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June 30, 2008

As the second quarter ended, the domestic equity markets were revisiting the lows set in March. Surging increases in the cost of energy continued to drain consumer strength and confidence and call into question forward estimates of corporate profitability. Renewed concerns about the strength of the financial system also pressured the market, as the adequacy of banks' capital reserves were scrutinized amidst a still weakening real estate market. These are only the headline issues. The current environment is extraordinarily complex and remains quite dangerous, so identifying simple investment themes to comfortably and profitably exploit is a challenging goal.

The good news for the Core Model is continued portfolio stability to date with a small gain in value for the quarter. We have thus far weathered the upheavals by continuing to implement a strategy built around uncommonly broad asset class diversification complemented by targeted short positions. Our objective is to identify areas of relative strength amidst the turmoil that may contribute to diversification in the short run and become strong growth opportunities when the market ultimately turns higher.

In that regard, we have maintained a strong and profitable allocation to gold and precious metals for several years, and we feel there is further upside potential for numerous fundamental reasons. Alternative energy has sharply corrected after a strong performance in late 2007, but we believe this sector holds significant opportunity moving forward. More recently, we began early in the year building a position in an exchange-traded fund comprised of water related stocks, which have demonstrated much greater strength than the broad market coming off the March lows. We have also rotated some of our capital into mid-cap growth for the upside potential we anticipate in a market rebound. As the quarter ended, we began an allocation to health care, which is beginning to show stability on a relative basis and appears positioned for long term growth.

The foreseeable future could be a grind as the economy works through a daunting set of problems while the markets appear to be conclusively trending lower in the intermediate term. Although our task in times like these can be laborious, we are optimistic about the degree of profitability that may lie ahead if we handle this period well. While working to limit risk, we will seek good risk/reward opportunities as we continue to manage for relative stability in the short run and strong total returns over the longer term.

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The S&P 500 reached an all time closing high on October 9, 2007. From that point, through June 30, 2008, the price had dropped 18.22%, and the value on a total return basis, after adjusting for dividends, had dropped 16.13%. Other broad domestic equity indices performed similarly.

During this same period, the Verity Core Model composite total return was only slightly below break- even at -1.03%.

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Beginning conclusively in June, 2007, the unusually tame domestic equity market conditions of recent years gave way to a dramatic increase in volatility. Given the objectives of the Core Model, a review of its response to this surge in volatility may provide insight into the effectiveness of its strategy in meeting those objectives over the particular period being reviewed.

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