Summit Investment Partners Portfolio Strategies in a Down Market

Investment Grade Markets

Gary Rodmaker, CFA           D. Scott Keller, CFA Portfolio Manager                 Assistant Portfolio Manager

The credit markets remain mired in one of the deepest slumps in many years. While its roots can be traced to the excesses of the housing market, the crisis has since spread to all sectors of the market. Massive credit losses on subprime mortgage securities have shaken the foundation of the global banking system, which in turn has engendered widespread risk aversion. Credit spreads have widened significantly over the last six months, as investors have fled credit-related products of all varieties in favor of the safety of treasuries. There are unmistakable signs that the economy is slowing, although it remains unclear whether the slowdown will result in a recession. Much of it depends on the housing market, the visibility of which is extremely limited right now. Until this outlook improves, the corporate credit market will likely continue to be characterized by wide spreads and poor liquidity. We have a cautious outlook on the corporate sector. We have increased the average credit quality of our mutual funds, and reduced exposure to credits that could suffer in a slowing economic environment. Despite our defensive posture, however, we are beginning to see more relative value opportunities in the corporate credit market than we have seen in several years. We view the spread widening as overdone in many cases and are taking advantage of this by purchasing high-quality, defensive credits at very attractive levels. One area in particular where we are beginning to see value is in the banking sector, which was one of the worst performing corporate sectors in 2007. We have been selectively increasing our exposure to this sector by identifying those banks who we believe have been unfairly punished by a market that has painted this sector with a very broad brush.

Mortgage-Backed Securities Markets

Mike J. Schultz Portfolio Manager

As we move into 2008, it is difficult to find many positives in the mortgage market.  The continued weak housing market, which does not appear likely to recover in the near future given the overhang of homes for sale, rising foreclosure rates and low affordability  is weighing very heavily on the mortgage sector and the entire fixed income market.  The continued poor performance of mortgage credit across a wide variety of sectors has contributed to the lack of liquidity and risk appetite of many market participants.  The uncertainty of the impact of legislation involving loan modifications and increasing loan limits for agency eligible mortgages also adds to this difficult environment.  Under this scenario, the subprime mortgage sector will continue to deteriorate along with other marginal sectors of the mortgage market. Even within this turmoil, Summit believes there are opportunities available to take advantage of wide spreads and distressed prices.  Recently, Summit increased the mortgage exposure in many of our mutual funds by purchasing agency pass-through securities to take advantage of the historic wide spreads in the sector.  While it is impossible to pick the bottom of the market, long term we believe the increased exposure will provide the potential for positive incremental returns to the funds.  Over the near term, we anticipate maintaining the overweight to the mortgage sector. Summit has historically invested in the prime, non-agency mortgage sector and has no plans to exit the sector due to recent market disruptions.  We believe our robust credit approach will continue to pay dividends in the long term.  While the subprime sector deserves to trade at distressed levels, many high quality mortgage securities are currently trading at distressed prices due to the problems in the subprime sector rather than on the underlying fundamentals. The Summit Funds have never had a significant exposure to the subprime market due to the credit characteristics of the underlying borrower and have no plans to increase our exposure to this sector.  Our approach to the non-agency market continues to focus on the upper tier of the mortgage market.  We anticipate spreads in the prime, non-agency sector improving later in 2008 and continuing into 2009. Overall Summit sees pockets of opportunities in the mortgage market for the patient investor who takes the time to thoroughly analyze the potential risks and rewards of individual securities.

High Yield Markets

Gary Rodmaker, CFA Portfolio Manager

The fourth quarter of 2007 was a difficult quarter for high yield investors.  Spreads continued to widen throughout the quarter and ended at their widest level of the year.  Liquidity remains poor in the marketplace, and many of the leveraged buyout (“LBO”) deals that investment bankers have underwritten have not been sold to the marketplace yet.  From a technical perspective, there is at least a six month supply of low rated LBO deals that have to come to market eventually.  We continue to believe that price is the only equalizer to break the current supply/demand imbalance.   Treasury rates declined materially during the quarter, as the flight to quality continued.  The 10-year Treasury rate ended the quarter at 4.02%, down 0.56% from September 30, 2007.  The 2-year Treasury rate dropped even further, declining 0.94% during the period, ending at 3.05%.  These events benefited the higher rated, BB-sector of the marketplace, and weighed heavily on the performance of the lower quality, CCC-rated sector of the market.  Using the Merrill High Yield Master II Index as a guide, BB-rated bonds provided a return of -0.54% during the fourth quarter, while B-rated bonds returned -0.77%.  CCC-rated bonds provided the worst return, at -3.40% during the quarter. Again using the Merrill High Yield index, the average spread over Treasuries closed the year at +592 basis points, which is the widest level in over four years.  Spreads widened about 170 basis points during the quarter.  The hardest hit sectors included retail, restaurant and anything consumer related, while sectors such as energy performed reasonably well.  The chart below graphically depicts high yield spreads over the last 20 years for BB-rated and B-rated securities. As one can see, spreads were particularly low from 2005 to mid-2007.  However, spreads are much more attractive at this point in time. Summit’s outlook on the high yield market remains neutral entering 2008.  After experiencing very tight/low spreads for the last few years, the marketplace is pricing risk more appropriately now.  The economy is slowing, and default rates should rise over the next year, after hitting 25 year lows in 2007.  However investors are getting paid for the risk that they are taking.  The current environment will present opportunities as dislocations occur in the marketplace.  Summit will attempt to exploit these opportunities as they arise in the near to intermediate term.  Summit’s overall strategy will continue to be to invest in higher quality bonds with intermediate maturities.  The focus will be on individual securities that provide the best relative value and total return opportunities.  Summit will continue to look for investments that have one or more of the following characteristics:  companies that have upgrade potential; asset coverage; debt reduction plans; strong free cash flow; and positive business fundamentals.

Large Cap Value Markets

James McGlynn, CFA Portfolio Manager

As a portfolio manager of large cap value portfolios, the market has been bearish since July 2007. At that time the market was up close to 9%, but markets declined for the value benchmarks and ended the year about break-even. In 2008 the bearish mood carried over as the indices were heading for a down 10% January before a huge rally ended January down around 5%. In August 2007, the market squarely focused on the subprime meltdown when the Federal Reserve cut rates to stave off a bankruptcy of Countrywide Financial. The latter half of 2007 consisted of rising energy prices battering the consumer and financial behemoths (Citigroup, Merrill Lynch, and Bear Stearns) firing their CEO’s for taking too many risks in subprime or other exotic financial instruments. The fear among many equity managers was that the Federal Reserve would not act quickly enough to restore confidence in the system and/or cut rates fast enough to re-liquefy the system of weakening balance sheets. In January 2008 the Fed finally responded to the “mayday” signal from the investment community by cutting rates between meetings, followed by another quick rate cut. The Nasdaq decline of around 20% since November was enough to set off many signs of panic in the market. Investor bearishness was very high and most economists were talking of a recession. These are signs of a lack of investor optimism or “benefit of the doubt.” When the Federal Reserve acts swiftly and fiscal policy sprinkles tax cuts among the population at the drop of a hat it appears that the markets should respond in spite of weakening economic fundamentals. I have said for months that the new Fed Chairman Bernanke will have to be tested as his predecessor was in 1987. Beginning in August 2007 the test began. Summit’s large cap value portfolios seek to always be diversified among sectors so that the economy doesn’t unduly hurt us versus our peers. Health Care names shone relatively while some other economically sensitive names were battered. But as painful as the market has been for seven months the benefit is that there are many attractive names to be purchased.

Large Cap Growth Markets

John N. Thompson, CFA Portfolio Manager

Summit’s Large Cap Growth Fund is currently underweight consumer discretionary and financial stocks. As a growth style manager, it is not unusual for the portfolios to be underweight financial stocks, as many industries within the sector are mature and grow more slowly. The consumer discretionary sector typically offers attractive growth opportunities; therefore an underweight position in that sector is more unusual. We are maintaining these underweights as a direct result of current and expected economic and market conditions. Initially brought on by a slowdown in the U.S. housing market, the economy has slowed significantly. As of the end of January 2008, expectations of a slowdown were fairly universal. However, some economists were calling for a slowdown and others were calling for a true recession. In both cases, after the economic pause, a recovery is generally expected in the latter half of 2008. We are taking a more cautious view of the economy. We view this slowdown, based on housing and tight consumer credit, as potentially more severe than a typical slowdown and one that could last longer than currently expected. While we have been underweight both consumer discretionary and financial stocks, their performance has been very weak, and our underweight stance has benefited the fund.  There have been short periods over the past several months where these sectors have rallied in anticipation of an economic recovery.  These rallies were short lived and we view increasing exposure to these sectors under the current conditions as premature. At some point in the future, adding to the sectors will be more appropriate. We are presently evaluating both the economy and market and looking for the opportunity to begin to reestablish positions. We are currently evaluating these and other sectors of the market for attractive stocks to own during an economic recovery. In the mean time, we are comfortable holding a larger than normal cash position as we continue our evaluation proces.

Disclosures A basis point equals 0.01%. Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income. The NASDAQ Composite Index is a market capitalization-weighted index that is designed to represent the performance of the National Market System which includes stocks traded only over-the-counter and not on an exchange.  You cannot invest directly in an index. As of December 31, 2007, of the securities mentioned, the Summit Everest Fund held Citigroup (1.75%) as a percentage of net assets.  Fund holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security. Past performance does not guarantee future results. 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 by calling 888-259-7565. Read it carefully before investing or sending money. Mutual fund investing involves risk. Loss of principal is possible. The Summit Everest Fund may invest up to 20% of its assets in financial futures contracts and options, and stock index futures contracts and options involve additional risk. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for long-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in mortgage-backed securities may involve additional risks, such as credit risk, prepayment risk, possible illiquidity and default, and susceptibility to adverse economic developments. The Merrill Lynch High Yield Master II Index is an index of corporate domestic and Yankee high-yield bonds. Issues included in the index have remaining maturities of at least one year, have a credit rating lower than BBB-Baa3, and are not in default. Opinions expressed are those of the Portfolio Managers and are subject to change, are not guaranteed and should not be considered investment advice. The funds are distributed by Quasar Distributors, LLC. (02/08)