Quarterly Letters

Roumell

Quarterly Update

January 31, 2009

Performance Summary

  Annualized as of 12/31/08
  4Q 2008 1 Year 3 Year 5 Year 7 Year Since
Inception
(1/1/99)
Total Return
Since Inception
(1/1/99)
Roumell Equity -17.76% -27.35% -7.79% 1.15% 3.32% 8.55% 127.07%
S&P 500 -21.94% -36.99% -8.36% -2.19% -1.53% -1.38% -12.99%
Russell 2000 -26.12% -33.79% -8.29% -0.93% 1.60% 3.02% 34.66%
Russell 2000 Value -24.89% -28.93% -7.49% 0.27% 3.94% 6.10% 80.85%
Roumell Balanced (Net) -13.80% -22.82% -6.66% 0.56% 2.53% 5.83% 76.17%
Thomson US Balanced Index -14.26% -26.97% -5.15% -0.84% 0.11% 0.64% 6.63%
Please refer to performance disclosures at end of document.

Roumell Asset Management, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). Ashland Partners & Co. LLP, our independent verifier, completed its examination of the composite performance returns for the period of 1999 (inception) through September 30, 2008. Please refer to the annual disclosure presentations.

Apart from that, Mrs. Lincoln, how did you enjoy the play? Of course, there was not much to enjoy in 2008 as investors lost nearly $7 trillion on Wall Street alone. The Washington Post reported on January 1 that, combined, the world’s stocks lost 48% last year. Astute investors were humbled. CGM Focus Fund, run by Kenneth Heebner, was the top-performing fund in 2007. Its shares slumped 48% in 2008. The well-known Fidelity Magellan Fund dropped 49% for the year.

We performed better than most of our peers, but it hardly feels like cause for celebration. If we ran a publicly offered mutual fund monitored by Morningstar, our returns would have put us in the top 5% of Morningstar’s diversified stock fund managers. The year 2008 marked the completion of our first ten years in business; the results can be seen above in the ‘Since Inception’ column. We have enclosed, with our annual disclosure presentations, a year-by-year performance comparison. Perhaps one of the lessons learned is that investment time horizons should be longer than many once thought. The intention of this letter is to share, in more depth than usual, our thoughts on our security selection process and how the current overall economic context affects our traditional bottom-up process.

We exited our financial investments at the end of 2007 and exited many consumer-sensitive companies before the 4th quarter’s dramatic drop, but nonetheless we were not immune from losses. In hindsight, our bearish views should have been acted upon more fully and the selling should have been even more widespread. However, as we have noted in past letters, there is a real difference between true impairment of capital and mark-to-market losses, though they can indeed temporarily look the same. With the exception of perhaps two companies, Ram Re and EDCI Holdings (which together now represent about 0.75% of the entire portfolio), we believe an irrational market has caused our securities to become discounted excessively. Thus, in our opinion, these unrealized losses are described more accurately as market related and not true impairment of capital related. Our conviction is underscored by current portfolio construction: our top-ten companies represent roughly 75% of our equity holdings because we like what we own.

As a firm, we hold approximately 40% equities, 25% fixed income (viewed, in some instances, as an equity substitute because of current pricing explained in more detail later in this letter), and 35% cash.

Being early does appear to be an issue for deep value investors like ourselves. Simply put, prices can go from cheap, to cheaper, to ridiculously cheap. One successful, longtime value manager recently commented, “Industrious, wide-awake value managers buy [stocks] when they are cheap, and suffer badly when they become—as they sometimes do—spectacularly cheap.” We believe our companies will endure, which cannot be said for the multitude of leveraged retail, banking, and real estate companies now experiencing severe financial stress. In fact, among the ten companies noted earlier that account for roughly 75% of our equities, nine have cash that exceeds debt and one has only 12% debt-to-total capital. In aggregate, our companies overwhelmingly do not need to access the capital markets. We feel quite comfortable with our portfolio.

Top-Down, Bottom-Up, and Valuation

Physicists wrestle with the ultimate top-down, bottom-up problem. On the one hand, macro physicists study space, time, and black holes; i.e., big stuff. On the other hand, bottom-up physicists study molecules, atoms, and quarks; i.e., small stuff. Miraculously, we do not have a unified theory of the universe. Einstein’s theory of relativity has not been synthesized with quantum discoveries. The Holy Grail in physics, therefore, continues to be a single explanation to the question “What is the universe—at its core—made up of?” Thus, in physics, you’re either in the “top-down” or “bottom-up” camp. One can see similar top-down versus bottom-up approaches in other disciplines as well; i.e., sociologists generally take a top-down approach to understanding society while psychologists favor a focus on the individual.

In the investment world, top-down has generally referred to an investor who focuses on: macro- economic events like interest rates, overall GDP growth, or industry-specific events like the emergence of alternative energy. The hope is to anticipate where the economy is headed and to capitalize on it. While cognizant of the greater environment, bottom-up investors, like Roumell Asset Management, LLC, focus on the company itself as the unit of analysis: its balance sheet, industry position, and profitability. Further, as a bottom-up deep value investor, we have long been more interested in asking what a company owns right now, as opposed to what it might own in the future vis-à-vis projected earnings. For instance, several years ago a top-down growth investor might have mused that Americans were spending more on discretionary leisure products and viewed Starbucks very favorably for tapping into this trend. Roumell would have avoided investing in such a security because Starbucks did not own much in terms of real assets. The investment thesis would have required much faith in projections of very robust sales of coffee drinks, particularly in light of the price at which the stock was trading. On the other hand, a company like Capital Southwest, which comprises a collection of public and private securities trading at a deep discount to a real net asset value—although not necessarily exciting businesses—would interest us but probably not interest a top-down investor seeking to capitalize on certain growth trends.

Both top-down and bottom-up investors got it wrong during the past year because both failed to adequately incorporate the larger economy into their analyses. Bottom-up investors have often quoted Peter Lynch, the famed 1980s Fidelity Magellan manager who once said, “If you spend fifteen minutes a year studying the economy, you’ve wasted ten.” The certainty with which Lynch has been quoted has probably been misguided. For instance, had we appreciated more fully the wider economic consequences of our concerns regarding financial investments, we surely would have exited more positions and held even more cash than we did last year, when our cash level was already quite high by industry standards. Thus, we enter 2009 more mindful of the macroeconomic environment and want to blend that analysis more consciously with our deep value, bottom-up bias. Given the challenges we are facing as a country, we think it Roumell Asset Management, LLC 3 January 2009 would be foolish not to have a more macro-rich framework in which to do our bottom-up work. Here are our thoughts on the macroeconomic issues we face.

Top-Down Considerations—Macroeconomic Context

1) Consumers have lost a lot of money: their investments have dropped by nearly half in many instances and their homes have fallen significantly in value. The only way to begin repairing a balance sheet so affected is to save money. Saving means not spending. Joseph Stiglitz, of Columbia University, one of the few economists who identified the looming financial crisis more than two years ago, recently wrote, “America’s government will, for a time, partly make up for the increasing savings of U.S. consumers. But if America’s consumers go from near-zero savings to a modest 4% or 5% of GDP, then the depressing effect on demand…will not be fully offset by even the largest government expenditure programs.” Consumption could well be down for an extended period of time. In fact, the Federal Reserve reported that total outstanding household debt shrank from $13.94 trillion to $13.91 trillion during the third quarter of 2008. This is the first decline in household debt recorded in the report in more than fifty years.

2) Stabilizing the housing market appears to be the key to putting the economy back on track. It is estimated that home values nationally would need to fall another 17% (having already dropped roughly 20% from peak prices) to reach their traditional relationship to household income dating back to 1950. Stuart Miller, CEO of Lennar (one of the largest homebuilders in the country), reported on December 18 after the company’s seventh straight quarterly loss, “Frankly, we’re in the midst of a downward spiral and the momentum is building.” Moreover, it has become clear that our banking system itself rests in no small part on the value of homes.

3) China is occasionally put forth as the country that will provide the demand to save us all. We at Roumell are not betting too much on this proposition. It is estimated that China needs 9% to 10% growth just to absorb about 24 million people joining its workforce each year. Well-regarded economists are now worried that China may be headed toward a hard landing; i.e., growth of only 5% to 6%. China has been the producer, but we have been the consumer and we’re not consuming as we had been. The global economy is really not fully understood, and the connections between countries certainly have not been sufficiently appreciated by us or by many other investors.

4) Rightly or wrongly, we’re assuming that Nouriel Roubini, perhaps the most well-known economist to have predicted the mess in which we now find ourselves, is roughly correct when he states, “The U.S. economy is only halfway through a recession that will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.” Unemployment is reported at 7.2%, but after accounting for forced part-time work and people “marginally attached” (no longer looking for work, but who report wanting a job), the unemployment figure jumps to 13.5% (the U6 figure, not the oft-reported U3 one). In “Why the Economy Is Worse Than We Know” (Harper’s, May 1, 2008), Kevin Phillips describes how beginning under John F. Kennedy, U.S. administrations have reframed economic statistics in order to present prettier pictures, thus the dropping of “discouraged workers” from unemployment figures. Rising unemployment is not only affecting mortgage delinquencies (sub-prime, Alt-A and prime). American Express, long the gold standard in credit card underwriting, reported 5.9% charge-offs in the 3rd quarter of 2008, up almost 100% from 3rd quarter 2007 charge-offs of 3.0%.

5) The government is spending hundreds of billions of dollars. Economists of all stripes seem to be appreciating the insights of famed economist John Maynard Keynes: there are times when demand evapo- Roumell Asset Management, LLC 4 January 2009 rates so much that the government needs to step in and spend money because the effects of a prolonged recession and/or depression far outweigh longer-term inflationary and balance sheet risks to rising debt levels. Further, we have a very accommodative Federal Reserve willing to push interest rates down. However, it is clear that policymakers are ad-libbing their remedies and that they do not really know where we’re headed. A short time ago, Henry Paulson and his team told us we had to pass the bailout package—that week—lest we all end up miserably poor. It was later revealed that the funds supplied to the financial institutions were not traceable or tied to requirements such as increasing lending, cessation of bonuses, or discontinuing common stock dividends. Now, the plan for the money has changed. The unmistakable conclusion may well be not to put too much faith in the government. Timothy Geithner, nominee for Treasury secretary, recently told lawmakers “we’re at the beginning of this process of repairing the system, not close to the end.”

6) It is currently estimated that $8.85 trillion is in “zero maturity” assets (bank, cash, and money marke instruments). The Federal Reserve estimated cash to be approximately 74% of the stock market’s value at December 31, 2008. That is potentially a lot of fuel for both the stock and bond markets as individuals step back into the securities markets seeking higher returns than zero-maturity assets provide. How-ever, cash as a percentage of stock market value rose to 95% in July 2002 and reached 121% in September 1974. Thus, the “cash on the sidelines argument” is worth noting, but it isn’t overwhelming.

Bottom-Up—There Are Some Awfully Cheap Securities Out There, but Be Careful

1) While the view from the top-down perspective may be scary, a view from the bottom-up presents opportunity. There is little question that periods of high uncertainty, declining economic activity, and rising anxiety create investment opportunities. Has fear peaked? We do not know, but it is certainly rampant. Bear markets can persist. However, for patient investors willing to look past the market while holding steadfast to the underlying values of their securities, it is also a time to buy selectively and, in certain instances, quite aggressively.

2) The corporate bond market provides an excellent example of underlying value being offered at great prices. We are buying bonds yielding north of 15% to maturity. Bond spreads—premiums over risk-free treasuries—are at levels not seen since the 1930s. Are risks similar? No. In the Great Depression, actual GDP dropped by 30%. Today economists are estimating a drop of 4% to 6%. The U.S. economy would have to lose twice as many jobs as it has already to reach the levels of the 1981–82 recession (measuring job losses as a percentage of the workforce). Nonetheless, we recently bought an energy bond with a yield-to-maturity of about 18%, maturing in three years. Similarly, we have added to our closed-end bond funds, where our projected yields to maturity are also greater than 15% after stressing for significant default levels (which we expect). In fact, corporate debt often appears to present a far better risk-reward opportunity to us than many common stocks. Our portfolios (both equity and balanced models) are collecting significant amounts of current income given these holdings. We expect that the vast majority of our debt holdings will mature at par.

3) We are adding to small and micro cap companies that are effectively debt-free, wherein we are paying next to nothing for what we believe are very good businesses. We are quite excited about our top holdings among this group and have continued to add at moments of attractive pricing. We believe micro caps—as a group—are very mispriced and provide us exceptional upside opportunities.

4) We are selectively buying into the current energy bear market—both bonds and stocks—on the belief that we are getting exceptional pricing and that the demand for energy ultimately will not go away. Energy will likely be the first mover on data suggesting an economic bottom is in place. Jim traveled to Roumell Asset Management, LLC 5 January 2009 Tulsa, Houston, and Dallas in the 4th quarter to visit a number of companies in this industry to assess management team strength and business strategy.

Valuation—What Are Things Worth Today?

Since our inception, we have always strived to buy a dollar at some meaningful discount. We have long discussed three types of situations we pursue: discount to net asset value, NAV (summing parts of a company with readily ascertainable values); discount to private market value (where actual buyers and sellers are transacting deals); discount to going concern (value of cash flows in the absence of a “monetizing” event). Our belief has always been that by adhering strictly to the math in each situation, we could deliver solid returns without taking on undue risk—and we still believe in this principle. However, the “math” has changed.

Asset values have fallen significantly throughout the world, such that “readily ascertainable values” do not necessarily exist. An exception would be bonds expected to mature at par that are currently trading at a discount to par (a place where Roumell is currently very active). Further, there is an absence of transactions. Determining “private market value” is somewhere between difficult and extremely difficult. Finally, going concern values are based on estimating cash flows to determine yield on an investment—good luck. Three months ago, Intel estimated 4th quarter revenues of $9.1 billion (having reduced the figure from more than $10 billion a few months before); in early January, it pre-announced an estimate of less than $8.2 billion, down 24% year-over-year. If Intel cannot estimate its quarterly revenues three months in advance within a ballpark, how can any investor, or Wall Street analyst, hope to do so? Thus, purchasing equities based on projected cash flows seems particularly inadequate.

We are mindful of the current environment characterized as it is by a dramatically slowing economy, real asset price declines, and the difficulty in assigning value to companies and their assets. However, in this environment, security prices appear in many instances to be priced at ridiculously low levels. If historically the investment criterion was “cheap,” it is now “ridiculously cheap” because (1) such prices are available and (2) it is necessary given current economic conditions. Demanding a greater margin of safety seems quite appropriate.

In addition to the strategies noted thus far in bonds, well-capitalized smaller companies, and energy issues, we would point to other ways in which we intend to approach the days and months ahead. We continue to hold high levels of cash. We are not interested in financials or other companies requiring access to the capital markets. If we conclude that there is an insufficient discount to our estimate of intrinsic value of an existing holding resulting from real asset depreciation (see Comstock Resources discussion below), we will sell. We are closely watching a number of larger, well-capitalized industry leaders but, in our minds, have not been offered adequate pricing so far. Securities “on deck” are growing.

We will capitalize on trading opportunities afforded by the market’s extraordinary volatility. In our brochure published several years ago, we state emphatically, “When our target is met, we sell.” We will only invest in a company we would gladly hold for the long term because it meets all balance sheet and valuation criteria we hold dear. However, the market’s manic-depressive state, jetting from one extreme mood to another, offers us the chance to exploit large movements in prices in relatively short periods of time. From 1966 to 1982, stock market indices were basically unchanged, but there were many ups and downs during that time. We are prepared—with a portion of our portfolio—for a similarly situated market. In the “Basic Principles” section of our brochure, we state, “A tremendous body of literature has argued for years that investors ought to buy and hold stocks. We disagree with the certainty that often accompanies this thesis.” Buy and hold has shown its limits—ten years of returns are now gone for the major indices…and this isn’t the first time that such an outcome has happened.

Perhaps our view is best described as being tempered, judicious, and flexible, but clearly one of opportunism as well. The economic outlook is truly muddled. The new Obama administration, which has arrived with so much hope and vitality, will certainly be tested in unpredictable and profound ways. The honeymoon will not last long, and lots of hard work lies ahead.

We are dedicated deep value bottom-up investors (which will not change), but we have a far greater appreciation of top-down realities than in the past. We will engage our bottom-up instincts against the larger economic climate because it seems most sensible and intelligent. We own some fabulous assets (principally on a completely unlevered basis), are collecting large sums of income on approximately 25% of the portfolio, and expect to be rewarded handsomely in time. We enter 2009 with great energy and enthusiasm and believe strongly in the securities we hold. We do not hold securities on margin, have ample cash reserves, and are confident in our abilities as we enter a period that should allow a flexible, research-intensive firm such as ours opportunities to make money for our clients. We wish you a happy, healthy, and prosperous new year.

We are now offering a dedicated closed-end bond fund product for income investors with a total return perspective. As discussed above, we believe this sector offers an exceptional investment opportunity. Please contact us if you are interested in learning more about this investment option.

Our Three Top Purchases

Unit Corp., UNT. Unit Corp. is a hybrid onshore energy exploration and production (E&P) company and onshore contract driller operating a fleet of 131 rigs. At our average price, we purchased Unit’s proved reserves for roughly $2.50/million cubic feet equivalent (Mcfe), a value we felt to be conservative at the time of purchase. This valuation implied that we were getting Unit’s drilling operation, undeveloped shale plays, and midstream operation for free. Unit’s largest shareholder, George Kaiser, an oil and natural gas investment legend, has recently significantly increased his stake and now owns 15% of the company. We view Unit as a well-capitalized, conservatively managed play on natural gas. Jim visited Unit’s management team in Tulsa in

Comstock Resources, Inc., CRK. We wrote extensively about CRK in our 3rd quarter 2008 letter. We decided to completely exit CRK following a sharp run-up in the stock that eroded the sizable margin of safety to our estimate of intrinsic value (which had declined with the fall of natural gas commodity prices) that we are demanding in this market. We will continue to monitor CRK in hopes of having the opportunity to repurchase shares at a cheaper price than the market currently offers.

Exxon Mobil Corp., XOM. Exxon Mobil is a cash-generating machine that was purchased at terrifically cheap multiples. We expect the company to add significant shareholder value through superior capital allocation in a credit-constrained market. The Exxon opportunity was short-lived, however, as we happily sold the position not too long after purchasing shares due to no longer having a meaningful discount to our estimate of intrinsic value.

On our website, we have posted a listing of our top-ten holdings, a description of each company, and the reasoning behind each purchase (www.roumellasset.com, Valuation tab, “Our Holdings” link). To view “Our Holdings,” you will have to enter a client-only username and password, which we can provide upon request. Or let us know if you would like for us to mail you a hard copy.

Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.

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ROUMELL ASSET MANAGEMENT, LLC
EQUITY COMPOSITE
ANNUAL DISCLOSURE PRESENTATION

  Total Firm Composite Assets Annual Performance Results
Year Assets USD Number of Composite S&P Russell Russell Composite
End (millions) (millions) Accounts Net 500 2000 2000 Value Dispersion
2008 166 104 413 -27.35% -36.99% -33.79% -28.93 3.40
2007 270 178 549 -7.67% 5.49% -1.57% -9.78 2.68
2006 280 176 458 16.89% 15.79% 18.37% 23.48% 2.18%
2005 199 111 312 12.38% 4.91% 4.55% 4.71% 2.59%
2004 123 47 125 20.18% 10.88% 18.33% 22.25% 2.69%
2003 66 15 46 32.13% 28.69% 47.25% 46.03% 4.04%
2002 41 8 44 -10.15% -22.10% -20.48% -11.43% 4.33%
2001 31 5 30 32.76% -11.89% 2.49% 14.02% 6.33%
2000 19 2 12 7.97% -9.10% -3.02% 22.83% 4.05%
1999 16 2 9 26.02% 21.04% 21.26% -1.49% 3.92%

 

Equity Composite contains fully discretionary equity accounts and for comparison purposes is measured against the S&P 500, Russell 2000, and Russell 2000 Value Indices. The S&P 500 Index is used for comparative purposes only and is not meant to be indicative of the Equity Composite performance. In presentations shown prior to March 31, 2005, the composite was also compared against the Nasdaq Index. The benchmark was eliminated since it did not represent the strategy of the composite.

Roumell Asset Management, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).

Roumell Asset Management, LLC is an independent registered investment adviser. The firm maintains a complete list and description of composites, which is available upon request.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results.

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. Net returns are reduced by all fees and transaction costs incurred. Wrap fee accounts pay a fee based on a percentage of assets under management. Other than brokerage commissions, this fee includes investment management, portfolio monitoring, consulting services, and in some cases, custodial services. As of December 31, 2006 and 2007, wrap fee accounts made up 33% and 36% of the composite, respectively. Wrap fee schedules are provided by independent wrap sponsors and are available upon request from each respective wrap sponsor. Returns include the effect of foreign currency exchange rates. Exchange rate source utilized by the portfolios within the composite may vary. Composite performance is presented net of foreign withholding taxes. Withholding taxes may vary according to the investor’s domicile.

The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Dispersion calculations are greater as a result of managing accounts on a client relationship basis. Securities are bought based on the combined value of all portfolios of a client relationship and then allocated to one account within a client relationship. Therefore, accounts within a client relationship will hold different securities. The result is greater dispersion amongst accounts. Additional information regarding the policies for calculating and reporting returns is available upon request.

The investment management fee schedule for the composite is as follows: For Direct Portfolio Management Services: 1.75% on the first $200,000, 1.50% on the next $300,000, and 1.00% on assets over $500,000; For Sub-Adviser Services: determined by adviser; For Wrap Fee Services: determined by sponsor. Actual investment advisory fees incurred by clients may vary.

The Equity Composite was created January 1, 1999. Roumell Asset Management, LLC’s compliance with the GIPS® standards has been verified for the period January 1, 1999 through March 31, 2008 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Equity Composite beginning January 1, 1999. A copy of the verification report is available upon request.






ROUMELL ASSET MANAGEMENT, LLC
BALANCED COMPOSITE
ANNUAL DISCLOSURE PRESENTATION

  Total Firm Composite Assets Annual Performance Results
Year Assets USD Number of Composite Thomson US Balanced Composite
End (millions) (millions) Accounts Net Mutual Fund Dispersion
2008 166 40 121 -22.82% -26.97% 5.01%
2007 270 75 154 -7.58% 5.76% 3.71%
2006 280 87 158 14.00% 10.47% 3.69%
2005 199 73 142 8.56% 4.22% 2.67%
2004 123 66 119 16.48% 7.79% 3.82%
2003 66 42 100 28.26% 18.60% 3.94%
2002 41 27 79 -9.70% -11.36% 3.77%
2001 31 17 39 21.18% -4.19% 4.75%
2000 19 10 23 8.47% 1.95% 4.53%
1999 16 9 22 12.53% 8.35% 2.63%

Balanced Composite contains fully discretionary balanced accounts (consisting of equity, fixed income, and cash investments) and for comparison purposes is measured against the Thomson US Balanced Mutual Fund Index. In presentations shown prior to March 31, 2006, the composite was also compared against the Lipper Balanced Index. Additionally, in presentations prior to December 2006, the composite was measured against the Vanguard Balanced Index Fund. The Thomson US Balanced Mutual Fund Index is a blend of over 500 balanced mutual funds and is therefore deemed to more accurately reflect the strategy of the composite.

Roumell Asset Management, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).

Roumell Asset Management, LLC is an independent registered investment adviser. The firm maintains a complete list and description of composites, which is available upon request.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results.

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. Net returns are reduced by all fees and transaction costs incurred. Wrap fee accounts pay a fee based on a percentage of assets under management. Other than brokerage commissions, this fee includes investment management, portfolio monitoring, consulting services, and in some cases, custodial services. As of December 31, 2007, there are no wrap fee accounts in the composite. As of December 31, 2006, wrap fee accounts made up less than 1% of the composite. Wrap fee schedules are provided by independent wrap sponsors and are available upon request from each respective wrap sponsor. Returns include the effect of foreign currency exchange rates. Exchange rate source utilized by the portfolios within the composite may vary. Composite performance is presented net of foreign withholding taxes. Withholding taxes may vary according to the investor’s domicile.

The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Dispersion calculations are greater as a result of managing accounts on a client relationship basis. Securities are bought based on the combined value of all portfolios of a client relationship and then allocated to one account within a client relationship. Therefore, accounts within a client relationship will hold different securities. The result is greater dispersion amongst accounts. Additional information regarding the policies for calculating and reporting returns is available upon request.

The investment management fee schedule for the composite is as follows: For Direct Portfolio Management Services: 1.75% on the first $200,000, 1.50% on the next $300,000, and 1.00% on assets over $500,000; For Sub-Adviser Services: determined by adviser; For Wrap Fee Services: determined by sponsor. Actual investment advisory fees incurred by clients may vary.

The Balanced Composite was created January 1, 1999. Roumell Asset Management, LLC’s compliance with the GIPS® standards has been verified for the period January 1, 1999 through September 30, 2008 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Balanced Composite beginning January 1, 1999. A copy of the verification report is available upon request.

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