Examining Vice Fund�s Defense-Sector Outlook
By Charles L. Norton, CFA Portfolio Manager

As the Presidential election process moves forward, one of the many issues that will be discussed is defense spending. But regardless of the headline-grabbing babble coming over the coming months, I believe defense stocks will have a strong 2008.

In my last correspondence to you, I took to task the commonly held belief that Republicans are better for defense stocks than Democrats. The data suggests that there simply is no correlation between the political party of the President or Republican representation in Congress and a main driver of defense stocks, growth in budget authority for procurement and Research, Development, Test, and Evaluation (RDT&E;), which together I refer to as �modernization� spending.

Budget authority is the �legal authority for an agency to enter into obligations of dollars in a certain amount� that will -- typically one to two years or more later -- result in cash outlays, meaning actual disbursements by the Treasury. Outlays means revenue for the defense contractors, but budget authority is a leading indicator and is thus likely more predictive of defense-stock price performance. Most investors focused on this sector key off of budget authority.

With those terms defined and that myth now thoroughly debunked, let me take a minute to explain why I believe this year may be a good one for the pure-play defense stocks.

First, look around the world. In addition to the ongoing Global War on Terror (which is funded in a separate, supplemental budget), there are plenty of volatile parts of the world that are causing some sleepless nights for folks in the Pentagon, including Iran, North Korea, India/Pakistan, and, importantly, China -- just to name a few.

There is certainly a high threat level right now that is likely to persist for many years to come and historically budget growth tends to go hand-in-hand with high global threat levels, regardless of the political party in the White House or dominating Congress.

Second, the next generation of warfare will most likely leverage technology more than ever before. This trend should reduce the funding required for other parts of the defense budget like Operations & Maintenance and Personnel, so more money should flow into Procurement and RDT&E;, which in my opinion are the real driver of defense stocks.

Another byproduct the increasing use of technology in our next-generation military is that defense programs are more highly integrated, making it difficult to eliminate one without having broader ramifications.

Finally, there is the ongoing need to replace equipment that�s been damaged in combat.

For these reasons, and others not mentioned in this limited space, budget authority for modernization is likely going to increase through 2010, the first year that the budget is entirely penned by a new administration. When budget authority for modernization increases, defense stocks tend to outperform. Add to that a supplemental budget, the prospect of high-margin foreign military sales and the fact that pure-play defense stocks are defensive, with near zero correlation to the broader market over the past two decades, 1 and you can understand why the defense stocks continue to be in our crosshairs here at the Vice Fund.

1 Bernstein Research, �Aerospace & Defense: Defense as a Defensive Play � Low Broader Market Exposure, Strong Near/Medium Term Outlook,� Aug. 7, 2007

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 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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