Portfolio Manager’s Outlook

Only in the third quarter of 2008 did the housing recession that began three years ago combine with the ongoing capital spending recession to morph into a consumer recession. The first signs of the consumer pulling back were seen sporadically in the fall but have now become apparent in almost every niche of the U.S. economy. Alarmingly, the U.S. consumer represents 18.2% of the global economy, up from only 8% 20 years ago. In my view, this puts any “decoupling” theory into serious doubt. Consequently, it will be very difficult to identify areas both globally and within any specific economy that won’t be negatively affected by the economic downturn sweeping across the globe.

If this wasn’t enough to make a portfolio manager’s job difficult, we also are now beginning to realize the long-term implications of a simultaneous consumer and corporate de-leveraging. Strikingly, from 1980 to 2007, the amount of debt owed by the U.S. financial sector increased 27 times, from $578 billion to over $15.4 trillion. At the same time, U.S. household debt has increased 10x, from $1.4 trillion to $13.5 trillion. Now, as credit standards are tightening, consumer sentiment is worsening and unemployment is ticking ever-higher, Americans are understandably beginning to save rather than spend. While saving is generally positive, if the U.S. savings rate trends upward too quickly, it has the potential to trap the U.S. economy in the dreaded deflationary spiral. I gain comfort, however, from remarks made by Federal Reserve Chairman Ben Bernanke in 2002, in which he assured that the “U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.” Therefore, while I see this as a significant risk and a condition to be carefully monitored, I do not anticipate anything as extreme as a “lost decade” for the U.S. economy. Despite all of the negative headlines, there are reasons to be optimistic as we begin a new year. Congress and both out-going President Bush and incoming President-Elect Obama have done their share to step in and socialize the losses plaguing Wall Street, Main Street and Detroit. The proposed 2009 stimulus package promises to provide significant support to the ailing economy. Investments in the nation’s aging transportation infrastructure, the expansion of broadband service to the 50% of Americans still accessing the internet via a modem, the digitalization of health care records and the construction of energy-efficient buildings will all serve to create jobs and set the stage for substantial future economic expansion.

As we welcome a new year and a new semester, I am grateful for the opportunity to serve as the Alpha Fund’s new Portfolio Manager. In this capacity, I aim to chart a course for the Alpha Fund in 2009 that revolves around the “best of breed” theme. Forced redemptions and low investor sentiment over the past year have created an environment of extreme volatility and correlation that is ripe with market inefficiencies. With traditional best-of-breed companies trading at historically low valuations, I see this as an opportunity for the Alpha Fund to invest in companies that have proven management teams, competitive advantages, strong balance sheets and high investor return on equity. Given the possibility of a sustained L-shaped recovery in the second half of 2009, we will also seek to diversify the fund with companies that pay attractive dividend yields, providing the Fund with a consistent income stream to partially offset any temporary market declines. Overall, I anticipate an eventual economic recovery and believe that holding the best-of-breed companies in each sector will set the foundation for outstanding long-term performance into the future.

The Alpha Fund is in a unique position due to its ability to invest in both the equity and fixed income markets. Historically, the Fund has allocated 70% of its assets to equity, 10% to cash and 20% to fixed income securities. It is my belief, however, that in the current market environment, traditional market risk premiums are not holding true. While stocks have traditionally offered higher returns to compensate for higher risk, investors today are being generously rewarded for taking on less risk as a bondholder. Municipal bonds, high-yield corporate bonds and investment grade corporate bonds are all trading with historically high yields due to the shortage of funds in the credit markets. Therefore, in the short and medium term, I believe there are significant opportunities for the Alpha Fund in fixed income. With this in mind, I will continue allocating a large portion of the Alpha Fund’s assets to fixed income securities, further allowing the fund to generate consistent income while we weather this market downturn.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” This bit of wisdom from Winston Churchill, in my mind, appropriately describes the mindset that guides the Alpha Fund as we persistently work to improve our portfolio and promote education as much as possible in the process. I invite with great enthusiasm any and all questions or comments regarding the Alpha Fund’s strategy, performance or any other area of concern.

Sincerely,

Chris Cerrone

Portfolio Manager