Destroying the �Republicans Are Better for Defense Stocks� Myth
By Charles L. Norton, CFA Portfolio Manager

With the Presidential election gathering steam, I wanted to take a moment to try and debunk a commonly held � but way off-base � view that Republicans are better for defense stocks than Democrats. This myth, originating during the Reagan years, I believe, is just not supported by the data.

Election-Year Performance Weighs In
First consider the historical election-year performance of the defense sector. The S&P; 500 Aerospace/Defense Index has outperformed the S&P; 500 in all four of the election years since 1992 by an average of 12.5% 1; two of those elections, recall, resulted in Clinton victories.

Goldman Sachs has data going back even further that shows that the defense sector has outperformed the S&P; in seven of the eight Presidential election years since 1976 by an average of over 20%. 2

Both of those data points infer that defense stocks tend to outperform the broader market in Presidential election years, regardless of political party. If the pattern persists, 2008 could be another strong year for the defense sector. 3

A close examination of the defense-budget data shows that historically, budget authority on procurement and Research, Development, Test, and Evaluation (RDT&E;) � one of the most important factor driving defense stocks � grows at just about the same annual rate regardless of which political party is in the White House. In fact, it has historically grown at a slightly faster clip when a Democrat is in office.

The Congressional Effect
Of course, that analysis is a bit complicated by the impact of Congress. Taking the same thought further down Pennsylvania Avenue, I took a look at the correlation between Republican representation in Congress and budget authority on procurement and RDT&E; � often called �modernization spending� or the �investment account� � and found it to be zero. In other words, Republican representation in Congress does not appear to be at all predictive of modernization spending.

So the bottom line is that, contrary to the widely held (but apparently seldom analyzed) view that the defense sector fares better with a Republican president, that appears to be nothing more than a myth that the data simply doesn�t support. With that in mind, in the Vice Fund we continue to have a favorable outlook for the defense sector, largely founded on our outlook of growth in the defense budget � regardless of who wins this year�s election.

1 These figures were compiled by GNI Capital using data from Bloomberg. It compares the return data for the S&P; 500 Aerospace & Defense Index during the full calendar year in which there is a Presidential election to the return of the S&P; 500 Index over the same time period.

2 Goldman Sachs, �Buy defense; avoid major pain � raising coverage view to Attractive,� Nov. 27, 2007

3 There is no guarantee that the pattern noted will persist in 2008. There are many factors that drive stock returns and, in fact, for any number of reasons defense stocks might underperform in 2008.

Mutual fund investing involves risk; principal loss is possible. The Fund is nondiversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund invests in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility.

Opinions expressed are those of Charles Norton, and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.

The S&P; 500 Aerospace & Defense Index is a capitalization-weighted index of large-cap aerospace and defense companies.

The S&P; 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.

The funds' investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company, and it may be obtained from www.vicefund.com, or by calling Shareholder Services toll free at 866-264-8783. Read it carefully before investing.

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