Composite	10.5%, as of 12/31/06
Lipper Global Flexible Portfolio Category	10.7%
CFSB/Tremont Hedge Fund Multi-Strategy Index	10.2%
Morningstar World Allocation category	9.9%
Morningstar Moderate Allocation category	7.1%
Morningstar Target Date 2015-2029 category	7.0%
MSCI World Index	6.2%
Citigroup 3-month T-bill index	3.7%

1. What was the rationale for launching these funds? You’ve got a small operation and three investment professionals who are already responsible for a half billion in assets spread over 2447 separate accounts. Is it reasonable to add four publicly-traded funds on top of all that?

Answer: There are actually three rationales for the funds. First, the funds give FIM access to certain opportunities that they couldn’t tap through their separately management accounts. Some purchases in Taiwan, for instance, come in $20,000 blocks which makes them impractical even for fairly large separate accounts. Second, a lot of investments weren’t available to clients with small separate accounts – those of $100,000 or so. Finally, the funds helped alleviate a problem for clients who wanted to transfer-in accounts from other advisers.

2. How do you distinguish between the risk levels and, hence, investment mixes in your funds? All of the funds have the same objective, "long-term positive total return." The prospectus only allows that Growth will invest "to a greater extent" in equities and will be "more volatile" than the others. But how are those risk levels and portfolio exposures set – internal guidelines, statistical models, gut instinct?

Answer: attorneys, the folks who write the prospectus, favor "bland language." The general answer is that, within the overarching goal of producing real absolute returns (that is, all of the funds seek to consistently generate returns in excess of inflation plus a reasonable rate of investor withdrawals – which translates to something in the high single digits), the funds are designed backward from an estimation of acceptable risk. The most conservative fund is designed to subject investors to no more risk than they’d see in an all-bond portfolio while producing as much "excess" return ("alpha") as they can. The managers use an asset class-based model to estimate their worst-case risk.

3. As part of your celebration of "good intentions," you note that "We avoid investing in products and services that hurt people… alcohol, tobacco, firearms, pornography, etc." Why aren’t any of those restrictions mentioned in your prospectus but only on your website?

Answer: "Good question. I really don’t know." The rationale for the limitations is economic as much as moral: businesses which injure their stakeholders are not sustainable. Mr. Liggett wasn’t sure why the language wasn’t more consistent across various documents (his suspicion involved lawyers again), but promised to check.

4. Why have the funds underperformed their composites by 47%? The implication of including the separate-account composites in the prospectus is that the performance of these accounts is broadly indicative of the performance of the corresponding fund. In your first year of operation, that’s been far from the case:

	Accounts in 2006	Fund in 2006
Growth	22.11%	9.41%
Core	14.60	8.75
Conservative Core	11.79	6.90
Yield Income	10.88	6.32

Answer: each fund, like each separate account, was built from scratch. The managers bought securities only as attractive opportunities presented themselves. As a result, the funds weren’t fully-invested until the second half of the year. For much of the first half, they held 50% or more of their assets in cash. Now that the funds are fully invested (typically that still implies a 10% cash stake), they’re actually outperforming their respective separate account composites. Through the first half of ’07, Zach estimated that the funds led the composites by 100 basis points or so.

5. How do you assess and manage the risk of including both an incredibly wide range of investible securities and complex derivatives in your funds?

Each fund may, you note, "invest without limit" in any conceivable foreign or domestic security. They can also sell short, leverage up to 33%, place 15% in illiquid securities, invest without limit "interest rate and currency rate swam agreements for hedging or speculative purposes." The Core fund’s most recent portfolio disclosure (6/30/07) reveals:

• About 150 common stocks spread over 25 countries,
• Five exchange-traded funds
• Four closed-end funds
• Two convertible bonds
• Eight corporate bonds (two from the Netherlands)
• Six foreign government bonds
• Six U.S. Treasury bonds
• Two preferred stocks
• Four call options (three SPX volatility calls)
• Seven reverse convertible bonds
• One range accrual bond
• Five non-inversion bonds
• Four warrants
• One CPI-linked structured corporate bonds

Collectively, 24 of those investments – primarily common stocks and ETFs – are held as short positions, comprising about 13.5% of the portfolio.

Answer: each of FIM’s investment professionals is a generalist with considerable expertise in a different slice of the investing world (Sutherland in equities, Stepan in convertibles and fixed-income, Liggett in international). They work as a team with each person responsible for bringing ideas to the group for debate.

The eclecticism of the portfolios is fed by several factors: first, they have far-flung professional networks and an institutional reputation for investing in "unique stuff." As a result, lots of outside professionals bring them leads on interesting opportunities for investments which might help manage risk. Second, they’re small enough that they can profit from opportunities that Fidelity or Price wouldn’t even notice. Finally, Zach describes the team as "absolutely passionate" about what they do. As a result, they delight in the effort to find new and unique ways to benefit their investors.

Bottom line: Mr. Liggett (and, via voice- and e-mail, Mr. Sutherland) came across as very bright, articulate and thoughtful. Their separate accounts have accumulated a substantial long-term record for consistently outperforming a wide array of benchmarks. The funds have been impressive in 2007: they’ve posted peer-beating returns (Core Conservative is up 9.53%, Core is up 11.83%, and Growth is 13.77%, YTD through July 28). And all of the funds gained 3-4% during the July turbulence, when the broad market declined 3% and even many of the "hedged" mutual funds I follow lost money.

Utopia’s shareholder communications probably don’t advance the company’s goal of educating their shareholders, the ones I read were bland, cursory and uninformative. In contrast, their separate account clients get a well-written monthly newsletter that actually explains the nature and purpose of the exotic investments. For example, the fund report merely notes that "a small allocation was made to a basket of reverse convertible securities and non-inversion structured notes." Period. No hint about what on earth reverse convertibles securities (apparently "revertible" to the cognoscenti) or non-inversion structured notes are, much less what they contribute to the portfolio. The newsletter, by contrast, goes on to say:

We have also been buying a basket of structured notes designed to provide attractive total returns when long-term interest rates are greater than short-term interest rates. These positions provide diversification, low sensitivity to the level of interest rates and good potential for attractive total returns.

These folks seem to be producing a really useful, first-rate product. I’m hopeful that they’ll be able to communicate their strengths and strategies somewhat more effectively to their new audience of mutual fund investors. Beyond that limitation, they seem to offer a compelling set of low-cost choices for a wide range of investors who are interested in "keeping it" as well as "making it."

Company website: http://www.utopiafunds.com/. For folks interested in reading the monthly newsletter, you need to go through the management company’s main site: http://www.fimg.net, then click on the links for "research" and "newsletters."



August 1, 2007