2nd Quarter

July 10, 1999

Another quarter has come and gone. The two quarters to date have not brought about many surprises, except for the turn around in most Asian and South American stock exchanges and the small run-up in REITs. At the end of the first six months of 1999 most Americans were richer, capital was more expensive, gold continued to lose its glitters, Coca-Cola had fallen out of favor in Europe, and bananas and steel were at the top of the trade war list.

The biggest winner year-to-date has been – you guessed it – large-cap stocks. This sector has continued to thrive on the low inflation and robust growth environment with the S&P 500 index posting a 11.67% gain year-to-date. In light of this we have continued to overweight large cap stocks that formed the foundation of all our portfolios. Mid-cap stocks represented by Longleaf Partners Fund and Oakmark Select have been our more stable and better performing funds. With some of the high flying small-cap technology stocks now moving into the mic-cap range, we are quite optimistic about the future of this sector. International stock funds continued to dampen volatility and at the same time added appreciable returns to our portfolios. The decline in returns from Europe due to the war in Kosovo, increased competition from deregulation, and the weakening Euro were offset be positive returns from Asia and South America.

At the other end of the spectrum, bonds, small-cap stocks, and gold combined to make up the laggards. Recent negative consumer sentiment regarding future inflation and interest rate hikes by the Fed and an over-supply of corporate bonds have sent bind prices, and with them returns from bond funds, sharply lower. Even revered and higher quality bond funds such as PIMCO Total Return Fund and Warburg Pincus Fixed Income Fund have been affected. Fortunately, asset allocation has helped cushion the negative impact to our portfolios. The perennial wait for small-cap stocks to jump-start may have to be put off for yet another quarter. Though the Russel 2000 shows a year-to-date gain of 8.47%, the underlying story has been that small-caps, sans Baron Small-Cap Fund and a couple of others, have found it hard hard to come into the black and have merely been trading water. Gold has, in recent times, fallen to new depths due to the sale of gold reserves by Central Banks and a decline in demand from Asia over the last couple of years. It is far from the market hedge investors once though it was.

Whoever the winners and losers might be, overall, the first six months of 1999 have been a time prosperity for the nation. Inflation is under control, unemployment at 4.2% is at all time lows (according to some, even below the “natural rate of unemployment”), productivity has been up every month this year, consumer confidence is high, and the economy is growing at a very healthy pace. All of this, as June 24th Wall Street Journal reports, has translated into a companies in the S&P 500 beating analysts’ earnings estimates by the largest margin in the first quarter. What is even more encouraging is that Asian and South American stock markets are staging a resurgence even though economic fundamentals in those countries remain shaky. It all points to a rather optimistic for investors. Although, in the final analysis, it is investor sentiment and emotions that have the largest impact on the markets.

It is our belief that although economic fundamentals remain strong unexpected increases in interest rates and external jolts to the economy, both of which can affect future earnings, could quite easily sour investor sentiment and have adverse effects on the markets. Therefore, investors should not become accustomed to thinking that double – digit returns in the future will become the norm merely because of recent past performance

Enclosed, you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of June 30, and a quarterly Account Management Fee Statement. If your desire Morningstar Reports or the most recent copy of our Form ADV, Part II, please call us. Also, if your investment objective or personal financial situation has changed, it is important to notify us so we can reevaluate your portfolio.

Sincerely,