Q:  What’s your investment philosophy? A : To provide investors with an easy and efficient way to invest in the small and micro cap sector of the stock market. Our fund of funds structure reduces the risks associated with investing in a single fund or investment style. By investing only in the small and micro cap sectors of the economy, the Fund is an excellent asset allocation tool an investor can use to compliment their other investments. Q:  Why do you believe that fund-of-funds is a better investment approach than investing in a single fund? A : The diversification of the fund of funds structure cannot be matched by investing in a single fund. Recent studies have indicated that investor behavior is most likely to have a negative impact on investor returns. Investing in a fund of funds can help investors avoid the major pitfalls that plague most investor returns. There’s a study which showed that during the 20-year period (1986-2005) the S&P 500 index averaged 11.9% but the average investor only earned 3.9%. A market-timing study for the period 1990 to 2005 shows that if you had been fully invested in the market your average annual return would have been 11.5%. Had you missed the 30 best days during that period your average annual return would have been only 3.1%. People are getting in and out of the market at the wrong time and the fear and greed scenario is blocking investors’ decision-making process. Asset allocation studies have revealed that the choice of which asset class to be in and how much was allocated to the classes accounted for over 90% of the investment return. In other words it is not which fund(s) you choose but the mix of funds within the asset classes that will have the greatest impact on the overall performance of a portfolio. The fund of funds structure is best suited to provide the asset allocation and diversification needed to keep investors focused and on track in managing their portfolios. Q:  How do you go about manager selection? A : First, to maintain a balanced portfolio, I’ll look at investing styles because I want to have exposure to both value and growth stock funds. The selection process includes evaluating portfolio manager tenure, fees and expenses, size of the fund, portfolio composition and quality of shareholder services. I will look into the fund’s statistical measures such as standard deviation and alpha as a guideline to see how they compare against other funds with similar investing styles. The sector weightings of each of the funds will also come into play to avoid an over concentration in any one sector of the economy. Q:  What is your manager research process? At any given time, how many fund managers do you have in the fund? A : Our portfolio will consist of 10 to 25 funds. Currently, we have 14 holdings. Initially, I run a number of screens, using software from Morningstar, to track a fund’s past performance and current investing style. A lot of additional information comes from the media via print and the internet where I can learn about new fund offerings, reopening of funds and any manager changes. Manager tenure plays a key role in our analysis of a fund. The past performance of a 5 star fund with an excellent 5 and/or 10 year track record with a new manager at the helm doesn’t carry as much weight in the selection process. Rankings of a fund can be misleading as the current manager may not have been responsible for the past successes of that particular fund. When I get a new fund name, I’ll look at its investing style and value-to-growth ratio. Sector weightings are very important now because a lot of funds are outperforming the market due to their concentration in the industrials and energy sectors. I don’t want to be overweight in those sectors. I’ll also look at their consistency of returns. I don’t want a fund that had one good year that distorted its average return for the previous five or ten year period. I’ll go back on a year-to-year basis and not just rely on a fund’s average annual returns in comparing it to other funds in the portfolio. From there, I’ll continue to monitor the performance and the managers. From the manager’s commentary, as reported in the fund’s annual and semi annual reports, I can look for changes and their insight as to what’s happening in the marketplace and how it’s impacting their portfolios. Unlike the managers of the underlying funds I invest in, I am not concerned with the financial ratios and profiles of the companies within their respective portfolios. I leave that up to the individual managers. Q:  What gives you the confidence that even if the fund performance suffers in one or two years for a manager, the fund will rebound and return to its average rate of return? A : For example, Schneider Small Cap Value Fund is one of our larger holdings. In 2007, it lost 17% as it was very vulnerable to the subprime mortgage and small cap value investing style, but it has one of the best track records over the past ten years. 2002 was also an off year for the Schneider Small Cap Value Fund but it rebounded in 2003 with a return in excess of 100%. Through our fund-of-funds process I was able to trim our overall losses for 2007 to 1.9%, in line with the performance of the Russell 2ooo index of small cap stocks. The fund-of-funds concept works because we didn’t put all our eggs in one basket and affords us the opportunity to hold onto a good fund that is currently underperforming. It is not uncommon for the best fund managers to go through periods of sub par performance. Generally if the weak performance of a particular fund is longer than six months then the fund is added to my watch list. That being said, I will also be more patient with a proven fund manager, as in the case with Schneider Small Cap Value that has a long term track record of above average returns. Q:  Could you illustrate your thinking process with another example? A : The example that comes to mind first is the Royce Funds. I currently have the Royce Opportunity and Royce Value Plus Funds in the portfolio and I am looking to add another Royce Fund. I recently met with some of the managers and was very impressed with their operation, range of investing styles and commitment and conviction to the small cap sector. In Royce’s case, they are considered value managers and generally adhere to a strict value investing style. In speaking with a number of the managers, I got the sense of consistency among the funds and the understanding that each fund is unique in its own right and each manager has the opportunity to express their ideas and invest according to their own discipline. Based on their accomplishments and what I have been able to gather from the manager interviews and shareholder reports, I acquired a comfort level and the confidence that their investing abilities will add value to our portfolio. I don’t meet all the managers that I invest with but feel that there is enough information in the public domain that I can rely on to do reliable research and analysis. Q:  How many funds will fall into your investible universe? A : It’s pretty broad. Morningstar has identified approx. 2,100 funds in the small cap value, blend and growth categories and that will include funds with multiple share classes. If I eliminate the multiple share classes there would probably be between 700 to 900 small cap funds that would meet our investment criteria. There will be periods of time in which a number of small cap funds will be closed to new investors. As a fund of funds, we often can provide investors access to closed funds. Such is the case with the Schroder US Opportunities Fund, a small cap growth fund currently closed to new investors. Recently a number of funds have reopened but you never know for how long they will remain open. Q:  What kinds of risk do you monitor? What do you do to mitigate risk? A : As I am required to invest 80% of our assets in funds that have a policy of investing at least 80% of their assets in small cap stocks, I have to monitor the market cap range of the underlying funds. Consequently, I have sold funds that have gone from 80% small cap exposure to 40%. A reduction in small cap exposure can be the result of managers holding onto stocks that have done particularly well or their decision to expand their portfolios to include more mid cap stocks. I have to constantly monitor that ratio to make sure we stay within the stated guidelines found in the prospectus. I will also pay close attention to style drift. Each manager will have their own definition of what constitutes a value or growth stock. It would not be unusual for a particular stock to be owned by both value and growth managers. I cannot maintain a balanced portfolio by just investing according to fund categories. Each fund has to be analyzed separately to see how their respective portfolios are allocated between value and growth. I want to make sure that our Fund stays true to its objective of providing a well balanced and diversified blend of small and micro cap funds. Sector weightings present another risk that I routinely control. Funds cannot be selected purely on performance. Over the short term, the best performing funds will have similar concentration to certain sectors. It is not a coincidence that funds with a larger exposure to the industrial materials and energy sector have done very well this past year. While a fund of funds structure cannot eliminate overlap in holdings we can control sector weightings and our commitment to maintaining a balanced portfolio.