RCT Fund Performance

The RCT fixed-income programs produced reasonably good results during 2007, a year in which the Federal Reserve began a policy of dramatic easing of interest rates to counter rising odds of a U.S. recession. Longer duration proved beneficial as interest rates declined by over 50 basis points during the year and the yield curve shifted from inverted to steep. RCT Fund returns were 4.56% for the Flex Cash Fund, 6.05% for the Short Bond Fund and 6.74% for the Intermediate Diversified Bond Fund (Class B, 6.91%). These results were generally quite favorable compared to peers due to the emphasis on high credit quality in the RCT programs.

The RCT Flex Cash Fund returned 4.56% for 2007 while the 91-Day Treasury Bill returned 5.00% and the median Lipper Government Money Market Fund manager returned 4.41%. The Fund began the year with an average maturity in line with that of its benchmark and a slight yield advantage of 30 basis points. At mid-year, a small position in AAA-rated home equity loans weakened as subprime loan problems surfaced, but this position steadily paid down as the year progressed and continued to do so in early 2008. We believe the Fund is well-positioned for the difficult market conditions prevailing at the start of 2008, with ample liquidity to take advantage of opportunities created by further spread widening or yield curve steepening.

The RCT Short Bond Fund returned 6.05% in 2007 compared to the Merrill Lynch 1-3 Year Treasury Index’s 7.32% return. The strength of Treasuries compared to all other sectors explains the Fund’s relative underperformance during the year, although the Fund’s high credit quality supported solid relative performance compared to other short-duration managers. The Fund ended 2007 with a considerable two percentage point (200 basis point) yield advantage over its benchmark due to the sharp decline in Treasury yields in the second half of the year. This should provide a substantial return advantage as 2008 begins.

The RCT Intermediate Diversified Bond Fund produced a 6.74% total return in 2007 (Class B, 6.91%) comparable to the 6.97% return of the Lehman Aggregate Index. The primary detractors from relative return were the negative impact of the Fund’s shorter duration and its modest exposure to lower quality corporates. The Fund’s yield curve positioning and its overall high credit quality (AA+) strengthened results. The 67 basis point decline in ten-year Treasury rates contributed to a superb year for bond investing given the relatively low absolute interest rate levels that prevailed at the start of the year. As investors reassess bond risk in 2008, we believe the Fund is well-positioned in regard to credit quality (it has no exposure to subprime, SIV or CDO issues) while its shorter effective duration than that of the benchmark should help relative return if interest rates rise due to inflation concerns.