Tom Marsico, Portfolio Manager

January through March 2008

During the first calendar quarter of 2008, the Focus Fund and the Growth Fund posted total returns of -13.66% and -13.53%, respectively. Those results trailed the S&P 500 Index, the Funds' primary benchmark index, which had a total quarterly return of -9.44%.

The table below updates the Funds' longer term investment results through March 31, 2008, as compared to the S&P 500 Index:



The performance data for the Funds quoted here represent past performance, and past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted above. To obtain performance information current to the most recent month end, please call 888-860-8686 or click here for the Focus Fund ² or click here for the Growth Fund.²

This commentary highlights the Funds' performance over a single calendar quarter. Shareholders should keep in mind that the Funds are intended for long-term investors who hold their shares for substantially longer periods of time. You should also keep in mind that our views on all securities and investments discussed in this commentary are subject to change at any time. References to specific securities, sectors, and industries discussed in this commentary are not recommendations to buy or sell the securities or investments, and the Funds may not necessarily hold these securities or investments today.³

As a reminder, the Focus Fund and the Growth Fund often invest in the securities of similar growth companies. Their respective performance may differ at times, however, for several reasons. Among other factors, the Focus Fund is a non-diversified mutual fund that may invest in a more concentrated portfolio and may hold the securities of fewer issuers than the Growth Fund. As a result, the Focus Fund may hold some different securities, and may be subject to greater short-term individual performance volatility than the Growth Fund or other mutual funds that invest in a larger number of securities. During the first calendar quarter of 2008, the Focus Fund and Growth Fund had similar returns.

On balance, the first calendar quarter was not a pleasant period from an investment perspective. Investor time horizons compressed dramatically, risk aversion soared, world-wide economic growth slowed, and terms such as stagflation and recession became part of the investment landscape–not a constructive backdrop for the stock market. Every GICS economic sector in the S&P 500 Index was in negative territory–in many cases, deeply so. Information Technology (-15%), Financials
(-14%), Telecommunication Services (-14%), Health Care (-12%), and Utilities (-10%) suffered the worst declines. Consumer Staples and Materials offered a modicum of protection, with returns of -2% and -3%, respectively. Outside of that small sample, finding positive stock price performance was a very difficult–some would call it "Quixotic"–task.

There was plenty of blame to go around in terms of the Funds' performances. However, there were a few "bright lights" that did well under the circumstances.

One major culprit in the Funds' underperformance during the three-month period ended March 31, 2008 was several of their holdings in the Information Technology sector, including Apple Inc., Google Inc., Intel Corp., and Microsoft Corp. Each of these positions was down sharply during the quarter and all, with the exception of Google, were sold prior to March 31. A general explanatory comment would be that technology companies, like many others, were beset by worries regarding the potential impact a global economic slowdown could have on their businesses and earnings growth. Whenever the profit outlook for technology companies is called into question, especially in the context of shortening investor time horizons, their stock prices have the potential to plummet very rapidly.

Health Care investments were a second area of major disappointment (with one notable exception: biotechnology company Genentech, Inc., a significant holding in the Funds, gained more than 20% during the quarter). In particular, UnitedHealth Group Inc. skidded -41% during the quarter, while Merck & Co., Inc. fell -34%. Health insurance companies were under pressure throughout the quarter, particularly in the wake of lower revised earnings outlooks announced on consecutive days by Humana Inc. and Wellpoint, Inc. The entire industry group responded to that news by plunging, regardless of company-specific business models, earnings outlook, cost structure, and stock valuation. Merck was another frustrating experience. The Company's stock price was negatively impacted primarily by controversy–fueled by what we believe may have been inaccurate reports in the media–surrounding the clinical benefit of a cholesterol-lowering drug called Vytorin. Those reports led to a loss in market share by Vytorin, which put substantial downward pressure on Merck's stock price.

We haven't owned many financial services companies in the Funds recently, which generally has been a good decision in the context of the mortgage finance, credit, and liquidity crises that have besieged this sector. However, any level of exposure to the Financials sector detracted from performance during the first calendar quarter. The Funds' position in Goldman Sachs Group, Inc., which fell -23%, was a case in point.

The Consumer Discretionary sector, as noted in the Capital Markets Overview, was generally not a good place to be in the first calendar quarter of 2008, as the outlook dimmed for consumer discretionary spending, which is a major component of overall US gross domestic product. Stock prices of gaming companies, which have represented a significant level of investment for the Funds over an extended period of time, were just one of a number of areas within the sector that reflected worries about the consumer; the value of these holdings declined sharply during the quarter. An interesting point is that significant earnings shortfalls by Consumer Discretionary companies were relatively infrequent during the quarter; instead, these stocks seemed to be saddled primarily by poor "macro" sentiment.

The apparent challenges facing consumers seemed to reach a crescendo during the first calendar quarter: housing price weakness and rising foreclosures, more stringent lending standards, increasing loan and credit card delinquency rates, sharply-higher oil and gasoline prices, and tepid real wage gains. The consumer, in a very real sense, seemed to be caught in a financial vise that kept inexorably tightening, although–at least with regard to mortgage debt–some government relief appeared on the horizon.

The performance news for the Funds was not entirely negative. The Funds had investments in a variety of companies whose stock prices outperformed the market–in some cases substantially so–including Genentech Inc., Union Pacific Corporation, Norfolk Southern Corporation, MasterCard Inc., Monsanto Co., Lowe's Companies Inc., and CVS Caremark Corp. The Funds also had a higher-than-normal cash position during the quarter, which provided a bit of downside protection.

Focus Fund and Growth Fund Positioning and Investment Outlook

"It may be a perilous time to be a citizen, but it is a very exciting time to be an economist."

-Larry Summers, former Treasury secretary (April 9, 2008)

In this turbulent, highly volatile environment, it is a perilous exercise to attempt to state something unalloyed by caveats. However, it is safe to say that one essential ingredient to a recovery in the financial markets will be a restoration of confidence–for both consumers and businesses -- particularly those operating in the financial services arena. As mentioned in the Capital Markets Overview, consumer confidence has ebbed to levels not seen in decades. With regard to the financial markets, this collapse–as opposed to being sector- or region-specific (e.g., the technology and "dot.com" meltdown in 2000-2002, Asia in 1997-1998)–has been systemic in nature. A tremendous amount of leverage needs to be unwound. Balance sheets need to be replenished. Counterparty risk needs to abate. These changes will take time and almost certainly will not proceed in a linear fashion, or without some pain. The US economy is now largely services-driven, as opposed to manufacturing-based, so the impact of the current financial crisis has been felt acutely.

The good news (perhaps) is that some reassurance seems to have been derived from the growing beliefs that the Federal Reserve is now fully committed to resolving the problems in the credit markets and that the US government stands behind commercial and investment banks. However, lending markets still appear hamstrung by a fundamental absence of trust. Credit spreads between inter-bank lending rates and risk-free rates (e.g., short-term US Treasury securities) remain–as of this writing–at unusually high levels, suggesting that financial institutions don't have a great deal of faith in each other. Trust is the bedrock for normally-functioning markets. In essence, its disappearance led to an almost-complete disruption of the capital markets. Paul Volcker, the former Federal Reserve chairman, articulated this view in a speech to the Economic Club of New York (April 8, 2008):

"[The]...financial system…has failed the test of the marketplace. What has plainly been at risk is a disorderly unraveling of the mutual trust among respected market participants upon which any strong and efficient financial system must rest."

We think that there are some nascent signs that the financial crisis may be in the "later innings", but the real economy–reeling from housing weakness, constrained wages, higher energy prices, and inflationary pressures–faces abundant challenges. We think housing is well into the process of finding a bottom and actions being undertaken in Washington will provide some measure of relief for strapped homeowners.

However, inflation is front and center on our radar screen, and we wanted to share some thoughts about this extremely important topic.

When the Federal Open Market Committee ("FOMC") released its written statement after its meeting on March 18, 2008, the bulk of its comments centered upon the growing downside risks to the economic outlook. The FOMC, however, while moving off its view of inflation as its "predominant concern", also explicitly indicated that inflation remains central to its policy deliberations. The FOMC statement noted that "inflation has been elevated", adding that "it will be necessary to monitor inflation developments carefully." Surging oil, gasoline, and agricultural commodity prices were no doubt central to the Federal Reserve's inflation assessment. Oil and gasoline prices recently reached record-high levels, and food inflation is emerging as a major issue worldwide–the latter most recently crystallized by an enormous price increase for rice.

One view of US inflation is that the combination of a financial crisis and slowing economic growth around the world will, over time, inevitably dampen inflationary pressures, particularly if global money supply growth also slows. Robert V. DiClemente, chief US economist for Citigroup, reacting in The New York Times (March 19, 2008) to the FOMC's inflation comments, espoused this view by saying:

"I'm disappointed [in the Federal Reserve]. It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."

That view was echoed by Ethan Harris in The New York Times (March 19, 2008), an economist at Lehman Brothers, who discounted the FOMC's inflation warning as "boilerplate" language. "I don't take it seriously," he said. "The upside risks on inflation are actually very low. The [US] economy is really quite weak, and we are probably in a recession right now. We're just at the beginning of a consumer slowdown."

Another "take" on inflation, however, is concerning to us. Higher oil prices, for reasons such as growing demand in developing countries, potential supply bottlenecks, and other factors we have discussed previously, could be here to stay for some time. Food and energy prices, as noted by the World Bank (April 8, 2008), have increased for six consecutive years. It is true, looking at components of the US Consumer Price Index ("CPI"), that certain items have declined in price over the past year, such as personal computers, technology hardware and services, apparel, and new vehicles. However, in the past year the costs of many "consumer essentials" have soared, including: oil and other fuel costs (+33%), dairy (+13%), transportation (+9%), and hospital services (+8%). The rising prices for these items put further pressure on consumers. Monetary policy, i.e., interest rate increases, probably cannot directly impact these types of inflationary forces given their global roots. Additionally, interest rate cuts or fiscal stimulus could potentially intensify commodity price increases that may be linked in part to global money supply growth.

In particular, pressure on "feed stocks" has been rising due to factors such as increased focus on ethanol and other biofuels as alternative energy sources, drought conditions in various parts of the world which have materially impacted crop production, the increasing cost of energy used in food production, and population growth. It is one thing to argue that there could be a "demand response" to higher gasoline prices in the form of people driving less, or owning more fuel-efficient vehicles. But it is trickier to envision a response to something such as higher food prices. People can't be asked to eat less wheat, corn, rice, vegetables, and meat. Possibly, there will be a supply response in conjunction with improved efficiencies in food production. And yet, in the context of a world-wide population that by some estimates may grow by 2.5 billion people in the next century and scarcer resources supporting agriculture (e.g., land, water, and oil), it may well be that higher food prices–like oil–are here to stay for awhile. As put by Paul and Anne Ehrlich, authors of "The Dominant Animal: Human Evolution and the Environment":

"On average, each new person [in the world] will need to be supplied with food from less productive land, using water transported further, requiring more fertilizer per unit of production, with energy needs met largely from oil drawn from deeper wells. All this while dealing with climate change that threatens agriculture from many different directions."

Clearly, there is no shortage of worries for the stock market. However, perhaps that is a good thing in and of itself. Equity markets are often characterized by their propensity to swing to extremes–from "irrational exuberance" (late-1990s) to ultra-pessimism (today). Many stocks are currently trading at depressed levels and the S&P 500 Index is trading at its lowest valuation since 1990 based on earnings estimates for 2008–with interest rates today well below what they were back then. Free cash flow yields, the lifeblood of companies, are reaching levels we have not seen in many years. In many cases, a company's stock price is low enough that free "call options" are being offered on some of its major business lines. Stock prices for some industry groups, such as retailers, appear to have discounted a major US recession. (We acknowledge that GDP growth may slow to a point where growth is "flat" or even mildly negative, but we do not envision a scenario in which the economy literally falls off a cliff.) The valuation backdrop, in other words, is increasingly compelling. We cannot forecast when this difficult chapter will come to a close, but we do know that this, too, shall pass.

It is often said that one of the surest signs that markets are peaking is when everyone is feeling good and wants to own equities (the story in The Wall Street Journal from years ago in which firemen were day-trading stocks in their spare time comes to mind). The corollary to that, however, is that historically some of the best times to be buying stocks are when no else wants to and everyone seems to be feeling bad about the equities market–which is the mode we are operating in today. To be sure, it remains an extraordinarily difficult and volatile environment. Recently, we have seen General Electric Company, commonly regarded as a bellwether for the global economy, announce a major earnings shortfall–just weeks after the Company's Chief Executive Officer reaffirmed a strong outlook for 2008. Frontier Airlines was forced to file for Chapter 11 bankruptcy protection because its credit card processer decided to begin withholding higher amounts of ticket revenue, which jeopardized Frontier's cash flow flexibility. There is potential for substantial further write-downs of mortgage assets in the financial services industry. Increasingly, however, our view is that the "bad news" is reflected, perhaps overly so, in stock prices. It is not unreasonable to think that some of the best opportunities we've seen in a long time may be in the process of being created by the current financial and economic malaise.

Turning now to the Funds' investment positioning:

The Funds' largest sector allocations as of March 31, 2008, included Consumer Discretionary, Financials, Industrials, and Energy. The major "overweight" at the end of the first calendar quarter of 2008, compared to the S&P 500 Index, was the Consumer Discretionary allocation, which was approximately twice as large as the Index. During the quarter, we pared back the Funds' technology-related positions, while shifting some assets towards areas such as oil exploration and production, railroads, and telecommunications services. We also took several modest steps to ratchet up holdings in the financial services arena. Cash equivalent positions, which had risen somewhat during the first calendar quarter, were reduced somewhat toward the end of the reporting period.

Thank you for your patience and support. We appreciate the opportunity to be part of your investment program.

Sincerely,

Thomas F. Marsico
Portfolio Manager

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