BMO Investments Inc. 77 King Street West Toll Free: (800) 665-7700 Suite 4200, Royal Trust Tower Phone: (416) 956-2271Toronto, ON M5K 1J5 Fax: (416) 867-6250 Email: mutualfunds@bmo.com

BMO Asset Allocation Fund

Pre-Call Report

Prepared for:

Golnaz Golnaraghi Senior Fund Manager

Prepared by:

Sahifa Imran Fund Sales Representative

Date: February 23, 2007

......... TABLE OF CONTENTS

EXECUTIVE SUMMARY.................................................................1

INDUSTRY KNOWLEDGE..............................................................2

COMPANY KNOWLEDGE..............................................................6

PRODUCT KNOWLEDGE..............................................................8

COMPETITIVE KNOWLEDGE......................................................12

CUSTOMER KNOWLEDGE..........................................................14

ANTICIPATED OBJECTIONS.......................................................15

BIBLIOGRAPHY...........................................................................16

.........

BMO Asset Allocation FundPre-Call Report

EXECUTIVE SUMMARY

This report discusses in detail the BMO Asset Allocation Fund. It starts by highlighting the mutual fund industry by detailing statistics such as the size, concentration, competitiveness and the reasons behind the competitiveness. It then talks about the main current economic, legal/political, social/environmental and other trends, how they are impacting the industry and the future outlook regarding these trends.

The report goes on to talk about the fund’s parent company, BMO Financial Group, and its immediate parent company, BMO Investments Inc. It outlines the company’s selling policies and procedures as well.

The report then moves onto the actual product itself, giving a detailed description of the fund along with relevant key statistics, its main features and how they benefit the investors and then does the same for the fund’s service support features.

The next section is about the fund’s main competitor, Fidelity Investment Canada’s Canadian Balanced-B Fund. It contains profiles of the company and the fund, lists key features and benefits of the fund, compares these features and benefits to those of the BMO Asset Allocation Fund and states why the BMO fund is better in these criteria.

Customer knowledge is presented next, with the key customer demographics for the fund explained in detail. These details include references to their stages in the life cycle, their income and financial considerations, their short, medium and long term goals and other relevant statistics.

The last section in the report addresses a few possible objections potential clients might have about the fund, and addresses these objections.

1

BMO Asset Allocation FundPre-Call Report

INDUSTRY KNOWLEDGE

PROFILE OF INDUSTRY

As of January 31, 2007, the Canadian mutual funds industry was worth $673.4 billion in terms of dollar assets under administration, of which long-term mutual fund assets accounted for $627 billion. The month of January saw industry growth of 1.9%, to which long-term fund net sales contributed $4.1 billion1.

Currently, investors can choose from more than nineteen hundred mutual funds operating within Canada. These have been divided into thirty six different categories (such as global equity funds, high yield bond funds, alternative strategies funds, etc.) by the Canadian Investment Funds Standards Committee2. Also, the Investment Funds Institute of Canada has, for the first time, reported the overall activity for mutual funds by classifying them into two groups: stand-alone mutual funds and mutual funds of funds. Stand alone mutual funds account for the majority of funds in existence, with $578.2 billion in assets and $1.6 billion in 2007 net sales as of January, while funds of funds represent $95.1 billion in assets and $2.4 billion in net sales3.

The financial services sector in Canada, in particular the mutual funds industry, is very competitive. Funds are offered by most of the country’s 6 largest banks and 13 smaller domestic banks, along with over 60 mutual fund companies, 180 investment dealers, 29 trust companies and 1300 credit unions. In fact, according to Statistics Canada’s 2005 National Balance Sheet Accounts, Canadian household financial assets (which include mutual funds) are managed by a variety of financial institutions, e.g. 20 percent are managed by banks, 69 percent are held by services providers such as pension and mutual funds, etc. Some of the reasons behind this increasing competitiveness are the disappearance of old taboos regarding institutions competing in each other’s immediate industries (e.g. banks now own investment dealers and mutual fund companies), federal law and regulation changes over the past few years that have allowed for more foreign banks to operate in Canada and for new banks to start up, and technological

1 Source: www.ific.ca 2 Source: www.cifsc.org 3 Source: www.ific.ca

2

advancements that have led to new ways of offering products and services (such as with iShares ETFs)4.

FACTORS AFFECTING INDUSTRY

Economic factors and outlook

One of the leading economic factors affecting the mutual fund industry at the moment is the positive performance of Canadian and US stock markets5. North American equity markets were expected to be weaker this year than they have been year to date, hence the weaker than anticipated demand in 2006. This year's sales are so far much higher than expected so demand is now catching up. Also, investors are finally moving past the reluctance stemming from the tech-bubble burst of the late 1990s6. And one of the reasons for this strong performance is that major equity markets in Europe are at 5 to 6 year, or even all-time highs, which is rubbing off on North American markets. Therefore, not only are North American equity funds expected to pick up, but global and international funds are being predicted to continue their current strong performance. Global and International Equity funds have been the fastest growing asset class over the past twelve months, at 29 percent growth. The outlook is further proven by Global Balanced and Sector Equity funds being the fastest growing asset classes at 5.2 percent in January of this year7.

Another strong factor has been the continuation of high level of Bank of Canada rates from over the past few years. While these rates are thought to be lowering towards the middle of 20078, they are remaining at the previous high levels for now9. While this has resulted in domestic bond funds underperforming so far due to the higher interest rates pushing bond values down, the performance might pick up before the interest rates are lowered, which will resurge bond investment10. Investment into bond funds containing foreign debt component has been especially disappointing for investors, as the rise of the Canadian dollar’s value, in particularly against the US dollar, has been responsible for eating into returns. However, the Canadian dollar is finally starting to weaken and is valued around 85 cents US currently, as compared to 90 cents US late last summer. This should start to elevate the appeal of such funds again for investors11.

The main reasons why interest rates are predicted to decline are the slow down of the

4 Source: www.cba.ca 5 Source: www.cbc.ca/money 6 Source: www.globefund.com 7 Source: www.ific.ca 8 Source: www.secure.globeadvisor.com 9 Source: www.bank-banque-canada.ca 10 Source: www.globefund.com 11 Source: www.globefund.com

3

US and Canadian economies and ease of inflation that is underway right now12. However, this decline may not last very long and rates could be raised again in 2008 and kept that way for some time13.

Legal / political factors and outlook

A factor behind the growing popularity of global funds has been the elimination of the foreign content limit restriction for registered plans as of February, 2005. This means that registered portfolios can now hold up to 100 percent of their allocation in foreign mutual funds. With net sales of almost $2 billion, Global and International Equity came out on top as the best selling asset category for January, 200714 and this monthly trend will likely continue into and beyond the rest of RRSP season.

The recent biggest investment news making headlines in Canada was the government’s decision to start taxing income trusts in a manner similar to corporations, effective year 2011. Shortly after this October 31, 2006 announcement the income trust sector (a large part of which are income trust mutual funds) dropped in value by over 20 percent, or almost $40 billion. However, the selling frenzy resulted partly due to investors selling their units in order to claim capital loss for the 2006 taxation year15. It is presently unclear whether income trusts will survive till 2011 as a class separate from high yield equity funds16.

Social / environmental factors and outlook

Opinion polls conducted in Canada recently point to environment and Kyoto as being the number one issue in Canada. In spite of this, Canadians are lagging behind their American counterparts when it comes to green investing, with about 3 to 5 percent of total investing in socially responsible investing (SRI) funds as compared to 10 percent for the US. The main reasons for this are limited investor education regarding these funds and their availability through credit unions and small SRI investment advisers only. Interest in these green and ethical funds is increasing, however, and is expected to get stronger as bigger companies tap into this market17.

Despite the eruption of scandals in the North American mutual funds industry over the past few years, Canadian investors are, overall, satisfied with their mutual fund experience. This has been concluded by the IFIC Survey Report released September 29, 200618. Of the investors surveyed, 83% were comfortable with their understanding of the mutual funds they owned, 95% were satisfied with the advice provided by their advisor, 84% were comfortable with the fees they paid for their mutual funds and 90%

12 Source: www.secure.globeadvisor.com 13 Source: www.economist.com/countries/canada 14 Source: www.ific.ca 15 Source: www.investorial.com 16 Source: www.secure.globeadvisor.com 17 Source: www.theglobeandmail.com 18 Source: www.ific.ca

4

experience any problems with their investments. Bodies like the Investment Funds Institute of Canada are taking additional steps to educate investors and to help the government regulate the industry further19.

Other current trends

Even though global markets are out faring the Canadian S&P/TSX and this trend is expected to continue throughout 200720, Morningstar Canada reports that Canadian demand for Canadian funds, especially balanced funds is very high, with three of the six top-selling categories (out of total mutual fund sales of $20.8 billion in 2006) featuring balanced funds. Canadian income balanced funds ranked second overall with $6.4 billion in new sales last year, Canadian balanced funds were fourth with $3.8 billion in sales and global balanced ended sixth overall with sales of $2.8 billion21.

Investing, in general, is likely to be high in 2007 because of the optimism resulting from a four year moderate to bull market. However, going forward this year analysts are recommending caution in the form of risk minimization, well diversified portfolios and smart global diversification. This is good news for mutual funds because of their potential to offer all these traits to investors22.

COMPANY KNOWLEDGE

19 Source: www.ific.ca 20 Source: www.morningstar.ca 21 Source: www.globefund.com 22 Source: www.morningstar.ca

5

PROFILE

The BMO Asset Allocation Fund is distributed by BMO Investment Inc., which is indirectly owned wholly by BMO Financial Group. The company was originally established as Bank of Montreal in 1817, making it Canada’s very first bank. It has consistently ranked among the top five banking institutions in Canada for decades23, and was ranked as Canada’s Best Corporate Citizen in 2005 by Corporate Knights Magazine. In 2006, IR Global Rankings declared the company’s series of investor relation websites as number one worldwide in the category of financial services.

BMO Financial Group is comprised of three separate operating groups: Personal and Commercial Banking, Investment Banking Group and Private Client Group (under which BMO Investments Inc. operates). This group earned $360 million by the end of October, 2006, the company’s 4th fiscal quarter. This performance was up by $40 million or 13 percent from a year ago.

The PCG provides clients access to over 950 mutual funds. These include the well diversified family of over 47 different BMO Mutual Funds™ offered by BMO Investments Inc., whose assets under management are $22.88 billion. On January 9, 2007, DALBAR (one of the leading financial services research firms in North America) pronounced BMO Mutual Funds™ as the winner of its 2006 Mutual Fund Service Award for providing the best overall service to both English speaking and French speaking investors over the past year24.

SELLING PRACTICES AND POLICIES

BMO Mutual Funds™ are offered in a way that minimizes the complexities and complications regarding investing. The funds are classified into the following four categories according to overall objectives and degree of risk:

Security funds, which cater to conservative investors and hold the safest

investments;

Income funds, which are meant to provide regular income with the minimal risk;

Growth funds, which bear higher risk but are designed to offer higher potential

returns;

and Aggressive Growth funds, which are best suited to experienced investors who

23 Source: www.fin.gc.ca 24 Sources for the rest of the section: www2.bmo.com, www.bmo.com/mutualfunds and www.globefund.com

6

are comfortable with higher short-term risk and price fluctuations in order to achieve

returns that are well above average.

BMO Mutual Funds™ are diverse enough to suit every investment objective and offer clients the flexibility to switch to another BMO Mutual Fund at no charge, should their needs or objectives change. The funds are of the “no load” kind in that clients are not charged any commission / sales fees (whether initial or deferred) or transfer fees when they buy, sell or switch within the BMO family of funds,

The funds are an affordable option for investors, as investment can be made in a single mutual fund for as little as $500. The fund offers further affordability by letting clients participate in the Continuous Savings Plan, which requires as little as monthly contributions of just $50 dollars, instead. Depending on the plan, clients have the freedom to choose the frequency and amount of contributions and can even temporarily stop payments in between. Most of the funds are RRSP eligible.

In order to inhibit excessive trading that could be detrimental to the value of the fund and other investors’ holdings, a fund may charge a short term trading penalty of up to 2 percent of the amount that is redeemed or switched between funds if such actions are undertaken within 30 days of the original redemption or switch25.

PRODUCT KNOWLEDGE

PRODUCT HIGHLIGHTS

25 Source for the entire section: www.bmo.com/mutualfunds

7

Description

The BMO Asset Allocation Fund was incepted on May 2, 1988. It falls under the CIFSC category of Canadian Balanced funds and is an open-ended, 100 percent RRSP, RRIF and RESP eligible fund. Its total assets under administration are worth $802.64 million.

The fund has a “no load” type sales fee, a per year management fee of 1.75 percent of its net asset value and its management expense ratio is 2.04%. The required initial regular and RRSP minimum investment is $500, and any subsequent regular and RRSP minimum investment is $50. The investment manager operating the fund for BMO Investment Inc. is Jones Heward Investment Counsel Inc.

As of February 22, 2007, the fund recorded a closing price of $19.23 per unit and showed month to date returns of 1.41% and year to date returns of 2.50%26. The following schedule and chart (Figures 1 and 2) show the most recent reported returns and asset allocation of the fund, respectively27.

Figure 1

*Note: Index refers to Blend: 60% S&P/TSX, 40% Scotia Universe

Figure 2

Asset Allocation as of Oct 31, 2006

26 Sources for the section: www.morningstar.ca, www.globefund.com and www.bmo.com/mutualfunds 27 Source: www.globefund.com

Returns as of January 31, 2007

Fund Group Average

Index*

1 month 1.08% 0.72% 0.65% 3 month 5.38% 3.78% 3.79% 6 month 9.62% 7.99% 8.19% 1 year 8.69% 7.80% 8.87% 3 year 10.02% 8.28% 12.12% 5 year 7.84% 6.66% 10.41%10 year 7.23% 6.54% 8.51%15 year 7.75% 8.15% 9.86%20 year n/a 7.82% 9.25%Since inception 7.63% n/a n/a

8

Features and Benefits

The following table (Figure 3) outlines the key features of the fund and the resulting benefits to the customers28.

Figure 3

Features Benefits

Invests primarily in Canadian equities and fixed income securities.

Clients are provided a good balance between income and growth, while risk, such as global risk, is minimized. Exposure to mainly Canadian securities indicated that the investor has bought into a relatively secure fund, since Canada is one of the world’s most well regulated countries (especially in terms of accounting, auditing and financial reporting).

Invests in reliable securities, such asfinancial sector equities and government and large corporate debt.

Investors do not have to worry about their investments being unsafe and exposed to high levels of default risk.

Adjusts mix of assets according to outlook for each asset class.

Clients are ensured that their investment value remains maximized in the long term.

Utilizes derivatives such as options, futures and forward contracts.

The clients’ investment in the fund is protected from potential interest rate and currency fluctuation losses, and the fund attains exposure to securities without having to directly invest in them.

Automatically reinvests distributions in additional units of the fund.

The number of holdings clients own is automatically increased for them.

28 Source: www.bmo.com/mutualfunds

Stock    57.48%

Bond    38.61%

Cash & Short Term Securities    3.91%

9

Offers a “no load” fee structure. Clients do not have to pay anything when engaging in long-term selling or switching between funds.

SERVICE SUPPORT HIGHLIGHTS

Description

BMO Mutual Funds™ offer four different service support features along with the investment products.

Aside from availing personal financial advisory services, investors are encouraged to

fill out the BMO Investor Profiler, which gives them a better idea of the type of

investor they are.

BMO Matchmaker® is another time saving service that matches an investor’s goals

and profile to come up with the right diversified mix of mutual funds.

Continuous Savings Plan lets clients invest in the funds by making monthly

payments as little as $50.

BMO Online Access allows clients to access their BMO Mutual Funds™ from the

internet.

Features and Benefits

Figure 4 is a table highlighting some key features and benefits of the service support

features offered by BMO Mutual Funds™29.

Figure 4

Features Benefits

BMO Investor Profiler assists a customer

in determining their investment style.

Clients can, themselves, get a good

understanding of their investment goal,

needs and styles before meeting with a

financial advisor, which can help them

with prioritizing better and feeling less

overwhelmed.

BMO Matchmaker® acts as a one-step

portfolio builder catering to clients’ specific

Clients can start building a portfolio on

their own time while staying assured that

29 Source for entire section: www.bmo.com/mutualfunds

10

needs. the diversification driven features of the

Matchmaker® will help them build a

portfolio with the perfect mix of securities.

The Matchmaker’s® automatic portfolio

rebalancing feature rebalances an

investor’s portfolio to their original chosen

asset mix every quarter.

Clients do not have to spend time

monitoring their investments, as the

portfolio is kept true to their objectives

automatically.

Continuous Savings Plan lets clients

invest for nominal amounts, while allowing

them to control the frequency of payments

as well.

Clients get the financial flexibility of

maintaining their investments on their

own terms, and of being able to utilize

their monetary resources elsewhere if the

need arises.

Online Account Management lets

customers access and review their

accounts, purchase/redeem/switch

funds, update their investment

objectives and

view updated financial information

online.

Clients benefit from the convenience of

being able to completely manage their

investments and stay on top of every

development at their own time (whether it

be day or night) and from anywhere they

choose to.

11

COMPETITIVE KNOWLEDGE

COMPETITOR PROFILE

In terms of product to product competition, BMO Asset Allocation Fund’s main competitor is the Canadian Balanced-B Fund offered by Fidelity Investments Canada30. The company is part of Boston based Fidelity Investments, one of the biggest financial services companies worldwide, with total assets of $1.3 trillion US and over 22 million customers. The Canadian arm of the company was established in 1987, and now manages over $41 billion in mutual funds and assets of corporate pension plans in Canada. The company’s main product is mutual funds31.

PRODUCT PROFILE

The Fidelity Canadian Balanced-B Fund was started on September 30, 1998 and now holds $755.43 million in net assets, with a current net average value per unit of $18.66. It is an open ended, RRSP eligible fund, with a 2.16% MER, 1.7% management fee and initial sales fees. The required regular and RRSP minimum initial and subsequent investments are $500 and $50 respectively.

As of February 22, 2007, the current price for the fund is $19.09 per unit, with month and year to date returns of 1.35% and 2.26% respectively. The fund has generated 3 month, 1 year and 5 year returns of 3.95%, 8.88% and 9.32% respectively as of January 31, 2007. Its most recent reported asset allocation is 44.78% stocks, 44.27% bonds, 7.41% cash and short term securities and 3.55% other securities32.

FEATURES OF THE PRODUCT AND SERVICE SUPPORT OFFERED AND COMPARISON TO BMO ASSET ALLOCATION FUND

One of the key features of the Fidelity Canadian Balanced-B Fund is its use of fixed asset weightings. This ensures that all of the fund’s three main asset classes are always present in the allocation and risk to investors in the form of the fund management taking chances on any particular class is reduced. However, this could significantly limit the fund management’s ability to minimize losses in the event of extraordinary market volatility, a consequence BMO funds will not feel to as great a degree.

Another distinctive feature of the fund is its significant investment in US high-yield bonds. While this can have the advantage of producing potentially higher levels of

30 Source: Telephone interview with BMO Investorline representative on February 15, 2007.31 Source for the rest of the section: www.fidelity.ca 32 Sources: www.globefund.com and www.morningstar.ca

12

income for the investors, the default risk associated with high yield bonds has the potential to impact the fund negatively. In this regard, the BMO fund might be better off.

T-SWP is a service offered by Fidelity Investments Canada that allows investors to withdraw from their original capital, hence providing them with tax free cash flows. However, this type of return on capital can be misleading as it still lowers an investor’s adjusted cost base, triggering capital gains taxation as soon as the ACB goes below zero (aside from when the units are sold). Also, the monthly cash flows from this service are not guaranteed in terms of dollar amount and could also include cash flows from income (which would be taxable to the investor).

The Fidelity Canadian Balanced-B Fund is slightly more equity focused as compared to the BMO Asset Allocation Fund which, in contrast, has primarily been a little more income focused over the years. Also, Fidelity charges an initial sales commission or fee for its fund, while the BMO Asset Allocation Fund (as with most BMO funds) does not. The rest of the product features belonging to the BMO fund are similar to those offered by Fidelity.

The same is true with regards to online portfolio builders offered by the two companies (Fidelity offers ClearPath™ Retirement and Custom Fund Portfolios). However, BMO offers more online financial advice and account management features than Fidelity33.

33 Source for the section: www.fidelity.ca

13

CUSTOMER KNOWLEDGE

One group of potential customers is made of people who are new to savings and investments, since balanced mutual funds let them add small amounts to their holdings without the need to change or constantly adjust the portfolio. As they become more comfortable with investing and their knowledge and risk tolerance increases, they can graduate to higher yielding or longer term investments, such as growth/equity funds34.

Another group consists of people who enter the investment market relatively late and have large amounts of money to invest. Balanced funds are a good way for these people to test the waters instead of diving headfirst into significantly riskier investments, such as stocks on the stock markets. As with the previous group, they can move on to other types of investments as time goes by35.

People falling under Stage 2: The Family Commitment Years of the life-cycle hypothesis are potential customers of a balanced/asset allocation fund due to their decreased liquidity because of high mortgage and car payments, decline in disposable income (especially with the birth of children) and requirement of adequate life insurance. As in the case of the very first group, balanced funds provide these customers a chance to add small amounts to their holdings, resulting in this money being automatically dispersed through the different classes of assets without the constant readjustment of the portfolio. Ideally, the income that the debt holdings in the portfolio provide acts to increase their liquidity (especially beneficial for those in the early years of Stage 2, who have comparatively less income), while the equity holdings serve to increase their capital adequately for their medium term goals, such as saving for their children's education (beneficial for those in the liters years of Stage 2, with slightly higher incomes). Since individuals in Stage 2 of the life cycle tend to be more risk averse than those in Stage 1 (The Early Earning Years) and Stage 3 (The Mature Earning Years), the balance between equities, debt and money market components in the fund provides for the right mix in terms of risk, capital growth and capital preservation36.

Pensioners or people who want pension like investments (usually in Stage 4: Nearing Retirement and Stage 5: Retired ) are a key demographic, as they do not prefer taking on a lot of risk and are looking for the kind of consistent returns that balanced mutual funds provide due to their balanced mix of equity and fixed income investments37.

Moreover, personal disposable income for Canadians increased by 25%, an average of 5% per year between 2001 and 2006, outpacing inflation by a considerable margin, according to Statistics Canada. This has resulted in an increase in liquidity, which is a good news for mutual funds and other investments38.

34 Source: www.globefund.com 35 Source: www.globefund.com 36 Source: ICB's "Investment Funds in Canada" book 37 Source: www.globefund.com 38 Source: www.globefund.com

14

ANTICIPATED OBJECTIONS

1. Does the high debt component expose the fund to higher interest rate risk?

Yes, but the fund manager has discretionary powers to shift the allocation of the fund to minimize this risk while still staying true to the objective of the fund.

2. Can I lose my investment money?

Yes, this is called risk. However, risk can be a good thing because usually the higher the risk, the greater the potential returns.

3. Does the high debt component expose the fund to default risk?

In the case of this fund, this risk is minimized since the fund invests in high quality government and corporate bonds.

4. Does the fund face high derivatives risk?

Yes, but again this is minimal since derivatives are only used when needed and in a cautionary manner.

5. How volatile is the fund (since it has a large equity component)?

The fund’s volatility rate is almost half that of normal equity funds. This is due to the diversification of asset classes in the fund.

15

BIBLIOGRAPHY

Source: www.ific.ca

1. IFIC Statistics2. IFIC Mutual Fund Industry3. IFIC Press Releases

Source: www.globefund.com

1. BMO Asset Allocation Fund Profile2. 15 Year Mutual Fund Review3. “Back to Bonds” article4. “Going Global” article5. Outlook 20076. Fidelity Canadian Balanced-B Fund Profile

Source: www.bmo.com/mutualfunds

1. BMO Mutual Funds2. BMO Growth Funds3. BMO Asset Allocation Fund4. BMO Investment Centre Products and Services

Source: www.morningstar.ca

1. BMO Asset Allocation Fund Quicktakes2. Fidelity Canadian Balanced Fund Quicktakes

Source: www.cba.ca

1. The Changing Marketplace – Competition in the Canadian Financial Services Sector

Source: www.cbc.ca/money

1. “January fund sales best in 10 years” article

Source: www.bank-banque-canada.ca

1. Rates and Statistics

16

Source: www.investorial.com

1. “Income Trust Taxation – Biggest 2006 Canadian Story” editorial

Source: www.economist.com

1. Country Briefings – Canada

Source: www.fidelity.ca

1. Mutual funds2. Canadian Balanced Senior B Fund3. Mutual Fund Services4. Mutual Fund Downloads

17