The Buckingham Report

Dear Shareholder:

On January 2, 2007, the Al Frank Fund (VALUX) began its 10th year of operation. Despite the milestone, long-time shareholders will note that little has changed in this annual missive. And that’s because so little has changed with our investment strategy. Oh sure, we are always trying to perfect our stock selection methodology, but for more than nine years we have simply gone about the business of applying our time-tested strategy of consistently buying and holding broadly diversified portfolios of undervalued stocks for their long-term appreciation potential.

Even though you’ve heard us beat this drum before, we encourage you to read the paragraphs below in order to better understand your existing and/or potential new investment in both our flagship Al Frank Fund and our younger Al Frank Dividend Value Fund. We know that many people are concerned solely with performance, and that’s precisely why you should fully understand the methodology that’s behind our solid long-term returns.

Let’s talk about setbacks—something we’ve never been shy about doing. We know that more than a few Al Frank Fund (VALUX) shareholders have only recently come on board, drawn to our market-beating 5-year and life-of-fund performance figures, but it must be pointed out that those gains were hardly linear in nature, as there have been ups and downs along the way. Alas, we are also not always able to beat the benchmarks in the short run, but those who have remained patient have generally been rewarded in the fullness of time.

And we can’t repeat it enough. Please, please, please think long-term, as we are buying and holding our undervalued stocks not for what they may do next week, next month or even next year, but for how we expect them to fare over the next three-to-five years, if not longer. We want you to enjoy the potential rewards – and the tranquility – that can accompany a long-term investment philosophy.

The table below documents the performance numbers to which I keep referring. Of course, despite the fine long-term returns, we realize that many shareholders will continue to try to time their purchases and sales of our Funds. Sadly, we recognize that quite a few short-term oriented folks have lost money investing in our Funds, even as both are priced near their all-time highs as of this writing. It’s worth pointing out that rather than contemplating a sale, I have utilized periods of poor performance to add to my holdings in our Funds, a strategy also employed by many of our long-time shareholders. I mention my commitment to the Funds as just one more example of the confidence we have in our philosophy. Yes, our own money is on the line, right next to yours.

While I recognize that VALUX and VALDX are classified as Small- to Mid-Cap Value Funds, I remind shareholders that we are never constrained by asset allocation style boxes. Take a look at the Top 10 Holdings (as a percentage of total assets on December 31, 2006) of each Fund to see what I mean. In VALUX, CSX, Marathon Oil and Washington Mutual sport market capitalizations of more than $15 billion, not exactly small-cap, while in VALDX, companies like American Eagle Outfitters, Hewlett Packard and Int’l Game Technology could be considered more growth oriented as opposed to value-based.

Fund holdings are subject to change and are not recommendations to buy or sell any security.

We are style agnostic—we seek bargains wherever they reside. If Blue-Chips are cheap, we buy them. If technology stocks are undervalued, we snap them up. We believe that limiting our investment universe by market-cap or value-versus growth distinctions likely will only serve to limit our returns. Generally speaking, mid- and large-cap stocks have become more attractive on a relative basis these days, especially as small-cap stocks have performed well, so new purchases in those areas are moving the median market capitalizations of both of our funds higher.

Given this ‘go-anywhere’ style, it is not unusual for our returns to differ materially in the short run from those of the major market averages. For example, we are well aware that performance in 2006 generally did not compare as favorably with the Russell 2000, S&P 500 and Wilshire 5000 indices, even as in 2005 we beat those benchmarks on average by a sizable percentage. Obviously, quarterly and annual performance is important, but our focus has always been on absolute returns over multi-year periods, an emphasis that has led to our superb long-term track record.

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Given that both of our Funds are broadly diversified, one or two winning or losing stocks do not make or break performance and, as is generally the case, in 2006 favorable earnings comparisons powered the winning stocks while disappointing results drove the losers lower. VALUX benefited in 2006 from strong gains in: energy stocks, like Holly Corp, Marathon Oil and Oceaneering Int’l; commodity stocks, like OM Group, Phelps Dodge and US Steel; retail stocks, like American Eagle Outfitters, J.C. Penney and Steven Madden; technology stocks like Lam Research, Nvidia and THQ Inc.; economically sensitive stocks, like Air France, Ameron International and CSX Corp; and other stocks, like travel services concern Ambassador’s International, diagnostic product maker BioVeris, defense giant Lockheed Martin and tobacco titan Reynolds American. Also helping performance were buyout offers received for Aleris International, Applica, Giant Industries, Inco, Maverick Tube, Midwest Air Group and RSA Security.

VALDX was powered higher by some of the same VALUX stellar performers such as Ambassador’s International, American Eagle Outfitters, Ameron International and Marathon Oil, but also by BellSouth, Empire Resources, Goldman Sachs, Insteel Industries, Nucor and OfficeMax. There were only a handful of acquisitions in VALDX, with a buyout offer for Sabre Group providing the biggest boost to 2006 performance. Of course, not all of our picks were winners. In 2006, VALUX was held back by big losses in Advanced Micro Devices, Beazer Homes, Forgent Networks, Hovnanian Enterprises, KB Home, Optimal Group, Orbit International, Peerless Systems and PXRE Group. In VALDX, AdTran, Beazer Homes, Nam Tai Electronics, PXRE Group Ltd., Standard Pacific and Wellman were among the largest losers. Interestingly, many of these same stocks contributed to our outperformance in 2005, so we can’t complain too much about our overall experience with the groups.

Remember, however, that our largest holding in either Fund is only slightly greater than 1%. So, we don’t necessarily need to agonize over individual losers—our historical experience has proven that our winners win more than our losers lose. We believe our excellent long-term returns are proof that our time-tested approach works and we will always happily take the bad with the good. Make no mistake—we are always working to improve our research, but the same fundamental analysis that gave us the top performers also led us to the laggards.

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Those who are familiar with our investment approach are likely well aware that we remain very optimistic about the prospects for the securities we hold in our Funds. The reasons for our enthusiasm regarding stocks have changed little. For example, the supply of shares in the U.S. is shrinking as stock buyback activity remains robust and mergers and acquisitions continue to be all the rage, especially with private equity shops. In fact, TrimTabs Investment Research calculated that in 2006 the value of shares outstanding fell by some $600 billion, or 3.1% of the U.S. markets’ total value. Since money available to invest is not in decline, simple laws of supply and demand come into play.

Valuations also remain attractive. Though today’s P/E ratio of 16.4 on the S&P 500 is about average for this metric dating back to the 1930s, a reading of 20 has been the norm since 1988. More interesting, the earnings yield (the inverse of the P/E ratio) of 6.1% on the S&P 500 is still well above the 4.8% yield on the 10-year Treasury, meaning that stocks remain cheap relative to the benchmark government bond. And current forecasts call for S&P 500 profit growth of 8% in 2007, which would be very healthy by historical standards, though it would be down from the double-digit percentage growth rates seen over the past several years.

Clearly, the strength of the U.S. economy and the actions of the Federal Reserve remain wildcards. Still, conditions seem to be just about right for those bullish on equities. Certainly, things can change quickly, but the data in recent weeks generally remain not-too-hot to cause the Federal Reserve to further tighten monetary policy, nor not-too-cold for the economy to slip into recession and for corporate profit growth to dramatically slow. Recent comments from Ben Bernanke & Co. in support of the decision to leave the fed funds rate at 5.25% in January defend the argument. The Fed said, “Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.”

The Commerce Department also recently disclosed that U.S. GDP growth came in at a better-than-expected 3.5% in the fourth quarter thanks to strong consumer spending that helped offset weakness in the housing and automotive sectors. In addition, the latest jobs numbers from the Labor Department confirmed that the economy is in decent shape as non-farm payrolls increased 111,000 in January after growing a revised 206,000 in December and 196,000 in November. The unemployment rate rose to 4.6% from 4.5% and average hourly earnings climbed just three cents, or 0.2%, to $17.09.

Almost as important, these economic reports did little to stir fears that inflation was picking up. Consumer prices rose at an annualized rate of 1.5% in Q4, while prices excluding volatile food and energy increased at an annualized 2.1% rate. Also, the Labor Department reported that its employment cost index, a measure of compensation that includes salaries and benefits, increased less than had been expected, inching up 0.8% in Q4 and 3.3% for the year.

The Fed is always on inflation watch, hence the second sentence that suggests interest rates are not likely to be cut anytime soon, but we did like this portion of their January statement: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.”

Obviously, we do not know what the future will hold and we must always be concerned about the geopolitical landscape. Nevertheless, we remain as optimistic as ever, even as we are well aware that the markets are always susceptible to a short-term correction. Of course, we would view any sell-off as a buying opportunity, especially since we are now in the statistically auspicious third year of the presidency.

Certainly, we recognize that media pundits will continue to find plenty to worry about, but with our broad diversification and emphasis on out-of-favor stocks, we have every expectation that our Funds can continue to perform well over the long-term. Of course, we can never forget that market data dating back to the 1920s from Ibbotson Associates shows that equities in general have historically returned 10% to 12% per annum, with stocks trading for inexpensive fundamental valuation metrics (low price to book value ratios) performing even better.

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We constantly strive to educate our shareholders and prospective shareholders about our approach and the merits of thinking long-term. While many are already receiving our philosophical musings via their subscriptions to The Prudent Speculator newsletter, we encourage those who are not subscribers to visit www.alfrankfunds.com/ar06 for additional information and to sign up for our free Buckingham Report service. Knowledge will give you confidence, and confidence can help deter you from making rash investment decisions when the going gets tough. Those moments of uncertainty could cost you dearly, so our goal is to provide you with the information you need to confidently ignore the inevitable bumps in the road. We want you to think twice before redeeming, and the Buckingham Reports just might encourage you to stay the course or even add to your holdings.

And speaking of adding to holdings, I have done just that for my own retirement account and for my daughter’s college fund. It bears repeating: Our money is invested right beside yours. We’re very much in this together, which is why all of us at Al Frank Asset Management appreciate the patronage of our long-term oriented shareholders. And we continue to be guided by the motto, “In order to turn ordinary into extraordinary, you put in the extra.” On that note, it’s back to work for me.

Sincerely,

John Buckingham

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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 888.263.6443, or visiting www.alfrankfunds.com. Read it carefully before investing.

Opinions expressed are those of John Buckingham, which are subject to change and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Mutual Fund Investing involves risk, principal loss is possible. Investing in securities of small and medium-capitalization companies involves greater price volatility than large-capitalization companies.

While the funds are no-load, management and other expenses still apply. Please refer to the prospectus for further details

Investment performance reflects voluntary fee waivers. In the absence of such waivers, total returns would be reduced.

The S&P 500, Russell 2000 and Wilshire 5000 are unmanaged indices commonly used to measure performance of U.S. stocks. The S&P 500 invests primarily in large-cap stocks; the Wilshire 5000 invests primarily in small-, mid- and large-cap stocks; and the Russell 2000 invests primarily in small-cap stocks. You cannot invest directly in an index. P/E Ratio is the current stock price divided by the earnings per share. Price to Book Value Ratio is the current stock price divided by common stockholders’ equity per share.

The Al Frank Funds are distributed by Quasar Distributors LLC. (3/07)

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About Al Frank Asset Management

Al Frank Asset Management, Inc. (Al Frank) is an Investment Adviser, registered with the Securities & Exchange Commission, is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser for individually managed accounts and two value-oriented no-load proprietary equity mutual funds.

Al Frank is committed to assisting our customers build wealth. We strive to be a leading resource for value-based investor information in the financial community, where we combine our simple, time-tested philosophy of buying under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.

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