitch, another ratings service, from A+ to AA- in October 1997,
and by Standard & Poor's from A to A+ in July 1996.
64
<PAGE>
California's municipal bond market also differs from the national municipal bond
market in its heavy and growing demand for such tax-exempt investments. The
booming economy has created more revenue in a state that already has a high
concentration of wealth and relatively high income-tax rates. With such high
demand, California is generally one of the largest issuers of municipal bonds
nationwide.
The other difference is California's frequent voter initiatives. In the November
3, 1998, general election, California voters approved Proposition 1A, the
state's largest bond measure in history. The $9.2 billion general obligation
bond proposal, aimed at providing funding for the state's schools, received an
approval rate that exceeded 60%.
Q: The Fund now invests more of its assets in higher-rated bonds than it once
did. Why?
A: Once again, Aaa-rated credits dominate the Fund (63% of assets as of
12/31/98). Over the past few years, most municipal bonds have been issued with
insurance. We do not anticipate the same trend to carry over into 1999, however,
because the rating agencies appear to be imposing tougher underwriting standards
on bond insurers. In time this should lead to a lower percentage of bonds being
issued with insurance, eventually causing spreads to widen and allowing for an
opportunity to add non-insured bonds at attractive levels.
During the second half of 1998, municipal bonds fared far better than taxable
bonds, such as corporates, due to widening quality spreads. Municipal spreads
not only remained at their already narrow levels, in certain instances they
narrowed even further. The main reasons for this stability include the
significant percentage of new issuance being insured and a strong domestic
economy, which allowed for the accumulation of increased tax revenues, leading
to an improvement in the credit quality of the municipalities.
*Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of 12/31/98. The ratings
are subject to change every month. The ratings are calculated from the Fund's
three-, five- and 10-year average annual returns (if applicable) in excess of
90-day Treasury bill returns, with appropriate fee adjustments and a risk factor
that reflects Fund performance below 90-day T-bill returns. The top 10% of funds
in an investment class receive five stars. Ratings are for Class R shares only;
other classes may vary.
--------------------
THE MONTGOMERY FUNDS
--------------------
California Tax-Free
Intermediate Bond Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
TOP TEN LONG-TERM HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Antioch, California, Public Financing
Authority, Series B,
4.000% due 09/02/99.................................................... 5.3%
San Jose, California, Redevelopment
Agency Tax Allocation, Merged
Area Redevelopment Project
(MBIA Insured),
6.000% due 08/01/10.................................................... 3.1%
Commonwealth of Puerto Rico
(MBIA Insured),
6.500% due 07/01/10.................................................... 2.8%
San Diego County, California,
Regional Transportation
Commission Sales Tax Revenue,
6.000% due 04/01/05.................................................... 2.8%
Public Financing Authority,
Lease Revenue, Capital
Facilities Project,
5.000% due 07/15/10.................................................... 2.7%
Anahiem, California, Public Financing
Authority, Series C,
6.000% due 09/01/12.................................................... 2.6%
San Diego Gas and Electric Company,
Series A, 5.900% due 06/01/14.. 2.6%
Central Valley, California,
School District
Financing Authority, GO, Series A
(MBIA Insured),
5.850% due 02/01/04.................................................... 2.6%
Central Valley, California,
School District
Financing Authority, GO, Series A
(MBIA Insured),
5.800% due 02/01/03.................................................... 2.5%
State Building Authority, Lease
Revenue (MBIA Insured),
5.600% due 05/01/08.................................................... 2.2%
- -------------------------------------------------------------------------------
INVESTMENT GRADE
- -------------------------------------------------------------------------------
(as a percentage of total net assets)
Aaa...................................................................... 71%
Aa....................................................................... 3%
A........................................................................ 11%
Baa...................................................................... 3%
Nonrated................................................................. 12%
Portfolio holdings are subject to change and should not be considered a recom-
mendation to buy individual securities.
A portion of income may be subject to some state and/or local taxes and, for
certain investors, a portion may be sub-ject to the federal alternative minimum
tax.
The accompanying notes are an integral part of these financial statements.
65
<PAGE>
--------------------
The Montgomery Funds
--------------------
California Tax-Free
Intermediate Bond Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
MUNICIPAL BONDS AND NOTES -- 95.4%
Principal Amount Value (Note 1)
California -- 90.9%
$1,000,000 Anaheim, California, Public Financing
Authority, Series C, 6.000% due 09/01/12..... $1,162,840
2,295,000 Antioch, California, Public Financing
Authority, Series B, 4.000% due 09/02/99..... 2,294,908
200,000 Bakersfield, California, Hospital,
Prerefunded, 7.375% due 01/01/14............. 204,000
205,000 Benicia, California, GO (MBIA Insured),
7.000% due 08/01/04.......................... 237,544
250,000 California Educational Authority Revenue,
University of San Francisco
(MBIA Insured), 6.000% due 10/01/08.......... 287,188
200,000 California Housing Finance Agency,
Housing Revenue, Series C
(MBIA Insured), 6.150% due 08/01/14.......... 212,250
California State:
40,000 6.800% due 03/01/99.......................... 40,114
260,000 6.200% due 11/01/02.......................... 284,050
100,000 6.750% due 04/01/04.......................... 113,625
115,000 7.000% due 04/01/06.......................... 136,131
200,000 7.400% due 09/01/07.......................... 247,750
100,000 6.500% due 02/01/08.......................... 117,375
250,000 6.000% due 10/01/08.......................... 285,937
145,000 7.000% due 08/01/09.......................... 178,169
295,000 6.250% due 09/01/09.......................... 345,519
100,000 7.000% due 10/01/10.......................... 124,375
100,000 6.250% due 09/01/12.......................... 118,875
(FGIC Insured):250,000
250,000 7.000% due 04/01/06.......................... 296,250
500,000 6.500% DUE 02/01/06.......................... 588,125
1,000,000 Pollution Control Finance Authority,
San Diego Gas and Electric Company,
Series A, 5.900% due 06/01/14................ 1,127,500
Public Works Board, Facilities Lease Revenue:
100,000 San Jose Facilities, Series A,
7.750% due 08/01/06.......................... 115,375
Various Community College Projects, Series A:
495,000 6.000% due 03/01/05.......................... 551,306
365,000 (AMBAC Insured) 6.000% due 03/01/06.......... 410,169
Public Works Board, Lease Revenue:
265,000 Department of Corrections, Series A
(AMBAC Insur 6.000% due 01/01/06............. 297,131
300,000 Secretary of State, Series A
(AMBAC Insured), 6.200% due 12/01/05......... 341,250
75,000 University Revenue (AMBAC Insured),
6.250% due 11/01/00.......................... 78,844
365,000 University Trust Certificates,
6.450% due 06/01/02.......................... 392,831
Veterans Bond:
70,000 Series AL, 9.600% due 04/01/01............... 78,925
100,000 Series AT (FGIC Insured),
9.500% due 02/01/10.......................... 144,500
250,000 California Statewide Communities,
Development Authority Revenue, Certificates
of Participation (St. Joseph Health System
Group), 6.500% due 07/01/04.................. 282,500
100,000 Carpinteria, California (FGIC Insured),
7.500% due 07/01/00.......................... 106,000
Castaic Lake, California, Water Agency,
Certificates of Participation,
Refunding, Water System Improvement Project,
Series A (MBIA Insured):
150,000 7.250% due 08/01/07.......................... 183,938
500,000 7.250% due 08/01/08.......................... 620,000
Central Valley, California, School District
Financing Authority, GO, Series A
(MBIA Insured):
1,000,000 5.800% due 02/01/03.......................... 1,078,750
1,000,000 5.850% due 02/01/04.......................... 1,102,500
Basin, California, Regional
Financing Authority Revenue, Municipal
Water and District Sewer Systems Project
(AMBAC Insured):
500,000 7.000% due 08/01/06.......................... 595,625
240,000 7.000% due 08/01/08.......................... 292,800
685,000 Coalinga, California, Public Financing
Authority, Senior Lien, Series A,
5.500% due 9/15/2010......................... 761,206
Commerce, California, Community
Development Commission, Tax
Allocation, Merged Redevelopment
Project, Series A, Refunding:
100,000 5.100% due 08/01/04.......................... 103,875
190,000 5.200% due 08/01/05.......................... 198,550
120,000 5.500% due 08/01/09.......................... 129,150
Contra Costa, California, Transportation
Authority Sales Tax Revenue, Series A
(FGIC Insured):
300,000 6.000% due 03/01/05.......................... 334,125
500,000 6.000% due 03/01/07.......................... 566,875
Desert Hospital District, California,
Hospital Revenue, Certificates of
Participation (CGIC Insured):
300,000 6.150% due 07/01/02.......................... 324,375
East Bay, California:
100,000 Regional Parks District, Series B,
8.750% due 09/01/99.......................... 103,716
75,000 Utility District, Series M,
7.500% due 03/01/00.......................... 78,562
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
California Tax-Free
Intermediate Bond Fund
Investments
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES -- continued
<S> <C>
Principal Amount Value (Note 1)
California -- continued
$375,000 Eastern Municipal Water District, California,
Water and Sewer Revenue, Certificates of
Participation, Refunding, Series A
(FGIC Insured), 6.250% due 07/01/05.............................................. $ 401,719
250,000 Elsinore Valley, California, Municipal
Water District, Certificates of Participation,
Refunding, Series A (FGIC Insured),
6.000% due 07/01/12.............................................................. 290,312
Emeryville, California, Public
Financing Authority,
Housing Revenue:
130,000 5.600% due 09/01/06.............................................................. 144,463
140,000 Unrefunded 5.600% due 09/01/06................................................... 153,650
50,000 Estero, California, Series S-1,
7.000% due 07/01/00.............................................................. 52,563
290,000 Fresno, California, Sewer Revenue, Series A
(MBIA Insured), 6.000% due 09/01/07.............................................. 330,962
155,000 Golden West Schools Financing Authority,
GO, Series A (MBIA Insured),
6.450% due 08/01/09.............................................................. 184,063
La Mesa, California, Improvement Board,
Assessment District No. 98-1:
180,000 4.900% due 09/02/04.............................................................. 183,150
100,000 5.500% due 09/02/11.............................................................. 102,500
175,000 Lafayette, California, Elementary School
District, 6.900% due 05/15/06.................................................... 207,156
835,000 State Building Authority, Lease Revenue
(MBIA Insured),
5.600% due 05/01/08.............................................................. 928,937
Los Angeles County, California:
Certificates of Participation:
200,000 6.700% due 03/01/99.............................................................. 201,104
200,000 6.708% due 06/01/15.............................................................. 217,750
50,000 Public Works, Revenue Anticipation Notes,
4.500% due 03/01/01.............................................................. 51,000
Transportation Commission, Sales Revenue,
Proposition C, Second Series, Series A:
180,000 6.200% due 07/01/04.............................................................. 200,700
400,000 6.400% due 07/01/06.............................................................. 460,000
500,000 5.900% due 07/01/08.............................................................. 568,750
Mammoth, California, Community
Water District:
260,000 5.100% due 09/02/07.............................................................. 264,875
255,000 5.200% due 09/02/08.............................................................. 259,781
275,000 5.2500% due 09/02/09............................................................. 279,125
Manteca, California, School District,
Community Facilities District No. 89-1:
120,000 5.400% due 09/01/10.............................................................. 121,800
170,000 5.450% due 09/01/11.............................................................. 172,550
Metropolitan Water District, Southern
California Waterworks Revenue:
200,000 6.000% due 07/01/21.............................................................. 211,750
Series C:
600,000 6.000% due 07/01/08.............................................................. 693,000
250,000 Ontario, California, Redevelopment
Financing Authority, Revenue Refunding
(Ontario Redevelopment Project No. 1)
(MBIA Insured), 6.550% due 08/01/06.............................................. 291,250
200,000 Orange County, Califorina, Certificates
of Participation (MBIA Insured),
6.000% due 07/01/08.............................................................. 228,250
150,000 Oxnard, California, School District, Refunding
(MBIA Insured), 5.625% due 08/01/13.............................................. 167,813
Piedmont, California, School District:
Series A:
75,000 8.300% due 08/01/01.............................................................. 83,531
45,000 7.100% due 08/01/02.............................................................. 50,175
Series C:
40,000 7.200% due 08/01/01.............................................................. 43,550
200,000 Pomona, California, School District, Series A
(MBIA Insured), 5.954% due 08/01/10.............................................. 230,250
Rancho, California, Water District Financing Authority,
Revenue Refunding (FGIC Insured):
400,000 6.500% due 11/01/02.............................................................. 441,000
400,000 6.500% due 11/01/05.............................................................. 461,500
Redwood City, California:
325,000 Multi-family Housing (Redwood Shores),
Series B, Mandatory Put 10/01/00,
5.200% due 10/01/08.............................................................. 326,773
1,095,000 Public Financing Authority, Lease Revenue,
Capital Facilities Project,
5.000% due 07/15/10.............................................................. 1,166,175
500,000 Riverside County, California, Transportation
Commission Sales Tax Revenue, Series A
(FGIC Insured), 6.000% due 06/01/09.............................................. 573,750
625,000 Sacramento, California, Municipal Utilities,
Electric Revenue Refunding, Series A
(MBIA Insured), 6.250% due 08/15/10.............................................. 733,594
San Bernardino, California,
Joint Powers Financing Authority,
Tax Allocation Revenue:
500,000 Central City Merged Project, Series A
(AMBAC Insured), 5.750% due 07/01/16............................................. 560,625
250,000 San Bernardino County, California,
Transportation Authority Sales Tax Revenue,
Series A (MBIA Insured),
6.000% due 03/01/06.............................................................. 280,938
115,000 San Diego, California, Public Financing
Authority, Sewer Revenue (FGIC Insured),
6.000% due 05/15/07.............................................................. 130,812
</TABLE>
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
California Tax-Free
Intermediate Bond Fund
Investments
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES -- continued
<S> <C>
Principal Amount Value (Note 1)
California -- continued
San Diego County, California:
$1,075,000 Regional Transportation Commission
Sales Tax Revenue, 6.000% due 04/01/05........................................... $1,198,625
175,000 Water Authority Revenue, Certificates
of Participation, Series A,
6.000% due 05/01/01.............................................................. 184,625
San Francisco, California, City and County:
375,000 City Hall Improvement Project, Series A
(FGIC Insured), 6.100% due 06/15/00.............................................. 389,531
International Airport Revenue, AMT, Second Series:
445,000 8.000% due 05/01/06.............................................................. 550,688
500,000 8.000% due 05/01/09.............................................................. 626,875
1,150,000 San Jose, California, Redevelopment
Agency Tax Allocation, Merged Area
Redevelopment Project (MBIA Insured),
6.000% due 08/01/10.............................................................. 1,325,375
San MateoFoster City, California,
School District (MBIA Insured):
240,000 7.750% due 08/01/06.............................................................. 297,300
Santa Rosa, California:
Central Packaging Service Facilities, Refunding:
265,000 4.200% due 07/02/00.............................................................. 267,650
200,000 4.800% due 07/02/06.............................................................. 204,500
100,000 4.900% due 07/02/07.............................................................. 102,750
170,000 5.100% due 07/02/09.............................................................. 175,525
500,000 High School District (FGIC Insured),
7.000% due 05/01/01.............................................................. 538,750
740,000 Sweetwater, California, Water Revenue
Authority (AMBAC Insured),
5.250% due 04/01/10.............................................................. 803,825
Torrance, California, Downtown Redevelopment Authority:
200,000 5.100% due 09/01/09.............................................................. 206,000
210,000 5.200% due 09/01/10.............................................................. 216,825
Walnut Valley, California, School District, Series A (MBIA Insured):
100,000 6.850% due 08/01/07.............................................................. 120,125
700,000 7.000% due 08/01/08.............................................................. 857,500
65,000 Watsonville, California, Water Revenue
(MBIA Insured), 6.100% due 05/15/99.............................................. 65,732
Wiseburn, California, School District,
Series A (FGIC Insured):
360,000 6.875% due 08/01/06.............................................................. 427,050
395,000 6.875% due 08/01/07.............................................................. 474,937
----------
39,161,237
----------
Puerto Rico -- 4.5%
$350,000 Commonwealth of Puerto Rico,
Public Improvement Bonds,
5.000% due 07/01/07.............................................................. $ 368,374
1,000,000 Commonwealth of Puerto Rico
(MBIA Insured),
6.500% due 07/01/10.............................................................. 1,206,250
Puerto Rico:
135,000 5.700% due 07/01/09.............................................................. 150,187
170,000 (FSA Insured), 5.700% due 07/01/09............................................... 190,613
----------
1,915,424
----------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $39,537,526)....................................................................................... 41,076,661
----------
SHORT-TERM MUNICIPAL BONDS AND NOTES -- 3.7%
(Cost $1,600,000)
California -- 3.7%
1,600,000 Orange County, California, Sanitation
District, Variable Rate, due 08/01/15............................................ 1,600,000
TOTAL INVESTMENTS -- 99.1%
(Cost $41,137,526*)...................................................................................... 42,676,661
OTHER ASSETS AND LIABILITIES -- 0.9%
(Net).................................................................................................... 408,293
----------
NET ASSETS -- 100.0%..................................................................................... 43,084,954
==========
</TABLE>
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
The Montgomery California Tax-Free Intermediate Bond Fund concentrates in
California municipal securities. Certain California constitutional amendments,
legislative measures, executive orders, administrative regulations, court
decisions and voter initiatives could result in certain adverse consequences,
including impairing the ability of certain issuers of California municipal
securities to pay principal and interest on their obligations.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CGIC Capital Guaranty Insurance Corporation
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
MBIA Municipal Bond Investors Assurance
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
INVESTMENT REVIEW
Q: How have the Funds performed over the past six months?
A: The Montgomery Money Market Funds all outperformed their benchmarks over the
six months ended December 31, 1998. The California Tax-Free Money Fund was up
1.4%, the Federal Tax-Free Money Fund was up 1.49% and the Government Reserve
Fund was up 2.5%. For the same time period, our benchmarks, the Lipper
California Tax-Exempt Money Market Funds Average, the Lipper Tax-Exempt Money
Market Funds Average and the Lipper Government Money Market Funds Average, were
up 1.3%, 1.4% and 2.4%, respectively.
Q: What were the main factors driving the money markets over the period?
A: Deflationary concerns drove market sentiment at the beginning of the period,
and it wasn't until the beginning of the fourth quarter that it became clear
that the Federal Reserve recognized market concerns. Following a September 29
reduction of interest rates by 0.25 percentage point, the Federal Reserve
implemented two more rate cuts during the fourth quarter. By the end of the
quarter, its target for the overnight bank-lending rate was a mere 4.75%. The
Fed's maneuvering halted a rally in U.S. Treasury securities across all parts of
the yield curve, including money market instruments. Credit-quality spreads
remained historically high by quarter end, however.
Turning to the municipal bond markets, California's short-term municipal market
gained ground during the second half of 1998. Short-term California new
issuances were lower than in previous years. As an example, the State of
California Revenue Anticipation Notes issuance was only $1.7 billion in 1998,
compared with $3 billion in 1997. California short-term municipal bond yields
dropped more than 0.5%, trailing closely the 0.75% drop in the discount rate.
The national short-term municipal market also showed significant gains during
the second half of 1998. Short-term general market new issuances were
insignificant. National short-term municipal bond yields also dropped 0.5%,
trailing closely the 0.75% drop in the discount rate.
Q: What should we expect in 1999?
A: We are currently monitoring a clash of countervailing forces. On the one
hand, problems in emerging markets could lead to deflation in the United States,
a decline in the stock market and a dampening in consumer confidence. Under this
scenario we would expect the Fed to ease rates to stimulate the economy. On the
other hand, if emerging markets rebound, U.S. economic growth is sustained and
the European Central Bank maintains an accommodative stance, inflationary
pressures may emerge, resulting in a hike in short-term rates. We do not expect
to see this drama play out in the first quarter, however, as the underlying
dynamics may take longer to unfold.
--------------------
THE MONTGOMERY FUNDS
--------------------
Money Market Funds
Portfolio Highlights
(unaudited)
- -------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
- -------------------------------------------------------------------------------
William Stevens...................................... Senior Portfolio Manager
Monica Wong................................................ Portfolio Manager
- -------------------------------------------------------------------------------
FUND PERFORMANCE
- -------------------------------------------------------------------------------
Yields as of 12/31/98
Montgomery
Government Reserve Fund
One-day yield........................................................... 4.72%
Seven-day yield......................................................... 4.65%
Montgomery
Federal Tax-Free Money Fund
One-day yield........................................................... 3.61%
Seven-day yield......................................................... 3.34%
Montgomery
California Tax-Free Money Fund
One-day yield........................................................... 3.69%
Seven-day yield......................................................... 3.18%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Yields will fluctuate. An
investment in one of our money market funds is neither insured nor guaranteed by
the Federal Deposits Insurance Corporation or any other government agency.
Although these funds seek to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the Funds. Fund performance
presented is for Class B shares.
69
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Government Reserve Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
FEDERAL FARM CREDIT BANK (FFCB) -- 17.2%
Principal Amount Value (Note 1)
<S> <C>
$ 2,360,000 5.320% due 01/04/99................................... $ 2,360,027
15,000,000 5.260% due 01/10/99................................... 15,000,000
800,000 5.270% due 02/01/99................................... 799,709
5,000,000 5.300% due 02/02/99................................... 4,998,988
25,000,000 4.740% due 02/25/99................................... 24,995,691
5,500,000 5.375% due 03/02/99................................... 5,499,223
18,000,000 5.160% due 04/01/99................................... 18,004,504
4,000,000 5.405% due 04/01/99++................................. 3,999,999
7,235,000 5.500% due 04/01/99................................... 7,237,945
4,000,000 5.770% due 04/01/99................................... 4,000,983
15,000,000 4.810% due 04/01/99................................... 14,983,068
18,000,000 5.600% due 05/03/99................................... 17,994,863
7,810,000 5.550% due 06/01/99................................... 7,807,433
1,000,000 8.400% due 07/26/99................................... 1,014,950
------------
128,697,383
FEDERAL HOME LOAN BANK (FHLB) -- 38.0%
18,440,000 Discount Note due 01/08/99............................ 18,422,017
1,040,000 5.400% due 01/15/99................................... 1,039,946
500,000 5.035% due 01/19/99................................... 499,863
500,000 6.046% due 01/21/99................................... 5,000,790
500,000 5.605% due 01/22/99................................... 500,000
100,000 7.860% due 01/25/99................................... 100,136
25,000,000 Discount Note due 01/29/99............................ 24,903,167
1,500,000 5.230% due 02/01/99................................... 1,500,000
2,000,000 5.425% due 02/16/99................................... 1,999,703
4,500,000 4.975% due 02/23/99................................... 4,499,109
1,200,000 5.610% due 03/03/99................................... 1,200,019
1,000,000 5.270% due 03/04/99................................... 9,999,342
2,000,000 5.570% due 03/09/99................................... 2,001,315
11,670,000 5.580% due 03/11/99................................... 11,667,951
5,000,000 5.605% due 03/12/99................................... 4,999,678
23,000,000 5.560% due 03/25/99................................... 23,001,676
10,000,000 5.073% due 03/26/99................................... 998,965
7,000,000 5.500% due 03/26/99................................... 6,997,679
9,810,000 5.570% due 04/07/99................................... 9,807,962
5,000,000 5.108% due 04/09/99................................... 4,999,329
1,000,000 6.440% due 04/16/99................................... 1,002,154
1,025,000 6.300% due 04/22/99................................... 1,028,951
2,000,000 5.705% due 05/05/99................................... 2,003,767
10,000,000 5.695% due 05/06/99................................... 10,035,064
10,000,000 5.610% due 06/18/99................................... 10,000,730
500,000 6.315% due 07/09/99................................... 501,608
3,600,000 5.540% due 07/13/99................................... 3,598,947
$ 1,500,000 3.630% due 07/15/99................................... $ 1,492,086
7,270,000 5.805% due 08/06/99................................... 7,298,612
14,015,000 5.510% due 08/17/99................................... 14,009,842
500,000 5.545% due 08/17/99................................... 502,550
10,000,000 5.088% due 09/02/99................................... 9,996,658
20,000,000 5.380% due 09/08/99................................... 19,993,113
3,000,000 5.915% due 09/24/99................................... 3,018,750
18,000,000 6.035% due 09/27/99................................... 18,185,743
20,000,000 4.800% due 10/13/99................................... 20,003,030
4,545,000 8.375% due 10/25/99................................... 4,681,107
10,000,000 4.800% due 11/10/99................................... 9,994,915
2,000,000 5.790% due 11/18/99................................... 2,017,656
1,000,000 6.405% due 11/22/99................................... 1,015,625
1,000,000 5.880% due 11/26/99................................... 1,011,273
10,000,000 Discount Note due 12/21/99............................ 9,542,750
------------
285,073,578
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 0.3%
1,483,572 M90319, 5.500% due 02/01/99........................... 1,482,749
89,635 1727, 6.250% due 02/15/99............................. 89,618
500,000 5.351% due 05/19/99................................... 499,568
------------
2,071,935
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 0.8%
2,250,000 Zero Coupon due 02/02/99.............................. 2,239,900
100,000 5.570% due 03/05/99................................... 99,997
3,000,000 Zero Coupon due 03/24/99.............................. 2,963,652
400,000 5.840% due 03/29/99................................... 400,081
------------
5,703,630
MUNICIPAL BONDS -- 2.6%
New York, General Obligation Bonds:
305,000 9.800% due 08/15/04................................... 319,777
55,000 9.750% due 08/15/09................................... 57,648
985,000 9.625% due 08/01/10................................... 1,029,966
165,000 9.750% due 08/15/10................................... 172,944
150,000 9.750% due 08/15/11................................... 157,222
351,000 9.875% due 08/15/13................................... 368,162
3,935,000 9.875% due 08/15/14................................... 4,127,400
585,000 9.875% due 08/15/15................................... 613,603
6,200,000 9.875% due 08/15/16................................... 6,503,146
5,005,000 9.875% due 08/15/17................................... 5,249,717
1,000,000 9.875% due 08/15/18................................... 1,048,895
------------
19,648,480
</TABLE>
70
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Government Reserve Fund
Investments
<TABLE>
STUDENT LOAN MARKETING ASSOCIATION (SLMA) -- 15.6%
Principal Amount Value (Note 1)
<S> <C>
$ 5,000,000 7.723% due 01/25/99................................... $ 5,006,568
7,000,000 5.450% due 02/10/99................................... 6,998,576
1,000,000 4.838% due 02/22/99................................... 999,531
350,000 4.500% due 02/24/99++................................. 349,321
500,000 5.200% due 02/26/99................................... 499,651
6,000,000 5.580% due 03/11/99................................... 5,999,564
5,000,000 5.128% due 04/16/99................................... 4,999,295
3,325,000 5.630% due 06/02/99................................... 3,324,503
6,000,000 5.525% due 06/10/99................................... 5,998,915
11,200,000 5.530% due 07/16/99................................... 11,252,615
28,500,000 4.858% due 08/02/99................................... 28,450,570
8,000,000 5.583% due 08/11/99................................... 7,998,686
20,000,000 5.280% due 09/15/99................................... 19,991,189
15,000,000 4.800% due 11/05/99................................... 14,998,022
------------
116,867,006
TENNESSEE VALLEY AUTHORITY (TVA) -- 0.2%
1,300,000 8.375% due 10/01/99................................... 1,330,899
U.S. SOVEREIGN BONDS -- 0.0%#
240,674 AID-Israel, Series B,
5.750% due 01/01/99+.................................. 240,674
TOTAL SECURITIES 559,633,585
REPURCHASE AGREEMENTS -- 25.7%
30,000,000 Agreement with Bear Stearns, Tri-Party,
5.150% dated 12/31/98, to be repurchased
at $30,017,167 on 01/04/99, collateralized by
$30,600,000 market value of U.S. government
securities, having various maturities and
various interest rates................................ 30,000,000
40,000,000 Agreement with Bear Stearns, Tri-Party,
5.300% dated 12/31/98, to be repurchased
at $40,041,222 on 01/07/99, collateralized by
$40,800,000 market value of U.S. government
securities, having various maturities and
various interest rates................................ 40,000,000
57,785,000 Agreement with Greenwich Capital Markets,
Tri-Party, 5.150% dated 12/31/98, to be
repurchased at $57,818,066 on 01/04/99,
collateralized by $58,940,700 market value
of U.S. government securities, having various
maturities and various interest rates................. 57,785,000
$65,000,000 Agreement with Paine Webber, Tri-Party,
5.150% dated 12/31/98, to be repurchased
at $65,037,194 on 01/04/99, collateralized by
$66,300,000 market value of U.S. government
securities, having various maturities and
various interest rates................................ $ 65,000,000
TOTAL REPURCHASE AGREEMENTS.......................................... 192,785,000
------------
TOTAL INVESTMENTS -- 100.4%
(At amortized cost*) 752,418,585
OTHER ASSETS AND LIABILITIES -- (0.4)%
(Net)................................................................ (3,154,132)
------------
NET ASSETS -- 100.0%................................................. $749,264,453
============
</TABLE>
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets weekly.
++ Floating-rate note, rate resets monthly.
# Amount represents less than 0.1%.
71
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Federal
Tax-Free Money Fund
Investments
PORTFOLIO INVESTMENTS
<TABLE>
December 31, 1998 (Unaudited)
MUNICIPAL BONDS AND NOTES -- 119.8%
Principal Amount Value (Note 1)
<S> <C>
Alaska -- 2.6%
$1,350,000 Alaska Municipal Bond Authority Revenue,
Series A, Revenue Bonds (FSA Insured),
4.000% due 12/01/99.................... $ 1,359,635
500,000 Alaska Student Loan Revenue Corporation,
Series A, Revenue Bonds (AMBAC Insured),
4.700% due 07/01/99.................... 503,162
500,000 Anchorage, Alaska, Electric Utilities
Revenue (MBIA Insured),
6.850% due 06/01/99.................... 506,340
200,000 Anchorage, Alaska, Telephone Utilities
Revenue Bonds (MBIA Insured),
4.000% due 02/01/99.................... 200,032
300,000 North Slope Boro, Alaska, General
Obligation Bonds, Series B (FSA Insured),
6.100% due 06/30/99.................... 303,935
------------
2,873,104
Arizona -- 0.7%
250,000 Maricopa County, Arizona, Unified High
School District, No. 210 Phoenix, Series C,
7.400% due 07/01/99.................... 255,004
450,000 Phoenix, Arizona, General Obligation Bonds,
Refunding, 6.250% due 07/01/16......... 464,507
------------
719,511
Arkansas -- 0.5%
500,000 Paragould, Arkansas, Sales and Use Tax,
Revenue Bonds (AMBAC Insured),
4.750% due 07/01/99.................... 503,776
California -- 4.6%
5,000,000 California Pollution Control Financing
Authority Revenue, Southern California
Edison Company, Series A, Revenue Bonds,
5.200% due 02/28/08+................... 5,000,000
District of Columbia -- 5.4%
District of Columbia, General Obligation Bonds:
1,100,000 Series A-3, Refunding,
5.200% due 02/01/07+................... 1,100,000
1,725,000 Series B (FSA Insured),
7.000% due 06/01/99.................... 1,752,087
1,800,000 Series B-1,
5.000% due 06/01/03+++................. 1,800,000
1,300,000 Series B-2,
5.000% due 06/01/03+++................. 1,300,000
------------
5,952,087
Florida -- 0.5%
500,000 Post Everglades Port Authority, Florida,
Series A, Revenue Bonds,
7.500% due 09/01/12.................... 523,778
Georgia -- 3.3%
$3,400,000 Georgia Municipal Authority, Gas Revenue
(Gas Portfolio II Project), Series C,
3.900% due 01/01/08++.................. $ 3,400,000
260,000 Metropolitan Atlanta Rapid Transit
Authority, Georgia Sales Tax Revenue,
Series P (AMBAC Insured),
5.500% due 07/01/99.................... 262,917
------------
3,662,917
Hawaii -- 0.9%
1,000,000 State of Hawaii, Budget and Finance
Department, Special Meeting Revenue,
3.800% due 03/01/14.................... 1,000,000
Illinois -- 16.4%
1,050,000 Chicago, Illinois, Public Building
Commission, Series A (FGIC Insured),
7.500% due 01/01/99.................... 1,050,000
220,000 Franklin Park, Illinois, General Obligation
Revenue (AMBAC Insured),
6.000% due 07/01/99.................... 223,006
2,500,000 Illinois Development Finance Authority,
PCR (Amoco Oil Company Project),
5.050% due 11/01/12+................... 2,500,000
3,000,000 Illinois Health Facilities Authority
Revenue (St. Lukes Medical Center),
Series B (MBIA Insured),
4.500% due 11/15/23++.................. 3,000,000
450,000 Illinois Rural Board Revenue
(Public Projects Construction),
4.500% due 03/15/99.................... 450,887
400,000 Illinois State, General Obligation Bonds,
4.700% due 04/01/99.................... 401,008
Illinois State Toll Authority, Highway
Priority Revenue, Series B:
1,100,000 (MBIA Insured) 3.850% due 01/01/10++... 1,100,000
3,000,000 (FSA Insured) 4.250% due 01/01/17++.... 3,000,000
2,100,000 Lisle, Illinois, Multi-family Housing
Revenue (Four Lakes Phase V Project),
4.250% due 09/15/26++.................. 2,100,000
3,000,000 Lombard, Illinois, Multi-family Housing
Revenue (Clover Creek Apartments Project),
3.550% due 12/15/06.................... 3,000,000
1,000,000 Metropolitan Pier and Exposition
Authority, Illinois State Tax Revenue,
6.000% due 06/01/99.................... 1,011,001
200,000 Regional Transit Authority, Illinois,
Series B (FGIC Insured),
4.600% due 06/01/99.................... 201,140
------------
18,037,042
</TABLE>
72
<PAGE>
---------------------
The Montgomery Funds
---------------------
Federal
Tax-Free Money Fund
Investments
<TABLE>
MUNICIPAL BONDS AND NOTES - continued
Principal Amount Value (Note 1)
<S> <C>
Indiana -- 4.7%
$2,400,000 Gary, Indiana, Environmental Improvement
Revenue, Commercial Paper,
3.200% due 02/10/99.................... $ 2,400,000
2,300,000 Rockport, Indiana, PCR (AEP Generating
Company Project), Series B,
5.150% due 07/01/25+................... 2,300,000
500,000 Warren Township, Indiana, School
Building Corporation Revenue Bonds,
First Mortgage, Series B,
5.600% due 07/15/99.................... 506,178
------------
5,206,178
Iowa -- 1.0%
1,100,000 Iowa Higher Education Authority, Loan
Revenue, Revenue Anticipation Notes,
Briar Cliff, Series A,
4.250% due 07/07/99.................... 1,102,400
Kansas -- 6.9%
250,000 Emporia, Kansas, General Obligation
Bonds (AMBAC Insured),
4.750% due 09/01/99.................... 252,267
2,875,000 Johnson County, Kansas, Public Buildings
Commission, Lease Revenue,
4.250% due 09/01/99.................... 2,886,155
Kansas State Development
Finance Authority Revenue:
3,000,000 Health Facilities Revenue, Series M
(MBIA Insured), 5.150% due 11/15/23+... 3,000,000
1,495,000 Village Shalom Obligation Group,
Series BB, 4.000% due 11/15/28+........ 1,495,000
------------
7,633,422
Kentucky -- 3.5%
3,900,000 Ohio County, Kentucky, PCR, Big Rivers
Electric Corporation, Revenue Bonds
(AMBAC Insured), 7.800% due 04/01/09.. 3,900,000
Maryland -- 0.2%
200,000 Howard County, Maryland, Series B,
General Obligation Bonds,
5.600% due 08/15/99.................... 202,779
Massachusetts -- 1.4%
230,000 Dighton and Rehoboth, Massachusetts,
Regional School District, General
Obligation Bonds (AMBAC Insured),
4.100% due 07/15/99.................... 230,963
1,000,000 Massachusetts State, Housing Development
Finance Agency, Series A (MBIA Insured),
3.800% due 06/01/99.................... 1,000,000
250,000 Quincy, Massachusetts, General
Obligation Bonds (MBIA Insured),
6.000% due 05/01/99.................... 252,145
------------
1,483,108
Michigan -- 0.8%
$500,000 Grand Traverse County Hospital, Michigan,
Munson Healthcare, Series A (AMBAC
Insured), 3.600% due 07/01/99.......... $ 500,000
400,000 Kalamazoo, Michigan, City School District,
6.700% due 05/01/99.................... 403,700
------------
903,700
Minnesota -- 1.9%
2,100,000 University of Minnesota, Revenue
Bonds, Series 1997A-144A,
4.250% due 05/18/12++.................. 2,100,000
Missouri -- 7.7%
315,000 Belton, Missouri, Certificates of
Participation, Series B (MBIA Insured),
4.250% due 03/01/99.................... 314,959
4,000,000 Independence, Missouri, Industrial
Development Authority Revenue,
Groves and Graceland, Series A,
5.100% due 11/01/27.................... 4,000,000
1,000,000 Kansas City, Missouri, Industrial
Development Authority, Hospital Revenue
(Resh Health Services Systems) (MBIA
Insured), 5.100% due 10/15/15+......... 1,000,000
1,300,000 Missouri State, Development Financing
Board, Infrastructure Facilities Revenue
(Sci City Union Station Project), Series B,
5.250% due 12/01/03+................... 1,300,000
1,390,000 Missouri State, Economic and Industrial
Development, Export and Infrastructure
Board, Series E, 4.200% due 09/01/10++. 1,390,000
485,000 Neosho, Missouri, School District
No. R-5, Building Corporation
Leasehold Revenue (FSA Insured),
3.500% due 09/01/99.................... 485,000
------------
8,489,959
Nebraska -- 0.4%
435,000 Omaha, Nebraska, School District,
General Obligation Bonds,
4.250% due 06/15/99.................... 436,929
Nevada -- 1.7%
1,532,000 Clark County, Nevada, Airport
Improvement Revenue, Series A1,
3.850% due 07/01/25++.................. 1,532,000
300,000 Nevada State, General Obligation Bonds
(Colorado River Community),
5.000% due 07/01/99.................... 302,633
------------
1,834,633
New Jersey -- 1.7%
500,000 Keansburg, New Jersey, Board of
Education, Certificates of Participation,
8.000% due 11/01/14.................... 529,253
</TABLE>
The accompanying notes are an integral part of these financial statements.
73
<PAGE>
---------------------
The Montgomery Funds
---------------------
Federal
Tax-Free Money Fund
Investments
<TABLE>
MUNICIPAL BONDS AND NOTES - continued
Principal Amount Value (Note 1)
<S> <C>
New Jersey -- continued
New Jersey Wastewater Treatment Revenue
Bonds, Series A (MBIA Insured):
$425,000 6.800% due 05/15/99.................... $ 429,393
425,000 Prerefunded, 7.000% due 05/15/06....... 437,030
500,000 Union County, New Jersey, Utilities
Authority (Ogden Martin Systems),
Series A, AMT, 4.500% due 06/01/99..... 501,296
------------
1,896,972
New Mexico -- 0.9%
1,000,000 Albuquerque, New Mexico, Lodgers Tax
Revenue Receipts, Series A, Revenue Bonds,
3.950% due 07/01/22++.................. 1,000,000
New York -- 1.0%
800,000 New York State, Dormitory Authority,
Revenue Bonds, Series A, State University,
7.125% due 05/15/17.................... 824,971
250,000 Triborough, New York, Bridge and Tunnel
Authority, General Purpose Revenue Bonds,
Series O, 7.700% due 01/01/19.......... 253,750
------------
1,078,721
North Carolina -- 1.8%
2,000,000 North Carolina Medical Care Community,
Health Care Facilities Revenue
(The Givens Estates Inc. Project),
5.050% due 12/01/26+++................. 2,000,000
North Dakota -- 0.3%
300,000 North Dakota State Municipal Board
(Capital Financing Project), Series I,
6.250% due 12/01/11.................... 308,173
Oklahoma -- 4.5%
5,000,000 Oklahoma State, Industrial Authority Revenue,
Baptist Medical Center, Commercial Paper,
3.350% due 01/25/99.................... 5,000,000
Oregon -- 5.3%
1,800,000 Clackamas County, Oregon, Hospital
Facilities Authority Revenue, Revenue Bonds,
4.000% due 04/01/14++++................ 1,800,000
1,010,000 Oregon State, Department of
Administrative Services, Certificates of
Participation, Series B (MBIA Insured),
4.400% due 11/01/99.................... 1,018,733
3,000,000 Oregon State, Economic Development
Revenue (Georgia-Pacific Corporation
95A Project), Series 168, AMT,
4.200% due 12/01/25++.................. 3,000,000
------------
5,818,733
Pennsylvania -- 8.1%
$1,400,000 Delaware Valley, Pennsylvania,
Regional Financing Authority,
Local Government Revenue,
3.900% due 08/01/16++.................. $ 1,400,000
Emmaus, Pennsylvania,
General Authority Revenue:
1,000,000 4.100% due 03/01/24++.................. 1,000,000
1,000,000 4.100% due 03/01/24++.................. 1,000,000
4,000,000 Pennsylvania State Higher Educational
Assistance Agency, Student Loan Revenue,
Series A, 4.350% due 03/01/27++........ 4,000,000
490,000 Pennsylvania State University, Revenue
Bonds, Series B, 4.500% due 08/15/99... 492,212
1,000,000 Sewickley Valley, Pennsylvania,
Hospital Authority Revenue
(Sewickley Valley Hospital Project),
7.500% due 10/01/14.................... 1,047,849
------------
8,940,061
Tennessee -- 1.7%
Nashville and Davidson Counties, Tennessee,
Metropolitan Government:
820,000 Health and Educational Facilities Board
Revenue, Open Arms Development Center,
3.700% due 08/01/99.................... 820,000
1,000,000 Water and Sewer Revenue (MBIA Insured),
5.500% due 01/01/99.................... 1,000,000
------------
1,820,000
Texas -- 14.0%
3,575,000 Austin, Texas, Commercial Paper,
4.250% due 03/01/99.................... 3,575,000
535,000 Austin, Texas, General Obligation Bonds,
Series A, 7.000% due 09/01/02.......... 547,484
1,000,000 Bexar County, Texas, Financing Authority,
Multi-family Housing Revenue
(Fountainhead Apartments Project),
4.250% due 09/15/26++.................. 1,000,000
1,200,000 Calhoun County, Texas, Naval Industrial
Development Authority, Port Revenue
(Formosa Plastics Corporation Project)
(LOC: Bank of America),
4.000% due 11/01/15++.................. 1,200,000
3,910,000 Dallas, Texas, Waterworks and Sewer
Systems, Commercial Paper,
3.200% due 01/21/99.................... 3,910,000
250,000 Dallas, Texas, Waterworks and Sewer
Systems, Revenue Bonds,
5.600% due 10/01/99.................... 253,449
360,000 Forney, Texas, General Obligation
Bonds (AMBAC Insured),
3.700% due 05/15/99.................... 360,385
2,500,000 Gulf Coast Waste Disposal Authority, PCR
(Amoco Oil Company Project),
5.100% due 10/01/17+................... 2,500,000
</TABLE>
74
<PAGE>
------------------------
The Montgomery Funds
------------------------
Federal
Tax-Free Money Fund
Investments
<TABLE>
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
<S> <C>
Texas -- continued
$1,000,000 Mansfield, Texas, Industrial Development
Revenue (Pier 1 Imports, Texas, Inc.,
Project), 4.150% due 11/01/26++........ $ 1,000,000
225,000 Pflugerville, Texas, Independent School
District, General Obligation Bonds,
8.750% due 08/01/99.................... 231,848
200,000 Texas Municipal Power Agency Revenue
(FGIC Insured), 7.000% due 09/01/99.... 204,271
305,000 Texas State Public Financing Authority,
Building Revenue (State Preservation
Board Project), Series B (AMBAC Insured),
4.500% due 02/01/99.................... 305,292
250,000 Travis County, Texas, General Obligation
Bonds, Series B, Refunding (MBIA Insured),
5.900% due 03/01/99.................... 250,869
------------
15,338,598
Utah -- 0.9%
1,000,000 Emery County, Utah, PCR
(Pacificorp Projects) (AMBAC Insured),
5.150% due 11/01/24+................... 1,000,000
Virginia -- 1.4%
1,500,000 Hampton, Virginia, Museum Revenue,
Refunding, 7.500% due 01/01/14......... 1,530,000
Washington -- 6.7%
265,000 King County, Washington, Housing
Authority Revenue, Series A,
3.850% due 07/01/99.................... 265,000
1,000,000 Port Seattle, Washington, Industrial
Development Corporation Revenue
(Sysco Food Services Project), Refunding,
4.200% due 11/01/25++.................. 1,000,000
285,000 Snohomish and Island Counties, Washington,
Stanwood School District No. 401,
Refunding (FGIC Insured),
3.250% due 12/15/99.................... 285,000
965,000 Thurston County, Washington, Olympia
School District No. 111 (FGIC Insured),
4.300% due 12/01/99.................... 973,685
1,085,000 Washington State, Economic Development
Financing Authority Revenue (Pioneer
Human Services Project), Series H,
5.200% due 09/01/18+................... 1,085,000
370,000 Washington State, Higher Educational
Facilities Authority Revenue (Whitworth
College Project) (MBIA Insured),
3.250% due 10/01/99.................... 370,000
Washington State, Housing
Finance Commission:
$2,225,000 Multi-family Mortgage Revenue
(Winterhill Apartments Project), Series A,
4.100% due 07/01/28++.................. $ 2,225,000
1,185,000 Non-Profit Housing Revenue
(YMCA Greater Seattle Program),
5.150% due 07/01/11++.................. 1,185,000
------------
7,388,685
Wisconsin -- 1.7%
1,800,000 Wisconsin State Transportation Revenue,
Series A, 5.800% due 07/01/99.......... 1,818,374
Wyoming -- 4.7%
2,500,000 Lincoln County, Wyoming, Environmental
Improvement Revenue (Pacificorp Projects),
AMT, 5.400% due 11/01/25+.............. 2,500,000
2,700,000 Sweetwater County, Wyoming, PCR
(Idaho Power Company Project), Series C,
5.150% due 07/15/26+................... 2,700,000
------------
5,200,000
TOTAL INVESTMENTS -- 119.8%
(At amortized cost*)....................................... 131,703,640
OTHER ASSETS AND LIABILITIES -- (19.8)%
(Net)...................................................... (21,776,547)
------------
NET ASSETS -- 100%......................................... $109,927,093
============
</TABLE>
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
+++ Floating-rate note, rate resets monthly.
++++ Floating-rate note, rate resets annually.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
LOC Line of Credit
MBIA Municipal Bond Investors Assurance
PCR Pollution Control Revenue
75
<PAGE>
------------------------
The Montgomery Funds
------------------------
California Tax-Free
Money Fund
Investments
PORTFOLIO INVESTMENTS
December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES -- 118.0%
Principal Amount Value (Note 1)
<S> <C> <C>
California -- 118.0%
$5,000,000 Abag, California, Financing Authority
Revenue, Nonprofit Corporations,
Certificates of Participation,
Lucile Salter Packard Project,
3.850% due 08/01/23+................................... $ 5,000,000
300,000 Alameda County, California, School
Financing Authority,
6.900% due 07/01/99.................................... 304,904
3,100,000 Anaheim, California, Electric Company,
Commercial Paper,
2.950% due 03/12/99.................................... 3,100,000
2,450,000 Antioch, California, Financing Authority,
Series A (AMBAC Insured),
6.500% due 09/02/99.................................... 2,508,335
200,000 Bay Area, California, Redevelopment
Agency, Pool A, 4.900% due 12/15/99.................... 203,445
930,000 Berkeley, California, GO (AMBAC Insured),
3.800% due 06/01/99.................................... 930,000
200,000 Berkeley, California, School District
Authority (AMBAC Insured),
8.100% due 08/01/16.................................... 209,749
2,025,000 Brentwood, California, School District, GO
(AMBAC Insured), 6.850%
due 08/01/16............................................ 2,070,783
400,000 Calexico, California, Financing Authority
Revenue (AMBAC Insured),
3.150% due 11/01/99..................................... 400,000
California State:
Educational Facilities Authority Revenue:
1,105,000 6.200% due 01/01/02..................................... 1,161,290
1,000,000 Commercial Paper, 3.300% due 01/22/99................... 1,000,000
Health Facilities Financing Authority Revenue:
7,400,000 Adventist Health Systems,
5.000 due 09/01/28+..................................... 7,400,000
125,000 Mercy Health Systems, Series C,
7.250% due 07/01/15..................................... 129,468
Sutter Healthcare, Series B:
4,300,000 5.100 due 07/01/12+..................................... 4,300,000
1,700,000 5.100 due 03/01/20+..................................... 1,700,000
3,000,000 Saint Joseph Health System, Series B,
5.100% due 07/01/09+.................................... 3,000,000
3,300,000 Scripps Memorial Hospital, Series B
(MBIA Insured),
3.800% due 10/01/21++................................... 3,300,000
Pollution Control Finance Authority:
4,965,000 Soild Waste Disposal Revenue,
Taormina Industrial Income Project,
5.300% due 08/01/14++................................... $ 4,965,000
2,225,000 Series B, 5.300% due 08/01/14++......................... 2,225,000
3,200,000 Homestake Mining,
3.900% due 05/01/04++................................... 3,200,000
Pacific Gas & Electric Company:
6,700,000 Series A, Refunding, AMT,
5.000% due 12/01/18+.................................... 6,700,000
Series C, Refunding,
4,000,000 5.100% due 11/01/26+.................................... 4,000,000
1,000,000 Series F, Refunding,
5.000% due 11/01/26+.................................... 1,000,000
Southern California Edison Company:
1,800,000 Series A, 5.200% due 02/28/08+.......................... 1,800,000
2,100,000 Series D, 5.200% due 02/28/08+.......................... 2,100,000
Economic Development Financing Authority
(California Independent Systems Project):
5,000,000 Series A, 5.000% due 04/01/08+.......................... 5,000,000
5,000,000 Series C, 5.000% due 04/01/08+.......................... 5,000,000
1,400,000 Serra Microchassis Project,
5.150% due 08/01/27+.................................... 1,400,000
California Statewide Communities Development Authority:
Solid Waste Revenue:
3,100,000 (Chevron U.S.A. Encore Project),
5.050% due 12/15/24+.................................... 3,100,000
2,000,000 Industrial Development Revenue,
(Karcher Property Project), Series C,
2.950% due 12/01/19++................................... 2,000,000
Lease Revenue:
500,000 (Oakland Convention Centers Project),
5.200% due 10/01/99..................................... 507,627
Multi-family Housing Revenue:
2,950,000 (Aegis Apartments Project), Series Y,
5.150% due 06/01/33+.................................... 2,950,000
4,600,000 (Pittsburg Plaza Apartments), Series K,
AMT, 4.000% due 09/01/27++.............................. 4,600,000
7,990,000 Kaiser Permananete,
3.760% due 12/01/15+.................................... 7,990,000
6,500,000 University Retirement Community Project,................
5.000% due 11/15/28+.................................... 6,500,000
7,500,000 Saint Joseph Health System,
3.800% due 07/01/08++................................... 7,500,000
500,000 Public Works, Department of Correction,
4.500% due 12/01/99..................................... 506,707
</TABLE>
76
<PAGE>
------------------------
The Montgomery Funds
------------------------
California Tax-Free
Money Fund
Investments
<TABLE>
Principal Amount Value (Note 1)
<S> <C> <C>
California -- continued
$475,000 Chico, California, University School District,
9.000% due 08/01/99..................................... $ 490,975
1,000,000 Clovis, California, University School District,
5.000% due 08/01/99..................................... 1,010,777
320,000 Comton, California, Redevelopment Agency,
Tax Allocation Revenue,
7.500% due 08/01/13..................................... 334,408
500,000 Contra Costa County, California,
Water District Revenue Bonds,
4.375% due 10/01/99++................................... 505,028
2,000,000 Contra Costa County, California, Water District,
2.900% due 01/20/99..................................... 2,000,000
2,900,000 Corona, California, Multi-family Housing
Revenue (Bay Apartments), Series B,
3.850% due 11/15/22++................................... 2,900,000
650,000 Culver City, California, Redevelopment
Finance Authority, Prerefunded, Senior Lien,
Series A, 6.900% due 11/01/01........................... 683,308
200,000 Desert Sands, California, School District,
Certificates of Participation (Measure O
Project), Series D (MBIA Insured),
4.100% due 03/01/99..................................... 200,061
300,000 East Bay, California, Municipal Utility
District, Water System Revenue,
5.300% due 06/01/99..................................... 302,817
2,000,000 Elk Grove, California, School District,
TRANS, 4.500% due 06/30/99.............................. 2,008,565
250,000 Evergreen, California, School District
Special Tax, 3.900% due 09/01/99........................ 251,458
5,000,000 Fontana, California, School District,
TRANS, 4.000% due 07/09/99.............................. 5,008,489
Fremont, California:
2,500,000 High School District, TRANS,
3.900% due 06/30/99..................................... 2,502,373
4,000,000 Multi-family Housing Revenue
(TreeTops Apartments Project), Series A,
AMT, 4.000% due 08/15/26++.............................. 4,000,000
765,000 Police Facility Refinancing Project,
3.000% due 08/01/99..................................... 765,000
250,000 Fresno, California, University School District,
7.000% due 05/01/12..................................... 258,160
3,000,000 Government Development Bank,
Commercial Paper,
3.000% due 02/11/99..................................... 3,000,000
250,000 HI Desert, California, Health Care District,
3.950% due 10/01/99..................................... 250,000
Irvine, California, Improvement
Board Act of 1915:
$2,353,000 No-94-13, 5.100% due 09/02/22+.......................... $ 2,353,000
3,200,000 No-97-17, 5.100% due 09/02/23+.......................... 3,200,000
3,500,000 Irvine Ranch, California, Water District:
5.100% due 10/01/05+.................................... 3,500,000
1,100,000 Series B, 5.100% due 10/01/04+.......................... 1,100,000
3,445,000 Various District No-140-240-105-250
5.100% due 04/01/33+.................................... 3,445,000
2,000,000 Kern, California, High School District,
3.760% due 02/01/13+.................................... 2,000,000
800,000 Lassen, California, Municipal Utilities
District Revenue, Series A, Refunding, AMT
(FSA Insured), 4.150% due 05/01/08++.................... 800,000
2,800,000 Long Beach, California, Health Facility
Revenue, Memorial Health Services,
2.700% due 10/01/16+.................................... 2,800,000
Los Angeles, California, GO:
775,000 Series A, 4.900% due 09/01/99........................... 784,576
1,640,000 Series B, 6.125% due 09/01/00........................... 1,680,850
Certificate of Participation:
1,000,000 6.200% due 02/01/01..................................... 1,012,607
600,000 3.000% due 03/01/99..................................... 600,000
5,260,000 Certificate of Participation,
Equipment and Reality Property Acquisition,
4.000% due 12/01/99..................................... 5,308,879
Convention and Exhibition Center Authority:
325,000 6.600% due 08/15/99..................................... 331,752
500,000 7.375% due 08/15/18..................................... 520,185
Multi-family Housing Revenue:
2,400,000 Series K, 3.600% due 07/01/10++......................... 2,400,000
200,000 (Central Library Project), Series A,
7.100% due 06/01/11++................................... 207,298
2,000,000 (Mission Village Terrace), Series D, AMT,
3.950% due 07/01/27++................................... 2,000,000
6,000,000 (Malibu Meadows Project), Series B,
3.800% due 04/15/28++................................... 6,000,000
700,000 Waste Water System Revenue,
7.000% due 02/01/08..................................... 716,249
7,500,000 TRANS, Series A,
4.500% due 06/30/99..................................... 7,537,621
500,000 TRANS, 4.000% due 06/30/99.............................. 501,914
200,000 Flood Control District,
4.300% due 11/01/99..................................... 202,117
300,000 Metropolitan Transportation Authority,
Sales Tax Revenue, Proposition C,
Second Series, Series A,
4.000% due 07/01/99++................................... 301,388
</TABLE>
77
<PAGE>
--------------------
The Montgomery Funds
--------------------
California Tax-Free
Money Fund
Investments
<TABLE>
Principal Amount Value (Note 1)
<S> <C> <C>
California continued
Los Angeles, California,
Water Works Department, Commercial Paper:
$1,250,000 2.900% due 01/15/99..................................... $ 1,250,000
5,000,000 2.950% due 01/08/99..................................... 5,000,000
Los Angeles, California
(Disney Parking Refunding Project):
4,500,000 2.900% due 01/13/99..................................... 4,500,000
1,000,000 3.000% due 02/18/99..................................... 1,000,000
4,000,000 M.S.R. Public Power Agency,
San Juan Project Revenue, Series F,
5.100% due 07/01/22+.................................... 4,000,000
215,000 Mammoth, California, Community
Water District, 4.000% due 09/02/99..................... 215,000
8,000,000 Metropolitan Water District, Southern
California Waterworks Revenue, Commercial
Paper, 3.000% due 03/09/99.............................. 8,000,000
510,000 Monrovia, California, Redevelopment
Agency, Tax Allocation Revenue
(Central Redevelopment Project)
(AMBAC Insured), 3.800%
due 05/01/99............................................ 510,000
Orange County, California:
1,300,000 Apartment Development Revenue
(Harbor Pointe), Issue D,
3.850% due 12/01/06++................................... 1,300,000
500,000 Local Transportation Authority, Sales Tax
Revenue, 5.200% due 01/15/99............................ 501,277
3,400,000 Sanitation Districts, Certificates of Participation,
5.100% due 08/01/15+.................................... 3,400,000
3,000,000 Orange County, California, TRANS,
3.050% due 02/17/99..................................... 3,000,000
200,000 Port Oakland, California, Port Revenue,
Series E (MBIA Insured),
5.200% due 11/01/99..................................... 203,820
1,040,000 Redlands, California, Redevelopment
Agency, Series A (MBIA Insured),
3.700% due 08/01/99..................................... 1,044,129
460,000 Riverside County, California, TRANS,
4.500% due 09/30/99..................................... 464,784
2,500,000 Riverside Teeter, Commercial Paper,
2.950% due 02/24/99..................................... 2,500,000
310,000 Rocklin, California, Unified School District,
Community Facilities District, Special Tax
(MBIA Insured), 3.750% due 09/01/99..................... 311,101
1,565,000 Sacramento, California, Regional County
Sanitation District,
4.500% due 08/01/99......................................... 1,572,917
195,000 San Bernardino, California, Joint Powers
Financing Authority, Tax Allocation
Revenue, 4.600% due 07/01/99............................ 195,808
1,250,000 San Bernardino, California, Certificate
of Participation, 7.400% due 08/01/11................... 1,279,394
San Diego, California:
Regional Transportation Commission,
Sales Tax Revenue, Series A (FGIC Insured):
$200,000 5.000% due 04/01/99++................................... $ 200,888
200,000 4.250% due 04/01/99++................................... 200,522
300,000 Series A, TRANS, 4.500% due 09/30/99.................... 303,146
Commercial Paper:
1,800,000 3.100% due 02/05/99..................................... 1,800,000
1,400,000 2.950% due 02/10/99..................................... 1,400,000
3,500,000 3.050% due 02/10/99..................................... 3,500,000
290,000 Unified School District, Certificate of
Participation, 6.000% due 07/01/99...................... 293,760
Water Authority, Water Revenue,
Certificate of Participation:
415,000 5.750% due 05/01/99..................................... 418,636
Commercial Paper:
4,900,000 2.950% due 01/12/99..................................... 4,900,000
1,200,000 2.950% due 01/13/99..................................... 1,200,000
San Francisco, California, City and County
Sewer Revenue (AMBAC Insured):
500,000 6.500% due 10/01/11..................................... 522,599
475,000 6.500% due 10/01/21..................................... 496,465
510,000 Santa Ana, California, Community
Redevelopment Agency, Tax Allocation,
7.400% due 09/01/19..................................... 534,088
1,000,000 Santa Barbara County, California,
School Financing Authority, TRANS,
4.500% due 06/30/99..................................... 1,003,946
Santa Clara County, California:
2,110,000 TRANS, 4.500% due 10/01/99.............................. 2,132,177
1,600,000 Financing Authority Lease Revenue
(VAR Facility Replacement Project),
3.800% due 11/15/25++................................... 1,600,000
2,500,000 Santa Cruz County, California,
Board of Education, TRANS,
4.000% due 06/30/99..................................... 2,503,795
500,000 Public Financing Authority Revenue,
Series B, 7.625% due 09/01/21........................... 526,208
330,000 Santa Maria Bonita, California,
School District, Certificate of
Participation (MBIA Insured),
4.250% due 03/01/99..................................... 330,178
250,000 Santa Rosa, California, Central Parking
Service Facilities District,
4.050% due 07/02/99..................................... 250,488
500,000 South Coast Air Quality Management,
California, District Building Corporation
Revenue, Series B (AMBAC Insured),
6.900% due 08/01/00..................................... 520,799
</TABLE>
78
<PAGE>
--------------------
The Montgomery Funds
--------------------
California Tax-Free
Money Fund
Investments
<TABLE>
Principal Amount Value (Note 1)
<S> <C> <C>
California continued
$250,000 South Poway Community, California,
District No. 1 Facilities
(MBIA Insured), 3.500% due 08/02/99..................... $ 250,711
375,000 Temecula, California, Community Facilities
District No. 88-12-A,
4.250% due 09/01/99..................................... 375,665
435,000 Thousand Oaks, California, Certificate
of Partnership, Wastewater System
Improvement Project (FSA Insured),
3.400% due 10/01/99..................................... 435,946
555,000 Torrance, California, Certificate of
Partnership (MBIA Insured),
4.000% due 12/01/99..................................... 559,956
2,000,000 University of California, UCLA Central
Chiller/Cogeneration Facility,
Certificate of Partnership,
7.000% due 11/01/21..................................... 2,104,118
2,300,000 Vallejo, California, Multi-family
Housing Authority Revenue,
3.900% due 01/01/08++................................... 2,300,000
2,500,000 West Contra Costa, California,
Unified School District, TRANS,
4.000% due 06/30/99..................................... 2,504,760
200,000 West Covina, California, Public
Financing Authority Water Revenue,
Water Systems Capital Improvements
Project, 7.500% due 09/01/08............................ 209,633
5,000,000 Western Riverside County, California,
Regional Wastewater Treatment Authority
Revenue, 5.100% due 04/01/28+........................... 5,000,000
320,000 Whittier, California, Community
Facility District Special Tax,
3.600% due 09/01/99..................................... 320,000
------------
TOTAL MUNICIPAL BONDS AND NOTES.............................................. 264,483,877
------------
TOTAL INVESTMENTS -- 118.0%
(At amortized cost*)......................................................... $264,483,877
OTHER ASSETS AND LIABILITIES -- (18.0)%
(Net)........................................................................ (40,363,087)
------------
NET ASSETS -- 100.0%......................................................... $224,120,790
============
</TABLE>
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
GO General Obligation
MBIA Municipal Bond Investors Assurance
TRANS Tax and Revenue Anticipation Notes
The Montgomery California Tax-Free Money Fund concentrates in California
municipal securities. Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations, court decisions and
voter initiatives could result in certain adverse consequences, including
impairing the ability of certain issuers of California municipal securities to
pay principal and interest on their obligations.
79
<PAGE>
---------------------
The Montgomery Funds
---------------------
Statements of
Assets and Liabilities
December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
U.S. Emerging
Growth
Assets: Fund
- -----------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities.................................................. $ 966,383,967
Repurchase agreements....................................... 77,674,000
--------------
Total Investments............................................. 1,044,057,967
Cash.......................................................... --
Foreign currency, at value (Cost $76,700)..................... --
Cash held as collateral for loaned securities (note 4)........ 29,098,365.65
Receivables:
Dividends................................................... 3,719,965
Interest.................................................... 11,111
Variation margin on futures contracts (note 4).............. --
Expenses absorbed by Manager................................ 6,145
Shares of beneficial interest sold.......................... 3,947,264
Investment securities sold.................................. 1,937,470
Other Assets:
Deferred organization costs (note 1)........................ --
--------------
Total Assets.................................................. 1,082,778,287
--------------
Liabilities:
- -----------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward
foreign-currency exchange contracts (note 4)................ --
Collateral on securities loaned (note 4)...................... 29,098,365
Payables:
Shares of beneficial interest redeemed...................... 3,496,963
Investment securities purchased............................. 1,216,985
Management fees............................................. 109,594
Administration fees......................................... 56,841
Share marketing plan fees (note 3) (Class P shares only).... 411
Custodian fees.............................................. 28,617
Dividends................................................... 3,979
Trustees' fees and expenses................................. 1,091
Cash overdrafts payable to custodian........................ 104,672
Transfer agency and servicing fees.......................... 92,885
Other accrued liabilities and expenses...................... 149,624
--------------
Total Liabilities............................................. 34,360,027
--------------
Net Assets.................................................... $1,048,418,260
--------------
Investments at identified cost................................ $ 901,387,155
Net Assets Consist of:
- -----------------------------------------------------------------------------
Undistributed net investment income/(distributions in
excess of net investment income/accumulated net
investment loss)............................................. $ 4,437,661
Accumulated net realized gain/(loss) on securities
sold, forward foreign-currency exchange contracts,
futures contracts and foreign-currency transactions.......... 26,278,400
Net unrealized appreciation of investments, forward
foreign-currency exchange contracts, foreign-currency
transactions, equity swaps and other assets.................. 142,672,999
Shares of beneficial interest................................. 508,404
Additional paid-in capital.................................... 874,520,796
--------------
Net Assets.................................................... $1,048,418,260
Net Assets:
- -----------------------------------------------------------------------------
Class R shares.............................................. $1,048,235,772
Class P shares.............................................. 182,488
--------------
Net Assets.................................................... $1,048,418,260
Number of Fund shares outstanding:
Class R shares.............................................. 50,831,622
Class P shares.............................................. 8,794
--------------
Total Shares.................................................. 50,840,416
Class R shares:
Net asset value, offering and redemption price per share
outstanding................................................ $ 20.62
--------------
Class P shares:
Net asset value, offering and redemption price per share
outstanding................................................ $ 20.75
--------------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
U.S. EMERGING SMALL CAP EQUITY INTERNATIONAL INTERNATIONAL
GROWTH SMALL CAP OPPORTUNITIES INCOME GROWTH SMALL CAP
FUND FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 380.293,230 $ 159,138,472 $ 88,823,235 $ 38,416,391 $ 183,155,494 $ 47,298,975
30,541,000 4,174,000 2,692,000 1,622,000 20,796,000 26,000
-------------- -------------- ------------- ------------- --------------- --------------
410,834,230 163,312,472 91,515,235 40,038,391 203,951,494 47,324,975
1,933,351 809,582 1,308 35,576 501,843 --
-- -- -- -- -- 71,913
31,483,077 6,250,029 12,720,074 156,096 10,397,650 3,797,929
73,795 6,317 20,434 35,811 220,454 71,340
4,369 -- 3,379 232 3,174 13,349
64,382 -- -- -- -- --
-- -- 12,787 924 -- --
623,215 1,068,478 69,516 39,885 -- 6,833
1,316,493 1,462,448 627,480 -- 1,831,892 920,581
1,456 -- 5,532 2,151 5,367 --
-------------- -------------- ------------- ------------- --------------- --------------
446,269,986 172,909,326 104,975,745 40,309,066 216,911,874 52,206,920
-------------- -------------- ------------- ------------- --------------- --------------
- ---------------------------------------------------------------------------------------------------------------------------
-- -- -- -- 36,661 4,310
31,483,077 6,250,029 12,720,074 156,096 10,397,650 3,797,929
626,788 1,845,647 1,370,519 47,131 -- 555,005
3,467,600 773,895 883,976 403,633 3,963,416 741,208
147,652 97,516 -- 42,225 168,613 50,288
21,525 41,044 2,321 2,376 11,080 2,464
-- 29,939 45 4,593 529 33
16,220 6,058 6,628 7,454 42,737 7,783
-- -- 1,533 11,614 1,103,027 --
1,053 1,096 1,548 954 2,508 --
-- -- -- -- -- 5,091
53,878 18,258 4,565 17,096 -- 28,198
111,449 29,717 32,377 25,870 137,047 48,802
-------------- -------------- ------------- ------------- --------------- --------------
35,929,242 9,093,199 15,023,586 719,042 15,863,268 5,241,111
-------------- -------------- ------------- ------------- --------------- --------------
$ 410,340,744 $ 163,816,127 $ 89,952,159 $ 39,590,024 $ 201,048,606 $ 46,965,809
-------------- -------------- ------------- ------------- --------------- --------------
$ 300,331,527 $ 124,315,008 $ 71,656,363 $ 34,514,654 $ 184,675,676 $ 43,444,661
- ---------------------------------------------------------------------------------------------------------------------------
$ (1,179,897) $ (824,703) $ (660,988) $ 219,631 $ (265,167) $ (330,802)
29,466,283 (14,723,300) (9,663,989) 947,272 (4,876,745) (3,349,979)
110,502,703 38,997,464 19,858,872 5,523,737 19,259,535 3,890,939
198,232 108,839 55,123 22,326 106,411 33,524
271,353,423 140,257,827 80,363,141 32,877,058 186,824,572 46,722,127
-------------- -------------- ------------- ------------- --------------- --------------
$ 410,340,744 $ 163,816,127 $ 89,952,159 $ 39,590,024 $ 201,048,606 $ 46,965,809
- ---------------------------------------------------------------------------------------------------------------------------
$ 410,340,744 $ 144,577,469 $ 89,865,111 $ 36,490,614 $ 200,062,353 $ 46,961,247
N/A 19,238,658 87,048 3,099,410 986,253 4,562
-------------- -------------- ------------- ------------- --------------- --------------
$ 410,340,744 $ 163,816,897 $ 89,952,159 $ 39,590,024 $ 201,048,606 $ 46,965,809
19,823,229 9,590,686 5,506,873 2,057,481 10,588,887 3,352,037
N/A 1,293,211 5,456 175,127 52,256 326
-------------- -------------- ------------- ------------- --------------- --------------
19,823,229 10,883,897 5,512,329 2,323,608 10,641,143 3,352,363
$ 20.70 $ 15.07 $ 16.32 $ 17.74 $ 18.89 $ 14.01
-------------- -------------- ------------- ------------- --------------- --------------
N/A $ 14.88 $ 15.95 $ 17.70 $ 18.87 $ 13.99
-------------- -------------- ------------- ------------- --------------- --------------
</TABLE>
81
<PAGE>
--------------------
The Montgomery Funds
--------------------
Statements of
Assets and Liabilities
December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Global
Opportunities
Assets: Fund
- ------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities.................................................. $ 49,546,086
Repurchase agreements....................................... 4,544,000
--------------
Total Investments............................................. 54,090,086
Cash.......................................................... --
Foreign currency, at value (Cost $445,516, $7,240,786,
$2,300,609and $174,311, respectively)........................ 445,516
Cash held as collateral for loaned securities (note 4)........ 4,068,868
Receivables:
Dividends................................................... 140,828
Interest.................................................... 650
Variation margin on futures contracts (note 4).............. --
Expenses absorbed by Manager................................ --
Shares of beneficial interest sold.......................... 965,487
Investment securities sold.................................. --
Other Assets:
Deferred organization costs (note 1)........................ --
--------------
Total Assets.................................................. 59,711,435
--------------
Liabilities:
- ------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-
currency exchange contracts (note 4)........................ --
Collateral on securities loaned (note 4)...................... 4,068,868
Payables:
Notes payable (note 4)...................................... --
Shares of beneficial interest redeemed...................... 285,452
Investment securities purchased............................. --
Reverse repurchase agreements............................... --
Management fees............................................. 43,866
Administration fees......................................... 2,913
Share marketing plan fees (see note 3)
(Class P shares only)...................................... --
Custodian fees.............................................. 2,779
Dividends................................................... --
Trustees' fees and expenses................................. 2,603
Cash overdrafts payable to custodian........................ 460,087
Transfer agency and servicing fees.......................... 9,746
Accrued liabilities and expenses............................ 29,945
--------------
Total Liabilities............................................. 4,906,259
--------------
Net Assets.................................................... $ 54,805,176
--------------
Investments at identified cost................................ $ 45,975,834
Net Assets Consist of:
- ------------------------------------------------------------------------------
Undistributed net investment income/(distributions in
excess of net investment income/accumulated net
investment loss)............................................. $ (1,172,004)
Accumulated net realized gain/(loss) on securities
sold, forward foreign-currency exchange contracts,
futures contracts, foreign-currrency transactions
and equity swaps............................................. 1,244,459
Net unrealized appreciation/(depreciation) of
investments, forward foreign-currency exchange
contracts, foreign-currency transactions, equity
swaps and other assets....................................... 6,686,096
Shares of beneficial interest................................. 32,644
Additional paid-in capital.................................... 48,013,981
--------------
Net Assets.................................................... $ 54,805,176
Net Assets:
- ------------------------------------------------------------------------------
Class R shares.............................................. $ 54,805,176
Class P shares.............................................. N/A
--------------
Net Assets.................................................... $ 54,805,176
Number of Fund shares outstanding:
Class R shares.............................................. 3,264,383
Class P shares.............................................. N/A
--------------
Total Shares.................................................. 3,264,383
Class R shares:
Net asset value, offering and redemption
price per share outstanding.................................. $ 16.79
--------------
Class P shares:
Net asset value, offering and redemption price per
share outstanding.......................................... N/A
--------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
GLOBAL U.S. ASSET
COMMUNICATIONS EMERGING EMERGING LATIN AMERICA SELECT 50 ALLOCATION
FUND MARKETS FUND ASIA FUNDS FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 254,524,184 $ 335,130,418 $ 34,423,623 $ 1,780,839 $ 172,274,247 $ 109,066,921
30,634,000 1,340,000 -- -- 4,564,000 --
-------------- -------------- ------------- ------------- --------------- --------------
285,158,184 336,470,418 34,423,623 1,780,839 176,838,247 109,066,921
-- 888,547 59,976 -- -- --
-- 7,248,906 422,975 -- 16,227 --
38,213,621 -- -- -- -- --
71,440 2,077,911 14,496 12,389 197,430 --
157,566 18,111 -- -- 653 --
-- -- -- -- -- 233,443
-- -- -- -- -- 72,212
2,058,918 583,046 222,326 887 289,429 96,908
-- 10,042,889 1,151,705 29,198 1,587,832 --
-- -- 9,058 5,127 3,066 3,451
-------------- -------------- ------------- ------------- --------------- --------------
325,659,729 357,329,828 36,304,159 1,828,440 178,932,884 109,472,935
-------------- -------------- ------------- ------------- --------------- --------------
- -----------------------------------------------------------------------------------------------------------------------
73 2,818 -- -- -- --
38,213,621 -- -- -- -- --
-- 14,500,000 -- -- -- --
734,701 3,350,770 619,164 73,431 1,632,825 --
585,637 2,908,165 1,207,276 -- 2,074,409 276,871
-- -- --
91,480 45,593 22,824 78 85,512 --
17,368 20,185 2,150 122 10,453 --
-- 1,050 5 -- -- 272
103,099 -- 26,809 162 8,258 --
-- -- 4,025 1,235 -- --
1,052 707 907 5,121 2,528 --
2,280,325 -- -- 148,114 38,245 1,475,125
117,899 173,985 21,285 -- 129,916 27,970
98,275 423,466 26,216 1,969 44,115 30,149
-------------- -------------- ------------- ------------- --------------- --------------
42,243,530 21,426,739 1,930,661 230,232 4,026,261 1,810,387
-------------- -------------- ------------- ------------- --------------- --------------
$ 283,416,199 $ 335,903,089 $ 34,373,498 $ 1,598,208 $ 174,906,623 $ 107,662,548
-------------- -------------- ------------- ------------- --------------- --------------
$ 222,213,487 $ 432,697,479 $ 34,295,472 $ 2,261,224 $ 147,342,298 $ 116,468,751
- -----------------------------------------------------------------------------------------------------------------------
$ (757,323) $ (4,969,584) $ (452,952) $ 15,644 $ (2,948,798) $ 4,027,448
10,507,930 (315,090,535) (15,928,843) (3,885,076) (5,490,677) 1,279,251
62,962,486 (96,197,656) (2,109,457) (481,595) 29,337,865 (7,401,830)
132,405 421,046 43,334 3,235 91,449 71,662
210,570,701 751,739,818 52,821,416 5,946,000 153,916,784 109,686,017
-------------- -------------- ------------- ------------- --------------- --------------
$ 283,416,199 $ 335,903,089 $ 34,373,498 $ 1,598,208 $ 174,906,623 $ 107,662,548
- -----------------------------------------------------------------------------------------------------------------------
$ 283,416,199 $ 335,555,688 $ 34,373,498 $ 1,598,208 $ 174,861,503 $ 107,595,413
N/A 347,401 N/A N/A 45,120 67,135
-------------- -------------- ------------- ------------- --------------- --------------
$ 283,416,199 $ 335,903,089 $ 34,373,498 $ 1,598,208 $ 174,906,623 $ 107,662,548
13,240,453 42,060,243 4,333,421 323,545 9,142,562 7,161,571
N/A 44,311 N/A N/A 2,376 4,620
-------------- -------------- ------------- ------------- --------------- --------------
13,240,453 42,104,554 4,333,421 323,545 9,144,938 7,166,191
$ 21.41 $ 7.98 $ 7.93 $ 4.94 $ 19.13 $ 15.02
-------------- -------------- ------------- ------------- --------------- --------------
N/A $ 7.84 N/A N/A $ 18.99 $ 14.53
-------------- -------------- ------------- ------------- --------------- --------------
</TABLE>
83
<PAGE>
--------------------
The Montgomery Funds
--------------------
Statements of
Assets and Liabilities
December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Total Return
Assets: Bond Fund
- ----------------------------------------------------------------------------
<S> <C>
Assets:
Investments in securities, at value (note 1)
Securities.................................................. $ 73,085,832
Repurchase agreements....................................... --
------------
Total Investments............................................. 73,085,832
Cash.......................................................... --
Receivables:
Interest.................................................... 770,296
Expenses absorbed by Manager................................ 29,419
Shares of beneficial interest sold.......................... 81,665
Investment securities sold.................................. 1,986,833
Other Assets:
Deferred organization costs (note 1)........................ 4,298
------------
Total Assets.................................................. 75,928,924
------------
Liabilities:
- ----------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions............. 4,027
Deferred gain on dollar roll transactions................... 24,974
Shares of beneficial interest redeemed...................... 48,695
Investment securities purchased............................. 16,547,827
Reverse repurchase agreements............................... --
Management fees............................................. 42,381
Administration fees......................................... 2,656
Share marketing plan fees (see note 3)
(Class P shares only)..................................... --
Custodian fees.............................................. 4,986
Dividends................................................... 322,627
Trustees' fees and expenses................................. 582
Variation margin............................................ --
Cash overdrafts payable to custodian........................ 463,766
Transfer agency and servicing fees.......................... 2,004
Accrued liabilities and expenses............................ 76,691
------------
Total Liabilities............................................. 17,541,216
------------
Net Assets.................................................... $ 58,387,708
------------
Investments at identified cost................................ $ 71,682,576
Net Assets Consist of:
- ----------------------------------------------------------------------------
Undistributed net investment income/(distributions in
excess of net investment income/accumulated net
investment loss)............................................. $ (6,189)
Accumulated net realized gain/(loss) on securities sold,
futures contracts and dollar roll agreements................. 882,140
Net unrealized appreciation of investments,
dollar roll agreements and other assets...................... 1,403,256
Shares of beneficial interest................................. 47,903
Additional paid-in capital.................................... 56,060,598
------------
Net Assets.................................................... $ 58,387,708
Net Assets:
- ----------------------------------------------------------------------------
Class R shares.............................................. $ 58,387,708
Class P shares.............................................. N/A
------------
Net Assets.................................................... $ 58,387,708
Number of Fund shares outstanding:
Class R shares.............................................. 4,790,265
Class P shares.............................................. N/A
------------
Total Shares.................................................. 4,790,265
Class R shares:
Net asset value, offering and redemption price
per share outstanding....................................... $ 12.19
------------
Class P shares:
Net asset value, offering and redemption
price per share outstanding................................ N/A
------------
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA
SHORT DURATION TAX-FREE GOVERNMENT FEDERAL CALIFORNIA
GOVERNMENT INTERMEDIATE RESERVE TAX-FREE TAX-FREE
BOND FUND BOND FUND FUND MONEY FUND MONEY FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 147,522,578 $ 42,676,661 $ 559,633,585 $ 131,703,640 $ 264,483,877
-- -- 192,785,000 -- --
-------------- ------------- -------------- -------------- --------------
147,522,578 $ 42,676,661 $ 752,418,585 131,703,640 264,483,877
6,591,057 -- -- -- --
1,356,417 735,133 6,682,087 916,374 1,660,269
-- 29,419 -- -- --
911,422 3,240 271,095 5,018 2,518,629
54,531 -- -- -- --
-- -- -- -- --
-------------- ------------- -------------- -------------- --------------
156,436,005 43,444,453 759,371,767 132,625,032 268,662,775
-------------- ------------- -------------- -------------- --------------
- ---------------------------------------------------------------------------------------------------
2,635 -- -- -- --
3,124 -- -- -- --
923,026 -- 3,310,799 30,344 3,197,672
16,075,420 -- 3,068,535 20,816,456 35,453,578
4,561,875 -- -- -- --
80,748 60,205 233 69,493 81,310
5,891 1,797 27,594 5,470 10,177
31 -- 1 -- --
9,464 1,746 14,321 16,194 8,366
572,335 4,969 2,890,353 -- 530,239
927 934 2,636 2,368 2,447
938 -- -- -- --
-- 239,827 183,093 1,693,761 5,165,629
30,183 6,460 294,601 2,454 14,798
75,920 43,561 315,148 61,399 77,769
-------------- ------------- -------------- -------------- --------------
22,342,517 359,499 10,107,314 22,697,939 44,541,985
-------------- ------------- -------------- -------------- --------------
$ 134,093,488 $ 43,084,954 $ 749,264,453 $ 109,927,093 $ 224,120,790
-------------- ------------- -------------- -------------- --------------
$ 146,974,170 $ 41,137,526 $ 752,418,585 $ 131,703,640 $ 264,483,877
- ---------------------------------------------------------------------------------------------------
$ (3,607) $ 1,198 $ 4,650 $ (387) $ 84
310,880 (55,289) (19,536) (1,054) (6,192)
569,986 1,539,135 -- -- --
131,323 32,942 7,492,681 1,099,285 2,241,277
133,084,906 41,566,968 741,786,658 108,829,249 221,885,621
-------------- ------------- -------------- -------------- --------------
$ 134,093,488 $ 43,084,954 $ 749,264,453 $ 109,927,093 $ 224,120,790
- ---------------------------------------------------------------------------------------------------
$ 134,060,594 $ 43,084,954 $ 749,263,443 $ 109,927,093 $ 224,120,790
32,894 N/A 1,010 N/A N/A
-------------- ------------- -------------- -------------- --------------
$ 134,093,488 $ 43,084,954 $ 749,264,453 $ 109,927,093 $ 224,120,790
13,129,107 3,294,235 749,267,136 109,928,534 224,127,675
3,225 N/A 1,010 N/A N/A
-------------- ------------- -------------- -------------- --------------
13,132,332 3,294,235 749,268,146 109,928,534 224,127,675
$ 10.21 $ 13.08 $ 1.00 $ 1.00 $ 1.00
-------------- ------------- -------------- -------------- --------------
$ 10.20 $ N/A $ 1.00 $ N/A $ N/A
-------------- ------------- -------------- -------------- --------------
</TABLE>
85
<PAGE>
--------------------
The Montgomery Funds
--------------------
Statements of Operations
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
U.S. Emerging
Growth Growth Small Cap
Net Investment Income: Fund Fund Fund
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest....................... $ 2,435,470 $ 1,194,017 $ 129,719
Dividends (net of foreign
withholding taxes)............ 8,858,310 477,408 89,434
Securities lending income
(note 4)...................... 27,318 22,091 17,288
-------------- ------------ ------------
Total Income................... 11,321,098 1,693,516 236,441
-------------- ------------ ------------
Expenses:
Custodian fee.................. 38,674 17,911 3,758
Transfer agency and servicing
fees.......................... 810,947 168,805 46,078
Management fee (note 2)........ 5,200,261 2,388,812 823,179
Administration fee (note 2).... 358,513 120,006 62,540
Share marketing plan fee
(note 3) (Class P shares only) 216 -- 22,267
Legal and audit fees........... 70,401 31,758 32,767
Trustees' fees................. 2,811 2,773 2,773
Registration fees.............. 32,247 17,911 --
Accounting expenses............ 209,023 68,957 33,511
Printing fees.................. 66,958 35,288 12,602
Amortization of organization
expenses (note 1)............. 2,873 738 --
Other.......................... 89,734 20,454 22,713
Tax expense.................... -- -- --
Interest expense............... 5,590 -- --
-------------- ------------ ------------
Total Expenses................. 6,888,248 2,873,413 1,062,188
Fees deferred and/or expenses
absorbed by Manager (note 2).. (6,145) -- (1,044)
-------------- ------------ ------------
Net Expenses................... 6,882,103 2,873,413 1,061,144
-------------- ------------ ------------
Net Investment Income/(Loss)... 4,438,995 (1,179,897) (824,703)
-------------- ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments:
- -------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions...... 35,912,457 24,977,970 (17,679,975)
Forward foreign-currency
exchange contracts.......... -- -- --
Futures contracts............ (3,715,656) 6,503,334 --
Foreign-currency
transactions and other
assets...................... (200) -- --
Net Realized Gain/(Loss) on
Investments................... 32,196,601 31,481,304 (17,679,975)
-------------- ------------ -------------
Net change in unrealized
appreciation/(depreciation)
of:
Securities................... (123,605,114) (22,667,432) (13,442,812)
Forward foreign-currency
exchange contracts.......... -- -- --
Foreign-currency
transactions and other
assets...................... 161 -- --
-------------- ------------ ------------
Net Unrealized
Appreciation/(Depreciation)
of Investments................ (123,604,953) (22,667,432) (13,442,812)
-------------- ------------ ------------
Net Realized and Unrealized
Gain/(Loss) on Investments.... (91,408,352) 8,813,872 (31,122,787)
-------------- ------------ ------------
Net Increase/(Decrease) in
Net Assets Resulting from
Operations.................... $ (86,969,357) $ 7,633,975 $(31,947,490)
-------------- ------------ ------------
Foreign withholding taxes...... $ 62,708 $ -- $ --
-------------- ------------ ------------
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP EQUITY INTERNATIONAL INTERNATIONAL GLOBAL GLOBAL
OPPORTUNITIES INCOME GROWTH SMALL CAP OPPORTUNITIES COMMUNICATIONS EMERGING
FUND FUND FUND FUND FUND FUND MARKETS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 97,050 $ 40,791 $ 505,709 $ 178,358 $ 90,390 $ 608,070 $ 5,999
145,790 530,361 517,695 210,713 142,681 1,666,805 5,065,968
5,645 88 34,925 29,961 42,030 167,447 --
------------ ----------- ----------- ------------ ----------- ----------- -------------
248,485 571,240 1,058,329 419,032 275,101 2,442,322 5,071,967
------------ ----------- ----------- ------------ ----------- ----------- -------------
8,748 5,635 100,467 24,108 27,136 86,975 270,427
113,269 39,144 110,514 57,476 49,749 270,799 834,492
713,915 116,865 794,152 301,803 404,017 1,646,463 2,765,259
41,645 13,634 50,537 16,921 20,994 91,760 159,536
27 3,531 553 9 -- -- 443
23,299 14,389 12,602 14,301 11,846 29,698 70,575
2,687 2,674 2,773 2,655 2,773 2,773 2,773
16,983 18,096 107,643 14,171 15,075 13,139 11,079
22,611 7,252 60,998 20,166 25,830 88,388 209,273
23,479 4,912 3,025 7,249 3,781 24,348 201,644
1,398 1,452 201 1,483 1,450 -- --
9,337 5,976 16,146 4,482 16,286 24,122 43,215
-- -- -- -- -- -- 124,626
23,389 910 2,280 1,033 60,235 6,805 119,993
------------ ----------- ----------- ------------ ----------- ----------- -------------
1,000,787 234,470 1,261,891 465,857 639,172 2,285,270 4,813,335
(91,314) (64,442) (71,964) (4,920) (10,282) -- --
------------ ----------- ----------- ------------ ----------- ----------- -------------
909,473 170,028 1,189,927 460,937 628,890 2,285,270 4,813,335
------------ ----------- ----------- ------------ ----------- ----------- -------------
(660,988) 401,212 (131,598) (41,905) (353,789) 157,052 258,632
------------ ----------- ----------- ------------ ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------------------------------
(9,294,753) 880,733 (5,269,237) (3,540,255) 3,272,054 31,143,653 (168,911,040)
-- -- 534,799 (68,018) (190,756) (125,356) (253,863)
78,627 -- -- -- -- -- --
-- -- (755,808) (26,588) 1,046,943 (526,261) (1,327,880)
------------ ----------- ----------- ------------ ----------- ----------- -------------
(9,216,126) 880,733 (5,490,246) (3,634,861) 4,128,241 30,492,036 (170,492,783)
(22,940,764) 923,086 9,982,434 (221,021) (5,206,542) (23,769,047) 47,910,943
-- -- (224,610) (1,917) 4,723 10,549 1,678
-- -- 35,869 28,196 (1,413,720 18,248 152,205
------------ ----------- ----------- ------------ ----------- ----------- -------------
(22,940,764) 923,086 9,793,693 (194,742) (6,615,539) (28,740,250) 48,064,826
------------ ----------- ----------- ------------ ----------- ----------- -------------
(32,156,890) 1,803,819 4,303,447 (3,829,603) (2,487,298) 6,751,786 (122,427,957)
------------ ----------- ----------- ------------ ----------- ----------- -------------
$(32,817,878) $ 2,205,031 $ 4,171,849 $ (3,871,508) $(2,841,087) $ 6,908,838 $(122,169,325)
------------ ----------- ----------- ------------ ----------- ----------- -------------
$ -- $ -- $ 67,803 $ 20,261 $ -- $ 75,713 $ 390,383
------------ ----------- ----------- ------------ ----------- ----------- -------------
</TABLE>
87
<PAGE>
--------------------
The Montgomery Funds
--------------------
Statements of Operations
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Emerging Latin America Select 50
Net Investment Income: Asia Fund Fund Fund
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income:
Investment Income:
Interest...................... $ 40,836 $ 563 $ 208,625
Dividends (net of foreign
withholding taxes)........... 129,675 29,387 818,471
Securities lending income
(note 4)..................... -- -- --
-------------- ------------ ------------
Total Income.................. 170,511 29,950 1,027,096
-------------- ------------ ------------
Expenses:
Custodian fee................. 28,321 3,325 49,553
Transfer agency and servicing
fees......................... 26,390 3,512 86,017
Management fee (note 2)....... 181,986 20,531 1,238,969
Administration fee (note 2)... 10,135 1,163 69,382
Share marketing plan fee
(note 3) (Class P shares
only)........................ -- -- 57
Legal and audit fees.......... 14,235 12,734 16,635
Trustees' fees................ 2,674 2,422 2,773
Registration fees............. 7,074 538 39,642
Accounting fees............... 11,498 1,347 46,258
Printing fees................. 2,291 2,757 15,123
Amortization of organization
expenses (note 1)............ 2,735 434 882
Other......................... 7,287 12,191 22,308
Interest expense.............. 650 56 5,447
-------------- ------------ ------------
Total Expenses................ 295,276 61,010 1,593,046
Fees deferred and/or expenses
absorbed by Manager (note 2). (20,279) (48,902) (12,302)
-------------- ------------ ------------
Net Expenses.................. 274,997 12,108 1,580,744
-------------- ------------ ------------
Net Investment Income/(Loss).. (104,486) 17,842 (553,648)
-------------- ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments:
- -----------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions and
swaps...................... (4,087,271) (2,506,321) (8,212,076)
Forward foreign-currency
exchange contracts......... 192,149 27 --
Futures contracts........... 238,929 -- --
Foreign-currency
transactions and other
assets..................... (282,731) (100,315) --
-------------- ------------ ------------
Net Realized Gain/(Loss) on
Investments.................. (3,938,924) (2,606,609) (8,212,076)
-------------- ------------ ------------
Net change in unrealized
appreciation/(depreciation)
of:
Securities and swaps........ 13,840,608 867,257 (1,249,360)
Forward foreign-currency
exchange contracts......... -- -- (142,810)
Futures contracts........... -- -- --
Foreign-currency
transactions and other
assets..................... (2,305,689) (1,017) (89,465)
-------------- ------------ ------------
Net Unrealized
Appreciation/(Depreciation)
of Investments............... 11,534,919 866,240 (1,481,635)
-------------- ------------ ------------
Net Realized and Unrealized
Gain/(Loss) on Investments... 7,595,995 (1,740,369) (9,693,711)
-------------- ------------ ------------
Net Increase/(Decrease) in
Net Assets Resulting from
Operations................... $ 7,491,509 $ (1,722,527) $(10,247,359)
-------------- ------------ ------------
Foreign withholding taxes..... $ 5,878 $ 397 $ --
-------------- ------------ ------------
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA
U.S. ASSET SHORT DURATION TAX-FREE GOVERNMENT FEDERAL CALIFORNIA
ALLOCATION TOTAL RETURN GOVERNMENT INTERMEDIATE RESERVE TAX-FREE TAX-FREE
FUND BOND FUND BOND FUND BOND FUND FUND MONEY FUND MONEY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ -- $ 2,536,991 $ 3,771,446 $ 899,976 $ 21,122,630 $ 2,182,542 $ 3,292,117
1,988,058 -- -- -- -- -- --
-- -- -- -- -- -- --
------------ ------------- ------------ ----------- ------------ ----------- -----------
1,988,058 2,536,991 3,771,446 899,976 21,122,630 2,182,542 3,292,117
------------ ------------- ------------ ----------- ------------ ----------- -----------
-- 7,189 10,854 1,811 23,445 8,680 12,493
91,710 7,816 72,062 12,794 303,472 11,516 23,270
-- 184,600 279,616 97,754 1,185,409 247,868 422,769
-- 18,460 27,961 9,776 169,105 31,001 50,853
85 -- 13 -- -- -- --
12,928 8,768 20,323 13,513 40,329 14,060 16,306
1,962 2,426 2,647 2,655 2,773 2,655 2,674
24,583 17,201 46,224 8,634 46,890 46,158 4,602
5,248 14,379 26,274 7,276 150,438 23,127 37,838
3,638 1,881 2,584 855 11,090 2,378 3,682
1,777 10,203 -- -- -- -- --
8,164 10,216 14,095 14,526 21,420 2,463 14,236
-- 151,586 626,538 -- -- -- --
------------ ------------- ------------ ----------- ------------ ----------- -----------
150,095 434,725 1,129,191 169,594 1,954,371 389,906 588,723
(5,643) (23,311) (169,656) (35,892) -- (17,922) --
------------ ------------- ------------ ----------- ------------ ----------- -----------
144,452 411,414 959,535 133,702 1,954,371 371,984 588,723
------------ ------------- ------------ ----------- ------------ ----------- -----------
1,843,606 2,125,577 2,811,911 766,274 19,168,259 1,810,558 2,703,394
------------ ------------- ------------ ----------- ------------ ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
1,052,838 1,481,669 562,947 62,129 6,556 -- 575
-- -- -- -- -- -- --
-- (11,240) 78,988 -- -- -- --
-- -- (910) -- -- -- --
------------ ------------- ------------ ----------- ------------ ----------- -----------
1,052,838 1,470,429 641,025 62,129 6,556 -- 575
(6,958,721) (430,134) 337,893 645,606 -- -- --
-- -- -- -- -- -- --
-- -- 21,579 -- -- -- --
-- -- -- -- -- -- --
------------ ------------- ------------ ----------- ------------ ----------- -----------
(6,958,721) (430,134) 359,472 645,606 -- -- --
------------ ------------- ------------ ----------- ------------ ----------- -----------
(5,905,883) 1,040,295 1,000,497 707,735 6,556 -- 575
------------ ------------- ------------ ----------- ------------ ----------- -----------
$ (4,062,277) $ 3,165,872 $ 3,812,408 $ 1,474,009 $ 19,174,815 $ 1,810,558 $ 2,703,969
------------ ------------- ------------ ----------- ------------ ----------- -----------
$ -- $ 19,300 $ -- $ -- $ -- $ -- $ --
------------ ------------- ------------ ----------- ------------ ----------- -----------
</TABLE>
89
<PAGE>
----------------------------------
The Montgomery Funds
----------------------------------
Statement of
Changes in Net Assets
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
U.S. Emerging
Increase/(Decrease) in Net Assets Growth Growth Small Cap
from Operations: Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss)................................. $ 4,438,995 $ (1,179,897) $ (824,703)
Net realized gain/(loss) on securities, forward foreign-
currency exchange contracts, futures contracts and foreign-
currency transactions and other assets during the period.... 32,196,601 31,481,304 (17,679,975)
Net unrealized appreciation/(depreciation) of securities,
forward foreign-currency exchange contracts,foreign-currency
transactions and other assets during the period............. (123,604,953) (22,667,432) (13,442,812)
Net Increase/(Decrease) in
Net Assets Resulting from Operations........................ (86,969,357) 7,633,975 (31,947,490)
Distributions to Shareholders:
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares............................................. (4,686,873) -- --
Class P shares............................................. (350) -- --
Distributions to shareholders from net realized
gains on investments:
Class R shares........................................... (75,567,646) (21,444,017) (24,042,728)
Class P shares........................................... (12,704) -- (2,995,083)
-------------- ------------ ------------
Total Distributions.......................................... (80,267,573) (21,444,017) (27,037,811)
Beneficial Interest Transactions:
- ---------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest
transactions (note 7):
Class R shares........................................... (167,425,721) 32,177,927 (5,177,139)
Class P shares........................................... 9,169 -- 2,993,610
Net Increase/(Decrease) in Net Assets........................ (334,653,482) 18,367,885 (61,168,830)
Net Assets:
- ---------------------------------------------------------------------------------------------------------------
Beginning of Period.......................................... 1,383,071,742 391,972,859 224,984,957
End of Period................................................ $1,048,418,260 $410,340,744 $163,816,127
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss).......................... $ 4,437,661 $ (1,179,897) $ (824,703)
Increase/(Decrease) in Net Assets............................ Emerging Latin America Select 50
from Operations: Asia Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss)................................. $ (104,486) $ 17,842 $ (553,648)
Net realized gain/(loss) on securities, forward foreign-
currency exchange contracts, futures contracts, equity
swaps and foreign-currency transactions during the period.. (3,938,924) (2,606,609) (8,212,076)
Net unrealized appreciation/(depreciation) of securities,
forward foreign-currency exchange contracts, equity
swaps, foreign-currency transactions and other assets
during the period.......................................... 11,534,919 866,240 (1,481,635)
-------------- ------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from
Operations.................................................. 7,491,509 (1,722,527) (10,247,359)
Distributions to Shareholders:
- ---------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares............................................ (4,294) (138,493) (3,072,458)
Class P shares............................................ -- -- (681)
Distributions to shareholders from net realized gains on
investments:
Class R shares............................................ -- (102) (9,337,842)
Class P shares............................................ -- -- (2,414)
-------------- ------------ -------------
Total Distributions.......................................... (4,294) (138,595) (12,413,395)
Beneficial Interest Transactions:
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest
transactions (note 7):
Class R shares............................................ 2,277,919 (1,006,062) (72,148,880)
Class P shares............................................ -- -- (2,000)
-------------- ------------ -------------
Net Increase/(Decrease) in Net Assets........................ 9,765,134 (2,867,184) (94,811,634)
Net Assets:
- ---------------------------------------------------------------------------------------------------------------------
Beginning of Period.......................................... 24,608,364 4,465,392 269,718,257
End of Period................................................ $ 34,373,498 $ 1,598,208 $ 174,906,623
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss).......................... $ (452,952) $ 15,644 $ (2,948,798)
</TABLE>
The accompanying notes are an integral part of these financial statements.
90
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP EQUITY INTERNATIONAL INTERNATIONAL GLOBAL GLOBAL
OPPORTUNITIES INCOME GROWTH SMALL CAP OPPORTUNITIES COMMUNICATIONS EMERGING
FUND FUND FUND FUND FUND FUND MARKETS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ (660,988) $ 401,212 $ (131,598) $ (41,905) $ (353,789) $ 157,052 $ 258,632
(9,216,126) 880,733 (5,490,246) (3,634,861) 4,128,241 30,492,036 (170,492,783)
(22,940,764) 923,086 9,793,693 (194,742) (6,615,539) (23,740,250) 48,064,826
(32,817,878) 2,205,031 4,171,849 (3,871,508) (2,841,087) 6,908,838 (122,169,325)
- ------------------------------------------------------------------------------------------------------------------------------------
-- (169,180) -- (36,703) (558,541) -- --
-- (12,401) -- -- -- -- --
(3,206,853) (3,146,949) (940,162) -- (5,700,468) (29,529,528) --
(52) (263,874) (4,968) -- -- -- --
------------ ---------- ------------ ------------ ------------ ------------- --------------
( 3,206,905 (3,592,404) (945,130) (36,703) (6,259,009) (29,529,528) --
- ------------------------------------------------------------------------------------------------------------------------------------
(75,824,405) 214,028 132,234,016 377,727 (32,506,342) 38,924,002 (301,264,769)
53,620 (2,215,556) 763,191 475 -- -- 13,580
(111,795,568) (3,388,901) 136,223,926 (3,530,009) (41,606,438) 16,303,312 (423,420,514)
- ------------------------------------------------------------------------------------------------------------------------------------
201,747,727 42,978,925 64,824,680 50,495,818 96,411,614 267,112,887 759,323,603
$ 89,952,159 $ 39,590,024 $ 201,048,606 $ 46,965,809 $ 54,805,176 $ 283,416,199 $ 335,903,089
$ (660,988) $ 219,631 $ (265,167) $ (330,802) $ (1,172,004) $ (757,323) $ (4,969,584)
</TABLE>
<TABLE>
<CAPTION>
U.S ASSET SHORT DURATION CALIFORNIA TAX-FREE GOVERNMENT FEDERAL CALIFORNIA
ALLOCATION TOTAL RETURN GOVERNMENT INTERMEDIATE RESERVE TAX-FREE TAX-FREE
FUND BOND FUND BOND FUND BOND FUND FUND MONEY FUND MONEY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,843,606 $ 2,125,577 $ 2,811,911 $ 766,274 $ 19,168,259 $ 1,810,558 $ 2,703,394
1,052,838 1,470,429 641,025 62,129 6,556 -- 575
(6,958,721) (430,134) 359,472 645,606 -- -- --
------------ ---------- ------------ ------------ ------------ ------------- --------------
(4,062,277) 3,165,872 3,812,408 1,474,009 19,174,815 1,810,558 2,703,969
- ------------------------------------------------------------------------------------------------------------------------------------
(1,379,492) (2,130,114) (2,815,445) (766,450) (19,613,304) (1,810,557) (2,703,197)
(837) -- (73) -- (2) -- --
(17,925,911) (1,995,680) (699,798) (99,699) -- -- --
(11,455) -- (115) -- -- -- --
------------ ---------- ------------ ------------ ------------ ------------- --------------
(19,317,695) (4,125,794) (3,515,431) (866,149) (19,613,306) (1,810,557) (2,703,197)
- ------------------------------------------------------------------------------------------------------------------------------------
2,883,271 (18,346,130) 67,414,966 6,810,275 24,632,912 (7,356,378) 36,903,961
13,254 -- 21,278 -- 1,007 -- --
------------ ---------- ------------ ------------ ------------ ------------- --------------
(20,483,447) (19,306,052) 67,733,221 7,418,135 24,645,428 (7,356,377) 36,904,733
- ------------------------------------------------------------------------------------------------------------------------------------
128,145,995 77,693,760 66,360,267 35,666,819 724,619,025 117,283,470 187,216,057
$ 107,662,548 $ 58,387,708 $ 134,093,488 $ 43,084,954 $ 749,246,453 $ 109,927,093 $ 224,120,790
$ 4,027,448 $ (6,189) $ (3,607) $ 1,198 $ 4,650 $ (387) $ 84
</TABLE>
91
<PAGE>
----------------------------------
The Montgomery Funds
----------------------------------
Statement of
Changes in Net Assets
Year Ended June 30, 1998
<TABLE>
<CAPTION>
U.S. Emerging
Increase/(Decrease) in Net Assets Growth Growth Small Cap
from Operations: Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss).. $ 9,632,489 $ (3,157,905) $ (1,618,774)
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts and foreign-currency transactions
during the year............................................ 164,931,428 28,785,885 42,779,392
Net unrealized appreciation/(depreciation) of securities,
forward foreign-currency exchange contracts,
foreign-currency transactions and other assets
during the year 31,011,960 44,225,233 4,803,792
Net Increase/(Decrease) in Net Assets Resulting
from Operations........................................... 205,575,877 69,853,213 45,964,410
Distributions to Shareholders:
- -------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares.......................................... (8,102,760) -- --
Class P shares.......................................... (591) -- --
Distributions to shareholders in excess of net
investment income:
Class R shares.......................................... -- -- --
Class P shares.......................................... -- -- --
Distributions to shareholders from net realized gains on
investments:
Class R shares.......................................... (160,149,883) (19,493,315) (27,244,989)
Class P shares.......................................... (20,125) -- (2,828,409)
-------------- ------------ -------------
Total Distributions......................................... (168,273,359) (19,493,315) (30,073,398)
Beneficial Interest Transactions:
- -------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest
transactions (note 7):
Class R shares.......................................... 208,241,016 23,801,277 (10,805,049)
Class P shares.......................................... (27,257) -- 14,944,224
Net Increase/(Decrease) in Net Assets....................... 245,516,277 74,161,175 20,030,187
Net Assets:
- -------------------------------------------------------------------------------------------------------------------
Beginning of Year........................................... 1,137,555,465 317,811,684 204,954,770
End of Year................................................. $1,383,071,742 $391,972,859 $224,984,957
Accumulated Undistributed Net Investment
Income/(Accumulated Net Investment Loss)................... $ 4,685,889 $ -- $ --
Increase/(Decrease) in Net Assets........................... Emerging Latin America Select 50
from Operations:........................................... Asia Fund Fund* Fund
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss)................................ $ 97,480 $ 236,065 $ 1,416,052
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, equity swaps and foreign-currency
transactions during the year............................... (11,921,961) (1,196,296) 23,620,118
Net unrealized appreciation/(depreciation) of
securities, equity swaps, foreign-currency
transactions and other assets during the year............. (23,554,621) (1,347,835) 3,990,850
Net Increase in Net Assets Resulting from Operations........ (35,379,102) (2,308,066) 29,027,020
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares.......................................... (552,799) (42,196) --
Class P shares.......................................... -- -- --
Distributions to shareholders in excess of net investment
income:
Class R shares.......................................... (799) -- --
Class P shares.......................................... -- -- --
Distributions to shareholders from net realized gains on
investments:
Class R shares.......................................... (3,025,530) (101,837) (20,659,018
Class P shares.......................................... -- -- (7,288)
-------------- ------------ ------------
Total Distributions......................................... (3,579,128) (144,033) (20,666,306
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest
transactions (note 7):
Class R shares.......................................... (4,528,662) 6,917,491 88,793,607
Class P shares.......................................... -- -- 45,960
Net Increase/(Decrease) in Net Assets....................... (43,486,892) 4,465,392 97,200,281
Net Assets:
- ------------------------------------------------------------------------------------------------------------------
Beginning of Year........................................... 68,095,256 -- 172,517,976
End of Year................................................. $ 24,608,364 $ 4,465,392 $269,718,257
Accumulated Undistributed Net Investment Income/
(Accumulated Ne Investment Loss)........................... $ (344,172) $ 136,295 $ 677,989
</TABLE>
*Montgomery Latin America Fund commence operations on June 30, 1997
The Accompanying notes are an integral part of these financial statements
92
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP EQUITY INTERNATIONAL INTERNATIONAL GLOBAL GLOBAL
OPPORTUNITIES INCOME GROWTH SMALL CAP OPPORTUNITIES COMMUNICATIONS EMERGING
FUND FUND FUND FUND FUND FUND MARKETS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ (2,502,295) $ 1,066,465 $ 90,925 $ (16,628) $ (8,126) $ (1,553,254) $ 5,849,057
26,422,640 5,353,093 1,926,799 3,884,910 4,218,182 16,560,504 (143,171,602)
930,153 165,897 6,190,676 (2,291,295) 8,813,624 53,641,157 (369,794,189)
24,850,498 6,585,455 8,208,400 1,576,987 13,023,680 68,648,407 (507,116,734)
- ------------------------------------------------------------------------------------------------------------------------------------
-- (1,024,731) (49,520) -- -- -- (11,344,230)
-- (41,734) -- -- -- -- (5,297)
-- -- (479) (338,201) -- -- --
-- -- -- (22) -- -- --
(5,324,651) (4,032,302) (2,206,214) (5,935,927) (4,796,210) (29,194,471) (24,396,251)
(256) (153,692) (291) (651) -- -- (14,456)
- ------------- ----------- ------------ ------------ ------------ -------------- --------------
(5,324,907) (5,252,459) (2,256,504) (6,274,801) (4,796,210) (29,194,471) (35,760,234)
- ------------------------------------------------------------------------------------------------------------------------------------
(44,104,914) 347,785 24,956,111 1,767,631 55,813,221 73,703,850 42,031,414
(680) 1,835,636 (1,025) (191,138) -- -- 105,227
(24,580,003) 3,516,417 30,906,982 (3,121,321) 64,040,691 113,157,786 (500,740,327)
- ------------------------------------------------------------------------------------------------------------------------------------
226,327,730 39,462,508 33,917,698 53,617,139 32,370,923 153,955,101 1,260,063,930
$ 201,747,727 $ 42,978,925 $ 64,824,680 $ 50,495,818 $ 96,411,614 $ 267,112,887 $ 759,323,603
$ -- $ -- $ (133,569) $ (252,196) $ (259,674) $ (914,375) $ (5,228,216)
</TABLE>
<TABLE>
<CAPTION>
U.S. ASSET SHORT DURATION CALIFORNIA TAX-FREE GOVERNMENT FEDERAL CALIFORNIA
ALLOCATION TOTAL RETURN GOVERNMENT INTERMEDIATE RESERVE TAX-FREE TAX-FREE
FUND BOND FUND** BOND FUND BOND FUND FUND MONEY FUND MONEY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,211,290 $ 4,495,030 $ 3,137,833 $ 1,173,983 $ 33,237,943 $ 3,829,270 $ 5,235,752
29,420,101 2,124,761 670,997 114,279 36,767 670 (23)
(15,356,094) 1,833,390 78,579 462,957 -- -- --
18,275,297 8,453,181 3,887,409 1,751,219 33,274,710 3,829,940 5,235,729
- ------------------------------------------------------------------------------------------------------------------------------------
(5,713,481) (4,458,508) (3,046,386) (1,174,001) (33,224,825) (3,829,270) (5,235,794)
(3,135) -- (90) -- -- -- --
(4,805,423) (1,652) -- -- -- -- --
(2,791) -- -- -- -- -- --
(11,764,751) (775,110) (90,023) -- -- -- --
(6,851) -- -- -- -- -- --
- ------------- ----------- ------------ ------------ ------------ ------------- -------------
(22,296,432) (5,235,270) (3,136,499) (1,174,001) (33,224,825) (3,829,270) (5,235,794)
- ------------------------------------------------------------------------------------------------------------------------------------
4,880,875 74,475,849 18,341,846 13,408,266 251,415,351 3,085,705 68,493,060
(1,740) -- 2,790 -- (204) -- --
858,000 77,693,760 19,095,546 13,985,484 251,465,032 3,086,375 68,492,995
- ------------------------------------------------------------------------------------------------------------------------------------
127,287,995 -- 47,264,721 21,681,335 473,153,993 114,197,095 118,723,062
$ 128,145,995 $ 77,693,760 $ 66,360,267 $ 35,666,819 $ 724,619,025 $ 117,283,470 $ 187,216,057
$ 1,771,623 $ (1,652) $ -- $ 1,374 $ (303) $ (219) $ (113)
</TABLE>
** Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
93
<PAGE>
----------------------------------
The Montgomery Funds
----------------------------------
Statement of Cash Flows
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND
Cash Flows from Operating Activities:
- ------------------------------------------------------------------------------------------------
<S> <C>
Income received........................................... $ 2,748,915
Fee income received....................................... 25,184
Operating expenses paid................................... (299,661)
Proceeds from sales of long-term securities............... (66,754,773)
Proceeds from short-term investments...................... 168,284,358
Proceeds from futures transactions........................ (11,240)
Purchases of long-term securities and purchased options... (75,169,486)
--------------
Cash Provided by Operating Activities......................... $ 28,823,297
Cash Flows from Financing Activities:
- ------------------------------------------------------------------------------------------------
Proceeds from subscriptions............................... $ 21,687,712
Payments on shares redeemed............................... (42,839,298)
Proceeds from reverse repurchase agreements............... (6,908,738)
Net dollar roll transactions.............................. 24,974
Cash dividends paid*...................................... (1,126,789)
Reverse repurchase agreement interest expense............. (126,350)
--------------
Cash Used by Financing Activities............................. (29,288,489)
Decrease in cash.............................................. (465,192)
Cash at beginning of period................................... 1,426
------------
Cash Overdrafts Payable to Custodian.......................... $ (463,766)
Reconciliation of Net Increase in Net Assets from
Operations to Cash Used by Operating Activities:
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations.......... $ 3,165,872
Decrease in investments..................................... $11,786,743
Decrease in interest receivable............................. 183,946
Increase in deferred fee income from dollar
roll transactions......................................... 3,264
Decrease in other assets.................................... (38,036)
Decrease in receivables for investments sold................ 723,288
Decrease in payable for investments purchased............... 12,848,431
Increase in accrued expenses................................ (1,797)
Interest expense............................................ 151,586
-----------
Cash Provided by Operating Activities......................... $28,823,297
</TABLE>
*Noncash activities include reinvestment of dividends of $2,678,030.
94
<PAGE>
----------------------------------
The Montgomery Funds
----------------------------------
Statement of Cash Flows
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND
Cash Flows from Operating Activities:
- ---------------------------------------------------------------------------------------------------
<S> <C>
Income received.......................................... $ 3,059,812
Fee income received...................................... 19,224
Operating expenses paid.................................. (195,624)
Proceeds from sales of long-term securities.............. 145,390,606
Proceeds from short-term investments..................... 1,192,818
Proceeds from futures transactions....................... 81,426
Purchases of long-term securities and purchased options.. (207,521,315)
Variation margin for futures transactions................ (3,838)
Cash Used by Operating Activities.......................... $ (57,969,215)
Cash Flows from Financing Activities:
- ---------------------------------------------------------------------------------------------------
Proceeds from subscriptions.............................. $ 121,028,015
Payments on shares redeemed.............................. (56,047,617)
Payments from reverse repurchase agreements.............. (372,938)
Net dollar roll deferral................................. 1,561
Cash dividends paid*..................................... 32,448
Reverse repurchase agreement interest expense............ (626,538)
-------------
Cash Provided by Financing Activities...................... 64,014,931
Increase in cash........................................... 6,045,716
Cash at beginning of period................................ 545,341
-------------
Cash at End of Period...................................... $ 6,591,057
Reconciliation of Net Increase in Net Assets from Operations to Cash Provided by
Operating Activities:
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations............. $ 3,812,408
Increase in investments........................................ $(73,329,227)
Increase in interest receivable................................ (834,552)
Increase in deferred fee income from dollar roll transactions.. 599
Decrease in variation margin for futures transactions.......... 3,838
Increase in receivables for investments sold................... 120,240
Decrease in payables for investments purchased................. 11,493,568
Decrease in accrued expenses................................... 137,373
Interest expense............................................... 626,538
------------
Cash Used by Operating Activities................................ $ (57,969,215)
</TABLE>
*Noncash activities include reinvestment of dividends of $3,025,130.
95
<PAGE>
<TABLE>
<CAPTION>
--------------------
The Montgomery Funds
--------------------
Financial Highlights
SMALL CAP OPPORTUNITIES FUND
Fiscal Year Ended Fiscal Year Ended
Selected Per-Share Data for the Year Class R Shares June 30, Class P Shares June 30,
or Period Ended: 12/31/98## --------------------------------- 12/31/98## --------------------
(unaudited) 1998## 1997 1996(a)## (unaudited) 1998## 1997(a)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 19.16 $ 17.53 $ 15.80 $ 12.00 $ 18.89 $ 17.53 $ 14.37
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.09) (0.20) (0.13) 0.02 (0.14) (0.25) (0.11)
Net realized and unrealized
gain/(loss) on investments (2.18) 2.25 1.86 3.78++ (2.23) 2.03 3.27
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets
resulting from investment operations (2.27) 2.05 1.73 3.80 (2.37) 1.78 3.16
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.00)# -- -- -- (0.00)#
Distributions from net realized
capital gains (0.57) (0.42) -- -- (0.57) (0.42) --
Distributions in excess of net realized
capital gains -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.57) (0.42) (0.00)# -- (0.57) (0.42) (0.00)#
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 16.32 $ 19.16 $ 17.53 $ 15.80 $ 15.95 $ 18.89 $ 17.53
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return** (11.53)% 11.86% 10.97% 31.67% (12.23)% 10.26% 22.09%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 89,865 $201,738 $226,318 $136,140 $ 87 $ 10 $ 9
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment
income/(loss) to average net assets (1.11)%+ (1.05)% (0.86)% 0.23%+ (1.36)%+ (1.30)% (1.11)%+
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before
deferral of fees by Manager $ (0.10) $ (0.26) $ (0.16) $ (0.04) $ (0.16) $ (0.30) $ (0.14)
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 16.53% 82.47% 154.50% 81.29% -- 82.47% 154.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including
interest and tax expense 1.53%+ 1.50% 1.50% 1.50%+ 1.78%+ 1.75% 1.75%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees
by Manager,including interest and
tax expense 1.68%+ 1.78% 1.75% 2.16%+ 1.93%+ 2.03% 2.00%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding
interest and tax expense 1.49%+ 1.50% -- -- 1.74%+ 1.75% --
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The Small Cap Opportunities Fund's Class R shares and Class P shares commenced operations on December 29, 1995, and July 29,
1996, respectively.
</TABLE>
<TABLE>
<CAPTION>
U.S. EMERGING GROWTH FUND
Selected Per-Share Data for the Year Class R Shares Fiscal Year Ended June 30,
or Period Ended: 12/31/98## --------------------------------------------------
(unaudited) 1998## 1997 1996 1995(a)##
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 21.89 $ 19.00 $ 17.82 $ 13.75 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.06) (0.18) (0.13) (0.04) 0.09
Net realized and unrealized gain/(loss) on investments 0.00# 4.21 2.54 4.26 1.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (0.06) 4.03 2.41 4.22 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- (0.04) --
Distributions from net realized capital gains (1.13) (1.14) (1.23) (0.11) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.13) (1.14) (1.23) (0.15) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 20.70 $ 21.89 $ 19.00 $ 17.82 $ 13.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 0.24% 22.18% 14.77% 30.95% 14.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 410,341 $ 391,973 $317,812 $ 306,217 $162,949
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.66)%+ (0.84)% (0.75)% (0.11)%+ 1.40%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ (0.06) $ (0.18) -- $ (0.05) $ 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 35.33% 23.63% 79.00% 88.98% 36.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.60%+ 1.57% 1.71% 1.75% 1.75%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expense 1.60%+ 1.57% -- 1.79% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.60%+ 1.56% -- 1.75% --
- ------------------------------------------------------------------------------------------------------------------------------------
(c) The U.S. Emerging Growth (formerly Micro Cap) Fund's Class R shares commenced operations on December 30, 1994.
</TABLE>
The accompanying notes are an integral part of these financial statements.
96
<PAGE>
<TABLE>
<CAPTION>
GROWTH FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------------------------ 12/31/98 ---------------------------
(unaudited) 1998## 1997## 1996 1995 1994(b) (unaudited) 1998## 1997## 1996(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 23.68 $ 23.07 $ 21.94 $ 19.16 $ 15.27 $ 12.00 $ 23.77 $23.12 $21.94 $ 19.22
- -----------------------------------------------------------------------------------------------------------------------------------
0.10 0.17 0.15 0.17 0.12 0.04 0.05 0.11 0.09 0.03
- -----------------------------------------------------------------------------------------------------------------------------------
(1.49) 3.51 3.90 4.32 3.91 3.31++ (1.46) 3.55 3.96 2.69
- -----------------------------------------------------------------------------------------------------------------------------------
(1.39) 3.68 4.05 4.49 4.03 3.35 (1.41) 3.66 4.05 2.72
- -----------------------------------------------------------------------------------------------------------------------------------
(0.10) (0.15) (0.15) (0.17) (0.07) (0.01) (0.04) (0.09) (0.10) --
(1.57) (2.92) (2.77) (1.54) (0.07) -- (1.57) (2.92) (2.77) --
-- -- -- -- -- (0.07) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(1.67) (3.07) (2.92) (1.71) (0.14) (0.08) (1.61) (3.01) (2.87) --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 20.62 $ 23.68 $ 23.07 $ 21.94 $ 19.16 $ 15.27 $ 20.75 $23.77 $23.12 $ 21.94
- -----------------------------------------------------------------------------------------------------------------------------------
(5.62)% 17.31% 20.44% 24.85% 26.53% 27.98% (5.63)% 17.09% 20.41% 14.15%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
$1,048,236 $1,382,874 $1,137,343 $926,382 $878,776 $149,103 $ 182 $ 198 $ 212 $ 82
- -----------------------------------------------------------------------------------------------------------------------------------
0.80%+ 0.71% 0.69% 0.78% 0.98% 1.09%+ 0.55%+ 0.46% 0.44% 0.53%+
- -----------------------------------------------------------------------------------------------------------------------------------
$0.10 $ 0.17 -- -- -- $ 0.03 $ 0.05 $ 0.11 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
19.56% 53.68% 61.10% 118.14% 128.36% 110.65% 19.56% 53.68% 61.10% 118.14%
- -----------------------------------------------------------------------------------------------------------------------------------
1.24%+ 1.20% 1.27% 1.35% 1.50% 1.49%+ 1.49%+ 1.45% 1.52% 1.60%+
- -----------------------------------------------------------------------------------------------------------------------------------
1.24%+ 1.20% -- -- -- 1.79%+ 1.49%+ 1.45% -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1.24%+ 1.19% -- -- -- -- 1.49%+ 1.44% -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(b) The Growth Fund's Class R shares and Class P shares commenced operations on September 30, 1993, and January 12, 1996,
respectively.
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------------------------ 12/31/98 ---------------------------
(unaudited) 1998## 1997## 1996 1995 1994(b) (unaudited) 1998## 1997(d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20.73 $ 19.52 $ 21.55 $ 17.11 $ 15.15 $ 16.83 $ 20.53 $ 19.48 $21.73
(0.07) (0.15) (0.18) (0.09) (0.10) (0.12) (0.08) (0.20) (0.10)
(2.82) 4.33 1.43 6.31 3.04 (0.47) (2.80) 4.22 1.13
(2.89) 4.18 1.25 6.22 2.94 (0.59) (2.88) 4.02 1.03
-- -- -- -- -- -- -- -- --
(2.77) (2.97) (3.28) (1.78) (0.98) (1.09) (2.77) (2.97) (3.28)
(2.77) (2.97) (3.28) (1.78) (0.98) (1.09) (2.77) (2.97) (3.28)
$15.07 $ 20.73 $ 19.52 $ 21.55 $ 17.11 $ 15.15 $ 14.88 $ 20.53 $19.48
(12.77)% 23.23% 6.81% 39.28% 20.12% (1.59)% (12.89)% 22.44% 5.74%
$144,577 $203,437 $198,298 $275,062 $202,399 $209,063 $19,239 $21,548 $6,656
(0.97)%+ (0.70)% (0.78)% (0.47)% (0.57)% (0.68)% (1.22)%+ (0.95)% (1.03)%+
$ (0.07) $ (0.15) -- -- -- -- $ (0.08) $ (0.20) --
30.77% 68.65% 58.71% 80.00% 85.07% 95.22% 30.77% 68.65% 58.71%
1.26%+ 1.24% 1.20% 1.24% 1.37% 1.35% 1.51%+ 1.49% 1.45%+
1.26%+ 1.24% -- -- -- -- 1.51%+ 1.49% --
1.26%+ 1.24% -- -- -- -- 1.51%+ 1.49% --
(d) The Small Cap Fund's Class P shares commenced operations on July 1, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the period may not be in accord with the net realized and
unrealized gain/(loss) for the period because of the timing of purchases and withdrawal of shares in relation to the fluctuating
market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share data
for the period, since the use of the undistributed income method did not accord with results of operations.
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
- --------------------
The Montgomery Funds
Financial Highlights
GLOBAL OPPORTUNITIES FUND
Selected Per-Share Data for the Year Class R Shares Fiscal Year Ended June 30,
or Period Ended: 12/31/98 ------------------------------------------------
(unaudited) 1998## 1997 1996 1995 1994(a)##
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 19.19 $ 19.17 $ 16.96 $ 13.25 $ 12.92 $ 12.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.09) 0.00# (0.11) (0.06) 0.13 0.01
Net realized and unrealized gain on investments 0.11 3.87 3.14 3.84 0.70 0.91
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.02 3.87 3.03 3.78 0.83 0.92
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.22) -- -- (0.07) -- --
Distributions from net realized capital gains (2.20) (3.85) (0.82) -- (0.50) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.42) (3.85) (0.82) (0.07) (0.50) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 16.79 $ 19.19 $ 19.17 $ 16.96 $ 13.25 $ 12.92
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return** 1.21% 27.12% 18.71% 28.64% 6.43% 7.67%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 54,805 $ 96,412 $ 32,371 $ 28,496 $ 13,677 $ 12,504
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (1.18)%+ (0.02)% (0.62)% (0.56)% 1.03% 0.02%+
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before
deferral of fees by Manager $ (0.09) -- $ (0.23) $ (0.16) $ (0.01) $ (0.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 76.22% 135.03% 117.10% 163.80% 118.75% 67.22%
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 2.10%+ 1.96% -- 2.05% 1.91% 1.99%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by
Manager, including interest and tax expense 2.13%+ 2.37% 2.62% 3.10% 2.99% 2.75%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.90%+ 1.90% 1.90% 1.90% 1.90% 1.90%+
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The Global Opportunities Fund's Class R shares commenced operations on September 30, 1993.
</TABLE>
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS FUND
Selected Per-Share Data for the Year Class R Shares Fiscal Year Ended June 30,
or Period Ended: 12/31/98 ------------------------------------------------
(unaudited) 1998## 1997 1996 1995 1994(c)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 22.88 $ 19.61 $ 18.05 $ 15.42 $ 14.20 $ 12.45
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.02 (0.17) (0.25) (0.20) (0.03) (0.05)
Net realized and unrealized gain on
investments 1.02 7.19 2.72 2.83 1.28 1.80++
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 1.04 7.02 2.47 2.63 1.25 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- -- --
Distributions in excess of
net investment income -- -- -- -- -- --
Distributions from net realized
capital gains (2.51) (3.75) (0.91) -- -- --
Distributions in excess of
net realized capital gains -- -- -- -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.51) (3.75) (0.91) -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 21.41 $ 22.88 $ 19.61 $ 18.05 $ 15.42 $ 14.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 5.46% 45.45% 14.43% 17.06% 8.83% 14.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $283,416 $267,113 $153,955 $ 206,671 $209,644 $ 234,886
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss)
to average net assets 0.12%+ (0.85)% (1.05)% (1.01)% (0.10)% (0.46)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before
deferral of fees by Manager $ 0.02 $ (0.17) $ (0.27) $ (0.22) $ (0.07) $ (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 52.52% 79.67% 75.79% 103.73% 50.17% 29.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including
interest and tax expense 1.74%+ 1.93% -- 2.01% 1.91% 1.94%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by
Manager, including interest and
tax expense 1.74%+ 1.93% 2.00% 2.11% 2.09% 2.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding
interest and tax expense 1.73%+ 1.90% 1.91% 1.90% 1.90% 1.90%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) The Global Communications Fund's Class R shares commenced operations on June
1, 1993.
The accompanying notes are an integral part of these financial statements.
98
<PAGE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------------ 12/31/98 ------------------------------------
(unaudited) 1998 1997## 1996 1995(b) (unaudited) 1998 1997## 1996(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.27 $ 17.91 $ 16.09 $ 13.38 $ 12.00 $ 18.25 $ 17.90 $ 16.09 $ 15.66
- ---------------------------------------------------------------------------------------------------------------------------------
0.19 0.44 0.49 0.43 0.31 0.15 0.38 0.44 0.08
0.91 2.27 3.35 2.82 1.38 0.92 2.27 3.35 0.35
- ---------------------------------------------------------------------------------------------------------------------------------
1.10 2.71 3.84 3.25 1.69 1.07 2.65 3.79 0.43
- ---------------------------------------------------------------------------------------------------------------------------------
(0.09) (0.44) (0.46) (0.42) (0.31) (0.08) (0.39) (0.42) --
(1.54) (1.91) (1.56) (0.12) -- (1.54) (1.91) (1.56) --
- ---------------------------------------------------------------------------------------------------------------------------------
(1.63) (2.35) (2.02) (0.54) (0.31) (1.62) (2.30) (1.98) --
- ---------------------------------------------------------------------------------------------------------------------------------
$ 17.74 $ 18.27 $ 17.91 $ 16.09 $ 13.38 $ 17.70 $ 18.25 $ 17.90 $ 16.09
- ---------------------------------------------------------------------------------------------------------------------------------
6.53% 15.83% 26.02% 24.56% 14.26% 6.29% 15.49% 25.64% 2.75%
- ---------------------------------------------------------------------------------------------------------------------------------
$36,491 $ 40,260 $ 38,595 $ 19,312 $ 6,383 $ 3,099 $ 2,719 $ 868 $ 2
- ---------------------------------------------------------------------------------------------------------------------------------
2.08%+ 2.32% 2.93% 3.03% 4.06%+ 1.83%+ 2.07% 2.68% 2.78%+
- ---------------------------------------------------------------------------------------------------------------------------------
$ 0.16 $ 0.34 $ 0.39 $ 0.34 $ 0.13 $ 0.13 $ 0.28 $ 0.34 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------------
29.16% 68.23% 62.31% 89.77% 29.46% 29.16% 68.23% 62.31% 89.77%
- ---------------------------------------------------------------------------------------------------------------------------------
0.85%+ 0.86% -- -- -- 1.10%+ 1.11% -- --
- ---------------------------------------------------------------------------------------------------------------------------------
1.19%+ 1.38% 1.46% 1.45% 3.16%+ 1.44%+ 1.63% 1.71% 1.70%+
- ---------------------------------------------------------------------------------------------------------------------------------
0.85%+ 0.85% 0.86% 0.85% 0.84%+ 1.10%+ 1.10% 1.11% 1.10%+
- ---------------------------------------------------------------------------------------------------------------------------------
(b) The Equity Income Fund's Class R shares and Class P shares commenced operations on September 30, 1994, and March 11, 1996,
respectively.
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98## ------------------------------------------------------ 12/31/98## ------------------------------------
(unaudited) 1998## 1997## 1996(d) (unaudited) 1998## 1997## 1996(d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.67 $ 16.24 $ 15.31 $ 12.00 $ 18.64 $ 16.22 $ 15.31 $ 13.66
- ----------------------------------------------------------------------------------------------------------------------------------
(0.02) 0.04 0.08 0.02 (0.04) (0.01) 0.05 0.00#
0.34 3.48 2.53 3.29 0.37 3.50 2.54 1.65
- ----------------------------------------------------------------------------------------------------------------------------------
0.32 3.52 2.61 3.31 0.33 3.49 2.59 1.65
- ----------------------------------------------------------------------------------------------------------------------------------
-- (0.02) -- -- -- -- -- --
-- (0.00)# -- -- -- (0.00)# -- --
(0.10) (1.07) (1.68) -- (0.10) (1.07) (1.68) --
-- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
(0.10) (1.09) (1.68) -- (0.10) (1.07) (1.68) --
- ----------------------------------------------------------------------------------------------------------------------------------
$ 18.89 $ 18.67 $ 16.24 $ 15.31 $ 18.87 $ 18.64 $ 16.22 $ 15.31
- ----------------------------------------------------------------------------------------------------------------------------------
1.91% 23.27% 19.20% 27.58% 1.91% 23.03% 19.13% 12.08%
- ----------------------------------------------------------------------------------------------------------------------------------
$ 200,062 $ 64,820 $ 33,912 $ 18,303 986 $ 5 $ 5 $ 1
- ----------------------------------------------------------------------------------------------------------------------------------
(0.18)%+ 0.22% 0.57% 0.26%+ (0.43)%+ (0.03)% 0.32% 0.01%+
- ----------------------------------------------------------------------------------------------------------------------------------
$ (0.02) $ (0.04) $ (0.02) $ (0.07) $ (0.05) $ (0.08) $ (0.06) $ (0.05)
- ----------------------------------------------------------------------------------------------------------------------------------
37.25% 127.13% 95.02% 238.91% 37.25% 127.13% 95.02% 238.91%
- ----------------------------------------------------------------------------------------------------------------------------------
1.65%+ 1.66% -- -- 1.90%+ 1.91% -- --
- ----------------------------------------------------------------------------------------------------------------------------------
1.74%+ 2.13% 2.37% 2.91%+ 1.99%+ 2.38% 2.62% 3.16%+
- ----------------------------------------------------------------------------------------------------------------------------------
1.64%+ 1.65% 1.66% 1.65%+ 1.89%+ 1.90% 1.91% 1.90%+
- ----------------------------------------------------------------------------------------------------------------------------------
(d) The International Growth Fund's Class R shares and Class P shares commenced operations on July 3, 1995, and March 11, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the period may not be in accord with the net realized and
unrealized gain/(loss) for the period because of the timing of purchases and withdrawal of shares in relation to the fluctuating
market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share data
for the period, since the use of the undistributed income method did not accord with results of operations.
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
EMERGING ASIA FUND LATIN AMERICA FUND
Fiscal Year Ended
Class R Shares Fiscal Year Ended June 30, Class R Shares June 30,
12/31/98 ----------------------------- 12/31/98 -----------
(unaudited) 1998 1997(a) (unaudited) 1998(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 6.18 $ 18.91 $ 12.00 $ 8.77 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.02) 0.13 (0.01) 0.05 0.33
Net realized and unrealized gain/(loss)
on investments 1.77 (11.74) 6.95 (3.61) (3.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.75 (11.61) 6.94 (3.56) (3.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.00)# (0.17) -- (0.27) (0.07)
Distributions in excess of net investment income -- (0.00)# (0.03) -- --
Distributions from net realized capital gains -- (0.95) -- (0.00)# (0.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.00)# (1.12) (0.03) (0.27) (0.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 7.93 $ 6.18 $ 18.91 $ 4.94 $ 8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 28.33% (63.45)% 57.80% (40.78)% (25.42)%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 34,373 $ 24,608 $ 68,095 $ 1,598 $ 4,465
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.72)%+ 0.22% (0.42)%+ 1.08%+ 3.18%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before
deferral of fees by Manager $ (0.02) $ (0.08) $ (0.02) $ (0.09) $ 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 140.99% 153.97% 72.18% 126.06% 168.18%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.89%+ 1.91% 2.20%+ 0.73%+ 0.26%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by
Manager, including interest and tax expense 2.03%+ 2.27% 2.69%+ 3.70%+ 3.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.88%+ 1.90% 1.80%+ 0.73%+ --
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The Emerging Asia Fund's Class R shares commenced operations on September 30, 1996.
(b) The Latin America Fund's Class R shares commenced operations on June 30, 1997.
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 FUND
Fiscal Year Ended
Class R Shares Fiscal Year Ended June 30, Class P Shares June 30,
12/31/98 ----------------------------- 12/31/98 -----------
(unaudited) 1998 1997(a) (unaudited) 1998(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 20.98 $ 20.01 $ 16.46 $ 12.00 $ 20.68 $ 19.98 $ 15.89
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.03) 0.12 0.01 0.06 (0.07) 0.09 (0.02)
Net realized and unrealized gain/(loss) on
investments (0.43) 2.70 4.16 4.45 (0.27) 2.46 4.11
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets
resulting from investment operations (0.46) 2.82 4.17 4.51 (0.34) 2.55 4.09
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.34) -- (0.10) (0.04) (0.30) -- --
Distributions from net
realized capital gains (1.05) (1.85) (0.52) -- (1.05) (1.85) --
Distributions in excess of
net realized capital gains -- -- -- (0.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.39) (1.85) (0.62) (0.05) (1.35) (1.85) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 19.13 $ 20.98 $ 20.01 $ 16.46 $ 18.99 $ 20.68 $ 19.98
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** (1.86)% 15.44% 26.35% 37.75% (2.13)% 14.12% 25.74%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $174,862 $269,667 $172,509 $ 77,955 $ 45 $ 52 $ 9
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to
average net assets (0.56)%+ 0.58% 0.04% 0.42%+ (0.81)%+ 0.34% (0.21)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before
deferral of fees by Manager $ (0.03) $ 0.12 $ (0.01) $ 0.02 $ (0.07) $ 0.09 $ (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 63.83% 151.43% 157.93% 105.98% 63.83% 151.43% 157.93%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including
interest and tax expense 1.59%+ 1.81% -- -- 1.84%+ 2.06% --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by
Manager, including interest and
tax expense 1.61%+ 1.81% 1.92% 2.11%+ 1.86%+ 2.06% 2.17%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding
interest and tax expense 1.59%+ 1.80% 1.82% 1.80%+ 1.84%+ 2.05% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
(d) The Select 50 Fund's Class R shares and Class P shares commenced operations on October 2, 1995, and December 12, 1996,
respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
100
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP FUND
Fiscal Year Ended
Class R Shares Fiscal Year Ended June 30, Class P Shares June 30,
12/31/98 --------------------------------------------------------------------- 12/31/98 ------------------------
(unaudited) 1998## 1997 1996 1995 1994(c) (unaudited) 1998## 1997(c)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.14 $ 17.16 $ 14.86 $ 11.75 $ 12.02 $ 12.00 $ 15.13 $ 17.16 $ 16.96
- ------------------------------------------------------------------------------------------------------------------------------------
(0.01) (0.01) (0.05) 0.03 0.12 0.00# (0.05) (0.05) 0.00#
(1.11) 0.31 2.35 3.10 (0.39) 0.02 (1.09) 0.30 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
(1.12) 0.30 2.30 3.13 (0.27) 0.02 (1.14) 0.25 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
(0.01) -- -- (0.02) (0.00)# -- -- -- --
-- (0.13) -- -- -- -- -- (0.09) --
-- (2.19) -- -- -- -- -- (2.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
(0.01) (2.32) -- (0.02) (0.00)# -- -- (2.28) --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 14.01 $ 15.14 $ 17.16 $ 14.86 $ 11.75 $ 12.02 $ 13.99 $ 15.13 $ 17.16
- ------------------------------------------------------------------------------------------------------------------------------------
(7.39)% 4.46% 15.48% 26.68% (2.23)% 0.17% (7.53)% 4.13% 1.18%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 46,961 $ 50,491 $ 53,602 $ 41,640 $ 28,516 $ 34,555 $ 5 $ 5 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
(0.17)%+ (0.03)% (0.34)% 0.20% 0.95% 0.04%+ (0.42)%+ (0.28)% (0.59)%+
- ------------------------------------------------------------------------------------------------------------------------------------
$(0.01) $ (0.10) $ (0.14) $ (0.08) $ 0.05 $ (0.02) $ (0.05) $ (0.16) $ (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
57.32% 110.58% 84.91% 177.36% 156.13% 123.50% 57.32% 110.58% 84.91%
- ------------------------------------------------------------------------------------------------------------------------------------
1.91%+ 1.92% -- 1.96% 1.91% 1.99%+ 2.16%+ 2.17% --
- ------------------------------------------------------------------------------------------------------------------------------------
1.93%+ 2.53% 2.60% 2.76% 2.50% 2.32%+ 2.18%+ 2.78% 2.85%+
- ------------------------------------------------------------------------------------------------------------------------------------
1.90%+ 1.90% 1.90% 1.90% 1.90% 1.90%+ 2.15%+ 2.15% 2.15%+
- ------------------------------------------------------------------------------------------------------------------------------------
(c) The International Small Cap Fund's Class R shares and Class P shares commenced operations on September 30, 1993, and June 9,
1997, respectively.
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------------------ 12/31/98 ---------------------------------
(unaudited) 1998 1997 1996 1995 1994(e) (unaudited) 1998 1997 1996(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.86 $ 16.85 $ 14.19 $ 13.17 $ 13.68 $ 11.07 $ 9.74 $ 16.77 $ 14.19 $ 12.62
- ------------------------------------------------------------------------------------------------------------------------------------
0.00# 0.07 0.07 0.08 0.03 (0.03) (0.01) 0.03 0.06 0.01
(1.88) (6.58) 2.66 0.94 0.25++ 2.92 (1.89) (6.61) 2.58 1.56
- ------------------------------------------------------------------------------------------------------------------------------------
(1.88) (6.51) 2.73 1.02 0.28 2.89 (1.90) (6.58) 2.64 1.57
- ------------------------------------------------------------------------------------------------------------------------------------
-- (0.15) (0.07) -- -- -- -- (0.12) (0.06) --
-- (0.33) -- -- (0.42) (0.28) -- (0.33) -- --
-- -- -- -- (0.37) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
-- (0.48) (0.07) -- (0.79) (0.28) -- (0.45) (0.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7.98 $ 9.86 $ 16.85 $ 14.19 $ 13.17 $ 13.68 $ 7.84 $ 9.74 $ 16.77 $ 14.19
- ------------------------------------------------------------------------------------------------------------------------------------
(19.07)% (39.20)% 19.34% 7.74% 1.40% 26.10% (19.51)% (39.75)% 18.62% 12.44%
- ------------------------------------------------------------------------------------------------------------------------------------
$335,556 $758,991 $1,259,457 $994,378 $998,083 $654,960 $ 347 $ 413 $ 607 $ 2
- ------------------------------------------------------------------------------------------------------------------------------------
0.11%+ 0.55% 0.48% 0.58% 0.23% (0.14)% (0.14)%+ 0.30% 0.23% 0.33%+
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.00# $ 0.07 -- -- -- -- $ (0.01) $ 0.03 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
33.72% 96.76% 83.08% 109.92% 92.09% 63.79% 33.72% 96.76% 83.08% 109.92%
- ------------------------------------------------------------------------------------------------------------------------------------
1.97%+ 1.65% -- -- -- -- 2.22%+ 1.90% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1.97%+ 1.65% -- -- -- -- 2.22%+ 1.90% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1.87%+ 1.60% 1.67% 1.72% 1.80% 1.85% 2.12%+ 1.85% 1.92% 1.97%+
- ------------------------------------------------------------------------------------------------------------------------------------
(e) The Emerging Markets Fund's Class P shares commenced operations on March 11, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the period may not be in accord with the net realized and
unrealized gain/(loss) for the period because of the timing of purchases and withdrawal of shares in relation to the fluctuating
market values of the portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share data
for the period, since the use of the undistributed income method did not accord with results of operations.
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
- --------------------
The Montgomery Funds
Financial Highlights
FEDERAL TAX-FREE MONEY FUND TOTAL RETURN BOND FUND
Fiscal Year Ended
Class R Shares Fiscal Year Ended June 30, Class R Shares June 30,
12/31/98 ----------------------------- 12/31/98 -----------
(unaudited) 1998 1997(a) (unaudited) 1998(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 1.00 $ 1.00 $ 12.00 $ 12.44 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.015 0.031 0.032 0.36 0.72
Net realized and unrealized gain/(loss) on
investments 0.000### 0.000### 0.000### (0.25) 0.56
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from investment operations 0.015 0.031 0.032 0.11 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.015) (0.031) (0.032) (0.36) (0.72)
Distributions in excess of net investment income -- -- (0.000)### -- (0.00)#
Distributions from net realized capital gains -- -- -- -- (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.015) (0.031) (0.032) (0.36) (0.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 12.19 $ 12.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 1.49% 3.12% 3.26% 4.35% 10.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 109,927 $ 117,283 $ 114,197 $ 58,388 $ 77,694
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets 2.92%+ 3.08% 3.24%+ 5.76%+ 5.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of
fees by Manager $ 0.015 $ 0.031 $ 0.030 $ (0.36) $ 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- 106.96% 390.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.60%+ 0.60% 0.33%+ 1.11%+ 1.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expense 0.63%+ 0.81% 0.69%+ 1.18%+ 1.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.60%+ 0.60% -- 0.70%+ 0.70%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The Federal Tax-Free Money Fund's Class R shares commenced operations on July 15, 1996.
(b) The Total Return Bond Fund's Class R shares commenced operations on June 30,
1997.
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Selected Per-Share Data for the Year Class R Shares Fiscal Year Ended June 30,
or Period Ended: 12/31/98 ------------------------------------------------
(unaudited) 1998 1997 1996 1995 1004(d)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 12.86 $ 12.53 $ 12.23 $ 12.04 $11.79 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.26 0.51 0.53 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on
investments 0.25 0.33 0.30 0.19 0.25 (0.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment
operations 0.51 0.84 0.83 0.73 0.69 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.26) (0.51) (0.53) (0.54) (0.44) (0.41)
Distributions in excess of net investment income -- -- -- -- .00)# (0 --
Distributions from net realized capital gains (0.03) -- -- -- -- --
Distributions in excess of net realized capital gains -- -- -- -- -- --
Distributions from capital -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.29) (0.51) (0.53) (0.54) (0.44) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 13.08 $ 12.86 $ 12.53 $ 12.23 $12.04 $ 11.79
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 3.98% 6.85% 6.91% 6.11% 6.03% 1.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $43,085 $35,667 $21,681 $13,948 $5,153 $11,556
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets 3.92%+ 4.03% 4.27% 4.34% 3.71% 3.44%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees
by Manager $ 0.25 $ 0.44 0.47 $ $ 0.43 0.34 $ $ 0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 111.16% 42.36% 25.60% 58.11% 37.93% 77.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.68%+ 0.69% 0.68% 0.61% 0.56% 0.23%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by
Manager, including interest and tax expense 0.87%+ 1.19% 1.18% 1.43% 1.41% 1.63%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.68%+ 0.68% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
(d) The California Tax-Free Intermediate Bond Fund's Class R shares commenced operations on July 1, 1993.
</TABLE>
The accompanying notes are an integral part of these financial statements.
102
<PAGE>
<TABLE>
<CAPTION>
U.S. ASSET ALLOCATION FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------- 12/31/98 -----------------------------------------
(unaudited) 1998 1997## 1996 1995 1994(c) (unaudited) 1998 1997## 1996(c)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 19.08 $ 19.89 $ 19.33 $ 16.33 $ 12.24 $ 12.00 $ 19.11 $ 19.89 $ 19.33 $ 17.86
- ----------------------------------------------------------------------------------------------------------------------------------
0.98 1.66 0.48 0.26 0.25 0.06 0.97 1.62 0.43 0.09
(1.01) 0.99 2.13 3.54 4.11 0.18 (1.56) 1.01 2.13 1.38
- ----------------------------------------------------------------------------------------------------------------------------------
(0.03) 2.65 2.61 3.80 4.36 0.24 (0.59) 2.63 2.56 1.47
- ----------------------------------------------------------------------------------------------------------------------------------
(0.93) (0.93) (0.39) (0.25) (0.17) -- (0.89) (0.84) (0.34) --
-- (0.70) -- -- -- -- -- (0.74) -- --
(3.09) (1.83) (1.66) (0.55) (0.10) -- (3.09) (1.83) (1.66) --
- ----------------------------------------------------------------------------------------------------------------------------------
(4.02) (3.46) (2.05) (0.80) (0.27) -- (3.98) (3.41) (2.00) --
- ----------------------------------------------------------------------------------------------------------------------------------
$ 15.03 $ 19.08 $ 19.89 $ 19.33 $ 16.33 $ 12.24 $ 14.54 $ 19.11 $ 19.89 $ 19.33
- ----------------------------------------------------------------------------------------------------------------------------------
0.22% 14.67% 14.65% 23.92% 35.99% 2.00% 0.09% 14.53% 14.35% 8.23%
- ----------------------------------------------------------------------------------------------------------------------------------
$107,660 $128,075 $127,214 $132,511 $60,234 $ 1,548 $ 67 $ 71 $ 74 $ 43
- ----------------------------------------------------------------------------------------------------------------------------------
3.25%+ 3.10% 2.55% 1.85% 3.43% 2.54%+ 3.00%+ 2.85% 2.30% 1.60%+
- ----------------------------------------------------------------------------------------------------------------------------------
$ 0.98 $ 1.63 $ 0.47 $ 0.24 $ 0.19 $ (0.11) $ 0.97 $ 1.59 $ 0.42 $ 0.08
- ----------------------------------------------------------------------------------------------------------------------------------
24.45% 84.23% 168.51% 225.91% 95.75% 190.94% 24.45% 84.23% 168.51% 225.91%
- ----------------------------------------------------------------------------------------------------------------------------------
0.25%+ 0.26% 1.43% 1.42% 1.31% 1.43%+ 0.50%+ 0.51% 1.68% 1.67%+
- ----------------------------------------------------------------------------------------------------------------------------------
0.26%+ 0.31% 1.49% 1.55% 2.07% 9.00%+ 0.51%+ 0.56% 1.74% 1.80%+
- ----------------------------------------------------------------------------------------------------------------------------------
0.25%+ 0.25% 1.31% 1.30% 1.30% 1.30%+ 0.50%+ 0.50% 1.56% 1.55%+
- ----------------------------------------------------------------------------------------------------------------------------------
(c) The U.S. Asset Allocation Fund's Class R shares and Class P shares commenced operations on March 31, 1994, and January 2, 1996,
respectively.
</TABLE>
<TABLE>
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------- 12/31/98 -----------------------------------------
(unaudited) 1998 1997## 1996 1995 1994 (unaudited) 1998 1997## 1996(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.14 $ 9.99 $ 9.92 $ 9.95 $ 9.80 $ 10.23 $ 10.14 $ 9.99 $ 9.92 $ 9.98
- -----------------------------------------------------------------------------------------------------------------------------------
0.26 0.57 0.59 0.60 0.62 0.61 0.24 0.61 0.59 0.16
0.12 0.16 0.07 (0.04) 0.16 (0.34) 0.12 0.11 0.06 (0.05)
- -----------------------------------------------------------------------------------------------------------------------------------
0.38 0.73 0.66 0.56 0.78 0.27 0.36 0.72 0.65 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
(0.26) (0.56) (0.59) (0.59) (0.62) (0.56) (0.25) (0.57) (0.58) (0.17)
-- -- (0.00)# (0.00)# -- (0.07) -- -- (0.00)# --
(0.05) (0.02) -- -- -- -- (0.05) -- -- --
-- -- -- -- -- (0.07) -- -- -- --
-- -- -- -- (0.01) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(0.31) (0.58) (0.59) (0.59) (0.63) (0.70) (0.30) (0.57) (0.58) (0.17)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 10.21 $ 10.14 $ 9.99 $ 9.92 $ 9.95 $ 9.80 $ 10.20 $ 10.14 $ 9.99 $ 9.92
- -----------------------------------------------------------------------------------------------------------------------------------
3.81% 7.56% 6.79% 5.74% 8.28% 2.49% 3.58% 7.34% 6.69% 1.12%
- -----------------------------------------------------------------------------------------------------------------------------------
$134,061 $66,357 $ 47,265 $ 22,681 $17,093 $21,937 $ 33 $ 3 -- $ 1
- -----------------------------------------------------------------------------------------------------------------------------------
5.05%+ 5.83% 5.87% 5.88% 6.41% 5.93% 4.80%+ 5.83% 5.62% 5.63%+
- -----------------------------------------------------------------------------------------------------------------------------------
$ 0.25 $ 0.51 $ 0.54 $ 0.52 $ 0.54 $ 0.51 $ 0.23 $ 0.55 $ 0.54 $ 0.14
- -----------------------------------------------------------------------------------------------------------------------------------
104.18% 502.23% 450.98% 349.62% 284.23% 603.07% 104.18% 502.23% 450.98% 349.62%
- -----------------------------------------------------------------------------------------------------------------------------------
1.72%+ 1.15% 1.55% 1.55% 1.38% 0.71% 1.97%+ 1.40% 1.80% 1.80%+
- -----------------------------------------------------------------------------------------------------------------------------------
2.03%+ 1.73% 2.05% 2.31% 2.23% 1.75% 2.28%+ 1.98% 2.30% 2.56%+
- -----------------------------------------------------------------------------------------------------------------------------------
0.60%+ 0.28% 0.60% 0.60% 0.47% 0.25% 0.85%+ 0.53% 0.85% 0.85%+
- -----------------------------------------------------------------------------------------------------------------------------------
(e) The Short Duration Government Bond Fund's Class P shares commenced operations on March 11, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share data
for the period, since the use of the undistributed income method did not accord with results of operations.
### Amount represents less than $0.001 per share.
</TABLE>
103
<PAGE>
--------------------
The Montgomery Funds
--------------------
Financial Highlights
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE MONEY FUND
Class R Shares Fiscal Year Ended June 30,
Selected Per-Share Data for the Year or Period Ended: 12/31/98 ----------------------------------------------------
(unaudited) 1998 1997 1996 1995(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.013 0.029 0.029 0.030 0.027
Net realized and unrealized gain/(loss) on investments 0.000### 0.000 ### 0.000### 0.000### 0.000###
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.013 0.029 0.029 0.030 0.027
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.013) (0.029) (0.029) (0.030) (0.027)
Distributions in excess of net investment income -- -- -- -- (0.000)###
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.013) (0.029) (0.029) (0.030) (0.027)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return** 1.37% 3.00% 2.95% 3.03% 2.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 224,121 $ 187,216 $ 118,723 $ 98,134 $ 64,780
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 2.66%+ 2.96% 2.91% 2.99% 3.55%+
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.013 $ 0.029 $ 0.028 $ 0.028 $ 0.023
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.58%+ 0.58% 0.58% 0.59% 0.33%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expense 0.58%+ 0.68% 0.73% 0.80% 0.86%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.58%+ 0.58% -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The California Tax-Free Money Fund's Class R shares commenced operations on September 30, 1994.
</TABLE>
The accompanying notes are an integral part of these financial statements.
104
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE FUND
Class R Shares Fiscal Year Ended June 30, Class P Shares Fiscal Year Ended June 30,
12/31/98 ------------------------------------------------------------- 12/31/98 -------------------------------
(unaudited) 1998 1997 1996 1995 1994 (unaudited) 1998 1997 1996(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------------------
0.025 0.052 0.049 0.052 0.049 0.029 0.023 0.049 0.048 0.014
0.000### 0.000### 0.000### 0.000### 0.000### 0.000### 0.000### 0.000### 0.000### 0.000###
- -----------------------------------------------------------------------------------------------------------------------------------
0.025 0.052 0.049 0.052 0.049 0.029 0.023 0.049 0.048 0.014
- -----------------------------------------------------------------------------------------------------------------------------------
(0.025) (0.052) (0.049) (0.052) (0.049) (0.029) (0.023) (0.049) (0.048) (0.014)
-- -- -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(0.025) (0.052) (0.049) (0.052) (0.049) (0.029) (0.023) (0.049) (0.048) (0.014)
- -----------------------------------------------------------------------------------------------------------------------------------
$1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------------------
2.50% 5.27% 5.03% 5.28% 4.97% 2.96% 2.37% 5.00% 4.88% 1.38%
- -----------------------------------------------------------------------------------------------------------------------------------
$749,263 $ 724,619 $ 473,154 $439,423 $258,956 $211,129 $ 1 $ -- -- $ 1
- -----------------------------------------------------------------------------------------------------------------------------------
4.90%+ 5.15% 4.93% 5.17% 4.92% 2.99% 4.65%+ 4.90% 4.68% 4.91%+
- -----------------------------------------------------------------------------------------------------------------------------------
$0.025 $ 0.052 $ 0.049 $ 0.050 $ 0.047 $ 0.028 $ 0.023 $ 0.049 $ 0.048 $ 0.013
- -----------------------------------------------------------------------------------------------------------------------------------
-- 0.53% -- -- 0.63% -- 0.78% -- --
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
0.50%+ 0.48% 0.62% 0.74% 0.79% 0.71% 0.75%+ 0.73% 0.87% 0.99%+
- -----------------------------------------------------------------------------------------------------------------------------------
0.50%+ 0.53% 0.60% 0.60% 0.60% 0.60% 0.75%+ 0.78% 0.85% 0.85%+
- -----------------------------------------------------------------------------------------------------------------------------------
(b) The Government Reserve Fund's Class P shares commenced operations on March 11, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
### Amount represents less than $0.001 per share.
</TABLE>
105
<PAGE>
--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
The Montgomery Funds and The Montgomery Funds II (individually, the "Trust" and,
collectively, the "Trusts") are registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as diversified, open-end management
investment companies. As of December 31, 1998, the Trusts had 26 publicly
offered series (individually, a "Fund" and, collectively, the "Funds"). The
Montgomery Funds included the following: Montgomery Growth Fund, Montgomery U.S.
Emerging Growth Fund, Montgomery Small Cap Fund, Montgomery Small Cap
Opportunities Fund, Montgomery Equity Income Fund, Montgomery International
Growth Fund, Montgomery International Small Cap Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications Fund, Montgomery Emerging
Markets Fund, Montgomery Emerging Asia Fund, Montgomery Latin America Fund,
Montgomery Select 50 Fund, Montgomery Total Return Bond Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Government Reserve Fund, Montgomery
Federal Tax-Free Money Fund, Montgomery California Tax-Free Intermediate Bond
Fund and Montgomery California Tax-Free Money Fund. The Montgomery Funds II
included the Montgomery U.S. Asset Allocation Fund, among other series.
The Montgomery Funds were organized as a Massachusetts business trust on May 10,
1990, and commenced operations with the Montgomery Small Cap Fund. The
Montgomery Funds II were organized as a Delaware business trust on September 8,
1993.
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 disclosure in the financial statements. Actual
results could differ from those estimates. Information presented in these
financial statements pertains to all the above Funds but exclude other series of
The Montgomery Funds II, which are presented under separate cover.
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 and in the case of fixed-income securities, 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 price prior to the time of valuation.
For the Government Reserve Fund, Federal Tax-Free Money Fund and California Tax-
Free Money Fund, portfolio securities are valued at amortized cost, which
approximates market value.
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 Trusts' Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. Forward Foreign-Currency Exchange Contracts
Certain Funds may engage in forward foreign-currency exchange contracts
("forward contract") 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, a Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
c. Foreign Currency
The accounting records of the Funds are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Funds 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 Funds do 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 or depreciation from
investments.
d. Repurchase Agreements
Each Fund may engage in repurchase agreement transactions either individually or
jointly through a joint repurchase account with other series of the Trusts
pursuant to a joint repurchase agreement. Under the terms of a typical
repurchase agreement, a 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 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
106
<PAGE>
--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
amount of the repurchase obligation, including interest. In the event of
counterparty default, a Fund has the right to use the collateral to offset
losses incurred. There could be potential loss to the Fund in the event a 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 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 Funds may also participate on an individual or
joint basis in tri-party repurchase agreements that involve a counterparty and a
custodian bank.
e. Dollar Roll Transactions
Certain Funds may enter into dollar roll transactions with financial
institutions to take advantage of opportunities in the mortgage market. A dollar
roll transaction involves a sale by the Fund of securities with a simultaneous
agreement to repurchase substantially similar securities at an agreed-upon price
at a future date. The securities repurchased will bear the same interest as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest and principal
payments on the securities sold. The Fund will invest the proceeds of the sale
in additional instruments, the income from which, together with any additional
fee income received for the dollar roll, may generate income for the Fund
exceeding the yield on the securities sold. Dollar roll transactions involve the
risk that the market value of the securities sold by the Fund may decline below
the repurchase price of those securities.
f. Reverse Repurchase Agreements
Certain Funds may enter into reverse repurchase agreement transactions with
member banks on the Federal Reserve Bank of New York's list of reporting
dealers. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities. Each Fund
establishes a segregated account with its custodian in which the Fund maintains
cash, U.S. government securities or other high-grade liquid debt obligations
equal in value to its obligations with respect to reverse repurchase agreements.
g. Futures Contracts
Certain Funds may enter into futures contracts. Upon entering into a futures
contract, a Fund is required to deposit with the custodian on behalf of the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent payments
("variation margin") are made or received by a Fund each day, depending on the
daily fluctuation of the value of the contract.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk a Fund
may not be able to enter into a closing transaction because of an illiquid
secondary market.
h. Equity Swaps
Certain Funds may enter into equity swap agreements in order to participate in
foreign markets not currently accessible to the Fund. Pursuant to these
agreements, the Fund pays a swap fee in cash which is equal to a fixed
percentage of the cost for the underlying security (the "notional amount").
Additionally, the Fund will make semiannual payments to the swap counterparty
equal to any capital depreciation on the underlying security, plus a floating-
rate payment based on the notional amount and the six-month LIBOR rate. The swap
counterparty will make semiannual payments to the Fund equal to any capital
appreciation and any dividends received on the underlying security. During the
terms of the agreements, changes in the underlying value of the swaps are
recorded as unrealized gains or losses and are based on changes in the value of
the underlying security. Amounts received from (paid to) the swap counterparty
representing capital appreciation (depreciation) are recorded as realized gain
(loss), while dividends on the underlying security are recorded when received.
The Fund is exposed to credit risk in the event of non-performance by the swap
counterparty; the Fund does not anticipate non-performance by the counterparty,
however.
i. Dividends and Distributions
Dividends from net investment income of the Growth Fund, U.S. Emerging Growth
Fund, Small Cap Fund, Small Cap Opportunities Fund, International Growth Fund,
International Small Cap Fund, Global Opportunities Fund, Global Communications
Fund, Emerging Markets Fund, Emerging Asia Fund, Latin America Fund, Select 50
Fund and U.S. Asset Allocation Fund are declared and paid at least annually.
Dividends from net investment income of the Total Return Bond Fund, Short
Duration Government Bond Fund, Government Reserve Fund, Federal Tax-Free Money
Fund, California Tax-Free Intermediate Bond Fund and California Tax-Free Money
Fund are declared daily and paid monthly. Dividends from net investment income
of the Equity Income Fund are declared and paid quarterly.
Distributions of net realized capital gains (including net short-term capital
gains) earned by a Fund are distributed no less frequently than annually.
Additional distributions of net investment income and capital gains for each
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
107
<PAGE>
--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
differing treatments of income and gains on various investment securities held
by a Fund, timing differences and differing characterization of distributions
made by a Fund.
j. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis (date the order to
buy or sell is executed). Interest income is accrued daily and includes
amortization of premium and accretion of discount on investments. Realized gain
and loss from securities transactions are recorded on the specific identified
cost basis. Dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded as soon as the Funds are
informed of the ex-dividend date. Interest income, including, where applicable,
accretion/amortization of discount/premium on short-term investments, is
recognized on the accrual basis. Each Fund's investment income and realized and
unrealized gains and losses are allocated among its classes based on the
relative net assets of each class of shares.
k. Federal Income Taxes
Each Fund has elected and qualified, and it is the intention of each 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
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 each Fund of all or substantially all federal
income taxes. Therefore, no federal income- or excise-tax provision is
applicable.
The Funds may be subject to foreign taxes on income, gains on investments or
currency repatriation, a portion of which may be recoverable. The Funds 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.
l. Organization Costs
Expenses incurred in connection with the organization of each Fund are amortized
on a straight-line basis over a period of five years from the commencement of
operations.
m. Cash
Cash, as used in the Statement of Cash Flows, is the amount reported in the
Statement of Assets and Liabilities. The Fund issues and redeems its shares,
invests in securities and distributes dividends from net investment income and
net realized gains (which are either paid in cash or reinvested at the
discretion of shareholders). These activities are reported in the Statement of
Changes in Net Assets. Information on cash payments is presented in the
Statement of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include unrealized gain or loss on investment
securities, accretion income recognized on investment securities and
amortization of organization costs.
n. Expenses
General expenses of the Trusts are allocated to the relevant Funds based on
relative net assets. Operating expenses directly attributable to a Fund or a
class of shares are charged to that Fund's or class's operations. Expenses of
each Fund not directly attributable to the operations of any Fund or class of
shares are charged to that Fund's or class's operations. Expenses of each Fund
not directly attributable to the operations of any Fund or class of shares are
prorated among the classes based on the relative average net assets of each Fund
or class of shares.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES AND OTHER CONTRACTUAL
COMMITMENTS:
a. Montgomery Asset Management, LLC, is the Funds' Manager (the "Manager"). The
Manager, a Delaware limited liability com-company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The Manager is a
subsidiary of Commerzbank AG.
Pursuant to Investment Management Agreements (the "Agreements") between the
Manager and the Trusts with respect to each Fund, the Manager provides each Fund
with advice on buying and selling securities, manages the investments of each
Fund including the placement of orders for portfolio transactions, furnishes
each Fund with office space and certain administrative services, and provides
the personnel needed by the Trusts with respect to the Manager's
responsibilities under the Agreements. Under Operating Expense Agreements with
each trust, the Manager has agreed to reduce some or all of its management fee
or absorb Fund expenses if necessary to keep each Fund's annual operating
expenses, exclusive of Rule 12b-1 fees, dividend expense, interest,
extraordinary expenses and taxes, at or below the following percentages of each
Fund's average net assets: 1.50% for the Growth Fund; 1.75% for the U.S.
Emerging Growth Fund; 1.40% for the Small Cap Fund; 1.50% for the Small Cap
Opportunities Fund; 0.85% for the Equity Income Fund; 1.65% for the
International Growth Fund; 1.90% for the International Small Cap Fund, the
Global Opportunities Fund, the Global Communications Fund, the Emerging Markets
Fund, the Emerging Asia Fund and the Latin America Fund; 1.80% for the Select 50
Fund; 1.30% for the U.S. Asset Allocation Fund (including total expenses of the
underlying funds); 0.70% for the Total Return Bond Fund and the Short Duration
Government Bond Fund; 0.60% for the Government Reserve Fund and the Federal Tax-
Free Money Fund; 0.70% for the California Tax-Free Intermediate Bond Fund; and
0.60% for the California Tax-Free Money Fund. Any reductions or absorptions made
to a Fund by the Manager are subject to recovery within the following three
years, provided a Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Operating Expense Agreements
have one-year terms, renewable at the end of each fiscal year.
108
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--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
Montgomery Asset Management, LLC, serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of each Fund's administrative operations.
As compensation, each Fund has accrued a monthly management and administration
fee (accrued daily) based on the average daily net assets of each Fund. The
following effective management fee annual rates include current-year accrued
fees and recoupment of prior-year deferrals, but do not include the effect of
current-year fee deferrals or expense absorptions:
Management
Effective Fee Including Effective
Management Effect of Administration
Name of Fund Fee Fees Reduced Fee
- -------------------------------------------------------------------------------
Growth Fund................... 0.94% 0.94% 0.06%
U.S. Emerging Growth Fund..... 1.33 1.33 0.07
Small Cap Fund................ 1.00 1.00 0.08
Small Cap Opportunities Fund.. 1.20 1.05 0.07
Equity Income Fund............ 0.60 0.27 0.07
International Growth Fund..... 1.10 1.00 0.07
International Small Cap Fund.. 1.25 1.23 0.07
Global Opportunities Fund..... 1.35 1.31 0.07
Global Communications Fund.... 1.25 1.24 0.07
Emerging Markets Fund......... 1.13 1.13 0.07
Emerging Asia Fund............ 1.25 1.11 0.07
Latin America Fund............ 1.25 0.00 0.07
Select 50 Fund................ 1.25 1.24 0.07
U.S. Asset Allocation Fund.... -- -- --
Total Return Bond Fund........ 0.50 0.44 0.05
Short Duration
Government Bond Fund........ 0.50 0.20 0.05
Government Reserve Fund....... 0.30 0.30 0.04
Federal Tax-Free Money Fund... 0.40 0.37 0.05
California Tax-Free
Intermediate Bond Fund...... 0.50 0.32 0.05
California Tax-Free
Money Fund.................. 0.42 0.42 0.05
The Manager recouped previously deferred fees and/or absorbed expenses during
the six months ended December 31, 1998. These amounts have been included with
current annual management fees in the Statement of Operations and are part of
the effective management fee shown. There were no amounts recouped during the
six months ended December 31, 1998.
For the six months ended December 31, 1998, the Manager has deferred fees and/or
absorbed expenses and has deferred management fees and absorbed expenses subject
to recoupment as follows:
Deferred
Management Fees
and Absorbed
Expenses
Fees Expenses Subject to
Reduced Absorbed Recoupment
- --------------------------------------------------------------------------
Growth Fund.......................... $ 6,145 $ -- $ 6,145
Small Cap Fund....................... 1,044 -- 1,044
Small Cap Opportunities Fund......... 91,314 -- 749,795
Equity Income Fund................... 64,442 -- 428,184
International Growth Fund............ 71,964 -- 261,662
International Small Cap Fund......... 4,920 -- 291,486
Global Opportunities Fund............ 10,282 -- 213,877
Emerging Asia Fund................... 20,279 -- 177,496
Latin America Fund................... 20,531 28,371 255,364
Select 50 Fund....................... 12,302 -- 12,302
U.S. Asset Allocation Fund........... -- 5,643 326,109
Total Return Bond Fund............... 23,311 -- 61,052
Short Duration Government Bond Fund.. 169,656 -- 673,578
Federal Tax-Free Money Fund.......... 17,922 -- 283,632
California Tax-Free
Intermediate Bond Fund............. 35,892 -- 262,679
b. Certain officers and Trustees of the Trusts are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an affiliated person will receive an annual
retainer and quarterly meeting fee totaling $55,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all Trusts advised by
the Manager ($35,000 of which will be allocated to the Montgomery Funds and
$15,000 to the Montgomery Funds II).
c. Certain Funds are parties to agreements with financial intermediaries and
recordkeepers related to the Funds' participation in various purchase,
marketplace and retirement programs. The Funds that participate in the programs
make payments to the financial intermediaries and recordkeepers for certain
services provided to shareholders who own shares of the Funds through such
programs. These fees are paid to shareholder servicing and recordkeeping and are
reflected in the Funds' financial statement as "servicing fees." The Manager,
out of its own resources, may make additional payments to financial
intermediaries and recordkeepers in connection with the Funds' participation in
these programs.
109
<PAGE>
--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
3. SHARE MARKETING PLAN:
Class P shares of each Fund have adopted a Share Marketing Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule"). Pursuant to that Rule,
the Trusts' Board of Trustees has approved, and each Fund has entered into, the
Plan with Funds Distributor, Inc., the Funds' distributor (the "Distributor"),
as the distribution coordinator for the Class P shares. Under the Plan each Fund
will pay distribution fees to the Distributor at an annual rate of up to 0.25%
of the Fund's aggregate average daily net assets attributable to its Class P
shares, to reimburse the Distributor for its distribution costs with respect to
that class (the "Class").
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to, (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the Manager or any other broker-
dealer or financial institution that engages in the distribution of that Class;
and (ii) compensation to broker-dealers, financial institutions or other persons
for providing distribution assistance with respect to that Class. Distribution
fees may also be used for (i) marketing and promotional activities, including,
but not limited to, direct-mail promotions and television, radio, newspaper,
magazine and other mass media advertising for that Class; (ii) costs of printing
and distributing prospectuses, statements of additional information and reports
of the Funds to prospective investors in that Class; (iii) costs involved in
preparing, printing and distributing sales literature pertaining to the Funds
and that Class; and (iv) costs involved in obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Funds may, from time to time, deem advisable with respect to the
distribution of that Class. Distribution fees are accrued daily, paid monthly
and charged as expenses of the Class P shares as accrued.
4. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. government securities, during the six months ended
December 31, 1998, were:
Fund Purchases Sales
- ------------------------------------------------------------
Growth Fund................... $191,324,261 $361,141,858
U.S. Emerging Growth Fund..... 123,365,219 113,030,641
Small Cap Fund................ 50,207,273 78,383,496
Small Cap Opportunities Fund.. 19,567,431 101,210,015
Equity Income Fund............ 10,859,895 16,998,511
International Growth Fund..... 170,638,333 48,888,142
International Small Cap Fund.. 29,850,478 24,515,777
Global Opportunities Fund..... 45,364,726 86,077,835
Global Communications Fund.... 127,770,114 139,572,473
Emerging Markets Fund......... 163,751,247 461,197,700
Emerging Asia Fund............ 38,631,306 35,021,414
Latin America Fund............ 3,923,103 4,939,574
Select 50 Fund................ 122,611,583 177,739,272
U.S. Asset Allocation Fund.... 27,540,849 45,272,109
Total Return Bond Fund........ 4,530,574 5,297,121
Short Duration
Government Bond Fund........ 1,551,210 1,019,742
California Tax-Free
Intermediate Bond Fund...... 46,101,548 41,492,161
The aggregate amount of purchases and sales of long-term U.S. government
securities, during the six months ended December 31, 1998, were:
Fund Purchases Sales
- ------------------------------------------------------------
Total Return Bond Fund........ $ 83,469,343 $ 94,309,445
Short Duration
Government Bond Fund........ 223,675,808 126,143,662
b. At December 31, 1998, 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 were as follows:
110
<PAGE>
------------------------
The Montgomery Funds
------------------------
Notes
to Financial Statements
<TABLE>
<CAPTION>
Tax Basis Tax Basis Net Tax Basis Cost for
Unrealized Unrealized Unrealized Appreciation Federal Tax
Fund Appreciation Depreciation (Depreciation) Purposes
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund............................... $228,098,948 $ 85,428,136 $142,670,812 $901,387,155
U.S. Emerging Growth Fund................. 125,255,891 14,753,188 110,502,703 300,331,527
Small Cap Fund............................ 49,910,986 4,913,514 38,997,464 124,315,008
Small Cap Opportunities Fund.............. 23,471,706 3,612,834 19,858,872 71,656,363
Equity Income Fund........................ 6,290,536 766,799 5,523,737 34,514,654
International Growth Fund................. 26,431,411 7,155,593 19,275,818 184,675,676
International Small Cap Fund.............. 7,001,373 3,121,059 3,880,314 43,444,661
Global Opportunities Fund................. 10,011,280 1,897,028 8,114,252 45,975,834
Global Communications Fund................ 78,096,061 15,151,364 62,944,697 222,213,487
Emerging Markets Fund..................... 26,913,133 123,140,194 (96,227,061) 432,697,479
Emerging Asia Fund........................ 6,279,403 6,151,252 128,151 34,295,472
Latin America Fund........................ 44,590 524,975 (480,385) 2,261,224
Select 50 Fund............................ 35,365,197 5,869,248 29,495,949 147,342,298
U.S. Asset Allocation Fund................ -- 7,401,830 7,401,830 116,468,751
Total Return Bond Fund.................... 1,496,879 93,623 1,403,256 71,682,576
Short Duration Government Bond Fund....... 679,667 131,259 548,408 146,974,170
California Tax-Free Intermediate Bond Fund 1,541,504 2,369 1,539,135 41,137,526
</TABLE>
c. Information regarding transactions under dollar roll transactions was as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Amount Shares per Share
Outstanding Outstanding Outstanding Outstanding Outstanding Fee
During as of During During During Income
Fund the Period 12/31/98 the Period the Period the Period Earned
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund................ $14,423,590 $12,443,349 $8,899,698 5,868,499 $1.52 $12,059
Short Duration Government Bond Fund... 11,714,075 9,507,000 8,184,592 10,629,876 0.77 19,034
</TABLE>
The average amount outstanding during the rear was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days
in the six months ended December 31, 1998.
d. Information regarding borrowing under reverse repurchase agreements is as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Shares per Share
Outstanding Outstanding Outstanding Outstanding Average
During During During During Interest Interest
Fund the Period the Period the Period the Period Rate Expense
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund................ $27,992,813 $16,155,876 5,868,499 $2.75 4.89% $151,586
Short Duration Government Bond Fund... 34,820,469 15,849,321 10,629,876 1.49 3.03 626,538
</TABLE>
The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days
in the six months ended December 31, 1998.
Reverse repurchase agreements outstanding at December 31, 1998:
Short Duration Government Bond Fund:
$4,561,875 Reverse repurchase agreement with BZW Securities, dated
12/31/98 bearing 0.25%, to be repurchased at $4,562,002,
collateralized by U.S. government securities having
various maturities and interest rates................... $4,561,875
111
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--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
e. The schedule of forward foreign-currency exchange contracts at December 31,
1998, was as follows:
<TABLE>
<CAPTION>
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Depreciation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Growth Fund:
Forward Foreign-Currency Exchange Contracts to Receive
421,370 British Pound 01/04/99 $ 709,376 $ 8,836
535,299 British Pound 01/05/99 898,231 8,312
115,968 British Pound 01/06/99 194,595 1,905
352,359 British Pound 01/07/99 593,690 7,945
564,826 British Pound 01/08/99 948,569 9,663
---------- -------
Total $3,344,461 $36,661
---------- -------
Net Unrealized Depreciation $36,661
-------
International Small Cap Fund:
Forward Foreign-Currency Exchange Contracts to Receive
259,506 Hong Kong Dollar 01/04/99 $ 33,515 $ 20
195,948 Hong Kong Dollar 01/05/99 25,300 9
---------- -------
Total $ 58,815 $ 29
---------- -------
Forward Foreign-Currency Exchange Contracts to Deliver
43,793 Australian Dollar 01/04/99 $ 26,670 $ 16
17,976,860 Japanese Yen 01/04/99 155,187 3,940
36,713 Australian Dollar 01/06/99 22,325 174
---------- -------
Total $ 204,182 $ 4,281
---------- -------
Net Unrealized Depreciation $ 4,310
-------
Global Communications Fund:
Forward Foreign-Currency Exchange Contracts to Receive
410,485 Hong Kong Dollar 01/04/99 $ 53,014 $ 32
907,389 Hong Kong Dollar 01/05/99 117,158 41
---------- -------
Total $ 170,172 $ 73
---------- -------
Net Unrealized Depreciation $ 73
-------
Emerging Markets Fund:
Forward Foreign-Currency Exchange Contracts to Receive
19,758,920 Thai Baht 01/04/99 $ 545,021 $ 1,527
---------- -------
Forward Foreign-Currency Exchange Contracts to Deliver
1,509,634 Brazilian Real 01/04/99 $1,248,148 $ 1,291
---------- -------
Net Unrealized Depreciation $ 2,818
-------
f. The schedule of futures contracts at December 31, 1998, was as follows:
Issuer Number of Contracts Value Unrealized Appreciation
Short Duration Government Bond Fund:
U.S. Treasury Note, 10 Year, Futures, March 1999 30 $3,574,688 $21,579
---------- -------
</TABLE>
112
<PAGE>
--------------------
The Montgomery Funds
--------------------
Notes
to Financial Statements
g. Certain Funds may lend securities to brokers, dealers and other financial
organizations. Each security loan is collateralized with collateral assets in an
amount equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in collateral should the borrower
fail financially.
At December 31, 1998, the Funds had outstanding loans of securities to certain
brokers, dealers or other financial institutions for which each Fund has
segregated cash equivalent to 102% of the market value of loans of domestic
securities and 105% for loans of international securities as collateral with the
Funds' custodian. At December 31, 1998, the following Funds had securities on
loan:
Market Value of Market Value
Fund Loaned Securities of Collateral
- ----------------------------------------------------------------
Growth Fund................... $28,527,809 $29,098,365
U.S. Emerging Growth Fund..... 30,865,762 31,483,077
Small Cap Fund................ 6,127,479 6,250,029
Small Cap Opportunities Fund.. 12,470,661 12,720,074
Equity Income Fund............ 153,035 156,096
International Growth Fund..... 9,902,524 10,397,650
International Small Cap Fund.. 3,617,075 3,797,929
Global Opportunities Fund..... 3,875,112 4,068,868
Global Communications Fund.... 36,393,925 38,213,621
Income earned from securities lending transactions is included in miscellaneous
income on the Statements of Operations.
- --------------------------------------------------------------------------------
h. Under an unsecured Revolving Credit Agreement with Deutsche Bank (New York),
each of the Funds of The Montgomery Funds and The Montgomery Funds II may, for
one year starting August 13, 1998, borrow (consistent with applicable law and
its investment policies) up to one-third of its net asset value (or such lower
limit applicable to such Fund), provided that the aggregate funds do not exceed
$175,000,000. The Funds pay their pro rata shares of the quarterly commitment
fee of 0.08% per annum of the unutilized credit line balance. At December 31,
1998, there were no loans outstanding under this agreement. For the year ended
December 31, 1998, borrowings by the Funds under the 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>
Small Cap Opportunities Fund.. $ 388,043 $16,700,000 6.3% 7,660,983 $0.05
Global Opportunities Fund..... 1,667,935 37,000,000 6.1 3,531,442 0.47
Emerging Markets Fund......... 3,375,326 23,500,000 5.9 58,019,510 0.06
</TABLE>
- --------------------------------------------------------------------------------
5. FOREIGN SECURITIES:
Certain Funds may purchase securities on foreign security exchanges. 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, among others, revaluation of currencies, less-
reliable information about issuers, different securities transactions clearance
and settlement practices, and potential 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.
6. ILLIQUID AND SPECIAL SITUATION SECURITIES:
Each Fund may not invest more than 15% (10% for the Government Reserve Fund,
California Tax-Free Money Fund and Federal Tax-Free Money Fund) of its net
assets in illiquid securities. The securities shown in the following table 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 the security at December 31, 1998. These securities are valued in
good faith by the Manager under the supervision of the Board of Trustees.
<TABLE>
<CAPTION>
Acquisition 12/31/98 Value per % of Total
Security Date Shares Market Value Share Cost Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Communications Fund:
Russian Telecommunications
Development
Corporation.......... 12/22/93 200,000 $ 123,780 $ 0.62 $2,000,000 0.04%
---------- -----
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Acquisition 12/31/98 Value per % of Total
Security Date Shares Market Value Share Cost Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Fund:
Bajaj Auto Ltd............. 09/23/98 20,500 $ 251,604 $12.2 $ 317,668 0.08%
Bashkirenergo.............. 08/06/97 5,100,000 102,000 0.02 4,347,386 0.03
Berjaya Sports
Toto Berhad............... 02/20/98 1,666,000 1,575,350 0.95 4,525,579 0.47
Bharat Petroleum
Corporation Ltd........... 02/18/98 100 549 5.49 900 0.00#
BSES Ltd................... 02/17/98 174,500 580,982 3.33 810,238 0.17
Castrol (India) Ltd........ 06/20/97 210 3,751 17.86 2,991 0.00#
Central Asia Growth Fund... 11/03/97 240,806 722,421 3.00 2,480,000 0.22
Cummins India Ltd.......... 09/15/97 200 1,448 7.24 2,920 0.00#
Czech Value Fund........... 05/21/96 342,500 1,840,938 5.38 2,655,255 0.55
Dr. Reddy's Laboratories
Ltd....................... 12/04/98 13,000 148,611 11.43 131,039 0.05
Engro Chemicals Pakistan... 08/21/95 278 503 1.81 881 0.00#
Fauji Fertilizer Company
Ltd....................... 11/27/96 3,249,800 2,991,776 0.92 6,642,236 0.89
Hindustan Petroleum
Corporation Ltd........... 06/12/97 350,000 1,937,485 5.54 4,412,981 0.58
Housing Development and
Finance Corporation....... 05/16/95 93,598 4,790,853 51.30 6,122,953 1.43
Indian Hotels Company
Ltd....................... 07/23/97 240 2,026 8.44 4,279 0.00#
Irkutskenergo, Sponsored
ADR....................... 02/25/97 116,000 174,000 1.50 1,168,768 0.05
ITC Ltd.................... 09/15/97 19,203 339,116 17.66 298,429 0.10
Kazkommerts Bank, GDR...... 07/16/97 42,285 147,998 3.50 794,958 0.05
Kepler Weber S.A........... 04/06/95 50,500 78,994 1.56 663,465 0.02
Keppel Phillipines
Holdings, Inc., Class B... 02/28/98 78,038 1,505 0.02 24,900 0.00#
Krasnoyarskelectrosvyaz,
ADR....................... 02/20/98 86,825 52,095 0.60 1,001,151 0.02
Krasny Oktyabr............. 07/14/97 99,800 129,740 1.30 1,721,550 0.04
LukOil Company, ADR........ 05/20/98 20,330 349,350 17.00 477,411 0.10
Mahanegar Telephone Nigam
Ltd. 01/10/97 1,270,000 5,478,313 4.31 9,875,216 1.60
Murmansk Electrosvyas, ADR. 02/20/98 331,775 33,509 0.10 841,641 0.01
Nizhnovsvyazinform, Sponsored
ADR...................... 02/20/98 114,425 34,328 0.30 710,757 0.01
Orenburg Region Electrosvyaz,
ADR...................... 02/10/98 474,375 23,719 0.05 272,168 0.01
Pakistan State Oil......... 05/17/95 453,866 714,779 1.57 3,698,418 0.21
Pepsi International Bottlers 03/10/97 32,000 544,000 17.00 960,000 0.16
Romania Growth Fund PLC.... 05/12/97 168,811 317,365 1.88 1,718,025 0.10
Samarasvyazinform.......... 09/12/97 6,000 19,200 3.20 486,000 0.01
State Bank of India........ 03/16/96 150 555 3.70 1,008 0.00#
Tata Engineering &
Locomotive Co., Ltd. .... 05/18/96 10 38 3.80 139 0.00#
Teleceara Celular S.A.,
Series B................. 06/19/97 5,422 292 0.05 441 0.00#
Telecears Celular S.A.,
Series D................. 04/23/97 4,556,835 101,826 0.02 870,639 0.03
Telecommunicacoes de Ceara. 06/19/97 5,422 449 0.08 1,706 0.00#
Telecommunicacoes de Ceara. 04/17/97 4,556,835 663,772 0.15 1,229,512 0.20
Uraltelecom, ADR........... 02/20/98 24,725 86,538 3.50 720,423 0.03
YTL Power International
Berhad................... 02/13/98 3,820,000 2,278,549 0.60 3,497,852 0.68
----------- ----
$26,520,327 7.90%
=========== ====
Select 50 Fund:
PPB Oil Palms Berhad....... 02/09/98 276,000 $ 211,358 $ 0.77 $ 240,229 0.12%
=========== ====
# Amount represents less than 0.00%.
</TABLE>
Certain of the Funds hold foreign currency at December 31, 1998, which may be
illiquid because conversion to U.S. dollars could take more than seven days.
7. TRANSACTIONS IN SHARES OF A BENEFICIAL INTEREST:
The Trusts have authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Because the Government Reserve Fund, the
California Tax-Free Money Fund and the Federal Tax-Free Fund are money market
funds, and money market funds sell shares, issue shares for reinvestment of
dividends and redeem shares normally at a constant net asset value of $1 per
share, the number of shares represented by such sales, reinvestments and
redemptions are the same as the dollar amounts shown for such transactions.
114
<PAGE>
-----------------------
The Montgomery Funds
Notes
to Financial Statements
TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST
<TABLE>
<CAPTION>
GROWTH FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 8,952,474 $ 191,837,899 16,507,063 $ 403,921,271
Issued as reinvestment of dividends 3,934,494 77,984,191 7,601,712 163,436,074
Redeemed (20,445,126) (437,247,811) (15,029,335) (359,116,329)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (7,558,158) $(167,425,271) 9,079,440 $ 20?,241,016
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:
- -----------------------------------------------------------------------------------------------------------------------------
Sold 727 $ 15,331 3,150
Issued as reinvestment of dividends 654 13,054 949 ??,488
Redeemed (912) (19,216) (4,943) (123,213)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 469 $ 9,169 (864) $ (27,257)
- -----------------------------------------------------------------------------------------------------------------------------
U.S. EMERGING GROWTH FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 4,796,287 $ 88,547,952 2,587,843 $ 57,?67,143
Issued as reinvestment of dividends 1,089,691 20,769,512 966,775 19,005,916
Redeemed (3,969,876) (77,139,537) (2,378,282) (53,191,782)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 1,916,102 $ 32,177,927) 1,176,336 $ 23,801,277
- -----------------------------------------------------------------------------------------------------------------------------
SMALL CAP FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 959,063 $ 16,167,287 697,973 $ 14,438,171
Issued as reinvestment of dividends 1,429,493 19,798,484 1,320,879 24,450,884
Redeemed (2,613,650) (41,142,910) (2,362,125) (49,694,104)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (224,894) $ (5,177,139) (343,273) $ (10,805,049)
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:*
- -----------------------------------------------------------------------------------------------------------------------------
Sold 190,222 $ 2,893,873 943,236 $ 20,198,104
Issued as reinvestment of dividends 218,219 2,980,874 194,148 2,828,622
Redeemed (164,796) (2,881,137) (389,596) (8,082,502)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 243,645 $ 2,993,610 707,788 $ 14,944,224
- -----------------------------------------------------------------------------------------------------------------------------
SMALL CAP OPPORTUNITIES FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 2,554,540 $ 36,120,572 5,720,009 $ 110,725,377
Issued as reinvestment of dividends 211,406 3,114,014 293,588 5,193,514
Redeemed (7,789,187) (115,058,991) (8,394,502) (160,023,805)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (5,023,241) $ (75,824,405) (2,380,905) $ (44,104,914)
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:
- -----------------------------------------------------------------------------------------------------------------------------
Sold 20,443 $ 300,112 225 $ 3,638
Issued as reinvestment of dividends 4 52 14 254
Redeemed (19,526) (246,544) (238) (4,572)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 4,921 $ 53,620 1 $ (680)
- -----------------------------------------------------------------------------------------------------------------------------
*The Small Cap and Small Cap Opportunities Funds' Class P shares commenced operations on July 1, 1996, and July 29, 1996,
respectively.
</TABLE>
115
<PAGE>
- -----------------------
The Montgomery Funds
Notes
to Financial Statements
TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST
<TABLE>
<CAPTION>
EQUITY INCOME FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 688,871 $ 15,351,643 1,554,094 $ ???????????
Issued as reinvestment of dividends 179,644 3,218,888 265,748 4,707,487
Redeemed (1,014,092) (18,356,503) (1,772,223) (33,012,153)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (145,577) $ 214,028 47,619 $ 347,785
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:*
- -----------------------------------------------------------------------------------------------------------------------------
Sold 32,146 $ 575,144 101,466 $ 1,859,907
Issued as reinvestment of dividends 15,388 275,304 10,850 195,396
Redeemed (21,422) (3,066,004) (11,769) (219,667)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 26,112 $ (2,215,556) 100,547 $ 1,835,636
- -----------------------------------------------------------------------------------------------------------------------------
GLOBAL OPPORTUNITIES FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares:** Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 2,865,399 $ 47,786,143 6,526,549 $ 115,???????
Issued as reinvestment of dividends 387,823 5,976,349 328,896 4,693,347
Redeemed (5,011,826) (86,268,834) (3,521,069) (64,528,940)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (1,758,604) $ (32,506,342) 3,334,376 $ 55,813,221
- -----------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 31,051,928 $ 257,965,493 64,252,253 $ 870,112,328
Issued as reinvestment of dividends -- -- 2,665,847 33,243,134
Redeemed (65,985,248) (559,230,262) (64,669,860) (861,322,948)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (34,933,320) $(301,264,769) 2,248,240 $ 42,031,414
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:*
- -----------------------------------------------------------------------------------------------------------------------------
Sold 6,870 $ 57,690 27,137 $ 396,184
Issued as reinvestment of dividends -- -- 1,597 19,750
Redeemed (4,918) (44,110) (22,590) (312,707)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 1,952 $ 13,580 6,144 $ 105,227
- -----------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares:** Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold 794,665 $ 4,954,356 1,867,516 $ 21,898,525
Issued as reinvestment of dividends 22,263 118,215 12,581 132,228
Redeemed (1,002,280) (6,078,633) (1,371,200) (15,113,262)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (185,352) $ (1,006,062) 508,897 $ 6,917,491
- -----------------------------------------------------------------------------------------------------------------------------
*The International Small Cap and Select 50 Funds' Class P shares commenced operations on June 9, 1997, and December 12, 1996,
respectively.
**The Emerging Asia, Latin America and total Return Bond Funds' Class R shares commenced operations on September 30, 1996; June 30,
1997; and June 30, 1997, respectively.
</TABLE>
116
<PAGE>
<TABLE>
INTERNATIONAL GROWTH FUND INTERNATIONAL SMALL CAP FUND
Six Months Ended 12/31/98 Year Ended 6/30/08 Six Months Ended 12/31/98 Year Ended 6/30/08
(Unaudited) (Unaudited)
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10,877,255 $ 197,884,955 4,351,572 $ 75,095,191 2,169,355 $ 29,709,262 2,996,436 $ 44,417,251
51,017 905,556 95,761 1,401,682 2,195 29,260 478,710 6,026,955
(3,812,118) (66,556,495) (3,062,252) (51,540,762) (2,151,178) (29,360,795) (3,262,988) (48,676,575)
- ----------------------------------------------------------------------------------------------------------------------------------
7,116,154 $ 132,234,016 1,385,081 $ 24,956,111 16,372 $ 377,727 212,158 $ 1,767,631
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
55,384 $ 823,247 121 $ 2,000 257 $ 4,000 87,254 $ 1,157,000
281 4,968 -- -- -- -- 53 674
(1,681) (65,024) (184) (3,025) (257) (3,525) (87,867) $ (?,348,812)
- ----------------------------------------------------------------------------------------------------------------------------------
51,984 $ 763,191 (63) $ (1,025) 0 $ 473 (560) $ (191,138)
- ----------------------------------------------------------------------------------------------------------------------------------
GLOBAL COMMUNICATIONS FUND EMERGING ASIA FUND
Six Months Ended 12/31/98 Year Ended 6/30/08 Six Months Ended 12/31/98 Year Ended 6/30/08
(Unaudited) (Unaudited)
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
9,643,821 $ 210,476,738 10,480,584 $ 216,384,607 12,906,603 $ 93,511,066 15,482,971 $ 169,?93,174
1,295,938 25,594,783 1,826,761 27,927,779 428 3,384 289,356 2,751,873
(9,972,974) (197,147,519) (8,484,435) (170,608,536) (12,552,873) (91,236,551) (15,395,025) (177,?73,709)
- ----------------------------------------------------------------------------------------------------------------------------------
1,567,385 $ 38,924,002 3,822,910 $ 73,703,850 354,160 $ 2,277,919 377,302 $ (?,???,???)
- ----------------------------------------------------------------------------------------------------------------------------------
SELECT 50 FUND U.S. ASSET ALLOCATION FUND
Six Months Ended 12/31/98 Year Ended 6/30/08 Six Months Ended 12/31/98 Year Ended 6/30/08
(Unaudited) (Unaudited)
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
1,242,428 $ 22,869,016 9,976,256 $ 210,226,345 674,306 $ 12,006,990 2,182,888 $ 44,133,194
650,669 11,790,131 1,052,393 19,382,808 1,504,036 22,440,218 1,217,904 21,581,251
(5,601,335) (106,808,027) (6,797,972) (140,815,546) (1,728,221) (31,563,937) (3,086,435) (60,834,270)
- ----------------------------------------------------------------------------------------------------------------------------------
(3,708,238) $ (72,148,880) 4,230,677 $ 88,793,607 450,121 $ 2,883,271 314,357 $ 4,880,875
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1,431 $ 26,372 3,967 $ 82,688 120 $ 2,150 334 $ 6,400
69 1,239 223 4,054 914 19,679 629 12,778
(1,615) (29,611) (2,131) (40,782) (128) (2,575) (1,074) (20,918)
- ----------------------------------------------------------------------------------------------------------------------------------
(115) $ (2,000) 2,059 $ 45,960 906 $ 13,254 (20) $ (1,740)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN BOND FUND CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Six Months Ended 12/31/98 Year Ended 6/30/08 Six Months Ended 12/31/98 Year Ended 6/30/08
(Unaudited) (Unaudited)
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
1,766,952 $ 21,768,681 9,144,322 $ 110,211,392 989,136 $ 12,927,513 1,962,625 $ 25,203,200
189,701 2,678,030 416,875 5,131,390 63,738 828,869 75,599 969,104
(3,413,273) (42,792,841) (3,314,312) (40,866,893) (533,077) (6,946,107) (994,510) (12,764,038)
- ----------------------------------------------------------------------------------------------------------------------------------
(1,456,620) $ (18,346,130) 6,246,8835 $ 74,475,849 519,817 $ 6,810,275 1,043,714 $ 13,408,266
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -----------------------
The Montgomery Funds
Notes
to Financial Statements
TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST
<TABLE>
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 11,843,618 $ 121,304,362 11,317,233 $ 114,???????
Issued as reinvestment of dividends 295,138 3,024,793 251,170 ?,???,???
Redeemed (5,551,719) (56,914,189) (9,757,162) (98,280,450)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 6,587,037) $ 67,414,966 1,811,241 $ 18,??????
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:
- -----------------------------------------------------------------------------------------------------------------------------
Sold 2,895 $ 20,941 296 $ ?????????
Issued as reinvestment of dividends 34 337 -- ????????
Redeemed -- -- (21) ?????????
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 2,929 $ 21,278) 275 $ 2,790
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT RESERVE FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares and Dollars Shares and Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold $ 2,183,467,671 $ 5,085,349,172
Issued as reinvestment of dividends 18,198,934 31,642,805
Redeemed (2,177,033,693) (4,865,576,626)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) $ 24,632,912 $ 251,415,351
- -----------------------------------------------------------------------------------------------------------------------------
P Shares:
- -----------------------------------------------------------------------------------------------------------------------------
Sold $ 1,007 $ 282
Issued as reinvestment of dividends -- 4
Redeemed -- (490)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) $ 1,007 $ (204)
- -----------------------------------------------------------------------------------------------------------------------------
FEDERAL TAX-FREE MONEY FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares and Dollars Shares and Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold $ 486,202,965 $ 1,183,904,180
Issued as reinvestment of dividends 1,695,660 3,577,816
Redeemed (495,255,003) (1,184,396,291)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) $ (7,356,378) $ 3,085,705
- -----------------------------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY FUND
Six Months Ended 12/31/98 Year Ended 6/30/98
(Unaudited)
R Shares: Shares and Dollars Shares and Dollars
- -----------------------------------------------------------------------------------------------------------------------------
Sold $ 543,433,785 $ 1,344,381,138
Issued as reinvestment of dividends 2,591,793 5,033,519
Redeemed (509,121,671) (1,281,121,597)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) $ 36,903,961 $ 68,493,060
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
118
<PAGE>
-----------------------
THE MONTGOMERY FUNDS
-----------------------
Notes
to Financial Statements
B. CAPITAL LOSS CARRYFORWARDS:
At June 30, the following Funds had available for federal tax purposes unused
capital losses as follows:
<TABLE>
<CAPTION>
Fund Expiring in 2003 Expiring in 2004 Expiring in 2005 Expiring in 2006
<S> <C> <C> <C> <C>
Emerging Markets Fund....................... -- -- -- $83,822,425
Emerging Asia Fund.......................... -- -- -- 3,385,829
Government Reserve Fund..................... $17,719 -- -- --
Federal Tax-Free Money Fund................. 20,714 $5,378 -- --
California Tax-Free Intermediate Bond Fund.. 6,745 -- 23
California Tax-Free Money Fund.............. -- -- -- 873
</TABLE>
Under current tax law, net capital and currency losses realized after October 31
may be deferred and treated as occurring on the first day of the following
fiscal year ended June 30, 1998. The following Funds elected to defer losses
occurring between November 1, 1997, and June 30, 1998, under these rules as
follows:
<TABLE>
<CAPTION>
Fund Amount
<S> <C>
International Small Cap Fund................... $ 81,074
Global Communications Fund..................... 494,506
Emerging Markets Fund.......................... 63,465,119
Emerging Asia Fund............................. 8,794,617
Latin America Fund............................. 1,216,108
</TABLE>
Such deferred losses will be treated as arising on the first day of the fiscal
year ending June 30, 1999.
9. PROPOSED REORGANIZATION
On November 18, 1998, the Board of Trustees approved a plan to reorganize the
Montgomery Small Cap Opportunities Fund into the Montgomery U.S. Emerging Growth
Fund. Shareholders will be asked to approve the proposed reorganization at a
shareholder meeting to be held on March 1, 1999. The reorganization will include
the transfer of substantially all of the assets and liabilities of the
Montgomery Small Cap Opportunities Fund to the U.S. Emerging Growth Fund.
Montgomery Small Cap Opportunities Fund shareholders will receive Montgomery
U.S. Emerging Growth Fund shares in exchange. The Montgomery Small Cap
Opportunities Fund will then be terminated and liquidated.
119
<PAGE>
--------------------
THE MONTGOMERY FUNDS
--------------------
Notes
This space for your own notes as you review this report.
120
<PAGE>
This report and the financial statements contained herein are provided for the
general information of the shareholders of The Montgomery Funds. This report is
not authorized for distribution to prospective investors in the Funds unless
preceded or accompanied by an effective prospectus.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other agency and are subject to investment risk,
including the possible loss of principal. Neither The Montgomery Funds nor
Montgomery Asset Management is a bank.
For more information on any Montgomery Fund, including charges and expenses,
visit our Web site at WWW.MONTGOMERYFUNDS.COM or call (800)572-FUND [3863] for a
free prospectus. Read it carefully before you invest or send money.
Funds Distributor, Inc. 2/99
<PAGE>
[LOGO OF MONTGOMERY FUNDS(SM) APPEARS HERE ]
