Mirzam Capital Appreciation Funds posted a disappointing return of -32.92% in 2008. However, in comparison to a peer group of funds in the Mid-Cap value category that are managed by some of the largest firms in the industry, Mirzam is comparatively speaking in better shape.

Mirzam Capital Appreciation Fund Performance:

Peer Group* & 2008 Return
1 ING Mid-Cap Value -38.02%
2 Fidelity Advisor Mid-Cap Value -40.74%
3 TIAA-CREF Mid-Cap Value -40.66%
4 Blackrock Mid-Cap Value -38.71%
5 Putnam Mid-Cap Value -42.95%
6 MFS Mid-Cap Value -41.90%
7 Principal Mid-Cap Value -42.69%
8 Rydex Mid-Cap Value -43.91%
9 T Rowe Price Mid-Cap Value -39.69%
10 Franklin Mid-Cap Value -36.86%

Russell Mid-Cap Value Index -38.44%

S&P500 Index -38.50%

Mirzam Capital Appreciation Fund -32.92%

* For the peer group, we consulted the websites of some of the most well-known companies that manage mutual funds and selected their Mid-Cap Value funds for comparative purposes. Despite the enormous resources at their disposal, only one of these funds outperformed the S&P500 and only two outperformed the Russell Mid-Cap Value Index. Mirzam Capital Appreciation Fund outperformed both the Russell Mid-Cap Value and the S&P500 Mid-Cap Value Indices and all ten funds comprising the peer group.

Although, we have outperformed many of the best money managers in the US, some by a huge margin, we are not pleased with this year's performance. We own a fair amount of foreign companies, comprising more than half the portfolio. After the Lehman Brothers bankruptcy, investors sold their foreign holdings to seek safety in US Treasuries. This meant an appreciation of the dollar of more than 20% against the major currencies. As a consequence, approximately ten percentage points of the returns are not so much a negative reflection of the underlying fundamentals of the companies we own, but purely a function of currency translation. In addition, foreign stock exchanges materially underperformed US indices, particularly in the second half of 2008 when the US enjoyed huge inflows of funds. With this in mind, our returns, albeit negative, compare well against all indices. All things considered, our performance could have been far worse, but we believe our ability to find great companies with enduring competitive advantages stood you in good stead.

The MSCI Emerging Market index dropped a stunning 43% in October. However, emerging markets still hold a gain of 86% from their 2002 low, while the S&P500 was only 14% above its October 2002 bear market low. It is worth noting that the MSCI EM has still outperformed the S&P500 by more than 200% since 1998.

Stock Options

One of our investment strategies is to shun companies that rely on stock-based compensation to remunerate employees. This seemingly trivial distinction has kept us from being hurt by technology companies and, most recently, the financial sector. Both industries have grossly abused stock options to enrich executives beyond measure.

Nothing better demonstrates the huge transfer of wealth from American workers to their undeserved bosses than an article by the WSJ, November 20, 2008, under the headline: "Before the Bust, Some CEOs Took Their Money Off the Table."

During the period 2003 to 2007, Richard Fuld of the now defunct Lehman Brothers cashed in $184.6 million. He systematically sold stock to luckless investors. This was before the firm's catastrophic bankruptcy that triggered an earthquake in global markets. Bear Sterns' CEO pocketed $163.2 million. Countrywide's CEO raked in $470.7 million. Ken Lewis of Bank of America who rescued the drowning Countrywide had a more "modest" payday of $81.0 million. Daniel Mudd and Dick Syron from Fannie Mae and Freddie Mac picked up $23 million and $33 million, respectively, in compensation for their last two years of service, arguably the two men who did the most to stoke the housing bubble and throw the two companies into the arms of the US taxpayer. Charles Schwab tops the list with compensation of $816.6 million during this period.

The WSJ documented the compensation of 25 CEO's of the nation's largest financial and home-building companies. In the aggregate, they received $4.891 billion, or $195.6 million per CEO, and $39.120 million p.a. per CEO during the five year-period 2003 to 2007, the bulk of it through the use of stock options. You can't make this up if you try.

Where did this money come from? CEO's exercise stock options, paying a nominal amount for the stock which they then flipped by selling mainly to fund managers who indiscriminately allocated capital to the companies represented by these CEOs under the presumption that they were making an investment, when in fact they were paying the egregiously high compensation of CEOs with cash provided by the retirement funds of Americans. Executives are unremittingly and anxiously monetizing their stock options. Such transactions effectively transfer the hard-earned savings of workers to the bank accounts of executives. The regulators and politicians are well aware of this, but care less.

Current Holdings

Currently, the top 12 holdings in the fund comprise 40% of the portfolio. Fifteen percent of the portfolio was in cash at the end of 2008. The performance of the fund in 2009 will depend to a large extent on how well these 12 companies perform over the next 12 months. We are providing a short summary of each company. We encourage our Mirzam shareholders to visit the websites of these companies for more information.

- Teva Pharmaceutical - 4.41% of the portfolio; dividend yield 1.16%

Teva is a global pharmaceutical company, specializing in the development, production and marketing of generic and proprietary branded pharmaceuticals as well as active pharmaceutical ingredients. Teva is the world's largest generic drug manufacturer and among the top 20 pharmaceutical companies in the world.

- China Mobile - 4.39% of the portfolio; dividend yield 3.40%

China Mobile is the world's largest mobile phone operator with more than 400 million subscribers. An investment in China Mobile is a way of tapping into the growth of consumerism in China.

- Telefonica - 4.37% of the portfolio; dividend yield 5.87%

Telefonica is the world's third largest telecommunications company, with more than 240 million customers. It has a 75% market share in Spain, but also has a commanding presence in Europe, the United Kingdom and in Latin America.

- Syngenta - 4.23% of the portfolio; dividend yield 2.29%

Syngenta, a Swiss-based company, is a global agribusiness, a leader in crop protection, and the world's third largest high-value commercial seed producer. It has operations in more than 90 countries.

- TransCanada - 3.73% of the portfolio; dividend yield 4.31%

TransCanada owns North America's largest network of natural gas pipelines (36,500 miles in total), that taps into virtually all major gas supply basins in North America. It is one of the continent's largest providers of gas storage and related services. As a growing independent power producer, TransCanada owns, controls, or is developing approximately 10,900 megawatts of power generation.

- StatOil - 2.95% of the portfolio; dividend yield 4.93%

StatOil, a Norwegian company, is one of the largest net sellers of crude oil in the world, and a major supplier of natural gas to the European continents and the United Kingdom. The company is engaged in exploration and production in 40 countries.

- Nestle - 2.70% of the portfolio; dividend yield 3.43%

Nestle, a Swiss-based company, is one of the world's largest packaged food companies, with operations and sales in virtually every country in the world.

- Emerson Electric - 2.61% of the portfolio; dividend yield 3.75%

Emerson Electric, a US-based company, was incorporated in 1890. The company manufacturers a wide variety of electrical products used primarily by other manufacturers and those who build networks associated with telecommunications and other types of data networks. It generates more than 50% of its revenues from abroad.

- Southern Copper - 2.60% of the portfolio; dividend yield 7.90%

Southern Copper is a fully integrated copper producer with significant byproducts of molybdenum, zinc and precious metals, the fifth largest copper mining company in the world. Revenues from byproducts effectively pay for the cost of mining copper.

- Pfizer Pharmaceuticals - 2.60% of the portfolio; dividend yield 7.38%

US-based Pfizer is the world's largest pharmaceutical company.

- Unit Corporation - 2.53% of the portfolio; dividend yield 0.0%

Unit Corporation is a diversified energy company engaged in the exploration and production of oil and natural gas, the acquisition of producing oil and natural gas properties, the contract drilling of onshore oil and natural gas wells, and the gathering and processing of natural gas, all in the US.

- Johnson & Johnson - 2.52% of the portfolio; dividend yield 3.14%

Johnson & Johnson is a 120-year old US-based company with operations across the globe. It specializes in consumer products, pharmaceuticals, medical devices and diagnostics.

2008 Meltdown

With a dismal 2008 behind us, everyone has an opinion about what caused the meltdown. However, there is general consensus that the bankruptcy of Lehman Brothers was the global economy's cardiac arrest.

When confidence evaporated, investors began acting irrationally and sold assets without regard to price. The market deeply discounted great companies, many selling below book value. The most admired US companies were trading at scrapheap values.

Everyone's Hurting

The smartest money managers in the world are currently looking at deeply discounted portfolios. The S&P500 declined 38.5% in 2008. The commodity markets recorded their worst ever performance. The Reuters-Jeffrey CRB index, which started in 1956, fell 36% in 2008. The S&P GSCI index, the most widely followed benchmark for commodity investors, dropped 46.5%. Nasdaq Composite declined 40.5% and the Dow 33.8%.

Predictions

Currently, there is no shortage of experts predicting how long the world will suffer through a recession, how deep that recession will be, and how prudent it is to load up on gold. The fact is hat economies are complex, dynamic, and non-linear systems where small changes in the many factors that effect growth can result in significant differences in predicted outcomes. The future is unknowable.

We agree with Zachary Karabell, who writes in the WSJ, "Economic News Isn't All Bleak" (Dec. 26, 2008), that predictions about a long and painful recession lying ahead are based on past recessions that were caused by events that occurred over the course of years. "What happened since the collapse of Lehman on Sept. 15 was a global, synchronous cessation of all but nondiscretionary economic activity in the wake of the near-collapse of global credit markets. And it happened over the course of weeks not years...

"And yet, if things come to a halt more quickly than ever before, they could also restart more quickly than ever before. This is not to say they will, only that the possibility is more than marginal...

"The last months of 2008 will go down as one of the most severe economic reversals to date and on a global scale. But it is foolish to assume that this period provides a viable guide to what lies ahead."

Our Strategy for 2009

Our position with regard to equity investments has always been that (i) we perform fundamental due diligence on the companies we intend to buy; (ii) we do our best to acquire these equities at prices that capture a discount to the intrinsic values of the companies; (iii) we invest in these equities with the intention to hold them for a very long time; (iv) our selling decisions are based on business model issues that indicate permanent impairment and (iv) in executing the above, we follow the investment principles of Warren Buffett that have withstood the test of time. While some investors were recklessly dumping stocks and thereby destroying their capital, we stayed rational and unemotional. It goes without saying, loss of capital is guaranteed when selling takes place in an environment where sellers hugely outnumber buyers. We do not buy in May to sell in August. The secret to capital preservation is buying stocks and owning them over the long-term. It is time in the market that matters, not market timing.

We do not allow ourselves to be unduly troubled by the pessimists. We continue finding great companies, with enduring business models and with people at the helm who care about shareholders and not their own pocketbooks.

It is easy to paint a dismal picture for 2009. The media will no doubt continue to spew out grim headlines for a couple more months. We will be told ad infinitum about job losses, foreclosures, bankruptcies, and recessions. The US economy could contract by 5% in 2009. Commercial mortgages could follow residential mortgages. Corporate bonds are currently deeply discounted, which raises the possibility of substantial defaults. The auto industry is on its knees. The Federal Reserve is responding with unprecedented measures to support the financial system and provide liquidity. Hank Paulson is providing financial relief in the form of direct equity investments to loans and other bail out packages. The incoming president is promising huge amounts of infrastructure spending that could see next year's deficit as high as 12.5% of GDP. The big fear now is a downward spiral of falling asset prices, rising bankruptcies, foreclosures and unemployment, all feeding on each other. We could go on, but like spring follows winter, de-leveraging will come to an end, excesses will be cleared out, and demand will return. Buy-and-hold investors, like us, will be the beneficiaries of any major rebound in indices, while the fear stricken will rue their panic selling and subsequent indecision.

Conclusion

The events of 2008 and their temporary impact on stock prices have not rendered unsound the investments that we made in the portfolio. For the most part, these businesses dominate their industries, have global reach, and are well positioned to profit from major economic trends that are sweeping the globe. The events of 2008 have postponed the realization of these profits but have not in any material way undermined or impaired the future prospects of the companies we own. Increases in their stock prices during the past six weeks have already given some indication of their buoyancy relative to the major indices. We look forward with confidence to 2009. There is an old saying that you make all your money in bear markets, you just don't know it until later. We trust you view your portfolio in the same frame of mind as Shakespeare's Merchant of Venice who said, "My ventures are not in one bottom trusted. Nor to one place; nor is my whole state upon the fortune of this present year; therefore, merchandise makes me not sad."