Upgrading is based on research indicating that, as economic conditions change, market leadership rotates among companies of different sizes, and among different investment approaches. While market conditions are constantly changing, fund managers rarely change their approach. Managers that excel under one set of market conditions often are only average (or worse) under a different set of conditions. Rather than buy a fund and hold it through both the periods that favor the manager's approach and the periods that don't, Upgrading attempts to seek out and buy those funds that are excelling right now.

We make no attempt to predict which funds will lead the market in the future. Instead, Upgrading helps us to gradually move into funds that reflect the market's continually evolving leadership. While most investment approaches focus on long-term performance as the key to determining which mutual funds will succeed in the future, we believe the opposite is true. Research has shown that funds exhibiting superior performance in recent months tend to continue to perform well in the following months. As a result, we focus only on returns over the past 12 months in determining which funds are the best candidates for ownership. This approach to selecting new funds, coupled with a strong selling discipline, is the key to the Upgrading strategy.

The Fund typically invests in underlying funds in the following categories: small- to mid-cap growth, small- to mid-cap value, large-cap growth, large-cap value, and international. These broad category definitions make a wide range of investment opportunities available to the Funds, while still maintaining some measure of diversification among underlying funds focused on various types of investments. It also provides a measure of asset class diversification, as the Fund owns a mixture of foreign and domestic investments at any given time, as well as a mixture of funds that invest in both larger and smaller stocks. In addition, the Fund benefits from diversification among various management styles (i.e., "growth," "value," and other management styles). As a fund-of-funds following this approach, the Sound Mind Investing Fund offers a convenient way to purchase multiple leading mutual funds from across the major stock asset classes through a single investment.

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The SMI Managed Volatility Fund (SMIVX) uses the exact same Upgrading approach described above, but then adds an additional component that distinguishes it from SMIFX. In addition to investing in mutual funds, the SMI Managed Volatility Fund also invests in securities that will tend to go down in value when the fund holdings are going up, and will tend to go up in value when the fund holdings are going down. This "hedge" acts as an insurance policy of sorts: when the market goes down and the underlying Upgrading funds perform poorly, the hedging component should prosper, helping the Fund lose less money overall than it would otherwise. But this insurance comes at a cost — when the market goes up and the underlying funds perform well, the insurance hedge will likely lose money and drag down performance a bit. In short, the hedging component of the portfolio is likely to reduce gains in a strong positive market, but also reduce losses in a declining market. That's how the Fund attempts to manage the volatility of this Upgrading portfolio.

In an attempt to lower the Fund's volatility compared to broad U.S. equity markets, the Fund engages in short sales in an attempt to dampen the impact of movements in the equity markets. We believe our hedging strategies are likely to both lower the Fund's volatility and reduce its correlation to the broad U.S equity markets, as compared to traditional domestic equity investments. The managers may adjust at any time the amount of hedging taking place. See the prospectus for additional detail and examples of the type of hedging the SMI Managed Volatility Fund uses.

If the details and jargon of "hedging" seem a bit complex, here's a simple way to understand what the two SMI funds intend to do. SMIFX is a pure Upgrading fund. SMIVX takes that pure Upgrading approach and tries to minimize the ups and downs by adding some portfolio insurance. For investors who want to take advantage of the Upgrading strategy but would rather take a more conservative approach to it, SMIVX may be an appealing choice.

Note that the underlying funds owned by SMIFX and SMIVX may differ. These differences are due to the timing of money flowing in and out of the funds. For example, SMIFX could receive new money to invest and determine that "Fund 1" is the best choice to purchase. Later, SMIVX may receive new cash, but by then "Fund 2" may be the best available choice, rather than Fund 1. As a result of this sort of cash flow variance between SMIFX and SMIVX, the two funds don't always own the same underlying funds despite the fact that both follow the same Upgrading philosophy.

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