Dear Shareholders:
According to John Rekenthaler, Morningstar's Director of Research, "Costs are
the most powerful determinant of fund performance within [a] category...There
are no other criteria you could specify that will give you as clear a pattern as
this." I think he is right.
For this primary reason, I'm asking you to vote in favor of reorganizing the
Aggressive Growth Fund into the Cornerstone Growth Fund and the Dogs of the
Market Fund into the Cornerstone Value Fund.
When we started the O'Shaughnessy Funds three years ago, we voluntarily capped
each fund's expense ratio at 2%. Our goal was to lower our expense ratios as our
Funds increased in size. Just as in most businesses, each of our Funds faces
potential economies of scale, with fixed costs that remain the same regardless
of their size. As a result, our Funds need to be relatively large if we want to
operate them for a reasonable and competitive cost. It was our hope that as
people learned about us, our Funds' assets would increase to levels that allowed
us to reduce their expense ratios.
Unfortunately, that didn't happen with our Dogs of the Market Fund and
Aggressive Growth Fund. O'Shaughnessy Capital Management has been subsidizing
both these Funds for the last three years by waiving a portion of our advisory
fee and paying for some of these Funds' operating expenses.
In order to address the cost issue head on, we have determined that it is in the
best interest of our shareholders to combine our two higher fee Funds into our
Cornerstone Funds, which have achieved lower expense ratios because of their
higher asset levels. As a direct result of the additional assets, we expect that
the two surviving Cornerstone Funds will enjoy even lower expense ratios than
they have currently.
As of October 31, 1999, the current annualized expense ratios for all four
O'Shaughnessy Funds were as follows:
1. Aggressive Growth Fund 1.99%
2. Dogs of the Market 1.94%
3. Cornerstone Growth Fund 1.16%
4. Cornerstone Value Fund 1.57%
We believe reorganizing our Funds will help lower costs without sacrificing
investor objectives. Indeed, the Dogs of the Market and Cornerstone Value Funds
have similar investment objectives, as stated in their prospectuses, and each
uses high dividend yield as the final criterion for security selection. Each
invests in large blue chip companies with high dividend yields, with the hope
that the higher dividend yield identifies companies that are temporarily
undervalued. The biggest difference is the universe from which we select the
stocks in each Fund. The Dogs of the Market Fund buys 20 stocks from the S&P
Industrial Average with high yields plus the 10 highest yielding stocks from the
Dow Jones Industrial Average.(TM) The Cornerstone Value Fund, on the other hand,
buys the 50 stocks from the broader O'Shaughnessy Market Leaders Universe with
the highest yields.
Statistically, the Dogs of the Market and Cornerstone Value Funds are very
similar as well. An additional benefit of the reorganization to shareholders of
the Dogs of the Market Fund will be that the surviving Cornerstone Value Fund
will have a higher dividend yield. As of October 31, 1999, the Dogs of the
Market Fund's yield was 2.62% compared to Cornerstone Value's 3.61%, a
difference of 0.99%.
Finally, in light of the recent changes made in the Dow Jones Industrial
Average, we think that the Cornerstone Value Fund now employs a more prudent way
to select high yielding blue chips.
I believe that our Aggressive Growth Fund and Cornerstone Growth Fund also are
highly similar, even though Aggressive Growth's investment objective is capital
appreciation whereas Cornerstone Growth's is long-term growth of capital (the
two objectives are essentially the same). Aggressive Growth Fund's stocks are
selected using eight separate quantitative models, with all but one of them
using price momentum as the final selection criterion. Cornerstone Growth also
uses price momentum as its final criterion for stock selection. Statistically,
the Funds are also very similar. Note some key variables:
Price to Earnings Median Market Median Price
Ratio (P/E) Capitalization to sales Ratio
----------------- -------------- --------------
Aggressive Growth 24.46 $1.7 Billion 1.22
Cornerstone Growth 22.00 $767 Million 0.85
Finally, the Aggressive Growth shareholders should experience a lower rate of
turnover in Cornerstone Growth while attempting to achieve similar objectives.
I believe that lower costs are of the greatest benefit for you as fellow
shareholders. We also expect this to be a tax-free reorganization, meaning no
gains will be realized for shareholders when their shares are exchanged in
connection with this action.
For all these reasons, I urge you to vote in favor of the reorganization and
thank you for your continued support and trust.
Sincerely,
James P. O'Shaughnessy