Q:  What is the rationale behind the name Adaptive Allocation Fund? A : The reason we attributed the term ‘adaptive allocation’ to the fund is because we invest in whatever market segment our proprietary models choose as having an optimum risk-reward ratio at that time. We can be invested in any aspect of the market, in any proportion, on any given day. Most mutual funds have static strategies, which mean they lose flexibility. We can be fully invested in the market, or 100% in cash, or any combination in-between. We believe trends and patterns in markets can be exploited if one has a structured way of tracking and analyzing them. There are markets within markets. When the markets are trending higher, we invest more aggressively. When the markets are going lower, we peel back the layers, seeking to identify segments that, in contrast, are going higher, whether they are stocks, bonds, or real estate investment trusts. If all segments are down, we retreat to the safety of short-term government securities. Also, we have the ability, in strictly defined circumstances, to short the equity market. Q:  What kinds of investment models do you have? A : In 2006, we created and utilized two models that could select individual stocks based on the financial statement analysis of thousands of companies each month. In addition, we developed trend-following models as a complement to the individual stock selection models. In doing so, we created diversification, both in asset class and system type. We began with a trend-following equity index model based on the Russell 2000, and then added two additional trend-following models, namely S&P 500 and High Yield Corporate Bonds in May of 2007. Two other trend-following models, High Yield Municipal Bonds and Inflation Protected Bonds, were added in 2009 and recently we added a NASDAQ Composite model. Q:  How many stock selection models do you currently have in place? A : By May of 2007, we had expanded the number of stock selection models from 2 to 24, whereas now we have more than 90 such models. Stock markets are ever-changing. Certain segments will be in favor at different times. By having over 90 models, we are able to select the most promising candidates for the given environment. Q:  What is your main investment objective in the fund? A : The main investment objective is to reduce risks in down markets and enhance returns in up markets. We invest in stocks, equity indices, bonds and/or cash in any combination, including being 100% in cash, or short the equity markets, if no other asset classes are selected by our models. Our market principally consists of individual stocks (including foreign stocks or ADRs that are listed on the NYSE and the NASDAQ), broad market indices (such as the S&P 500, the Russell 2000, and the NASDAQ Composite), corporate bonds, municipal bonds, and inflation-protected securities. A good example of meeting our objectives, through our flexible strategies, is that our trend-following models were 100% in cash in the last six months of 2008 but 100% invested in the markets in the last six months of 2009. Q:  How does investing in your fund differ from investing in a typical balanced fund? A : Most of the balanced funds in the market follow the principle that risk can be reduced by diversifying into various asset classes, typically stocks and bonds, hoping that if stocks lose value, bonds may not, or vice-versa. We see two major flaws in that strategy. The first issue arises if stocks and bonds become highly correlated, as has often been the case. Losses can be significant and compounded if both move down together. The second problem arises if they are not highly correlated and one goes up while the other goes down. The opposing asset classes might offset each other. This situation creates a missed opportunity by not being able to take advantage of the up segment while avoiding the down. We found the best way to reduce risk and enhance returns is by allocating assets based on what the market is doing at any given time, seeking to invest in rising assets and avoid those that are falling. Our active management style does exactly this, allowing us infinite flexibility. Q:  How do your models help you in choosing investments? A : We use two distinct types of models which we refer to as ‘fundamental’ and ‘technical’ models. We have over 90 fundamental, financial statement analysis models that help us choose individual stocks every month, based on the various price ratios and financial statements of thousands of domestic and foreign companies. These models are independent of each other and are designed to select stocks either from specific sectors or in certain economic environments. However, these models may not select any stocks at all if the financial information available indicates that no potential for a positive, risk-reward result exists at that point in time. In terms of the broad market indices like the S&P 500, the Russell 2000, the NASDAQ Composite, and the bond funds, we use our six trend-following models. These models do not take into consideration financial statements and ratios, they follow only the trends. If the bond funds or the indices are trending up, we try to be invested in them, and if they are trending down, we move to a cash or short position. Q:  Is there any allocation restriction to investments chosen by these models? A : There are no significant restrictions. The amounts that we allocate to individual stocks, picked by our fundamental models, and the equity indices and bond funds, selected by our technical models, are very dynamic. There may be times when the fundamental models pick very few stocks and yet the market may be on the upswing. In such cases, we tend to allocate more assets to the investments selected by our technical, trend-following models. At other times, some of our technical models may be in cash while our fundamental models are selecting individual stocks. During these times, we would tend to allocate more assets to our individual stocks. If individual stocks are selected, we will limit investment in any one company to 2% of the portfolio and no more than 60% invested in individual stocks collectively. Q:  Does emotion ever play any role in your buy and sell discipline? A : No. Our overall strategy is designed to avoid emotional traps. These models, responsive in virtually any market condition, make our investments by using rule-based techniques. Thus, an investor does not have to worry about entry or exit decisions. Our strategy will do that for them. Q:  How dynamic can your models actually be? A : We have designed the fundamental models in such a way that they will enable us to buy stocks in many environments. We have models for value stocks, momentum stocks, growth stocks, dividend paying stocks, and foreign stocks to name a few. In certain environments, we will hold no stocks at all. Our trend-following models can be invested in equities, bonds, cash, or short positions, in any percentage, at any time. Q:  How do you explain these models to your potential investors? A : We explain in detail how these models are built and what they are supposed to do. In some cases, if an investor wants to see the details of each model, we show them that detail. There are no “black box” models in use by us. We also elucidate the various terminologies and concepts such as value stocks, growth stocks, momentum stocks and others to our investors. Finally, we explain how the models execute our buy and sell discipline. Q:  Would you elaborate on your sell discipline? A : In the case of investments chosen by the trend-following models, we sell them when the trend in the index starts to go down. As for stocks picked by the fundamental models, we sell all stocks that no longer pass our screens. We strictly follow these principles in order to avoid situations where emotions could play a negative role. Q:  How do you perceive risks in your fund and what do you do to mitigate them? A : Mutual fund investing involves many risks which are detailed in our fund’s prospectus. We perceive the greatest risk to be what we term “system diversification” risk. If a fund uses a limited number of investment strategies, and one of them doesn’t function as intended, the results can be catastrophic. A good example of this risk is how the buy/hold strategy failed in 2008, causing enormous losses. We mitigate this risk by having so many models and such adaptable diversification, that a failure of one of them would not cause irreparable harm.