The Sound Mind Investing Fund (SMIFX) follows an investing strategy called Upgrading. We continually monitor and rank thousands of mutual funds by type in order to determine which ones have been performing the best recently. We purchase those funds showing superior performance relative to their peer group, and hold them until they stop outperforming. When that occurs, they are sold and replaced with other funds showing stronger recent performance.

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 Sound Mind Investing Balanced Fund
SMILX

The SMI Balanced Fund (SMILX) was created to help further simplify the task of implementing the Upgrading strategy within a balanced portfolio of stocks and bonds. Whereas the flagship SMI Fund (SMIFX) is allocated 100% to stock investments, the SMI Balanced Fund (SMILX) provides the convenience of professionally-managed stock and bond investing all within a single product.

The SMI Balanced Fund's portfolio will normally be allocated roughly 60% to stocks, 40% to bonds and other fixed-income products. (The managers do have the flexibility to alter this allocation; see the prospectus for details.)

The stock portion of the portfolio will be managed using the same Upgrading methodology as the SMI Fund (see above section), though the specific underlying stock funds owned by SMIFX and SMILX may differ due to the timing of fund flows as well as the varying diversification needs of each fund.

The bond portion of the portfolio will be managed by Reams Asset Management Company,* one of the nation’s premier bond management teams. Hiring another firm with specific expertise in a particular area is a common practice in the mutual fund industry. This hired firm is called a Sub-Adviser and their fees come out of the published management fee collected by SMILX.

The Sub-Adviser is limited in its ability to place trades to monies that have been specifically segregated into a separate "Bond Account" by the managers of SMILX. The managers of SMILX also review and reconcile the trading activities of the Sub-Adviser each day. This arrangement allows SMI Advisory Services to provide the services of a premier bond management team to the bond portion of the SMILX portfolio.

Combining Upgrading on the stock side of the portfolio with the professional management of Reams Asset Management on the bond side creates what we believe to be a formidable pairing. Best of all, this total portfolio management solution is conveniently available to investors through the purchase of a single fund — The SMI Balanced Fund.

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Reaching Your Target Allocation Using SMIFX & SMILX

The table below is provided to help potential investors determine how to use SMIFX and SMILX in arriving at their preferred stock / bond portfolio allocation.

1. The table is set up using a hypothetical $100,000 portfolio. To convert these numbers for use with your personal situation, simply divide the total you wish to invest by $100,000. This will provide you with a "multiplier." For example, a $350,000 portfolio would have a multiplier of 3.5 and a $60,000 portfolio would have a multiplier of 0.6.
2. Select the row that most closely matches your target stock/bond allocation.
3. Multiply each dollar amount in that row by the multiplier you just calculated. The resulting values are your targets. They show how much to invest in SMIFX and SMILX (& other bond funds, if needed), to most closely arrive at your target allocations.

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