Tom Marsico, Portfolio Manager

July through September 2008

During the third calendar quarter of 2008, the Focus Fund and the Growth Fund had total returns of -11.06% and -13.58%, respectively. Those results significantly trailed the S&P 500 Index, the Funds' primary benchmark index, which produced a total quarterly return of -8.37%.

The table below updates the Funds' longer term investment results for several time periods through September 30, 2008, as compared to the S&P 500 Index:



The performance data for the Funds quoted here represent past performance, and past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted above. To obtain performance information current to the most recent month end, please call 888-860-8686 or click here for the Focus Fund² or click here for the Growth Fund.²

This commentary highlights the Funds' performance over a single calendar quarter. Shareholders should keep in mind that the Funds are intended for long-term investors who hold their shares for substantially longer periods of time. You should also keep in mind that our views on all securities and investments discussed in this commentary are subject to change at any time. References to specific securities, sectors, and industries discussed in this commentary are not recommendations to buy or sell the securities or investments, and the Funds may not necessarily hold these securities or investments today.³

As a reminder, the Focus Fund and the Growth Fund often invest in the securities of similar growth companies. Their respective performance may differ at times, however, for several reasons. Among other factors, the Focus Fund is a non-diversified mutual fund that may invest in a more concentrated portfolio and may hold the securities of fewer issuers than the Growth Fund. As a result, the Focus Fund may hold some different securities, and may be subject to greater short-term individual performance volatility than the Growth Fund or other mutual funds that invest in a larger number of securities.

During the third calendar quarter of 2008, the Focus Fund outperformed the Growth Fund primarily as a result of having better overall results in its Capital Goods positions, and having somewhat less exposure to areas such as Energy, Materials, and Telecommunication Services – all of which struggled during the period. The Focus Fund also held more cash, on average, than the Growth Fund during the quarter which helped its performance at the margin. In addition, the Growth Fund owned a position in Lehman Brothers Holdings Preferred 7.25%, which fell significantly in value prior to being sold during the third quarter.

The Funds shared a variety of common elements that had a significant positive influence on their investment results. Certain holdings and an overweighted posture (as compared to the Funds' primary benchmark index) in the Banks industry benefitted performance, including positions in Wells Fargo & Co. and U.S. Bancorp. Several Consumer Discretionary holdings, including McDonald's Corporation, also aided results. Cash and cash equivalent positions, which were at somewhat elevated levels in both Funds throughout the third quarter, provided a modest "cushion" for the market sell-off (more so, as noted above, for the Focus Fund than the Growth Fund), and avoiding certain weak-performing areas of the equity market – particularly the Utilities sector and the Semiconductors & Semiconductor Equipment industry – contributed positively to performance.

The major blemishes to the Funds' quarterly returns were attributable to the following factors:

• Certain Technology-related Holdings – MasterCard Inc. Class A, Visa Inc., Apple Inc., and Google Inc. were the largest individual performance detractors for the Funds during the third calendar quarter. (Google was sold from both Funds prior to quarter-end.) To varying degrees, each of these companies seemed to be under pressure due to concerns regarding the potential for a significant global economic downturn and concomitant dimming outlook for consumer discretionary spending.



• Stock Selection and an Underweighted Posture in the Diversified Financials Industry – Both Funds owned a position in Goldman Sachs Group, Inc., which skidded -26% during the third quarter. The Growth Fund, as noted above, also held a position for part of the quarter in preferred stock issued by Lehman Brothers Holdings, which fell -37% prior to being sold. In addition, the Funds on average had an underweighted posture (as compared to their benchmark index) in Diversified Financials, which created an opportunity cost as the industry was among the stronger-performing areas of the market last quarter.



• Stock Selection and an Underweighted Posture in the Consumer Staples Sector – A position held by both Funds in CVS Caremark Corp. declined by -15% during the quarter. The Funds were also penalized by maintaining an underweighted posture (as compared to their benchmark index) in this sector, which was the best-performing area of the market during the third calendar quarter.



• Stock Selection and an Overweighted Posture in the Materials Sector – The Materials sector plunged nearly -23% during the third quarter in response to worries about global growth and plummeting commodity prices. Both Funds' performance was negatively impacted by our decision to maintain an overweighted posture in this weak-performing area. Positions in Monsanto Co. (-22%) and Air Products & Chemicals, Inc. (-30%) hurt both Funds. The Growth Fund was further negatively affected by its positions in Potash Corp. of Saskatchewan Inc. (-41%) and Praxair, Inc. (-24%). (Praxair was sold from the Focus Fund prior to quarter-end.)



• Stock Selection in the Telecommunication Services Sector – Both Funds held positions in China Mobile Ltd. and AT&T Inc., which struggled. (AT&T was sold out of both Funds prior to the end of the quarter.) In addition, the Growth Fund had a position in America Movil S.A.B. de C.V., which declined -11%. (America Movil was sold from the Focus Fund prior to quarter-end.)



• An Underweighted Posture in the Health Care Equipment & Services Industry – Both Funds maintained a below-benchmark index weighting in this industry group, which adversely impacted performance as it was among the better-performing areas during the third quarter.

In addition, the Focus and Growth Funds struggled with respect to their energy-related holdings, although the effect on the Growth Fund's performance was more acute as it had a higher allocation on average to this sector as compared to the Focus Fund. In particular, positions in Petroleo Brasileiro S.A., Transocean Inc., and Schlumberger Ltd. impacted both Funds negatively, as all three companies had sharply-lower stock prices. The Growth Fund also owned positions in XTO Energy Inc. (-29% prior to being sold) and Petrohawk Energy Corp. (-27% prior to being sold) which weighed further on its performance.

Investment Outlook

So, where are we now, and – more importantly – where might we be headed? As we write this letter, the S&P 500 Index – on the heels of a major slide this month (through October 15th) has declined 37% year-to-date and is on a pace for its worst calendar year return in more than 70 years. The stock market's plunge has been a function of a number of factors, many of which we have touched upon above. But, the whirlwind of events – highlighted in the Marsico Funds Capital Markets Overview – has been historic and cannot be overlooked. A great deal has happened in just the past several weeks:

• Global central banks made record-level liquidity injections into the markets on several occasions.



• Counterparty risk soared as banks hoarded cash. Credit spreads widened dramatically.



• The US government approved a $25 billion loan package to the three major U.S. automobile manufacturers.



• Citigroup and Wells Fargo competed to purchase Wachovia Corporation, with Wells Fargo emerging as the "winner" after several days of negotiations.



• Signs of strain appeared in state budgets, in part due to debt markets that were essentially closed. California and Massachusetts considered asking the U.S. government for support.



• Financial rescue programs proliferated in overseas markets including Iceland, Belgium, the Netherlands, Luxembourg, and the United Kingdom. The common elements in the "Eurozone" plans so far have involved providing short-term liquidity to the inter-bank market, offering guarantees to some bank loans, and designating government money to be injected as equity stakes in banks.



• The Federal Reserve was in almost-continuous motion, expanded its balance sheet considerably, and most recently took steps including expanding the size of the Term Auction Facility (a lending facility for depositary institutions first introduced in December 2007), participating in unsecured lending (i.e., commercial paper) market, and paying interest on bank reserves.



• The Federal Deposit Insurance Corporation ("FDIC") increased (through at least December 31, 2009) bank deposit insurance from $100,000 – a level that it had guaranteed at least since 1980 – to $250,000.



• The Federal Reserve, Bank of England, Bank of Canada, European Central Bank and China, in a coordinated global action, cut their benchmark interest rates on October 8th – an unprecedented (yes, that word again) response to the global credit freeze.

The pace of events does not appear likely to abate. Policy-makers around the world are now fully engaged and major, ground-breaking announcements are flowing on a daily basis. Most recently, government guarantees of various types of debt instruments have occurred as part of major efforts to restore stability and liquidity to the credit markets. A tremendous amount of fiscal and monetary stimulus has been put into the system – although, candidly, little of that has seemed to matter so far. A remarkable number of innovative fiscal and monetary policy responses to the financial crisis have been enacted – many of which have lagged effects. The Troubled Asset Relief Program ("TARP") is evolving rapidly in its planned structure and approach, and has yet to be implemented. We would expect capital raises, merger and acquisition activity, and asset disposals to continue occurring at a very brisk pace, particularly if private equity capital returns to the market significantly.

Some Thoughts Regarding Financial Services Companies, the Housing Crisis, and Their Importance to a Stock Market Recovery

For the equity market to recover from the severe pummeling it has taken over the last year, we think the recuperation must start with the healing of financial stocks and the normalization of credit markets. On at least one level, the healing process is underway as massive deleveraging in the financial system has already taken place. At this point, financial institutions have raised $500 billion in new capital. If you were to include the US government's backstops of Freddie Mac and Fannie Mae and AIG, that number grows to approximately $750 billion on an economic basis. And, with the passage of TARP, $700 billion in new government assistance is now available to directly recapitalize banks, purchase troubled assets currently residing on financial institutions' balance sheets, and serve other potential valuable deployment options.

The bleeding needs to stop in housing, where price declines have been at the root of much of the losses experienced by banks and other lending institutions – and which simultaneously puts pressure on consumers' balance sheets and net worth. We think many investors assume that the capital raises that have occurred recently are aimed at past mortgage-related losses, but we believe they really are directed at prospective losses and may potentially be overly cautious in nature. As one example, Wachovia Corporation's charge-offs on their Option Adjustable Rate Mortgage ("ARM") business total roughly $1 billion to date. However, in Wells Fargo's proposal to acquire Wachovia, it assumed cumulative charge-offs will be $32 billion, or about 26% of the total mortgage business at Wachovia. That is, to say the least, a draconian assumption. To put it into some perspective, a 26% charge-off rate would imply that one out of two mortgage holders will default and the recovery value on the mortgage will be just 50%.

Home underwriting problems are in the process of being repaired. One of the factors we (and the market) have been most worried about was the magnitude of the impact of seriously-flawed mortgage underwriting standards, and how those could be transmitted into the real economy. In particular, we have been concerned about interest rate re-sets on banks' pay-option mortgage books of business, and whether those re-sets could trigger another spike in home foreclosures, which would further depress the housing markets. Now, however, Countrywide Financial, IndyMac Bancorp, Washington Mutual, and Wachovia – all of which were major "players" in the pay-option markets – no longer exist. Other banks that purchased their loan books on average have written them down by 25% each to this point. That allows the new owners of those mortgages significant flexibility to refinance those loans and perhaps keep more of those customers in their houses – a potential stabilizing force for housing markets.

The "fix" won't happen immediately. Home foreclosures are still swamping the system (as one example, about one-half of home sales in the Las Vegas area are foreclosure transactions), but we now think foreclosures will peak sooner than others have been forecasting. There definitely appear to be some signs of improvement, although those haven't made the headlines. The fledgling program HOPE NOW, an alliance between counselors, servicers, investors, and other mortgage market participants, announced that through August it had assisted nearly 2.3 million homeowners in avoiding foreclosure. Home sales activity is showing nascent signs of perking up; we recently saw examples in California where multiple bidders appeared after banks reduced listing prices by 10%. We also believe that a nationalized Fannie Mae and Freddie Mac will make significant efforts to keep people in their homes. Now that they are in conservatorship and under government control, we expect their profit maximization mandate will be a lower priority, which could lead to less aggressive actions to foreclose upon delinquent home loans. Earlier this month, there was some initial evidence of that sea change, when Fannie and Freddie both cut their fees by 0.25%. As mortgage interest rates stabilize and come down, that should help re-establish home affordability. That, in turn should, over time, be a catalyst for helping put a floor on declining home prices, increasing sales and refinancing activity, and bolstering consumer confidence.

Although we are starting to see some signs of improvement in housing, we are not yet prepared to "call a bottom" in the industry. Our caution is driven mainly by flagging consumer confidence, weak labor markets, and our expectation that unemployment could increase -- which would put pressure on the prime mortgage market. But we do think that much of the pain has already been felt, and the strongest, best-capitalized banks with large deposit bases now have a major growth opportunity in attracting new customers and meeting their financial needs. We think that several banks whose stocks we own on your behalf in the Funds will be able to absorb any future losses through big increases in their reserves and by making highly-accretive transactions such as JP Morgan's purchase of Washington Mutual's deposit base at a very compelling price. The global interest rate cuts recently announced by central banks should also help banks recapitalize more rapidly because they will have a higher net interest margin due to a lower cost of borrowing.

Credit Markets and Policy Responses

As financial institutions de-lever, rebuild their capital bases, and move opportunistically to acquire valuable assets at attractive prices, another important development needs to happen: improvement in credit markets. Credit – and the trust that credit is inherently based on – is the oxygen in our financial system. Without credit and capital creation, capital markets and economic growth become seriously impaired.

The restoration process needs to start with inter-bank lending and the normalization of credit markets. The economy cannot grow without smoothly-functioning, rational credit markets. Banks, wary of counterparty risk and uncertain of their own liquidity needs, have been hoarding capital. To explain further:

• Lack of trust – Banks are not comfortable with the assumption of any counterparty risk, perhaps as best evidenced by the dramatic spike upwards in LIBOR that took place in late September and early October. This dynamic probably started when the US government allowed Lehman Brothers to fail in mid-September. Lenders are wondering what counterparty might be the next to fall. Over the course of the past month, banks have not been willing to lend to each other on more than an overnight basis. The absence of confidence may not subside soon unless some form of a counterparty guarantee on LIBOR term funding is provided. A variety of government-led responses have been announced in the past several days. It is too soon to fully assess their impact but we think they will be very meaningful. Encouragingly, LIBOR has declined substantially as have some other global interest rates, and the commercial paper market is showing signs of revival.



• Lack of clarity about their own liquidity situation – Many banks remain hamstrung by illiquid, distressed mortgage and mortgage-related assets on their balance sheets, have made funding commitments, and don't yet know what their liquidity needs are going to be as corporate customers draw down those lines. On the latter point, we note that US corporate debt levels generally are much lower as compared to the 1990-1991 recession. Given that overall balance sheet strength, we don't foresee a disproportionate amount of corporate borrowing. As that becomes clearer, we would expect banks to become more confident about their liquidity condition and to cease hoarding cash.

The Treasury and the Troubled Asset Relief Program ("TARP")

Although there have been numerous, and potentially very significant, policy responses with regard to addressing impaired financial institution balance sheets, the TARP is the first direct, sweeping, permanent strategy to focus on infusing capital directly into banks and – in conjunction with Fannie Mae and Freddie Mac – creating a mechanism for taking impaired mortgage assets off bank balance sheets and finding a clearing price for those assets. There is no playbook, no precedent for the Treasury to follow as it moves forward. (The same is true for the Federal Reserve.) Will TARP be effective at fulfilling its mission and providing some badly-needed relief in terms of alleviating some of the pressure on bank balance sheets and improving liquidity and investor confidence? That is hard to say right now, although we are impressed by the speed at which TARP is moving and by Neel Kashkari, the US Treasury official overseeing the financial rescue plan. The stock market, based on its steep sell-off after enactment of the TARP legislation, appears to have already voted – at least on a knee-jerk basis. Some have questioned TARP's size, and whether it will be large enough to have an impact. But we would note that the entire US mortgage debt is about $10 trillion, so TARP's size of $700 billion implies an outright loss ratio of 7%. Presently, approximately 6% of outstanding mortgages are in default. And, to be fair, the apparent rush to judgment on TARP to us seems premature – we think the TARP leadership team is moving as expeditiously as possible and, again, has not actually implemented anything yet. Some of the most important factors to monitor will be:

• When will it start?



• Will the planned use of TARP funds to invest directly in banks be a more effective use of assets than the original proposed use of buying troubled debt?



• Will this enable banks to more effectively expand lending to reflect their increased capital levels?



• Does it make sense for TARP to invest substantially in banks that may be adequately capitalized already?



• Who should the government buy troubled debt from?



• In what quantity?



• And, perhaps most importantly, at what price? TARP will need to find some balance between two very important constituencies. A price paid that is below a bank's "marks" on these assets will weaken bank balance sheets, perhaps materially. On the other hand paying too high a price would help the bank but would also expose taxpayer money to losses.

The TARP legislation gives the Treasury an unusual amount of leeway in terms of specific implementation (which was one of the reasons why the legislation was so controversial). Increasingly, it appears Treasury will veer away solely from buying troubled mortgage assets – Fannie Mae and Freddie Mac are now being directed to do this – and move to directly recapitalize certain banks and providing guarantees, in a manner potentially similar to what some European countries are presently undertaking.

And – we cannot emphasize this enough – the US government must take a leadership role as it addresses the problem of financial institutions' capital adequacy. This includes modernized accounting standards (whereby banks have to recognize losses) and transparency of information (including better disclosure of holdings and trading positions). One big reason for the lack of confidence in financial stocks is that the companies are very difficult to analyze, especially given the proliferation of derivative instruments which can make it difficult to ascertain a company's balance sheet, exposures, and risk profile. As an example: according to The Wall Street Journal, when potential acquirers of Lehman Brothers were looking at Lehman's books, among other things they found almost two million (two million) individual interest-rate swap agreements. The bottom line is that the Treasury needs to go after the right problems, and take the opportunity to implement positive changes in the financial services industry.

Some Closing Thoughts

In writing this letter in mid-October, with major US market indexes down more than 40% from their peak levels reached a year ago – and having nose-dived 25% in barely two weeks – we have tried to provide some perspective about the problems in the real economy (housing, in particular) and in the credit markets. Some decline in the stock market was, in hindsight, inevitable and justifiable. But the recent collapse in stock prices, from our perspective, is irrational and driven by panic. We don't know when this cycle will pass (nobody knows), but we are confident that it will pass. We don't know what event will serve as the catalyst for a market recovery (no one does) but it is our strong belief that there will be such an event, perhaps more than one.

In the meantime, stock prices of good, even excellent, companies have been marked-down – in many cases – to what we believe are fire-sale valuations, levels that have not been seen in decades. We are seeing stocks trading at or even below book value, at single-digit earnings multiples, at prices – in other words – that we think dramatically underestimate a company's true worth and earnings power. As of quarter-end, the Funds' primary economic sector allocations emphasized Financials (which were increased during the quarter), Industrials, Consumer Discretionary, and Information Technology – the latter inclusive of MasterCard and Visa.

In an environment where the ceiling seems to be falling every single day, it may seem hard to believe, but we think there is a strong likelihood that stock prices will be higher – perhaps significantly higher – going forward. The adage "it is always darkest before the dawn" may ring a bit hollow as you look over your third quarter account statements and given current market conditions, but the truth of the matter is that it is far more compelling to be buying stocks here at their current valuations, at a time when people are exiting the equity market en masse, than it is when stock prices are already up a lot and still rising (e.g., 1998-2000) and everyone wants to own equities and people are writing books called "Dow 36,000" and giving up their day jobs to day-trade stocks, and….well, you get the idea.

Howard Marks, a portfolio manager at Oaktree Capital Management whom we respect a great deal, recently outlined his version of the stages of a bear market:

• Stage #1: When only a few prudent investors recognize that, despite the prevailing bullishness, things won't always be rosy.



• Stage #2: When most investors recognize things are deteriorating.



• Stage #3: When everyone is convinced things can only get worse.

We think that we are deeply into the third stage, with the stock market essentially reflecting extreme levels of pessimism. But we believe that it will get better. It always has. In great chaos lies great opportunity.

Signs of hope and things we are looking for:

• Unprecedented, major, constructive, and impactful fiscal and monetary policy responses have been implemented, or are soon to be implemented, and are now global in scope and being done on a coordinated basis. More will be forthcoming (e.g., additional fiscal stimulus packages, further protection for distressed homeowners). It will not stop here. Policy-makers are becoming more aggressive and are working together.



• The dollar has stabilized.



• Credit market structures are being set up to allow access to credit and reopen the debt markets; it is possible we will see counterparty guarantees as one step in this process.



• The successful closing of the Morgan Stanley-Mitsubishi UFJ deal is potentially a watershed event, in that the US government implied it would stand behind Morgan Stanley's equity. In other words, the shareholder wipe-outs that happened with Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG would not repeat themselves with respect to Morgan Stanley. We think this will help encourage renewed capital flows into businesses.



• The TARP appears likely to be implemented relatively effectively and speedily in part through direct investments in banks.



• An enormous number of steps are being taken to improve liquidity conditions in the credit markets. There are increasing government guarantees for bank deposits and inter-bank loans. The Federal Reserve announced it will purchase assets directly from money market mutual funds that are having difficulty meeting redemption requests.



• Credit spreads in the past few days appear to be showing signs of thawing. LIBOR has come down, and inter-bank lending activity is showing some signs of stirring.



• Housing – the "positives": affordability has improved, inventory levels are being worked down, prices in some markets appear to be attracting multiple bidders, and mortgage rates have fallen. More needs to happen. We need to see mortgage application and refinancing activity perk up before we can call a bottom on housing.



• Record levels of cash are sitting on the sidelines, earning very little.



• Some pressure has been taken off the consumer (e.g., lower gas prices, better home affordability, and mortgage relief); reduced gas costs equates to a tax cut.



• Inflationary pressures appear to have abated; we think "headline inflation" could come down significantly.



• Valuation – In the current environment, valuation and business fundamentals haven't mattered. However, that will not persist indefinitely. Stocks of many excellent companies are on sale, in some cases at prices not seen in decades. Some measures of aggregate equity market valuation are at extreme levels, seen only rarely in the past. Interest rates are relatively low. Generally, that combination – over time – provides a favorable backdrop for equities to move higher.

We apologize for the length of this commentary, but these are extraordinary times, there is a tremendous amount of activity unfolding, and we feel it is important to share our thinking with you in as much detail as possible. We are talking with our universe of companies on a daily basis. We are communicating constantly with our contacts in Washington, DC and around the world. As part of our ongoing effort to understand the global economy, we sent four different teams to China during the third quarter, and also visited Hong Kong, Macau, and Japan. The tectonic plates have shifted on Wall Street and we are doing as much as we can to understand what promises to be a very different US and global financial system and regulatory environment in the future.

We know these have been trying times for you, too, and we appreciate your patience and support immensely. Please be assured that we are working as hard as possible to manage all of the Marsico Funds on your behalf, position them to the best of our abilities to take advantage of opportunities as they present themselves, and generate solid long-term performance results.

Thank you very much.

Sincerely,

Thomas F. Marsico
Portfolio Manager

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