Q:  What is the history of The Vice Fund and The Generation Wave Growth Fund? A : The Vice Fund and The Generation Wave Growth Fund are part of the USA Mutuals Funds. The Vice Fund, which started about nine years ago, focuses on vice or sin stocks such as aerospace/defense, gaming, tobacco, and alcoholic beverages. These four sectors were chosen because they tend to demonstrate one or more of the compelling and distinctive investment characteristics of steady demand regardless of economic condition, global marketplace which is not limited to the U.S. economy, potentially high profit margins, and natural barriers to new competition. We believe that there are numerous investment opportunities in these sectors which have been largely overlooked by other funds. The Generation Wave fund primarily focuses on baby boomers, bearing in mind that they are the largest population segment in the United States. With over $4 trillion in expenditures in 2007 alone, this is obviously a very powerful segment of the population. Q:  What are the core beliefs behind your investment philosophy? A : The Vice Fund primarily considers tobacco, alcohol, gaming, and aerospace/defense companies for its portfolio. We capitalize on the belief that when things are going well, people drink, smoke, and gamble. At hard times, it seems that people tend to drink and smoke even more. And regardless of these economic times, the military and defense/weapons companies that supply them have had busy times with little or no signs of slowing anytime soon. The overall investment philosophy of the no-load Generation Wave Growth Fund is to invest into sectors of the market that will most likely be positively influenced by the spending habits of the massive generational communities. From baby boomers’ healthcare needs to the ever increasing interdependency on technology from the Y Generation, each age group will redefine market leaders and the Generation Wave Growth Fund seeks to identify and invest in such leaders. Q:  What is the investment strategy for The Vice Fund? A : The Vice Fund seeks to select well-performing stocks of tobacco, alcohol, gaming, and aerospace/defense companies because we believe that these industries tend to thrive regardless of the economy as a whole. In fact, they may have the potential to experience demand regardless of economic cycles. Q:  And how do you execute the investment strategy of The Generation Wave Growth Fund? A : The Generation Wave Growth Fund invests in those industries/sectors that cater to the boomer generation. The fund seeks capital appreciation over the long-term and a low level of current income. By investing in varying combinations of companies in industries such as financial services, healthcare, and technology, the Generation Wave Growth Fund attempts to optimize growth over the long term while seeking to minimize risks. The fund is designed to capitalize on the industries and sectors we believe are most likely to benefit from the spending and other economic, demographic and lifestyle trends of any one or all of the baby boomer (persons born between 1946 and 1964), Generation X (persons born between 1965 and 1980), and Generation Y (persons born between 1980 and the late 1990s) populations. Q:  Would you explain the research process for The Vice Fund? A : The Vice Fund invests in companies, both domestic and foreign, engaged in the aerospace and defense industries, owners and operators, gaming facilities as well as manufacturers of gaming equipment, manufactures of tobacco products and producers of alcoholic beverages. Our research methodology is based on a four-step process. First, it involves determining the industry-level trends affecting each sector. Second, it is deep fundamental research which identifies potential winners. Third, we invest in our best ideas as we seek to capitalize on developing trends. Fourth, we constantly monitor the portfolio in search fresh opportunities. There are about 160 to 200 names within the Vice universe with the number of companies varying by sector. Among them, there are about 40 companies in the tobacco and gaming sectors respectively, another 30 to 40 companies in the defense aerospace sector and probably about 25 to 30 companies in the alcohol space. We may also add new companies pertaining to new areas that have the same vice qualifications of high barriers to entry and strong cash flow generation and stuff with non-politically correct conventions. A case in point is nuclear power. Because that’s another area that would be worthy of consideration and valuations and might expand the universe by another 30 or 40 names. We focus on large companies that pay better dividend and which are not tripping red flags, or have pension problems, or had to take a lot of write-offs. In the case of smaller companies, we identify companies which could be acquisition targets or generate strong cash flow if they’re not taken over and still provide value and a solid return. We focus on companies whose valuations are less than seven times EBITDA. We also will look at broader themes. For instance, if the casino companies needed to upgrade slot machines or they have spent on equipment that might lead us to look at the slot machine makers or other equipment makers that would supply or benefit from a spending increase from a number of companies. Q:  What analytical steps are involved in the research process for The Generation Wave Growth Fund? A : The Generation Wave Growth Fund investment process for selecting the companies in which the fund invests begins with a thorough, top-down analysis of the macro environment for equities in general and the major trends and themes developing within the sectors most influenced by generational factors. Following this macro analysis, the portfolio manager’s individual security selection is the result of a rigorous evaluation of a company's fundamentals and various valuation measures. Specifically, the portfolio manager seeks to identify companies that it believes will be positively impacted by the macro industry backdrop where there are future catalysts that could lead to a systemic change in a company's business or in its valuation. Entire industries, such as healthcare, financial services and technology, have and will continue to be re-shaped by the changing needs and spending habits of each generation. By investing in varying combinations of companies in these industries, the fund attempts to optimize growth over the long term while seeking to minimize risks, though there is no guarantee that such risks will be minimized. We start off with basic screening of companies, doing valuations based on price-to-EBITDA and price-to-earnings. We also try to buy something cheaper than what the market is actually valuing it for. The other metrics that we concentrate on as part of our stock selection are the accounting quality and strength of earnings. We tend to focus on companies that have consistent cash flow over the years and the ability to pay dividends and sustain their own growth, whether in terms of both capital spending or working capital additions, minor acquisitions as needed. In addition, we favor companies that do not need a lot of outside money. Essentially, we look for a cheaper valuation for large cap names that are going to be acquired or should be acquired. But at the same time, they should be cheap enough, self-funding and not reliant on acquisition or external infusion to cash in order to survive. We try to find stocks that have lower P/E-to-growth rate ratios and companies with sound accounting policies that are self-funding. Q:  Would you explain your research process with an example? A : A good example would be Melco Crown Entertainment Limited, a developer, owner and, through its subsidiary Melco Crown Gaming, operator of casino gaming and entertainment resort facilities focused on the Macau market. The table game and slot machine revenue in Macau has been rising at fairly decent clip year-over-year for several quarters now, whereas Las Vegas and Atlantic City have been down. Even some of the local markets like Missouri and Kentucky have not shown the same type of growth though they were obviously much more mature markets. We went entirely with Melco as a result of that. Some of the main factors for adding that company to the portfolio were its decent earnings quality, and the fact that a lot of their previous expansion had already been completed, therefore, it was going to start generating higher net free cash flow. Also, the company was not going to need above normal capital spending in the immediate future. Q:  What is your sell discipline? A : We will normally sell a stock for the following reasons. First, if the valuation is too generic. Second, if the company makes a desperate acquisition and they go on to buy something which has gone through ten years of restructuring already. That would also trigger a sell. Third, if a company dramatically changes assumptions on pension plans. Those are usually items that we focus on to sell something when we think the quality of the company is about to enter a declining phase and rather be out it first and then wait. Q:  Could you give us an overview of your portfolio construction process? A : There are currently 30 names in the Vice Fund and 35 names in the Gen Wave fund. The benchmark for both portfolios is the S&P 500 Index and the target turnover is generally between 25% to 40% at the most for the two funds. Both portfolios are structured with fairly large core names so that we seek to add four or five positions of decent size within each sector. Then, we look for other areas where we can generate some alpha by finding some smaller names or some names such as defense or cigarette companies, or tobacco leaf companies, or slot machine makers as opposed to casinos. We have the discretion to overweight or underweight any of these sectors at any given time. We certainly do not want to have a situation where we have 5% in one industry and 45% in another, hence we prefer to be close to the 25% range. At times when we need cash, we can generate it without too much effort because we own a number of very large liquid names in our portfolios. We also generate additional cash flow by writing some options, which will enhance yield to shareholders. Q:  What are your views on various risks and how do you manage them? A : Our biggest risk is that the fund may underperform the benchmark index. The sectors that we invest in may not be in favor and they may lag the broader market. Given the mandate of our portfolios, we cannot switch into other sectors, so that is a serious risk. The other thing we can’t do is provide people with the defensive natured portfolio, namely high cash flow generation from dividends which should limit downside risk. In The Vice Fund, due to the nature of the bulk of the industries, gaming would still have volatility that would probably stay above the market volatility. Yet, a balanced portfolio with four sectors should generate lower than the average volatility in the market. In The Generation Wave Growth Fund, the concept for risk is that we can do more sector rotation. There may be times that we start seeing the boomers move into greater areas of concentration. But our way of dealing with the risk in that regard is to track and find the next beta industry that people have not fully focused on for baby boomer demand, which will enable us to buy cheap enough.