The Buckingham Report

Recognizing that many of our shareholders have only recently purchased their stakes in The Al Frank Fund and/or The Al Frank Dividend Value Fund, we offer the friendly reminder that we are buying and holding stocks based on their prospects for long-term, three-to-five year capital appreciation, not for how they may perform over a week, month, quarter, or even half-year. We are thus never overly concerned with interim returns as we will not alter our disciplined investment philosophy based on short-term fluctuations. It has been this strict adherence to our value-based approach, we believe, that has been responsible for our long-term results.

We know that more than a few Al Frank Fund shareholders have been drawn to our market-beating 3-year, 5-year and life-of-fund performance figures, but it must be pointed out that those gains were not achieved without any setbacks. For example, The Al Frank Fund was down as much as 8.83% at one point in 2005, yet closed the year with a gain of 11.06%. And, we can’t forget that after a rough time in 1998, the Fund roared back to return 60% in 1999, and that after dismal returns in 2002, The Al Frank Fund soared 78% in 2003. Not once during those difficult periods did we waver from our time-tested approach of buying and patiently holding undervalued stocks. In fact, some of the very same stocks that created the lousy returns were responsible for the tremendous recoveries!

Certainly, we are well aware that the performance of both The Al Frank Fund and The Al Frank Dividend Value Fund over the first half of 2006 have been below their historical returns, just as has been the performance of the market benchmarks to which we have been traditionally compared. We aren’t trying to make excuses, but sky-high energy prices, a slowdown in the housing market, mixed data on inflation and the strength of the U.S. economy, several more quarter-point increases in interest rates from the Federal Reserve, fears of slowdown in corporate profit growth, new trouble in the Middle East and a fresh terrorist scare are all factors negatively influencing stock prices so far in 2006.

Nevertheless, with interest rates remaining low by historical standards, corporate balance sheets still flush with cash, merger & acquisition activity going strong, the Federal Reserve likely nearing the end of its tightening cycle and valuations on many stocks approaching their cheapest levels in the last two decades, we can’t help but be optimistic about the future.

And speaking of valuations, consider data gleaned from the web site of Standard & Poor’s Investment Services (click here and here for the latest S&P data) in regard to the widely-followed S&P 500 Index. Since 1996, the average Price-to-Earnings ratio (P/E) based on operating earnings has been 22.5 and since 1988, the average P/E has been 19.7. Today, the P/E is 15.5 and on a forward-looking (next-12-months) basis, it drops to 14.7. Some may argue that stripping out non-recurring items by simply using operating earnings is a bit unfair, so S&P also calculates P/E ratios on an ’as-reported’ basis. Looking at the numbers in this manner shows an average as-reported P/E of 27.5 since 1996 and an average P/E of 23.2 since 1988. Today, the figure stands at 17.0 on a trailing-12-month basis and 15.0 on a forward basis. Clearly, stocks appear to be cheap relative to where they have traded in the past two decades, though I do concede that they are less undervalued when one looks at the average P/E on the S&P 500 of 15.7 since 1935.

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 the first half of 2006 favorable earnings comparisons powered the winning stocks while disappointing results drove the losers lower. The Al Frank Fund has benefited this year from strong gains in: energy stocks like Holly Corp, Oceaneering Int’l and Valero Energy; commodity stocks like Aleris Int’l & Archer Daniels Midland; technology stocks like Diodes and Lam Research construction-related stocks like Ameron Int’l; aerospace stocks like LMI Aerospace; transportation stocks like CSX Corp, retail stocks like American Eagle Outfitters and apparel & footwear stocks like Steven Madden. Also helping performance were buyout offers received on Applica, Inco, Maverick Tube and RSA Security.

The Al Frank Dividend Value Fund was powered higher by some of the same Al Frank Fund stellar performers such as American Eagle Outfitters, Ameron Int’l, Archer Daniels Midland, CSX Corp and Valero Energy, but also by American Ecology, Empire Resources, Insteel Industries, Kerr McGee, NuCor & Trinity Industries.

Obviously, not all of our picks were winners. In the first half of 2006, The Al Frank Fund was held back by Beazer Homes, D.R. Horton, Forgent Networks, Hovnanian Enterprises, KB Home, Optimal Group, Orbit Int’l, PXRE Group, Ryland Group and United Healthcare. In The Al Frank Dividend Value Fund, AdTran, Beazer Homes, D.R. Horton, KB Home, Lennar Corp, PXRE Group, Ryland Group, Standard Pacific, Talbots and Wellman were among the largest losers.

Of course, shareholders should keep in mind that our largest holding in either Fund is less than 1.27% of total assets, so individual losers may not be very painful, and our historical experience has shown that our winners win more than our losers lose.

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. In fact, as readers of our commentary over the years are likely aware, many of this year’s winners started out as short-term losers. Remember that as long as a stock is undervalued, we will generally continue to hold. Hence, despite big setbacks this year, we continue to support the homebuilding stocks, nearly all of which trade at single-digit multiples to current and projected earnings and at the low end of their historical price to book value ranges.

Yes, we are well aware that housing has weakened considerably this year, industry news has been dismal of late, fears are mounting that a ’soft landing' in real estate may not materialize and homebuilding stocks have dominated the new-lows listings, but we remain convinced that the large, well-capitalized and geographically-diverse builders are solid long-term investments. In support of that assertion, we point to these observations:1) The top 20 builders have plenty of room to grow as they had only a 27% market share at the end of 2004. 2) Demographic trends are favorable as baby boomers, echo boomers and immigrants are expected to fuel strong long-term housing demand. 3) The homeownership rate is likely to rise to 70%-72% by 2013,up from 64% in 1994. 4)The Harvard Joint Center for Housing Studies projects that housing starts will average two million per year over the next 10 years, up from 1.7 million over the past decade. 5) Land development restrictions are likely to intensify with the regulatory approval process becoming increasingly lengthy. 6) Large builders benefit from economies of scale that can enhance margins. 7) Interest rates, though now above the generational lows seen a few years ago, remain low by historical standards.

Despite our enthusiasm for the long-term prospects of the homebuilders, shareholders should understand that our desire for broad portfolio diversification means that we invest in numerous industry groups, rarely placing big bets on anyone particular sector. By way of example, consider that home construction stocks accounted for just 4.9% of our holdings in The Al Frank Fund and 3.2% in The Al Frank Dividend Value Fund as of June 30, 2006.

While we recognize that The Al Frank Fund and The Al Frank Dividend Value Fund are classified as Small- to Mid-Cap Value Funds, we 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 June 30, 2006) of each Fund to see what I mean. In The Al Frank Fund, Valero Energy, Marathon Oil and Washington Mutual boast market capitalizations of more than $30 billion, not exactly small-cap, while in The Al Frank Dividend Value Fund, companies like Trinity Industries, Kerr McGee and Archer Daniels Midland could be considered more growth oriented as opposed to value-based. Of course, all of the companies in which we invest sport what we believe are inexpensive valuation metrics when we first add them to the Funds.

We are proud of the fact that we are style agnostic as we seek bargains wherever they reside. If Blue-Chips are cheap, we will buy them. If technology stocks are undervalued, we will not hesitate to pick them up. After all, we believe that if we limit our investment universe by inflexible market-cap or classical value-versus-growth distinctions, then we are likely to limit our potential returns! Generally speaking, mid- and large-cap stocks have become more attractive on a relative basis these days as small-cap stocks have performed well over the past five years. Thus, new purchases in the mid- and large-cap areas are moving the median market capitalizations of both of our Funds higher.

For those whose confidence in our strategy may be wavering, I can offer the perspective that we have lived through difficult market conditions on numerous occasions in the past. While there can never be any guarantees, we always advise staying the course when the going gets tough as we know that our performance will never be uniform. We have had years in the past where we have lost money, years where we have enjoyed above-average gains and years that have been closer to the 10% to 12% annualized return that Ibbotson Associates has calculated as the average for equities over the past 80 years. And despite the inevitable ups and downs, we have nearly always been very happy with our patient, buy-and-hold-but-don’t-forget strategy in the fullness of time.

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/sar06 for additional subscription information and to sign up for our free periodic Buckingham Report service. The next time the going gets tough, we hope that you will think twice before redeeming and we think the newsletter and the Buckingham Reports just might encourage you to keep the faith or even add to your holdings!

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." And why not? Our money is invested right beside yours.

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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.

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.