January 15, 2008

Dear Fellow Shareholder:

The Balanced Fund had a poor quarter to close out a similarly poor year. The Fund’s total return in the fourth quarter was -3.9% versus -0.8% for our primary benchmark, the Blended Index^†. For the full year the Fund’s return was -5.3% compared to 6.2% for the Blended Index^†. The negative returns are especially disappointing in an up market given our focus on capital preservation.

The following table shows the results of the Balanced Fund over various time periods through December 31, 2007, along with the Blended Index^†, the S&P 500 (stocks) and the Lehman Brothers Intermediate U.S. Government/Credit Index (bonds).

Portfolio Review

We are running out of adjectives to describe the past few quarters. The results do not come close to meeting our standards or yours. We lost money on a few old favorites, and we have been too early on several new investments. The housing market continues to deteriorate, U.S. consumers are increasingly strained, and financial company woes are spreading well beyond subprime mortgages. In a tougher economy the fundamentals at many of our companies may well get worse before they get better.

Yet, if we have done our job well, the outlook is much more promising. Your Fund owns stocks that we think are cheap. One of our analysts, Peter Supino, recently dubbed them "cave" holdings. After describing a litany of current challenges, Peter concluded by saying "I want to take this stock plus six others and go in a cave for three years where nobody can take them away." A growing number of our holdings have the potential to double over our investment horizon. If a stock were to double in five years, it would deliver 15% annual returns. So we wait.

In the meantime, we have taken several steps to improve the risk-reward profile of the Fund. Fourth quarter highlights included:

• The sale of all of our Countrywide Financial stock. We concluded that other investments had comparable upside potential with much less risk. Countrywide was a costly and embarrassing experience, with the reputational black eye stinging nearly as much as the economic loss.


• The elimination of positions in Iron Mountain, Apollo Group and Corinthian Colleges when their stock prices traded above our estimates of business value.


• Initial purchases of two new stocks, Martin Marietta Materials and Bed Bath & Beyond. The former is an aggregates producer that complements our Vulcan Materials position. The latter is a best-in-class retailer of domestics merchandise and home furnishings.


• Additional purchases of several existing holdings at depressed prices, most notably Cabela’s, Comcast and Fannie Mae. These buys partially replaced stock sold in prior quarters at much higher prices.


• Sales of Treasury bonds as investors bid up the price of government securities in a flight to quality. We also modestly increased our holdings of high-quality mortgage-backed securities at acceptable yields.

The net effect of this activity on the Fund’s asset allocation was modest. Stocks represent 61% of assets, with the remaining 39% invested in bonds and short-term securities. Our fixed-income investments remain defensively positioned with short average lives and high credit quality. For the first time in quite some time, investors re-priced credit risk and began demanding higher spreads to hold riskier assets. We are watching with interest but have not yet felt compelled to act. If current credit trends continue, we may see more attractive fixed-income opportunities in the coming quarters.

The economy is softening, and investors are increasingly jittery. Financial and consumer stocks have been battered, and the malaise has spread to other sectors in recent weeks. The near-term uncertainty is creating opportunities. As sentiment shifts, more terrific businesses are trading at attractive prices. We like the current portfolio, are continuously working to upgrade it, and feel very good about the long-term outlook. Thank you again for your continued patience through a very tough year.

Regards,

Bradley P. Hinton
Portfolio Manager