Q:  What was the purpose of establishing the fund? A : We designed the New Century Alternative Strategies Portfolio seven years ago to be everything that a hedge fund is not. As a noload mutual fund of funds we have liquidity, transparency, lower costs, daily pricing, broad diversification, active management and simple tax reporting. The fund provides investors access to an actively managed portfolio of investments within the alternative asset class that has a low correlation to the U.S. equity market and potentially higher returns than pure fixed income instruments. Q:  What kind of managers are you in search of? A : We choose managers based on their riskadjusted returns, consistency of management style, and a low correlation to the US equity market. We monitor the cross correlation of managers to each other. The universe from which we select includes no-load mutual funds, Class A shares at net asset value, institutional class funds, ETFs, and closed end funds selling at a discount to net asset value. We also can invest up to 10% of the Portfolio in structured notes. Q:  How do you achieve your investment objectives? A : The Portfolio consists of ten distinct asset categories. The percentage allocated to each category varies within ranges, based on each strategy’s relative performance, volatility and correlation to other categories within the Portfolio. We start with a base of market neutral strategies. Then, we look for strategies that are distinct from each other in terms of the ability to show positive returns in different market conditions. We’ve had the experience of operating under very extreme market conditions since the fund’s inception in May 2002. We have found that using a very broad asset allocation, including categories such as long/short equity, merger arbitrage, natural resources, fixed income and option hedged investments, has given the Portfolio the potential to earn a total return in various market conditions. Over the long term, natural resources and real estate provide inflation protection. The option hedged funds tend to perform well during very volatile markets because the value of the call options that are written on the funds become a lot cheaper in times of high volatility, so you can enhance the income significantly. Managers that use deep value and distressed investment strategies can find opportunities in companies coming out of bankruptcy or reorganizations. It is the mixture of strategies that have low correlations to each other that can enhance risk adjusted returns over time compared to a simple stock and bond allocation. Q:  What is the research process for your strategy selection? A : We start by looking at the relative performance of each of the major strategies within our Portfolio to each other. We review these strategies on a monthly basis. The next key element is the volatility of each of the categories. Our objective is to keep the overall volatility of the Portfolio at approximately 50% of the market as measured by down market capture. We monitor this on a daily basis. The third component of our selection deals with fundamental valuation. For example, in 2003, the economy was beginning to come out of a recession and high yield bonds had a spread of about 1,100 basis points over Treasury notes. We saw the asset class as priced very cheaply and therefore, we moved the high yield portion of our Portfolio up close to the 10% maximum category range. By mid-2007 the yield differential had shrunk to a little over 300 basis points. Along the way we reduced the allocation so that by late 2007 we were down to 3% and had moved half of that to emerging market debt, because we saw better opportunities for yield and the potential for currency appreciation overseas. We had a similar experience with the real estate sector. In 2003 yields on Real Estate investment Trust or rEiTs were in the 8.5% range and real estate represented close to 9% of the Portfolio. By the beginning of 2008 we brought our exposure down to 5% and moved more into world REITs rather than domestic REITS. Again, yield was an indicator, as well as other market valuations, that the category was getting rather expensive. As oil prices rose sharply in 2008, we created a broader diversification within the Natural resources category by adding water, gold and natural resources that were not directly tied to energy. Q:  How do you come up with a preferred list of categories? A : The ten categories we use have existed in the Portfolio since 2002. There have been only slight variations. They are derived from categories used in hedge fund of funds and contain a mixture of relative value, long/ short, event driven, global macro and income strategies. Q:  When do you decide to add or drop a category? A : Rather than eliminating a category, we set a minimum and maximum exposure. The typical category range is ten percent. In setting an exposure to a category, we constantly look at our investment universe and see how prospective funds fit into our existing categories or whether we would need to create a new category to capture that type of a return. One change we made was to expand the high yield category to the “high yield/ fixed” income category in March 2008, based on our belief that there would be more fixed income opportunities than just high yield bonds. We have utilized this expanded category to invest in municipals, international bonds, preferred equities, and emerging market bond funds. Q:  What is the target percentage limits for your investment categories? A : The target percentage is set within a minimum and a maximum range for each category based on relative strength, volatility and fundamental valuation criteria. Q:  Could you explain the process of selecting a fund? A : First, we consider at risk-adjusted returns over one, three, five-year periods, which take into account how much volatility the portfolio manager took to achieve the absolute return. Second, we look for managers that have somewhat different approaches and are using distinct strategies. Within each category we are actually looking to blend a range of styles, particularly if we find each of them successful at what they do. Within the long/short equity category we have managers which have substantial long market exposure, market neutral managers, and a short biased manager. We don’t weight all managers equally. We have about 50 holdings in our Portfolio. The top ten funds represent approximately 40% of the Portfolio. We have a higher concentration with managers where we have a higher conviction. Our biggest holding, First Eagle global, is approximately 5% of the Portfolio. The second biggest holding, the Merger Fund represents 4.2% of the Portfolio. Q:  What is your manager selection process? A : We research mutual funds using databases such as Morningstar® and Value Line®. Our next step is to go directly to each of the fund’s websites and prospectuses to review the most recent holdings, sector allocations information about their management team, how long they have been in place, and whether the same manager today is responsible for the reported results. We conduct periodic interviews with fund managers primarily by telephone and occasionally in person. We are most concerned with the absolute performance of these managers compared to the benchmarks that we set for them. When there is a change of manager or when a fund’s performance diverges significantly from what our expectations would be, it is vital to contact the manager. Primarily, we are looking at bottom line performance by each of these managers which we can measure both in terms of actual performance and volatility. On a monthly basis we review performance and on a quarterly basis we review broader issues of the management companies in detail. Q:  How do you determine if a fund you select can beat the benchmark you have? A : We examine the manager’s risk adjusted performance in various market conditions, compared to its peer group. Q:  What are your views on inflation? What are the steps taken to safeguard the fund from inflationary pressures? A : We believe that inflation is an intermediate to longer-term problem. Currently, inflation is not an immediate issue. The economy has tipped over the point where deflation was the worry and the government’s combination of fiscal and monetary policies are going to create both inflation and interest rate issues as well as US dollar issues. We believe the US dollar issues may show up before inflation issues. It’s hard to have significant inflationary problems when there is such a weak consumer demand and excess manufacturing capacity, but when foreign governments become tired of buying US Treasury bonds given U.S. fiscal and monetary policy, we are likely to see a decline in the dollar. We provide inflation protection through our foreign equity, foreign bond, gold and commodity exposures, since all of those sectors are influenced by the strength of the US dollar relative to other currencies. For instance, if the US dollar declines the price of gold may not go up in terms of euros, yuan or yen, but it would rise in US dollars and thus create inflationary pressures. Some of the funds we own invest directly in commodities futures contracts, while others invest in mining or energy companies. Q:  What are the risks perceived in the Portfolio and how do you mitigate them? A : Risks include equity market risk, certain hedging techniques, distressed securities, currency fluctuations, volatility of natural resource prices, long/short selling and credit risk in the fixed income sector. We seek to control risk with a disciplined approach which diversifies across ten distinct investment categories. We monitor the performance, volatility and correlation of each category to each other. We continually review macroeconomic and market data which are used to set target allocations within each category range. This is not a fund that trades on a daily basis, but our research provides us with information which allows us to lean into strategies that have lower volatilities. The Portfolio invests in certain funds that short the market and market neutral funds to reduce equity risk. We use income to buffer overall volatility through our option hedged and fixed income strategies. In late 2008 we saw unprecedented volatility and a convergence of markets that had historically been distinct. Given that experience, we are continuing to develop strategies to dampen volatility for events that exhibit the so-called Black Swan effect - a very low likelihood but an extremely high impact.