PORTFOLIO MANAGER'S DISCUSSION & ANALYSIS – BALANCED FUND

DECEMBER 31, 2009

Portfolio Manager:  Bradley P. Hinton

The Balanced Fund returned +28.8% for the 2009 calendar year, compared to a +18.0% return for the Blended Index. For the fourth calendar quarter, the Fund increased 2.4% compared to a 3.7% gain for the Blended Index. Microsoft’s stock increased another 18% as the company reported solid quarterly results and launched the Windows 7 release. Health care companies LabCorp (+14%), UnitedHealth Group (+22%) and WellPoint (+23%) delivered the largest sector returns as the more extreme legislative proposals lost steam in Washington. Global spirits leader Diageo gained 13% as the world economy showed early signs of recovery. Our higher yielding bonds also showed continued price appreciation, supplementing already strong coupon cash flows.

Coinstar declined 16% during the quarter, paring some of the stock’s healthy gain for the year. This small-cap stock is much more volatile than the company’s underlying business, which continues to make reasonable progress. Investors remain concerned about the Redbox division’s difficult relationships with a few movie studios, and the potential impact on DVD kiosk profitability. We have factored in lower margin assumptions and still think the stock is cheap. Apollo Group fell 18% amid concerns about the company’s revenue recognition policies and continued negative headlines about the for-profit education industry. We believe the issues are manageable and think the $60 stock price reflects undue pessimism. Our building materials stocks also declined modestly during the quarter, led by Eagle Materials (-8%) as the cement and wallboard markets remain cyclically challenged.

The Fund’s equity exposure is relatively unchanged at 55% of net assets. We bought a handful of new companies during the quarter. Purchases included consulting giant Accenture plc, auto parts retailer AutoZone, cable channel operator Liberty Media – Starz and for-profit education company ITT Educational Services. All four companies generate plenty of free cash flow per share and are willing to buy back stock in size when it makes sense. We also purchased shares of Monsanto (seeds, genomics and herbicides) and Compass Minerals (salt and specialty potash), increasing our agriculture-related materials exposure.

We recycled capital out of several stocks as they approached our estimates of value. We sold WellPoint, UnitedHealth Group, News Corporation, DIRECTV Group and American Express after strong recoveries from the March lows. We also sold The Washington Post, which we think remains undervalued, to focus on other pure-play, higher-conviction education and cable companies.

The Fund’s fixed income results were terrific in 2009, especially in corporate bonds. However, the prospective return outlook for most bonds is far less exciting. Our corporate exposure remains 13% of net assets. Valmont Industries was the only new credit we purchased during the quarter. We also added to our Coinstar convertible debt holdings at prices below par. Mortgage-backed securities (MBS) account for 11% of net assets. Our holdings remain largely concentrated in seasoned, federal agency MBS with relatively short expected lives. These securities offer reasonable coupon income with little risk of negative surprises. We continue to avoid Treasury securities at current price levels, and cash reserves represent 20% of net assets.

Click here to obtain December 31, 2009 performance information.