Q:  What is the investment philosophy of Pearl Funds? A: We’re actually a fund-of-funds. We’re not picking stocks - we’re picking mutual funds. There are two funds - Pearl Total Return Fund and Pearl Aggressive Growth Fund. Both funds went public five years ago. The investment philosophy of both Pearl Funds is picking the best all-star team of fund managers - long-term players and people who have been around for at least three years, although once in a while we might invest in a brand new fund that’s in a fund family we know well. We’re trying to decide three things: First, what is the overall global stock market outlook for the medium-term? We’re not looking 3 to 6 months horizon, but 12 to 18 months. Second, which categories do we believe will outperform during that period – small, mid, or large cap; value, blend, or growth style; and U.S. or foreign, including emerging markets? Third, we then do our research within a category to find the fund managers that have performed well in this market environment. We constantly monitor. Our Investment Committee meets three or four times a month to try to determine if we see anything changing in the overall market outlook. We also ask: are there any category out performance trends that appear to be peaking or reversing, any categories that are starting to outperform, any funds in a category that we like that are starting to lag or maybe in the wrong area in that category, and are there some other funds we should take a look at? Back in 2004 we got into Keeley Small-Cap Value Fund. We were doing a search for small-cap funds, came across Keeley, compared it with the funds that we were currently in and decided to take a closer look. We called Keeley and found out more about their investment philosophy and one of the things that we liked was the long-term performance is really good. Also, at that time they had a strong position in oil and natural gas and we believed those stocks had a good chance of going higher. We generally make gradual changes in each Pearl Fund’s category allocation and its portfolio funds. We get into funds incrementally. We won’t move $5 million or $10 million at a time. We’ll start out with $1 million or $1.5 million in a fund and build that over a period of time. Total Return Fund now has almost $10 million in Keeley because that fund has done well and we’ve put more into it over time. Total Return and Aggressive Growth are both constantly monitoring the funds that are out there in the categories that we like - are there any funds that are doing better than the funds we’re in and if they are, then making follow up calls to the managers and looking at all factors to help us decide whether this is a fund that we want to start putting money into. Total Return Fund almost always has to be at least 80% in equity funds but it can be up to 20% in cash and bond funds, while Aggressive Growth always has to be 95% in equity funds. Q:  But that doesn’t mean that Aggressive Growth has to be in the small emerging category? A: No, it has the same flexibility as Total Return. It’s just going to always be more invested in the market than Total Return. For example, as of yesterday, Total Return was 88% in equity funds and Aggressive Growth fund was almost 99% in equity funds. Aggressive Growth usually selects more volatile portfolio funds, and often invests more in categories such as emerging markets, than Total Return does. When we do research on funds, we oftentimes come across three or four funds we like and we see that this fund manager takes a lot more risk than other fund managers. If the fund manager takes more risk and there’s more fluctuation in the net asset value, then that fund will end up in Aggressive Growth. If it’s a fund that has had a more conservative track record, then it usually ends up in our Total Return Fund. Q:  So one is to anticipate what categories in the market are likely to do better going forward and the second is who are the better managers. What are your processes for these two agendas? A: First, we carefully analyze longterm category outperformance trends and factors that might change those trends. Second, we research how those managers are doing versus their category. We like a certain category and we do our research. We come back with five funds that we like and we take a look at every time period that is available and we’re comparing it against their category and against our funds in the same category. Q:  Berkshire Hathaway is almost like a fund and the fund manager has done quite well. Would you consider that as a part of your fund-of-funds option? A: It couldn’t be part of our fund-offunds since Berkshire Hathaway is a stock that trades. Warren Buffet has done a great job and if there was a fund that had all the same holdings that he did, we’d take a look at it. We see a fund that we haven’t researched before. We put it on our watch list and we take a look at it on a regular basis, comparing it with the other funds in its category. So if there were a Warren Buffet-style fund out there, and it made it to our watch list, it would be something that we would look at. Q:  Why do you believe those who have done well in the past are likely to do better in the future as well? A: There has to be an overall belief on our part that the fund is in a category that will have better performance than the overall market during that period of time. You have to believe that small-caps are going to do well to put money in Keeley Small-Cap Value. Then you chat with them on the phone, and you get a feel for what are some of the stocks that they like in their portfolio, and why. Oftentimes we’ll talk to a manager who’s had a great track record but what they’re investing heavily in is not something that we think is going to have that strong a run in the future. If you’re a fund manager who has been around for 10 or 12 years or longer, and you’ve weathered the storm, especially in the small-cap area, you have an advantage but that doesn’t mean that we’re going to put you in our portfolio or keep you there forever. The largest holding in Total Return Fund is First Eagle Overseas Fund and we bought that in May, 2000. It performed better than our expectations in the bear market through 2002. In 2003 when the market started to take off, we kept thinking we’re going to have to sell some of First Eagle because it’s too conservatively managed and will hold back Total Return Fund. But instead it didn’t. At this point it’s $20 million of the $100 million that’s in Total Return Fund and it’s there because of the growth of First Eagle, not because we’ve put in a lot more money. Q:  Comment on your portfolio construction - how many funds do you have? You mentioned you’re looking to hold between 12 and 18 months or longer. A: The portfolio turnover last year for Total Return Fund was 24% so Total Return Fund is averaging four years of holding the funds we own. Aggressive Growth was 44% so a little over 2 years. We want to be sure we’re not picking a fund that we think has a short time horizon. We don’t want to get into something saying we think the next three months are going to be great but after that we want to get out of it. We’re trying to pick the best funds that we’re going to hold onto for a length of time and not be short term traders. Q:  Why should investors invest with you in a fund-of-funds? A: We do the mutual fund selection work for investors who are too busy to do it themselves or who want to use their time for other things. We provide instant double diversification. If you buy a mutual fund, you may get exposure to sixty different stocks. Each of our two funds-of-funds usually holds 12 to 15 funds, so your money is spread across several hundred different stocks. We also provide allocation across market categories. There are a lot of funds out there that do diversify your money but they’re not constantly turning to the market categories that they think are going to perform well. So if they’re stuck in a category that is under-performing, that hurts their shareholders. People like to invest with us because we provide personal, prompt service for shareholders and inquirers. We do the transfer agent work in-house. When you call, you talk to one of seven people here. Three of those seven people serve on our Investment Committee, and all seven are involved in shareholder service. When you ask a question about our funds, you’re getting somebody who helps figure out the NAV every day, and you can talk with one of our portfolio managers. You aren’t getting a big company that is transfer agent for 12 mutual funds, and keeps you waiting on the phone and then the person who finally answers can’t give you any information. Both of our Funds are no-load. We don’t have transaction costs, because we buy our portfolio funds no-load or load-waived. We focus totally on managing our two Pearl Funds. We don’t receive any compensation for managing any other fund or account. Both funds are self-distributed, so we don’t have problems with broker-dealers or intermediaries. Our shareholders like our single focus. Q:  What do you do if there’s an overlap in holdings within funds? A: We check the overlaps several times a year, and it’s consistently been that each- Pearl Fund’s highest ownership of any one stock, through all our portfolio funds, is less than one percent of our net assets. Because we invest across different market categories, both U.S. and international, we don’t get a lot of overlaps. Q:  If you’re a holder of a fund-of-funds, how does the tax situation work? A: We have to pass on to our shareholders all the distributions our fund receives from its portfolio funds, plus all our net capital gains when we sell portfolio funds, less our expenses. We do an annual year-end distribution. In a bad market year, our distribution may be small or none. Our 2005 distribution was the largest we had ever had, because many portfolio funds had done extremely well in ‘03 through ’05 and made big distributions in ’05. Usually most of our distribution qualifies for the lower tax rates on long-term capital gains and qualified dividends.