Fund Facts
For 1997, shareholders designated the following charities
AIDS Services of Austin
Alzheimer's Association
American Cancer Society
American Heart Association
Animal Trustees of Austin
Arthritis Foundation
Austin Sunshine Camp
Austin YMBL Sunshine Camps
Boy Scouts of America
Brenham Christian Academy
The Columban Fathers
Compassion International
CrossPointe Church
Cystic Fibrosis Foundation
Family Violence Project
Faith Home for Babies with AIDS
Forgotten Children's Fund
Habitat for Humanity
Harvard Law School Fund
Hilo Salvation Army
The Home Care Program/MSKCC
Make-A-Wish Foundation
MD Anderson Children's Art Project
Medical Institute for Sexual Health
Methodist Children's Home
National Cancer Institute
National Kidney Cancer Association
Nature Conservancy of Tennessee
Nevada SPCA
Northwest Hills United Methodist
People's Community Clinic
Rapheal Free Clinic
Red Cloud Indian School
Salvation Army
San Diego Historical Society
SOVA Food Pantry
St. Michael's Academy
Texas Baptist Children's Home
Union Station
United Way of the Flint Hills
Wesleyan Homes Alzheimer's Care
Women Helping Women
? Who is one of the largest individual shareholders? Your manager, Mark
Coffelt.
? Need a prospectus and other information for a friend? Call 1-888-839-7424.
? Have questions about your account? Call the Transfer Agent at 1-800-628-4077.
? Have a question for your portfolio manager?
Call (512) 458-8165, or (800) 880-0324. Ask for Mark or Eric.
? Daily NAV. Call (512) 302-6099.
? Roth IRA's are now available. Call 1-888-839-7424 for a kit.
1
Fellow Shareholders,
The Net Asset Value of the Value & Growth Portfolio for the period ending
December 31st, 1997 was $16.66, after our $.88 distribution of capital gains
for the year.
For the year of 1997, your Fund was up 45.5%, making it the 7th best
performing growth fund out of 928 growth funds in the country, according to
Lipper Analytical Services, Inc., a mutual fund research organization1. We
performed exceptionally well against the Russell 2000 Index, up 22.4% for the
year, which is representative of how your Fund is invested, and against the S&P
500 Index, up 33.4% for the year.
<TABLE>
<CAPTION>Period The Fund2 Russell 2000 S&P 500
<S> <C> <C> <C>
Last Quarter -0.6% 1.8% 2.9%
Last 12 Months 45.5% 22.4% 33.4%
Since Inception
(annualized) 32.3% 20.4% 28.7%
</TABLE>
Of course, you know the old caveat, past performance may not be indicative of
future results.
Commentary
If you recall our letter at the end of last year, we noted that we dont
predict the future, because it simply cant be done. Were not about to start
this year. But as we write this letter, pessimism about stocks is higher than
it has been for
[FN]
1 Lipper rankings as of December 31, 1997.
2 After payment of the maximum 4.5% sales charge, the Fund return for the last
quarter, last 12
months, and since inception would be 5.1%, 39.0%, and 29.5%, respectively.
Value & Growth Portfolio
2
awhile, which brings us to the core question of this commentary Is the
pessimism justified?
We think a part of investor's pessimism stems from the market's unusual
volatility. However, unusual it isnt. Stocks have always been volatile.
Until recently, stocks have enjoyed both robust returns and smooth sailing.
What looks unusual today is really the history of the market.
Will the market continue to be as good as it has been? Probably not.
Nonetheless, stocks are the only vehicle we know where the investor can double
his money every five to ten years. The ride may be rougher, but that still
sounds pretty good to us. But, ask the pessimists: How can you have another
good year in 1998 after already having three good years?
At the beginning of 1997, the experts predicted that stocks in 1997 would
probably not do well. After two years of stellar returns in 1995 and 1996,
they
said there had never been a third year of high returns following two good
years. The experts knew their history. Yet, had you based your investment
strategy on those predictions, you would be poorer today for it.
The Asian Contagion
Then there is Asia. The pessimists refrain is: This time is different.
They may well be right. The problems of Asia are a legitimate concern.
But, should you lose sleep over Asia? We dont think so, at least in relation
to the investment in your portfolio, for a couple of reasons:
? Your portfolios small-cap focus should insulate it from problems that
companies with significant exposure to Asian markets might experience.
? Asia has financial problems, but so did Texas in the late 1980s. It was
tough in Texas, but we dont recall the problems here severely
impacting the U.S. economy or the U.S. markets.
3
There is no place like home.
We looked at how exposed your stocks were to the international economy.
As of December 31st, on average, the companies in your portfolios derived
approximately 20 percent of their revenues from outside the United States and
Canada. Compared to the 42 percent average exposure for the companies that
comprise the Dow Jones Industrial Average, your portfolio looks safer than
most, in terms of International and Asian exposure. The U.S. continues to
provide an exceptional economic environment. So is the pessimism justified?
Maybe, but not for the stocks in our portfolio. Dorothy from The Wizard of
Oz had the right idea, There is no place like home.
Asia Looks Like Texas
They dont wear cowboy boots, but Asia looks a lot like Texas to us. The
Korean market is currently experiencing banking defaults not unlike the savings
and loan company defaults in Texas in the 1980s. From what we can read,
there are real problems. But then Texas had real problems too. We know of no
banks in Texas with the same name for the last ten years cause there arent
any. Yesterday, it was the Resolution Trust Corporation that closed banks and
liquidated assets. Today, it is the International Monetary Fund. We suspect
that the Texas economy was both larger and certainly more significant to the
United States than are most Asian economies today. So is the pessimism
justified? Texas and the U.S. made it through their crisis; The Asian
countries and the world will make it through this one. While this is not the
area on which we focus, we suspect the investment opportunities in these markets
will be substantial in the next few years.
4
The Glass is at Least Half Full
Weve discussed reasons not to be pessimistic. We also think there are at
least two reasons for optimism:
? Relative to the S&P 500 and the Dow, the stocks your portfolio holds
are substantially cheaper and have better earnings prospects going
forward. That doesnt guarantee better performance, but it strikes us as
a pretty good head start.
? We appear to be one of a very small number of managers that stick to a
highly disciplined, quantitative strategy. We see no reason to believe
that what has worked in the past will cease working in the future, since
your portfolio does not rely on strong market performance.
Ferrari Under the Hood
The markets are high. Clearly, richly valued markets add to the risk of
investing as well as reduce the return. But your portfolio is cheaper than
most. Your portfolio has had, and continues to have, some of the cheapest
valuations around cheap being defined as a portfolio of stocks with low
Prices-to-Earnings, low Prices-to-Book Values, and low Prices-to-Cash Flow.
Why is this important? In the most recent CFA Digest, there are two
abstracts of articles from the Journal of Portfolio Management, and the Journal
of Finance. Both articles seek to explain the superior performance of value
stocks, the kind of stocks we hold in your portfolio, over growth stocks.
Reading some of these articles is a bit like trying to understand the dynamics
of the internal combustion engine. We wont bore you with the details. All
you need to know is that with value stocks, your portfolio has a Ferrari under
the hood.
5
Rational Investing in an Irrational World
Up or down, volatile or not, the most compelling reason to be optimistic
about your portfolios future is this: we follow a highly disciplined,
investment strategy. The more other investors are irrational, the more
opportunities we have to buy undervalued, or sell overvalued stocks. Others
irrationality pays off for us. That is really what value investing is all
about buying in the midst of pessimism, and selling in the midst of optimism.
So even if we are wrong, and the markets go crazy, that plays to our strengths.
We think the best response for every investor is to stay invested, just as we
do in the management of your portfolio. Eighty percent of the time, the market
goes up. That alone gives you pretty good odds for success. More importantly,
we have never in our experience seen anyone who has the ability to distinguish
between those periods when the market will be going up and those periods when
the market will be going down. We certainly cant make that distinction.
In an uncertain world, there is one thing of which you can be certain: We
are going to keep our focus on buying undervalued stocks, company by
company. That is what we do best. We are not going to worry one wit about
the markets, or Asia, or politics, or whatever, because it adds no value to the
investment process. We hope our letter this quarter gives you the perspective
to do likewise and stay put.
Respectfully submitted,
Mark A. Coffelt, CFA
<TABLE>
<CAPTION>
S T O C K P R I C E S R E L A T I V E TO
Earnings Cash flow Book value
<S> <C> <C> <C>
Value & Growth Portfolio 18.9x 12.6x 2.6x
Avg Small Value Fund 21.5x 14.0x 3.0x
Avg Small Growth Fund 32.7x 25.2x 5.4x
S&P 500 Index 27.1x 17.7x 6.1x
<FN>
All Ratios from Morningstar Mutual Funds December, 1997
</TABLE>
6
<TABLE>
<CAPTION>
Short-Term Principal Issues Market As % of
Investments-2.3% Amount/Shares Value Net Assets
<S> <C> <C> <C> <C>
$675,021 Bank of Boston
Repurchase Agreement $675,021 2.4
<FN>
(5.00% due 2/15/99 & 5.50% due
12/31/00 Collateralized by U.S.
Treasury Notes)
<CAPTION>
Common Stocks 98.6%
<S> <C> <C> <C> <C>
Agriculture 24,100 Universal Corp. 860,487 3.1
Apparel 22,400 Tommy Hilfiger 854,273 3.1
67,700 Farah Inc. 355,425 1.3
1,209,698 4.4
Automobile Parts 41,900 Standard Products 1,073,688 3.9
13,500 Superior Industries 361,969 1.3
1,435,657 5.2
Building Materials 37,900 LaFarge Corp. 1,120,419 4.0
26,900 Medusa Corp. 1,150,539 4.1
2,270,958 8.1
Computer Products 37,800 Sequent Computer* 756,000 2.7
35,100 Stratus Computer* 1,327,219 4.8
41,100 Western Digital* 660,169 2.4
27,700 Symantec 592,313 2.1
3,335,701 12.0
Diversified 56,800 Katy Industries 1,157,300 4.2
7
Electronics 6,500 Dynatech Corp.* 304,688 1.1
6,200 Pioneer Elect. 1,090,332 3.9
1,395,020 5.0
Financial Services 52,400 Money Store 1,113,500 4.0
Furniture 24,500 La-Z-Boy 1,056,563 3.8
42,200 Kimball Int'l. 778,063 2.8
1,834,626 6.6
Homebuilding 67,900 Standard Pacific 1,060,938 3.8
Hotel/Gaming 22,700 Anchor Gaming 1,376,244 4.9
Insurance 28,000 Nac Re Corp. 1,352,750 4.9
Machinery 23,600 Gleason Corp. 635,725 2.3
Maritime 21,900 Sea Containers 700,800 2.5
Medical Supplies 42,700 U. S. Surgical 1,251,644 4.5
Metal Fabricating 16,300 Oregon Metallurg.* 544,013 2.0
Recreation 13,700 Callaway Golf 391,306 1.4
Recr. Vehicles 87,500 Winnebago 776,563 2.8
Restaurant 24,000 Applebees 433,500 1.6
8
Retail 11,000 Ross Stores 400,125 1.4
60,600 Burlington Coat 996,113 3.6
1,396,238 5.0
Security Brokerage 31,700 Advest Group 782,594 2.8
26,000 Lehman Bros. 1,326,000 4.8
2,108,594 7.6
Trucking 48,700 Werner Enterprises 998,350 3.6
Total Common Stocks 27,485,900 98.6
(Cost $27,483,138)
Total Investment
Portfolio 28,160,921 101.0
Other Assets
Less Liabilities -277,750 -1.0
Net Assets - 100% 27,883,171 100.0
<FN>
*Non-Income Producing Security
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS (ANNUAL REPORT)
