Applied Investment Management Program Student … Investment Management Program Student Managed Fund 2005 ... thank you to Christina Gasser, ... John Potter – Cortina Asset

AIM Fund Annual Report 1

Applied Investment Management Program Student Managed Fund

2005 - 2006 AIM Fund Annual Report Period Ending April 30, 2006

College of Business Administration Marquette University



Applied Investment Management Program 2005 - 2006 Annual Report

Letter from the Dean of the College of Business Administration 1

Letter from the Director of the AIM Program 3 The AIM Program Class of 2006 4 AIM Fund Overview 6 AIM Fund Operations 8 AIM Fund Portfolio Performance 9

AIM Equity Fund 16 AIM Equity Fund Sector Performance 56 AIM Equity Fund Top 10 Holdings 57 AIM Equity Fund Statement of Operations 57 AIM Fixed Income Fund 58

Letter from the Chair of the Finance Department 2

AIM Fund Transactions 15

AIM Fixed Income Fund Statement of Operations 62

Table of Contents

Contact: Dr. David S. Krause Director, AIM Program College of Business Administration Finance Department Marquette University P.O. Box 1881 Milwaukee, WI 53201-1881 Telephone: (414) 288-1457 Email: [email protected]


OFFICE OF THE DEAN, COLLEGE OF BUSINESS ADMINISTRATION

May 3, 2006 The Applied Investment Management (AIM) Program is an important recent addition to the Marquette University College of Business Administration curriculum. The AIM Program pro-vides a quality education in investment management that is firmly grounded in Jesuit Catholic intellectual values. The program parallels the College of Business Administration’s core mis-sion, enabling our graduates to function effectively and ethically in a diverse workplace and global economy. In creating the AIM program, we actively solicited the input of top professionals in the invest-ment community – many of whom are alumni of the College of Business Administration. We have also attempted to learn from the successes of other innovative business schools around the globe that have created similar programs. As you will see in this, the AIM program’s first an-nual report, I believe we have succeeded in creating a world-class program. Recently, the Chartered Financial Analysts (CFA) Institute announced that the AIM Program had been selected as the first undergraduate-level Program Partner. Recognition as a CFA Pro-gram Partner signals to potential students, employers, and the marketplace that our curriculum is closely tied to professional practice and is well-suited to preparing students to sit for the CFA examinations. We are pleased that the CFA Institute recognizes that the AIM Program ad-dresses the elements necessary to help our students develop the skills, competence, and integrity required to succeed in the investment profession.

I am impressed with the progress of the AIM Program and I know that Drs. Krause and Peck are looking forward to working closely with Marquette’s alumni, the investment community, and the CFA Institute to further enhance the learning experience of our students. Congratulations to the inaugural AIM graduates, the Class of 2006!

David L. Shrock Dean


DEPARTMENT OF FINANCE, COLLEGE OF BUSINESS ADMINISTRATION

May 3, 2006 The AIM Program is off to a successful start. As this annual report shows, the student managed fund has done well. The Class of 2006 students all had meaningful internship experiences last summer, have secured entry level positions in the investment industry, and now are busy pre-paring to take the Chartered Financial Analysts Level I exam. AIM is clearly poised to become one of the leading undergraduate applied finance programs by serving the need for well-educated and ethical investment research analysts. While only a select group of finance majors participate in AIM, the program has benefited all finance majors. The excitement created by the program has re-energized students, faculty, alumni, and the business community. For example, the Financial Management Association has once again become active and numerous outside speakers have visited our campus. During the past year, our students traveled to Wall Street and the Chicago financial markets. Professional development seminars have been hosted on campus and an Investment Club was launched al-lowing non-AIM students to also have the experience of managing money. All of these events have allowed our faculty to help place more students within the financial industry. Additionally, the curriculum requirements of the AIM program have created more fi-nance electives that are open to all majors. One such course addresses investment ethics, corpo-rate governance and social responsibility that are open to all majors. Finally, the research tools in the AIM room have stimulated new research projects for the faculty and students. The Applied Investment Management Program has served as a model for innovative financial education. The Department of Finance will continue to seek ways to develop other “niche” ap-plied programs with a strong emphasis on ethics and social responsibility that helps to create a truly transformational educational experience for our students. We appreciate your support in this important mission.

Sarah Peck Dr. Sarah W. Peck

Chair, Department of Finance


DEPARTMENT OF FINANCE, COLLEGE OF BUSINESS ADMINISTRATION

May 3, 2006 On behalf of all the students who participated in the Applied Investment Management Program, I am pleased to introduce the first AIM Fund Annual Report for the year ending April 30, 2006. This was a wonderful year for the students in the AIM Program as they began quite literally with a blank spreadsheet upon which they created a $1 million investment portfolio. Since the Fall 2005 semester, the AIM students in the inaugural class have been responsible for essentially all aspects of portfolio management: adopting methods for screening and evaluating stocks and bonds; preparing and presenting pitches to decide on which financial securities to buy and sell; and implementing portfolio trading strategies. In short, the AIM students were ac-countable for organizing and managing a real portfolio. Special thanks go to Marquette University’s Office of Treasury Services for allowing the AIM Program to manage a portion of the endowment. John Hansen and Sean Gissal provided valu-able experience and guidance – not to mention considerable patience – during the first year of our operations. The support of the professional investment community also has been out-standing. Many individuals shared their time and knowledge with our students in the classroom and during our AIM Fund Investment Advisory Board meetings. It has been a gratifying year for me working with the students in the AIM Program. In addition to being intellectually curious, they were extremely committed to the responsibilities associated with running a student-managed fund. We experienced the ‘thrills and spills’ involved in man-aging small cap equities – and we also learned about the impact rising interest rates have on a fixed income portfolio. Despite the ongoing uncertain investment climate, we are confident that the AIM Fund will provide invaluable opportunities for learning as students in future classes apply their training to managing a portion of Marquette’s endowment funds. We are truly grate-ful to all of the supporters of the AIM Program.

David S. Krause

Dr. David S. Krause

Director, AIM Program


The AIM Program Class of 2006 We would like to thank the following investment professionals who have taken time out of their busy schedules during the past year to meet with our class and offer their insight and expertise.

In addition we would like to thank the Marquette faculty – especially Drs. David Krause, Sarah Peck, Michael DeWally, Don Giacomino and Brian Prucyk. We would like to extend a special thank you to Christina Gasser, Graduate Assistant, for her service to the AIM Program. The AIM Fund started with no investments and we are leaving with over 60 investment posi-tions in the portfolio. We would like to extend a good luck wish to the classes that follow us and hope that they help establish a tradition of excellence in the AIM Program. With the contin-ued guidance of the faculty and advisors, we believe this will happen. Thank you. The AIM Program Class of 2006

James Kitzinger – Kitzinger Lautmann Thomas Kramer – LightPoint Dr. George Kutner – Marquette University Chuck Lamb – Marquette University Pete Lautmann – Kitzinger Lautmann Dennis Long – Principal Global Investors John Malooly– Wasatch Advisors Susan Marshall – Executive Advisor David McHugh – Northern Trust Barry Mendelson – Capital Market Consultants Andrew Moore – Wells Fargo Bob Ollech – Fortress Partners Kyle O’Meara – Baird John Potter – Cortina Asset Management Srini Pulavarti – Spider Management Dave Reichart – Principal Global Investors Mike Rems – Goldman Sachs Jay Schwister – Baird Ben Somers – JP Morgan Sarah Somers – Morgan Stanley Mike Steppe – Brookfield Investment Dan Tranchita – Baird Bill Walker – Mason Street Advisors Tom Warden – Piper Jaffray Ronald White – Citigroup Global Markets Jason Weiner – M&I Dr. Robert Yahr, Marquette University Mark Zellmer – Northern Oak

Brian Andrew – Ziegler Rod Bare – Morningstar Mike Blonski – Artisan Partners John Boritzke – M&I Greg Branson – Wells Fargo Pat Brown – Citigroup Global Markets Jon Bruss – Fortress Partners Maureen Busby Oster – MBO Cleary Matt D’Attilio – Reinhart & Mahoney Ryan Davies – Cortina Asset Management Jeff DeAngelis – Mason Street Advisors Neal Dihora – Wasatch Advisors Patrick Dorsey – Morningstar Tom Eck – Cortina Asset Management Matt Fahey – M&I Mike Ferris — Wachovia Doug Fry – Reinhart & Mahoney Dan Fuss – Loomis Sayles Dan Geigler – Morgan Stanley Sean Gissal – Marquette University Doug Guffy – Baird Pat Halter – Principal Global Investors John Hansen – Marquette University William Heard – Stark Investments Tao Huang — Morningstar Dan Keegan – Keegan House Bob Kemp – Capital Growth Management Sean Kennedy – Wells Fargo


Applied Investment Management Program Marquette University

Class of 2006

Back Row Standing (left to right): Scott Kennedy, David Trotter, Ryan Berg, Jaclyn Jensen, Gregory Rawls, Jason Toellner, Paul Zandt. Front Row Seated (left to right): Steven Holtkamp, Timothy Wojs, Raymond Auth, Christopher Cunningham, Michael Hepp.


AIM Fund Overview The AIM Program was established in 2004 to provide Marquette University’s undergraduate students the opportunity to integrate the financial principles they are learning, along with rele-vant internships and investment experiences, so that they may become proficient and ethical investment research analysts. The inaugural class of students enrolled in the AIM Program gained valuable experience by managing a portion of the University’s endowment fund. The University initially contributed $500,000 of endowment funds in September 2005 to establish the AIM Equity Fund. In January 2006, an additional $500,000 was contributed allowing for the creation of the AIM Fixed Income Fund. The AIM Fund student managers were required to comply with the same policies and perform-ance guidelines as the other money managers retained to invest Marquette University’s endow-ment funds. In keeping with these requirements, the student managers sought to achieve excess rates of return while assuming risks similar to those of the Russell 2000 and the Lehman Broth-ers Aggregate Bond Indexes. The AIM Fund student managers held two widely diversified portfolios of common stocks and fixed income securities. They sought to invest in well-managed, profitable businesses without unnecessarily exposing the University’s funds to impru-dent risks. The investment objective of the AIM Equity Fund was to achieve long-term capital return in excess of 200 annualized basis points of the benchmark (Russell 2000 Index) by investing in small market capitalization companies ($250 million to $1 billion market value). Initial com-mon stock positions were not allowed to exceed 2% of the total market value of the AIM Equity Fund at the time of purchase and no investment position was allowed to exceed 5% of the port-folio’s value at any time. Over 97.5% of the equity portfolio was required to be invested at all times in marketable equities with a risk profile similar to that of the market benchmark. The stu-dents were allowed to invest in American Depository Receipts (ADRs); however, these com-bined investments could not exceed 10% of the portfolio’s market value at any time. The AIM Equity Fund was well diversified with respect to exposure to different economic sec-tors, industry segments, and individual stocks. This was accomplished by implementing a ‘sector neutral’ policy, which restricted the maximum (minimum) allocation to any industry sector (as defined by the Russell 2000 Index) to be no more (or less than) than the lesser of: 2% above (below) the Index’s market value weighting of the AIM Equity Fund or 1.5 times above (below) the Index’s market value weighting of the portfolio’s equity investment. This policy promoted a ‘bottoms-up’ or fundamental analysis approach, which involved stock evaluation methods that used financial and economic analyses to identify mispriced securities. Students in the AIM Program learned to evaluate fundamental information which included a company's fi-nancial reports and non-financial information, such as estimates of the growth of revenue and earnings; industry comparisons; analysis of the effects of new regulations or demographic changes; and economy-wide trends. Discounted cash flows models and relative valuation tech-niques were employed to identify potentially mispriced securities.


The investment objective of the AIM Fixed Income Fund was to achieve a total return in excess of 20 annualized basis points of the benchmark (Lehman Brothers Aggregate Bond Index). The duration of the fixed income portfolio was not allowed to exceed that of the benchmark by more or less than 20% at any time. The fixed income portfolio followed a ‘core plus’ investment management style, which permitted the student managers to add debt instruments with slightly greater risk and return potential than found in the Lehman Brothers Aggregate Bond Index. These investments could include the addition of high yield and global debt securities to the core portfolio of investment-grade bonds – provided that the percentage of assets invested in ex-tended non-benchmark investments was not greater than 20% of the fixed income portfolio’s market value. The AIM students utilized a ‘top-down’ approach in establishing their fixed income portfolio. Basing their investment strategy on economic and interest rate forecasts, they established fixed income sector allocations based on the expected future movements of interest rates and the yield curve. The student managers of the AIM Fixed Income Fund employed a ‘fund of funds’ strategy which combined low-cost fixed income index mutual funds and exchange traded funds (ETFs) to benefit from anticipated future trends. This strategy provided excellent diversification and low transactions costs. ACADEMIC ADVISORS David Krause, PhD Sarah Peck, PhD MARQUETTE UNIVERSITY ENDOWMENT LIAISONS John Hansen Sean Gissal BROKERAGE SERVICES Robert W. Baird CASH MANAGEMENT SERVICES Marshall & Ilsley Bank


AIM Fund Operations The AIM Fund was divided into two autonomous funds: the Equity Fund and the Fixed Income Fund. While the goal of each fund was to identify and acquire under-valued securities within its respective investment universe, the student managers were free to determine the best way to identify those opportunities within the investment policy guidelines. Throughout the holding period, the AIM Fund student managers endeavored to improve their common stock and fixed income selection processes by applying their academic experiences, learning from their peers, and building upon the existing knowledge base of professional investors and the faculty. The AIM Fund consisted of the student managers, the AIM Program Director, and the AIM In-vestment Advisory Board. The Board members contained representatives from the University’s Office of Treasury Services, Department of Finance and Accounting faculty, and various mem-bers of the investment community selected on the basis of their availability and ability to en-hance the educational benefits of the student-managed portfolio experience. The function of the AIM Investment Advisory Board was to serve as counsel to the student members of the AIM Fund. The Board met six times during the academic year with the students. The role of the AIM Program Director was to help the students develop and enhance best prac-tices in order to position the overall portfolio for continued success. In addition to teaching in-vestment courses, the Director also served as the contact with Marquette’s Office of Treasury Services to insure that the students were developing and maintaining risk profiles consistent with the University’s policy. In addition to helping place the AIM students in their summer in-ternships and post-graduation investment positions, the Director is responsible for overseeing that the AIM Fund is rebalanced in a timely manner; monitoring the Fund during the summer months; and coordinating external relations through monthly newsletters, receptions, and out-side visits. The Director works closely with the investment management community and the Marquette alumni network, as well with University Admissions and the Office of Career Ser-vices. To maintain the safety of the portfolio, limit orders are established prior to the end of the fall semester and at the conclusion of the school year. The AIM Program Director, with the ap-proval of the Office of Financial Services, has the authority to execute trades during breaks in the school year, if necessary. The proceeds of securities sold during the semester breaks will be invested in the exchange traded funds of the respective benchmarks. The next class of AIM Fund student managers will begin actively managing the portfolio at the start of their fall se-mester.


AIM Fund Portfolio Performance As noted earlier, the AIM Fund’s benchmarks are the Russell 2000 Index and the Lehman Brothers Aggregate Bond Index for the equity and fixed income portfolios. The inception dates for the equity and fixed income funds were September 28, 2005 and January 30, 2006, respec-tively. The funds’ total return performance for the holding period versus their benchmark is pre-sented below.

For the holding period ended April 30, 2006, the AIM Equity Fund returned 21.35%, over per-forming its benchmark by 456 basis points. The AIM Fixed Income Fund returned – 0.53%, over performing its benchmark by 45 basis points. The following graph displays the AIM Eq-uity Fund’s sector weighting relative to the benchmark.

AIM Equity Fund Sector Weightings(as of 4/30/2006)

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AIM FUND Russell 2000

Holding Period Return (as of 4/30/2006)

Fund Benchmark AIM Fund Index Over/(Under) Performance

Equity * Russell 2000 Index 21.35% 16.79% 4.56%Fixed Income ** Lehman Aggregate Bond Index -0.53% -0.98% 0.45%* 9/28/2005 Inception ** 1/30/2006 Inception


The AIM Fund’s investment policy allows for up to 20% of the fixed income portfolio to be invested in non-investment grade bonds. As shown below, the fixed income portfolio was nearly sector neutral during the holding period; however, high yield corporate bonds comprised nearly 20% of the portfolio.

The following table shows a risk-return snapshot of the AIM Fund over its history. As meas-ured by the standard deviation of returns over the holding period since inception, the equity portfolio was less risky than its benchmark. The equity fund’s Sharpe ratio (a risk-adjusted measure calculated using standard deviation and excess return to determine reward per unit of risk) was almost 10 and well above the benchmark. The AIM Equity Fund’s beta was 1.23 – less than the Russell 2000 Index beta – which was computed relative to the Standard & Poor 500 Index. Jensen’s alpha (the average excess return versus that predicted from the portfolio's beta and the average benchmark return) was 5.04% – which exceeded the return objective. The AIM Fixed Income Fund’s standard deviation was also lower than the benchmark during the holding period. The Sharpe ratio for the fixed income portfolio, although negative, was bet-ter than the Lehman Brothers Aggregate Bond Index. The AIM Fixed Income Fund’s average duration, the most commonly used measure of risk in bond investing, was 4.21, about 10% lower than the benchmark at the end of the holding period. Duration incorporates a bond's yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a fixed income security or portfolio is to changes in interest rates. The excess return for the AIM Fixed Income Fund was 45 basis points above the benchmark – also exceed-ing the return objective.

AIM Fixed Income Fund Sector Weightings(as of 4/30/2006)

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U.S. Government Mortgage-backed Corporates ForeignGovernment/Other

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AIM FUND Lehman Aggregate Bond Index


The following chart shows the monthly total return figures for the AIM Equity Fund, the Rus-sell 2000 Index, and the Standard & Poor’s 500 Index since the inception of the fund. The AIM Fund had positive returns during six of the seven months in the holding period.

AIM Fund Holding Period Risk-Return Measures (as of 4/30/2006)

Since Inception (9/28/2005)Holding Period Std. Deviation (annualized)

Sharpe Ratio Beta* Alpha**

Equity Fund 12.61% 9.85 1.22 5.04%

Russell 2000 Index 15.22% 6.27 1.36

Since Inception (1/30/2006)Holding Period Std. Deviation (annualized)

Sharpe Ratio Average Duration

Excess Return**

Fixed Income Fund 2.58% -1.27 4.21 0.45%Lehman Aggregate Bond

Index 2.87% -1.54 4.68

* Computed on S&P 500 Index ** Relative to benchmark

Monthly Returns - AIM Fund vs. Russell 2000 and S&P 500

0.6%

5.7%

8.7%

-1.9%

2.3%

-0.5%

1.6%

3.0%

1.1%

3.4%

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1.3%1.3%

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3.8%

2.6%

-0.7%

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-4%

-2%

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Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06

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AIM FUND RUSSELL 2000 S&P 500


The following chart shows the monthly total returns for the AIM Fixed Income Fund and the Lehman Brothers Aggregate Bond Index since the inception of the fund. The AIM Fund outper-formed the benchmark in March and April.

The following charts track the time series performance of the two AIM Fund portfolios. The AIM Equity Fund outperformed the Russell 2000 and the Standard & Poor 500 Indexes during the holding period ended April 30, 2006. The AIM Fixed Income Fund also tracked more fa-vorably than the Lehman Brothers Aggregate Bond Index since its inception. The total returns of both AIM portfolios included brokerage fees, which depressed the equity and fixed income returns during the holding period by about 40 and 3 basis points, respectively. These fees were likely to have been disproportionately higher than future periods because each of the portfolios had to be fully invested from an initial cash position of $500,000. Both portfolios also experi-enced a “cash drag” during the time period before they were fully invested. Although it is not displayed, the “equity only” portion of the AIM Equity Fund achieved a return in excess of 25% during the holding period.

Monthly Returns - AIM Fund vs. Lehman Brothers Aggregate Bond Index

0.04%

-0.49%

-0.09%-0.18%

-0.98%

0.18%

-1.2%

-1.0%

-0.8%

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Feb-06 Mar-06 Apr-06

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AIM Fund Lehman Aggregate Bond Index


AIM Equity Fund Relative Performance (Inception through 4/30/2006)

$460,000

$480,000

$500,000

$520,000

$540,000

$560,000

$580,000

$600,000

$620,000

29-Sep-05

13-Oct-05

27-Oct-05

10-Nov-05

25-Nov-059-Dec-05

23-Dec-05

10-Jan-06

25-Jan-068-Feb-06

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23-Mar-066-Apr-06

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Mar

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AIM Fund

S&P 500

Russell 2000

AIM Fixed Income Fund Relative Performance (Inception through 4/30/2006)

$494,000

$495,000

$496,000

$497,000

$498,000

$499,000

$500,000

$501,000

$502,000

$503,000

8-Feb-06

23-Feb-06

9-Mar-06

23-Mar-066-Apr-06

21-Apr-06

Mar

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AIM Fund

Lehman AggregateBond Index


The Chartered Financial Analysts (CFA) Institute issued the Global Investment Performance Standards (GIPS) in 1999 to provide a basis for readily accepted and comparable presentations of an investment fund’s past investment performance. It is currently stated as a recommenda-tion within the GIPS standards that relevant risk measures, including tracking error and the in-formation ratio, be presented along with total returns for investment funds relative to their benchmarks. The following charts present the tracking errors and information ratios for the AIM Equity and Fixed Income Funds.

AIM Equity Fund Tracking Error and Information Ratio

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Annualized Tracking Error (30-day Moving Average)

Information Ratio (30-day Moving Average )

AIM Fixed Income Fund Tracking Error and Information Ratio

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Annualized Tracking Error (30-day Moving Average )

Information Ratio (30-day Moving Average)


The next table contains excess return attribution information for the AIM Equity Fund based on Fama’s decomposition of risk. The portion of excess return that was not explained by the port-folio’s beta and market risk premium was 7.3%; which indicates the AIM student managers’ stock selection contribution. AIM Fund Transactions The following table displays the securities sold throughout the holding period for the two AIM Funds. The turnover ratio for the AIM Equity Fund was about 20% for the period ending April 30, 2006.

AIM Equity Fund - Sold Securities (9/28/2005 Through 4/30/2006)

Security Symbol Acquisition Date Sale Date Days

HeldUnit

Quantity Unit Cost Total Cost Sale Price Proceeds Realized Gain/Loss

% Gain/Loss

Serena Software SRNA 10/05/05 10/22/05 17 500 $19.45 $9,725 $23.33 $11,665 $1,940 20%Blue Nile NILE 10/05/05 11/22/05 48 310 $33.08 $10,255 $43.62 $13,522 $3,267 32%Rackable Systems RACK 10/11/05 11/22/05 42 720 $13.88 $9,994 $20.50 $14,760 $4,766 48%Sonosite SONO 11/02/05 11/22/05 20 350 $30.56 $10,698 $37.24 $13,034 $2,337 22%Select Comfort SCSS 10/11/05 12/15/05 65 275 $17.86 $4,912 $27.16 $7,468 $2,556 52%Multi-fineline Elec MFLX 10/05/05 01/04/06 91 200 $26.23 $5,246 $48.75 $9,750 $4,504 86%Tim Participacoes TSU 10/11/05 01/06/06 87 270 $18.52 $5,000 $30.85 $8,330 $3,329 67%Oregon Steel Mills OS 11/02/05 01/30/06 89 140 $26.02 $3,643 $39.64 $5,550 $1,907 52%Mikohn Gaming PGIC 10/05/05 02/03/06 121 730 $13.17 $9,614 $7.41 $5,409 -$4,205 -44%Matria Healthcare MATR 10/11/05 02/08/06 120 135 $35.39 $4,778 $42.18 $5,694 $917 19%Blue Coat Systems BCSI 12/08/05 02/21/06 75 220 $45.34 $9,975 $19.09 $4,200 -$5,775 -58%Amedisys AMED 10/05/05 03/21/06 167 260 $37.48 $9,745 $35.18 $9,161 -$584 -6%First Horizon Pharm FHRX 02/08/06 03/27/06 47 680 $17.09 $11,621 $24.18 $16,466 $4,845 42%

Sub-Total $105,204 $125,009 $19,805 19%Russell 2000 ETF IWM Multiple Dates $1,477

Total $21,282

AIM Fixed Income Fund - Sold Securities (1/30/2006 Through 4/30/2006)

Security Symbol Acquisition Date Sale Date Days

HeldUnit

Quantity Unit Cost Total Cost Sale Price Proceeds Realized Gain/Loss

% Gain/Loss

Lehman Aggregate Bond Index ETF AGG 01/30/06 02/09/06 10 3500 $100.50 $351,750 $99.98 $349,946 -$1,804 -1%

Fama's Decomposition of Risk (Holding Period Return as of 4/30/2006)AIM Equity

Fund Russell 2000

Holding Period Return 21.3% 16.8% - 3 Month Treasury Bill 1.6% 1.6%

Total Risk Premium 19.6% 15.1% - Risk premium due to risk 13.1% 15.1% - Risk premium due to selectivity 6.5% 0.0%

Risk Premium Due to Selectivity 6.5% 0.0% - Diversification -0.8% 0.0% - Net Selectivity 7.3% 0.0%


AIM Equity Fund Business Services 10.7% of AIM Equity Fund Analyst: Timothy Wojs The business services sector of the AIM Equity Fund is comprised of a variety of different in-dustries such as employment, transportation, advertising, business process outsourcing, and construction. The employment industry is made up of companies that provide businesses with several different staffing and employment services, ranging from executive search to temporary staffing. The companies tend to be very cyclical and returns are driven by the current employ-ment environment within the economy. Trucking, airlines, and waste management services are some of the sub-industries that make up the transportation part of the sector. Advertising con-sists of a range of different service providers, from typical ad agencies to internet advertisers. Business process outsourcing has the largest amount of sub-industries and includes financial technology, information processing, and customer care companies. The final segment of the sector is construction – an industry that encompasses construction companies, engineering and architecture firms, and the companies that provide services to this industry.

The business services sector has been driven by several positive macroeconomic trends during the holding period, including a tight employment market, rising oil prices, and a non-residential construction recovery. We believe that the sector is currently exposed to individual industries that are primed to take advantage of the current and future state of the global economy. During the course of the year, we invested in six business services stocks. Currently, we con-tinue to hold all six of our initial investments, which include Korn/Ferry International, Marlin Business Services, Forward Air, ADVO, Scansource, and American Reprographics.

Advo, Inc. (AD) is a full-service targeted home delivered print advertising company. They are primarily engaged in seeking and processing printed advertisements from retailers, manufactur-ers, and service companies. AD offers combined and solo mailing options with a targeted home approach to reach consumer households in both the United States and Canada. Currently, Advo’s network reaches 112 million households, with 78 million households as part of its core program, and an addition 34 million households belonging to the Advo National Network Ex-tension (ANNE) program. The majority of AD’s revenues come from their weekly Shopwise distribution.

Advo AD Weight (%) 1.97Price as of 4/30/2006 $28.34 P/E (ttm) 20.14

52-Week High $35.80 P/Book 4.5152-Week Low $23.06 P/Sales 0.63

Holding Period Return (%) 9.76 ROA (%) 8.35Market Capitalization ($Mil) 882 ROE (%) 21.56

Beta 2.24 2005 EPS $1.41Dividend Yield (%) 1.39 2006 EPS (est.) $1.67

Lower Sell Limit $20.00 Upper Sell Limit $37.00


Focused advertising providers that give companies a higher return on investment are currently in heavy demand. Considering that Advo has the largest household address list in the nation and is able provide its customers with advertisements that can be tailored to specific markets, their services are in high demand. Although the company has effectively been able to meet or beat Wall Street revenue numbers, AD has operational issues that have hampered the stock’s returns by delivering lower-than-expected earnings per share. Since operational issues take several quarters to improve, we view the stock as a long-term play on the move to focused advertising. Management’s ability to fix their unused postage issues and leverage their business plan will be prime drivers of the stock’s future returns.

American Reprographics Company (ARP) is the largest nationwide provider of reprographic services to the architectural, engineering, and construction (AEC) industry. Reprographics is the management and reproduction of construction documents (mainly blueprints) and related mate-rials. ARP specializes in business-to-business document management services, document distri-bution and logistics, and print-on-demand. The company also provides services to non-AEC industry companies, most of which include the reproduction of large or small color marketing and point of sale materials. ARP operates about 190 facilities, located in 141 cities throughout 30 states. American Reprographics Company became a public company in early February 2005. An investment in ARP gives the portfolio exposure to the current boom in non-residential con-struction. Over 65% of the company’s revenues are derived from this industry. A leading con-sulting firm for the construction industry recently increased its growth estimates for this part of the industry from 6% to 8%. We view this as incrementally positive for the stock price. ARP’s management team is considered to be the leader in reprographic technology. The company is the only nationwide provider of reprographic services, as it is five times the size of its nearest competitor. This gives the company an advantage in signing large construction companies as customers. ARP has exceeded Wall Street expectations since its IPO and continued earnings growth should drive the stock price higher.

American Reprographics Company ARP Weight (%) 1.93Price as of 4/30/2006 $35.47 P/E (ttm) 25.10






Forward Air (FWRD) is the leader in scheduled airport-to-airport surface transportation for the deferred air freight market. Deferred air freight, while time definite, is not as sensitive to time demands as regular air freight. FWRD’s primary customers are domestic and international freight forwarders, but they also handle overflow for airlines and integrator, such as UPS and FedEx. With 80 domestic terminals located close to airports, 8 regional hubs, and 1 central sort-ing facility, FWRD has one of the most flexible and efficient sorting systems in the industry. The rising price of oil has been the key driver of the stock returns of Forward Air. Since the company provides an alternative to air transportation, rising oil prices make traditional air trans-portation more expensive. Forward Air is able to capitalize on this trend by providing a cheaper alternative to air freight shipping. Another positive for the company is that it does not compete with the Big Two – UPS and FedEx. It actually provides both of the companies with service for deferred freight overflow. With FWRD’s unmatched domestic network, experienced manage-ment team, and overall oil environment, the company is simply our best option for small-cap transportation exposure. FWRD’s future returns likely will be driven by its network expansion into Europe.

Korn/Ferry International (KFY) is the global leader in executive search and placement services. KFY provides global executive, professional, and middle-management recruitment services to both large and small companies. They also offer executive strategy and coaching services. With 35 years of experience, KFY has expanded operations to 70 offices worldwide, including posi-tion in Europe, Asia, and South America.

Forward Air FWRD Weight (%) 1.39Price as of 4/30/2006 $40.17 P/E (ttm) 28.75





Korn/Ferry International KFY Weight (%) 3.22Price as of 4/30/2006 $21.00 P/E (ttm) 17.85






KFY is currently the largest holding within the AIM Equity Fund. The stock was selected for inclusion based on several factors – the ripe employment market, its vast global network, and the reputation that it has as the world’s largest and most respected executive employment firm. The prime driver of the stock has been the stage of the employment market and the level of un-employment in the domestic market, which is currently 4.7%. During these times of tight em-ployment, executives tend to move frequently between companies, allowing executive search firms to prosper. This is especially true for Korn/Ferry, which has the largest and most compre-hensive global network. This global network allows them to attract larger companies that typi-cally spend more money on executive salaries. Executive search is a “reputation business” and companies frequently use the same firm for all of their executive search needs. Since KFY is able to effectively deliver the best candidates, a majority of their customers represent repeat business. With the competition within the executive search industry increasing, loyal clients this will be a key factor for the stock going forward.

Marlin Business Services (MRLN) is a nationwide provider of leasing and financing solutions for small to mid-size businesses. Copiers, telecommunications equipment, water filtration sys-tems, computers, and closed-circuit security systems are just a few of the 60 commercial equip-ment categories. MRLN provides independent equipment dealers the opportunity to offer point of sale financing solutions, which allows them to increase their revenues. The average MRLN lease is about $8,400 with a term of approximately 46 months. MRLN reaches its end-use by using their existing network of over 9,200 independent equipment dealers. MRLN has regional offices in Atlanta, Denver, and Chicago, an executive office in New Jersey, and a lease re-cording office in Philadelphia. MRLN was selected for the portfolio in order to provide some exposure to the business process outsourcing segment of the business services sector. The company’s management has shown the ability to produce EPS growth over the past several years, and we believe that the company can continue to grow its bottom line by approximately 15%. Management has identified that they have connections with roughly 12% of the available independent equipment dealers in the United States, leaving plenty of room for revenue and earnings growth. MRLN is poised to capitalize on the current increase in business equipment leasing.

M arlin Business Services MRLN Weight (%) 1.62Price as of 4/30/2006 $21.80 P/E (ttm) 16.43


Holding Period Return (%) -1.44 ROA (%) 2.42Market Capitalization ($Mil) 264 ROE (%) 14.43




ScanSource, Inc. (SCSC) is a leading wholesale distributor of systems and software designed to organize, classify, and document sales and units for its customers. The company has two main distribution centers: one that focuses on sales in the United States and Canada, and a second that manages sales to Europe and Latin America. The most prominent arm of SCSC’s business, the ScanSource Sales Units, focuses on the collection, processing, and communication of infor-mation for commercial and industrial uses, including retail sales, inventory needs, shipping, and distribution. Earnings growth for SCSC has been fairly consistent with an 8 to 10% guidance range given by management over the past month. Though stock movement has been mostly horizontal over our holding period, we expect positive movement over the year as the company continues to per-form at expectations. As the radio frequency identification industry grows, this company is poised to reap the benefits. We expect to continue to see about a 10% growth rate in revenues annually for the next 5 years. Consumer Goods 4.2% of AIM Equity Fund Analyst: David Trotter The consumer goods sector contains companies whose businesses are less sensitive to economic cycles. It includes businesses that produces food, beverages, household and personal products, apparel, shoes, textiles, auto parts, consumer electronics, luxury goods, packaging, and tobacco. The main story for the consumer goods industry in the second half of 2006 will be higher credit card payments, higher oil prices, and a slowing housing market. Companies that make con-sumer goods are likely facing higher energy prices that will probably remain above $50 a barrel for the remainder of 2006. The companies who will suffer the most in 2006 will be the ones that are catering to low and middle class consumers, who will be hit harder by the higher credit card payments and higher gas prices. The group of consumer companies that likely will do better in 2006 will be the ones that have the ability to pass on the higher cost of energy to the consumer. One consumer goods sector, consumer staples, will be less affected by the higher energy prices and slowing housing market in the second half of 2006.

ScanSource SCSC Weight (%) 1.76Price as of 4/30/2006 $62.60 P/E (ttm) 20.33






Two consumer goods sector stocks in the AIM Fund appreciated rapidly early in the holding period. We sold our positions in Select Comfort (SCSS) and Blue Nile (NILE) believing them to be fully priced. Maidenform Brands (MFB) and Sanderson Farms (SAFM) are currently held in the AIM portfolio.

Maidenform Brands, Inc. (MFB) is a global intimate apparel company with a product line of established and well-known brands, top-selling products, and an iconic heritage. Maidenform designs, sources, and markets an extensive range of intimate apparel products, including bras, panties, and shapewear. The products are distributed through department stores, national chains, mass merchants, specialty stores, off-price retailers, company-operated outlets stores, and the company’s website. Some of the most recognized brands include Maidenform, Flexees, Lily-ette, Self Expressions, Sweet Nothings, Bodymates, Rendezvous, and Subtract. The company is planning to pay down debt in the amount of $20 million per year. We estimate that once the full effect of MFB’s off-shore outsourcing takes effect (the U.S. last factories were closed in July 2005) that operating margins will be able to reach around 12%. Additionally, Maidenform currently distributes to most of the top mass channel and national chains including Wal-Mart, Target, Costco, Sears, as well as department stores. Sales will grow as MFB takes advantage of new store openings, increased shelf space allocated to their products, and store square footage growth.

Maidenform Brands MFB Weight (%) 2.56Price as of 4/30/2006 $11.00 P/E (ttm) -


Holding Period Return (%) -18.35 ROA (%) -5.07Market Capitalization ($Mil) 258 ROE (%) -



Sanderson Farms SAFM Weight (%) 1.75Price as of 4/30/2006 $26.51 P/E (ttm) 10.13



Beta 1.23 2005 EPS $2.62Dividend Yield (%) 1.98 2006 EPS (est.) -$1.52



Sanderson Farms (SAFM) is an integrated poultry processing company that engages in the pro-duction, processing, marketing, and distribution of fresh and frozen chicken products. It sells ice pack, chill pack, and frozen chicken in whole, cut-up, and boneless form to retailers, dis-tributors, and casual dining operators principally in the southeastern, southwestern, and western United States. The company also offers approximately 100 processed and prepared food items, which include processed chicken products and frozen entrees (such as chicken and dumplings, lasagna, seafood gumbo, shrimp creole, and other specialty products), to distributors, national food service accounts, retailers, and club stores.

SAFM is consistent with our sector outlook that forecasts consumer discretionary spending to fall in the second half of 2006. SAFM will be a defensive position in the portfolio if the econ-omy slows. We believe Sanderson Farms will be able to generate 1 to 2% sales growth in 2006. In 2007, we expect sales to increase at about 14% as chicken prices return to normal levels. One of the disadvantages of owning SAFM is that poultry prices will determine the majority of the stock movement; however, we forecast that poultry prices have reached a low. The stabiliza-tion of prices will create more visible earnings for the poultry companies, and, in turn, an in-crease in the multiples is likely. Prices should increase as companies begin to store inventory for the summer season. SAFM had gross and operating margins of 17.8% and 11.0%, respec-tively. These are superior to their competitors, Tyson Foods and Pilgrim Pride. In addition, San-derson Farm’s ability to run a lean and efficient business has made it one of the most profitable in the industry. Consumer Services 9.9% of AIM Equity Fund Analyst: Ray Auth The consumer services sector covers a variety of sub-sectors such as gaming, restaurants, lodg-ing, apparel, and footwear. Gaming consists of an array of corporations providing products and services such as signage, software, and technology based systems to casinos. Restaurants vary from fast-food chains, such as McDonalds, to elegant steakhouses across the world. Lodging ranges from home builders and suppliers to hotels and motels of varying quality. Apparel and footwear is the broadest category, as there are a vast number of corporations involved in the process of manufacturing and selling finished goods to consumers worldwide. Equity returns in the consumer services sector might be cooling off from the torrid pace of the last three years. Although the first quarter of 2006 has been strong, the record high energy costs could begin to take their toll on U.S. consumer spending. Many consumers are concerned about high oil and gasoline prices, as the Iranian and Nigerian situations remain unresolved. As the peak summer driving season looms, many families will likely begin saving to counter the ex-traordinary gasoline expenditures. In addition, Chairman Bernanke and the Federal Open Mar-ket Committee seem to be set on raising the Fed Funds rate to at least 5.00%. Although it ap-pears the Fed might stop raising rates soon, the continual hikes of the past are likely to weigh on consumer spending. Following a strong first quarter, it appears that personal consumption spending could deteriorate for the rest of 2006 as a variety of factors move American consum-ers to save rather than spend their hard earned dollars.


Over the past eight months, the AIM Fund has purchased five stocks in the consumer services sector. The five purchases were Progressive Gaming International (PGIC), Jos. A. Banks Cloth-iers (JOSB), Rare Hospitality International (RARE), Volcom Clothing (VLCM), and Nautilus Incorporated (NLS). Of the five, PGIC was sold at the beginning of 2006 due to a fog of bad news surrounding the company – including a variety of shareholder lawsuits, weaker than ex-pected earnings announcements, and accounting issues.

Jos. A. Bank Clothiers (JOSB) is a designer, retailer, and direct marketer of men’s tailored and casual clothing and accessories. JOSB targets the male professional through high quality cloth-ing lines. The company touts their “Three Levels of Luxury,” which include their opening brand, Signature, and Signature Gold collections. JOSB currently operates 324 retail stores throughout 40 states and the District of Columbia. JOSB continues to capitalize on their “Four Pillars of Success” strategy, which includes quality, service, inventory in-stock, and product innovation. The company strives to achieve their goal of over 500 stores by 2008. JOSB continues to look for strategic openings in ideal locations. We believe that JOSB has done a good job of seeking out premier locations for new store open-ings, and that they will continue to do so in 2006 and 2007. In addition, the demographics give Jos. A. Bank a tremendous advantage in the coming years, especially with the baby-boom gen-eration – the largest, most affluent segment of the U.S. population. Because JOSB has the larg-est pool of people to attract with their niche clothing, we believe that they will continue revenue growth of 20% over the next few years and should continue to be a solid investment.

Jos A. Bank Clothiers JOSB Weight (%) 2.08Price as of 4/30/2006 $42.00 P/E (ttm) 21.83





Nautilus Group NLS Weight (%) 1.44Price as of 4/30/2006 $16.40 P/E (ttm) 24.04






Nautilus Inc. (NLS) is a marketer, developer, and manufacturer of branded health and fitness products. They currently sell under brand names such as Nautilus, Bowflex, Schwinn, Stair-master, and Trimline. The company’s line includes cardiovascular and weight resistance prod-ucts that include home gyms, free weight equipment, treadmills, indoor cycling equipment, steppers, elipticals, tread climbers, and fitness accessories. The company also offers nutrition supplements and athletic apparel for men and women. They conduct their business through di-rect and commercial/retail segments. The direct segment involves all brands marketed to con-sumers through direct channels, while the commercial/retail segment includes all brands sold to consumers by other retailers. NLS is headquartered in Vancouver, Washington. NLS is currently struggling through some challenging manufacturing issues that have hindered their earnings. It appears that supply chain issues are at the root of the problem, which manage-ment has vowed to address. Mr. Hammann, the Chief Executive Officer, is actively pursuing the problem and making the necessary changes to remedy the problem. The company has re-cently closed a Texas manufacturing plant to consolidate operations and, hopefully, repair some of the major supply issues. In addition, NLS is actively intensifying their plans to expand inter-nationally, as Darryl Thomas was just named the President of the company’s International Busi-ness Operations. The news surrounding NLS is beginning to look brighter as the stock has ral-lied in April. Although there is still much room to improve, we believe that NLS will rectify their manufacturing issues and continue to introduce innovative products into international mar-kets, which will provide a solid return for the AIM Fund in the future.

Rare Hospitality International (RARE) operates and franchises 303 restaurants, including 247 LongHorn Steakhouse Restaurants, 23 The Capital Grille restaurants, and 31 Bugaboo Creek Steak House restaurants. In addition, they operate Hemenway’s Seafood Grille and Oyster Bar and The Old Grist Mill Tavern. LongHorn Steakhouse restaurants are casual dining, full-service establishments serving both lunch and dinner throughout 25 states in the eastern half of the United States. The Capital Grille restaurants are located in major U.S. metropolitan cities and feature relaxed elegance and style. Bugaboo Creek Steak House is designed as a family restau-rant that is primarily located in the eastern portion of the United States.

Rare Hospitality International RARE Weight (%) 2.05Price as of 4/30/2006 $31.12 P/E (ttm) 20.79






RARE is looking to add to their already extensive restaurant portfolio. They currently have 303 restaurants and are planning to double that number in the next five to seven years. The com-pany employs a controlled expansion strategy for each of their restaurants. For instance, the LongHorn Steakhouse expansion plan is to increase market share in their existing markets and by developing restaurants in selected new markets across the eastern half of the United States. The strategy of clustering in existing markets enhances the company’s ability to supervise op-erations and market the company’s concepts in a cost-effective manner. This strategy should succeed as the number of families with two working adults continues to rise. A recent statistic revealed that men and women over the age of 35 have increased from 12% of the population in 2000 to 16% in 2006 - which equates to almost 12 million more people entering into their prime earnings phase. Based on RARE’s expansionary vision and demographic opportunities, reve-nue growth of 16% should be achieved as their restaurant count continues to increase in the near term.

Volcom Incorporated (VCLM) designs, markets, and distributes worldwide their clothing and accessories for young men and women. They primarily concentrate on products that appeal to teens interested in skateboarding, snowboarding, and surfing. Their brands are distributed na-tionally through core specialty shops and national chains, and internationally through distribu-tors and licensees. They currently operate in 2,900 stores in over 40 countries. VLCM receives royalties on the sales of Volcom branded products sold by their licensees. The company intends to establish their own operations in Europe beginning in December 2006, when their European licensees expire. Volcom is headquartered in the heart of boardsport country, Orange County, California, and they completed their initial public offering in July 2005.

Volcom was named the most preferred boardsport brand, according to 41% of the votes of boardsport enthusiasts in 2005. The company continues to be the favorite brand of the growing teenage boardsporters in the U.S. This is an important statistic as SGMA International has noted that there are more skateboarders than there are baseball and football players in the United States. This support creates a unique opportunity for VLCM since boardsports is estimated as an $11 billion annual industry. Additionally, VLCM is beginning the process of bringing their European operations in-house, which should boost profit margins. We believe that as Volcom continues to gain market share among teenagers, the company will see continued margin expan-sion coupled with revenue growth in excess of 20% over the next five years.

Volcom VLCM Weight (%) 2.30Price as of 4/30/2006 $35.67 P/E (ttm) 33.50






Energy 6.8% of AIM Equity Fund Analyst: Ryan Berg The two main segments within the small cap energy sector are Exploration and Production (E&P) and Oil Services companies. The AIM Fund has exposure in each of these segments. The E&P segment consists of firms whose goal is to extract oil or natural gas from the ground as efficiently as possible and sell it at the prevailing market rate. Oil Services companies, on the other hand, generally earn their profit by selling the equipment the E&P companies use to extract the oil and gas from the ground. Since the AIM Funds’ inception, the energy space has provided the portfolio with some solid returns. At the same time, it has been a wild ride with a high level of oil and gas price volatility. Lately, because oil and natural gas prices have been at historically high levels, E&P companies have witnessed record profits and expended a great deal of cash acquiring new drilling opportu-nities. The Oil Services companies have capitalized on this trend as there has been increased demand for their product and service offerings. The end result of these trends has been robust stock price gains in the small cap energy space. The high level of oil and gas prices has been brought on by a few key issues. First, the current supply and demand situation for oil remains very tight, as the insatiable appetite demonstrated by many countries, particularly emerging markets like China and India, has kept demand growth at a level that is difficult for supply to match. Furthermore, at the beginning of the hold-ing period, oil and gas prices had just experienced major spikes due to temporary supply short-ages caused by hurricane damage in the U.S. Prices eased a bit as these shortages dissipated; however, now they have spiked again amidst a great deal of geopolitical uncertainty in coun-tries such as Iran and Nigeria. The future for this sector is likely to be as volatile as we wit-nessed during the past year.

The first energy company selected by the AIM fund was Edge Petroleum (EPEX). Edge Petro-leum Corporation is a rapidly growing Houston-based independent energy company engaged in the exploration, development, and production of crude oil and natural gas. Edge’s operations are focused onshore in the United States, primarily along the Gulf Coast and Permian Basin of Texas and New Mexico.

Edge Petroleum EPEX Weight (%) 1.59Price as of 4/30/2006 $23.11 P/E (ttm) 12.22






EPEX is a fundamentally strong growth firm and represents a good value trading in-line with their peers’ valuation multiples. They are among the best in their sector in almost every cate-gory of fundamental performance. They have demonstrated a strong ability to pursue successful exploration projects: 95% of their drillings during 2005 appear successful. Their conservative capital structure and successful risk management hedging techniques make them a relatively safe investment in a risky business. Furthermore, their conservative capital structure has al-lowed them to pursue an aggressive growth strategy consisting of several significant acquisi-tions during the past several years. It is believed that these acquisitions should pay major divi-dends in 2006. Combining these factors with the continued upward pressure on oil and gas prices, Edge appears poised to have another solid year in 2006 and to continue to outperform their peers. Thus, EPEX remains a good relative value play and has strong potential for further appreciation.

The second energy stock selected for inclusion in the AIM portfolio was Toreador Resources Corp. (TRGL). Toreador Resources’ principal activities are explorations and production of oil and gas. TRGL’s operations are conducted through the ownership of perpetual mineral and roy-alty interests. The company holds interests in foreign developed and undeveloped oil and gas properties in the Paris Basin (France), the Cendere and Zeynel Fields (Turkey), and the Bonasse Field and Southwest Cedros Peninsula (Trinidad, West Indies). TRGL’s domestic properties are located in Texas, Alabama, Mississippi, Louisiana, Arkansas, California, Kansas, and Michi-gan. Because of their strong growth prospects, exposure to intriguing international growth opportu-nities, and experienced management team, Toreador represents an interesting developmental growth story in the exploration and production industry. TRGL has operations in six countries, which represent a strong mix of steady income plays and growth opportunities. Their revenue stream continues to grow rapidly, and they are beginning to experience good results from their international niche strategy. We expect this trend to continue and given the current oil and gas price environment, Toreador looks like a company on the rise. TRGL offers an attractive com-bination of international E&P exposure and a solid growth story. Combining this with the fact that they are still developing, and currently have relatively little analyst coverage, we believe this company has the look of a diamond in the rough. We think there is tremendous potential here for price appreciation, with future announcements of successful exploration projects as the likely catalyst.

Toreador Resources TRGL Weight (%) 1.94Price as of 4/30/2006 $30.86 P/E (ttm) 64.60






The final energy company selected was W-H Energy Services (WHQ). The company’s princi-pal activity is to provide products and services used for drilling and production of oil and natu-ral gas wells. WHQ operates in two segments: drilling and completion. The drilling segment provides products and services used for drilling of oil and natural gas wells. The completion segment provides products such as wireline logging and perforating, polymers, and specialty chemicals and tubing. WHQ is focused on conducting operations onshore in Canada, Brazil, Europe, North Africa, and the Middle East; and offshore in the North Sea, the Persian Gulf, the Gulf of the Suez, the Mediterranean Sea, off the coasts of Brazil and the United States. Because of their strong growth prospects, reasonable valuation, and solid fundamentals, W-H Energy Services represents an excellent small cap energy services play. Based on the continued growth in U.S. oilfield activity and improvement in product and service pricing, WHQ should be able to continue to generate strong revenue and earnings growth for the next several years. WHQ has respectable fundamentals for a small cap energy services firm with a 5-year average return on capital of 10.8% versus an industry average of 9%. Finally, WHQ has been able to generate strong momentum with its latest earnings reports, demonstrating significant year-over-year margin improvements. These factors combined with a very favorable industry environ-ment make WHQ an attractive investment for the AIM Fund in the future. Financial Services 20.2% of AIM Equity Fund Analyst: Steven Holtkamp The financial services sector includes five major sub-sectors: regional banks, investments, real estate, savings and loans, and insurance. Regional banks take in deposits and make loans to in-dividuals and businesses through a wide range of product offerings. Investment companies pro-vide consulting, asset management, and brokerage services to individuals and institutions. The real estate sub-sector is composed of companies formed as REIT’s or other companies that own, develop, and sell real estate as their main source of income. Savings and loans generate depos-its and make loans to individuals and businesses but are limited in their product offerings. The insurance sub-sector is composed of companies offering property, life, mortgage, malpractice, and reinsurance to individuals and institutions.

W-H Energy Services WHQ Weight (%) 2.99Price as of 4/30/2006 $50.25 P/E (ttm) 28.35






Even in a rising interest rate environment, financial services companies have faired well since the inception of the AIM Fund. Overall, each sub-sector performed strongly over the holding period with the best returns being generated by insurance, real estate, and investment compa-nies. Insurance companies benefited in the short term due to increased premiums in the hurri-cane-affected regions of the United States. Real estate values continued to increase in various areas resulting in continued investment growth in this sector. Regional banks and savings and loans performed well but were hurt to a greater degree by the flattening yield curve and rising interest rates. This last sector should provide favorable investment opportunities in the second half of 2006 as interest rate increases are expected to stop around 5% and the yield curve steepens.

American Equity Investment Life Holding Company (AEL) sells insurance and annuity prod-ucts through its offices and affiliates. The company is headquartered in Des Moines, Iowa, and has offices in 49 states as well as the District of Columbia. AEL currently employs a full-time staff of 200 throughout its various offices. Annuity sales are a primary driver of revenue for AEL with 51% of the company’s annuity sales in index-equity investments and the remainder in fixed income securities. The continued success of the company’s growth depends on its abil-ity to sell these annuity products. We believe this defensive stock will perform well in periods of high financial market volatility. American Equity Life’s revenues for the first quarter were reported in mid-April at $564.7 mil-lion, a 16% decline year over year. A significant portion of this reduction was the inability of AEL’s sales force to promote its fixed income annuities due to the inverted yield curve during a significant portion of the quarter. Though the yield curve now has a normal upward slope, if it were to invert again it could present a significant challenge for the company in meeting its ex-pected revenue numbers for the year. Given the interest rate forecast for the remainder of 2006, we believe the company will again achieve between 10 to 15% revenue growth annually.

American Equity Invest Life Hldg AEL Weight (%) 1.95Price as of 4/30/2006 $13.56 P/E (ttm) 13.44






BankAtlantic Bancorp (BBX) operates as a financial thrift offering commercial banking ser-vices, brokerage services, and investment banking through its subsidiary Ryan Beck & Co. The bank is headquartered in Ft. Lauderdale and operates principally in the Florida market. Ryan Beck provides underwriting, distribution, trading of equity and fixed income securities, and re-search though its offices located around the United States. BBX reported an intentional slowdown in earnings at the end of the third quarter of 2005 in or-der to generate lower cost funds. Until the company generates the desired lower cost funding mix, management has decided to slow loan growth. BBX is generating these funds through a strategy of aggressive marketing and 24/7 banking services. The firm’s expenses were excep-tionally high in the period following this strategy shift; however, it has been rewarded with lower cost deposit growth of 15% and 79% for the past two quarters. Low cost deposits now represent 58% of total deposits and should provide BBX with strong earnings growth in 2006 as the yield curve normalizes and the company starts to grow loans again at higher margins.

Bluegreen Corporation (BXG) provides vacation and residential lifestyle choices through its resorts and residential community businesses. The company conducts its operations through two segments, Bluegreen Resorts and Bluegreen Communities. The Bluegreen Resorts segment acquires, develops, and markets vacation ownership interests in its resorts. The Bluegreen Com-munities segment acquires, develops, and subdivides real estate property, as well as markets residential home sites to retail customers, seeking to build a home in a residential setting.

BankAtlantic Bancorp A BBX Weight (%) 1.80Price as of 4/30/2006 $14.92 P/E (ttm) 16.67





Bluegreen BXG Weight (%) 1.34Price as of 4/30/2006 $12.33 P/E (ttm) 8.36






BXG has had a few bumps in performance due to losses incurred from the hurricanes of 2005, as well as lower than expected fourth quarter earnings. BXG has done an excellent job entering into emerging vacation markets in the United States, such as Tennessee and South Carolina. BXG continues to develop and expand its operations, which will drive the growth of the com-pany for the coming years. BXG is expected to generate 8 to 10% revenue and 10 to 15% earn-ings growth rates annually over the next five years.

FPIC Insurance Group (FPIC) provides property, casualty, and insurance management services within the United States. The company offers medical liability insurance products to physi-cians, dentists, and healthcare providers primarily in Florida and Missouri. In addition, FPIC, through a dual business model, offers insurance management services to PRI, the second largest provider of medical malpractice insurance in New York. FPIC is headquartered in Jacksonville, Florida. FPIC is a market leader in two of the largest healthcare markets in the nation. New York is the largest medical practice insurance market in the U.S., while Florida is the third largest market. In Florida, FPIC has been the market leader for 29 years. Net premiums written in 2005 in-creased by 23.5% and overall earnings increased by 33%. Insurance management for PRI al-lows FPIC to gain commission on the amount of underwriting fees generated by PRI, without having to invest significant capital. This, in turn, provides for excellent profit margins. In 2005, insurance management represented 15% of revenues and 24% of income. FPIC is selling near their 12-month high and is also considered a good defensive stock for the portfolio.

FPIC Insurance Group FPIC Weight (%) 1.98Price as of 4/30/2006 $39.95 P/E (ttm) 12.94





Macatawa Bank MCBC Weight (%) 1.75Price as of 4/30/2006 $35.42 P/E (ttm) 17.63






Macatawa Bank Corporation (MCBC) operates as a commercial bank in the western Michigan market. Macatawa focuses on providing loans to individuals and institutions to finance opera-tions or purchase property. The bank provides these services through 21 branches. MCBC is headquartered in Holland, Michigan. MCBC has set a goal to be the leading bank in western Michigan. To date, it has achieved its goal in two of the three counties in which it currently operates. The western Michigan market-place is characterized by higher than average household income and is less susceptible to eco-nomic downturns as manufacturing represents only 23% of the area’s employment. Macatawa Bank hit 2005 consensus estimates; however, it missed 1Q’06 estimates. While this may signal slower asset growth in the future, we believe the company’s fundamentals remain strong as margins continue to widen, non-performing loans decrease and deposits grow by more than 10% annually.

Placer Sierra Bancshares (PLSB) provides banking services to small- and medium-sized busi-nesses and individuals throughout California. The bank operates through 49 branches and is based in Sacramento, California. During the holding period, PLSB entered into a secondary offering where its controlling shareholders, Belvedere Capital Partners LLC, offered up to 5 million shares reducing their interest from 80% to 48% of the firm. In February 2006, Placer Sierra entered into an agreement to acquire Southwest Community Bancorp in an all-stock transaction at a cost of $175 million. PLSB has created a bank centered on the generation of low cost funds to grow its assets. This is an important factor considering the interest rate environment in which banks operated during 2005. Total interest on deposits cost the bank only .89%, with total interest bearing liabilities costing 1.55% in 2005 – while the total cost of interest bearing liabilities for leading competi-tors averaged 2.94% over the same period. The merger with Southwest Community Bancorp should prove to be beneficial for two reasons: 1) it should increase PLSB’s market reach; and 2) it should help fund growth with low cost deposit. Placer Sierra is in a good position for outper-forming the market over the next two years as they put these assets to use and take advantage of their economies of scale.

Placer Sierra Bancshares PLSB Weight (%) 1.67Price as of 4/30/2006 $26.55 P/E (ttm) 16.34






Pinnacle Financial Partners (PNFP) is a bank holding company operating under the name Pin-nacle National Bank. The bank provides commercial banking services to Davidson County, Tennessee, and surrounding counties. PNFP was founded in 2000 and is headquartered in Nashville, Tennessee. During 1Q’06, Pinnacle completed a merger with Nashville-based Cav-alry Bancorp (CAVB). The merger doubled the company’s book value and total market capi-talization. PNFP is a strong growth bank operating in some of the best markets in the United States. The bank has been able to achieve a three year compound growth on loans and deposits of 47% and 42%, respectively. Asset quality has also remained strong during this time period with non-performing assets averaging only .21%. The merger with Cavalry Bancorp provides a strong catalyst for future growth. It is expected that the cultures of the banks will mix well together and that PNFP should have a strong footprint in the Nashville market. The merger also added 63% to assets and 70% to deposits. The deposits offer a cheaper source of funds as CAVB’s cost of deposits was 1.81%, compared with 1.98% for Pinnacle.

Sterling Bancshares (SBIB) is a bank holding company for Sterling Bank. SBIB provides com-mercial and consumer banking services in the Houston, San Antonio, and Dallas metropolitan areas. The company operates out of 40 banking offices and is headquartered in Houston, Texas.

Pinnacle Financial Partners PNFP Weight (%) 1.89Price as of 4/30/2006 $28.66 P/E (ttm) 34.46





Sterling Bancshares SBIB Weight (%) 1.94Price as of 4/30/2006 $16.56 P/E (ttm) 20.98






Sterling occupies attractive markets in which demographic and income growth have greatly out-paced the national averages. SBIB actively targets small businesses with annual revenues of less than $25 million. This provides diversification in the loan portfolio and a higher net in-come margin but has the drawback of creating a greater number of non-performing loans. SBIB’s fund structure consists of 48% demand deposits, keeping them well positioned for the favorable trends in the growing Texas marketplace.

Triad Guaranty, Inc. (TGIC) provides private mortgage insurance to residential mortgage lend-ers and investors in the United States. As one of eight private mortgage guarantors, Triad is the youngest in the industry with a history dating back to 1987. Although the company also has the smallest market share among its eight competitors, that market share is steadily growing – from 0.5% in 1995 to roughly 6% today. Triad is also geographically diverse, providing cover-age for lenders in all regions of the United States. The company is known for its innovative use of technology and its ability to create new products, which has helped to fuel growth. Triad fre-quently has the lowest mortgage delinquency rates in the industry. TGIC’s stock price appreciation generally has been steady since it entered the AIM Fund port-folio at the end of October 2005. The stock briefly declined in early February after a negative earnings report in which the company announced a 17% drop in fourth quarter 2005 net income over the same quarter 2004 and a 2.7% year-over-year decrease. Triad executives attributed the poor fourth quarter earnings to an increase in defaults in federal designated areas in the after-math of Hurricanes Katrina and Rita. However, Triad’s stock quickly recovered from that re-port over optimism that higher interest rates are reducing the competitive threat from piggy-back loans, which have diminished the need for private mortgage insurance during the past few years.

Triad Guaranty TGIC Weight (%) 2.25Price as of 4/30/2006 $54.52 P/E (ttm) 13.60






Vineyard National Bancorp (NVBC) operates as the holding company for Vineyard Bank, which offers community banking services in California. The bank engages in generating depos-its and originating loans. VNBC operates through 12 branch offices in Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties and a loan production office in Anaheim. Vineyard National Bancorp is headquartered in Rancho Cucamonga, California. VNBC is a highly profitable, growing bank located in a rapidly expanding inland empire. Vine-yard invests in quality employees who are able to generate a large level of loans and deposits, while keeping strong underwriting standards. Deposit growth has been largely overshadowed by loan growth within the bank. Vineyard is now concentrating on deposit growth and partici-pating loans until funding costs decrease. In the future, VNBC plans to rebalance its loan port-folio to become more risk averse and to enter the high net worth markets of Marin County. VNBC has a five-year stock appreciation of over 2300% and is still undervalued based on fu-ture prospects. Hardware 10.6% of AIM Equity Fund Analyst: Greg Rawls The hardware sector includes communication equipment, computer peripherals, electronic equipment, office electronics, semiconductors, and semiconductor equipment. The communica-tion equipment segment consists of networking and telecommunications equipment. Computer peripherals consist of computer hardware and computer storage devices. Electronic equipment consists of equipment manufacturers, electronic manufacturing services, technology distribu-tors, and office electronics. The semiconductor and semiconductor equipment sub-sectors con-tain manufacturers and designers of semiconductors and microprocessors. Overall, the AIM Fund’s hardware sector has performed well since its inception. The Federal Reserve’s Business Outlook survey has forecasted an increase in capital expenditures during 2006. The hardware segment of the portfolio had two transactions during the holding period. We sold Rackable Systems (RACK) at a 48% total return, believing that it was fairly valued. We also sold Blue Coat Systems (BCSI) because of an undesirable acquisition and slowing growth in the proxy server market; we experienced a loss of 58%.

Vineyard National Bancorp VNBC Weight (%) 3.12Price as of 4/30/2006 $27.92 P/E (ttm) 14.66






Actel (ACTL) designs, develops, and markets field programmable gate arrays (FPGAs) and supporting products and services. FPGAs are used by manufacturers of automotive, communi-cations, computer, consumer, industrial, military, aerospace, and other electronic systems to dif-ferentiate their products and get them to the market faster. ACTL is the top supplier of FPGAs based on flash and antifuse technologies and are the leading supplier of high reliability FPGAs. Actel’s strategy is to offer innovative solutions to firms in which their technologies have a com-petitive advantage, including the value-based and high-reliability FPGA markets. In support of FPGAs, Actel also offers intellectual property (IP) products, design and development software, programming hardware, debugging tool kits and demonstration boards, a web-based resource center, and system design, online prototyping, and programming services. Actel is a market leader in flash FPGAs and antifuse FPGAs. ACTL’s flash devices are non-volatile and reprogrammable, unlike other products on the market that are either volatile or non-reprogrammable. The company’s antifuse FPGAs are leading the market with high perform-ance, low power consumption, and high reliability. ACTL also has a significant economic moat with approximately 25% of revenue generated from aerospace and military sales. In order to enter either one of these markets, ACTL’s competitors would need to go through rigorous test-ing and red tape. Additionally, the cost of switching FPGA suppliers would be difficult for some customers. On a valuation basis, it trades at a discount to its peers on an enterprise value- to-sales ratio and price–to-book ratio.

Actel ACTL Weight (%) 1.96Price as of 4/30/2006 $16.07 P/E (ttm) 58.39





AudioCodes AUDC Weight (%) 2.18Price as of 4/30/2006 $13.62 P/E (ttm) 111.42






AudioCode (AUDC) develops parts for original manufacturers and networks that include media gateways and servers. AudioCode’s products include media gateway systems, Voice over Internet Protocol (VoIP) communication boards, VoIP media gateway modules, VoIP chip processors, and analog media gateways for access and enterprise solutions. As a result of continuing growth in VoIP communications, AUDC should be able to grow annu-ally at over 25% during the next five years. VoIP likely will evolve at an astonishing rate as the technology becomes available to consumers world-wide. AudioCode is well positioned within the industry and could become a major supplier of data transmission hardware for several of the original large telecommunication manufactures. AUCD should continue to be a strong growth performer for the AIM Fund.

MIPS Technologies (MIPS) develops embedded processors and related intellectual property in certain high technology markets. These markets include digital consumer, wired and wireless communications, office automation, security, and automotive firms. MIS’s revenue lines con-sist of royalties and licenses. Currently, they have over 155 license agreements with more than 105 companies worldwide and control patents and intellectual property rights on over 280 proc-ess based chips. MIPS Technologies will grow in the embedded processors market that consists of few competi-tors. MIPS has a competitive advantage in the digital TV market with a 40% market share and the VoIP gateway and the handset system on a chip (SoC) market with a 75% market share. The high cost of purchasing electronic design automation (EDA) tools, as well as developing and maintaining processor IP, provides a steep barrier to entry for startup firms and competi-tors. MIPS is a strong long-term investment for the AIM Fund.

M IPS Technologies MIPS Weight (%) 1.59Price as of 4/30/2006 $7.41 P/E (ttm) 46.94






Nice Systems Ltd. (NICE) was founded in 1986 and is an Israel-based company that offers mul-timedia digital recording solutions. NICE is involved in two major business segments: audio and video. Their audio products are used in call centers around the world to help ensure quality assistance and facilitate a better understanding of their customers. NICE’s video products help organizations and governments provide a high level of security. NICE is well positioned to grow in the coming years due to their superior audio and video tech-nology. The company’s audio products feature state-of-the-art audio analysis. NICE audio products help ensure companies that their call representatives are assisting the needs of their customers while at the same time gaining insight regarding the needs of their customers. Their video technology offers superior video quality, advanced video networking, and content ana-lytics. NICE’s video technology has tremendous growth potential as more governments be-come increasingly concerned about the threat of terrorism and seek greater security solutions.

Novatel (NVTL) is a leading provider of wireless broadband solutions. Novatel’s products are designed for wireless, mobile access to information over the internet or local networks. NVTL’s products include third-generation (3G) wireless personal computer card modems, em-bedded modems, ruggedized modems, and communication software to wireless network opera-tions and distributions. Novatel is the global leader in universal mobile telecommunications system (UMTS) PC data card sales.

NICE-Systems ADR NICE Weight (%) 2.13Price as of 4/30/2006 $54.80 P/E (ttm) 45.75





Novatel Wireless NVTL Weight (%) 1.16Price as of 4/30/2006 $10.06 P/E (ttm) 27.22






NVTL has continued to seek out new wireless growth areas. The firm is prepared to enter into the development of wireless networking through strategic relationships with leading companies such as Dell, Lucent, Sprint PCS, Verizon Wireless, and Vodafone. Due to Novatel’s growth potential, continued development of new products, and their strategic relationships with major wireless companies, they are well positioned for strong future growth. Healthcare 11.3% of AIM Equity Fund Analyst: Jaclyn Jensen The healthcare sector is composed of eleven segments including assisted living, home health-care, hospitals, managed care, physicians, research services, diagnostics, medical equipment, medical goods and services, biotechnology, and pharmaceuticals. Demand for healthcare prod-ucts and services tends to remain constant throughout the business and economic cycles, classi-fying the sector as defensive. During the holding period, the healthcare sector of the AIM Fund was a strong performer. The healthcare sector is currently benefiting from a long-term shift in demographics towards a popu-lation that is living longer, has many conditions requiring healthcare services, and is superfi-cially oriented toward generating demand for discretionary healthcare. Many stocks in the healthcare sector were adversely affected by proposed government budget cuts at the beginning of the year, which could reduce Medicare and Medicaid reimbursement rates. Since the AIM Fund’s inception, four sales have been made in the healthcare sector. We sold SonoSite, Inc (SONO) for a 21.2% holding period gain and First Horizon Pharmaceuticals (FHRX) for a 41.9% holding period gain believing the stocks to be fully priced. The AIM Fund sold a partial position in Matria Healthcare (MATR) for a 19.2% holding period gain to lock in gains on concerns about the growing short position in the stock. The fund sold Amedisys, Inc. (AMED) for a 5.8% holding period loss, believing the stock to be fully valued following an ad-verse change in government policy. Serologicals (SERO) received an acquisition offer and will be sold on May 1.

Encore Medical ENM C Weight (%) 2.69Price as of 4/30/2006 $5.48 P/E (ttm) 30.61






Encore Medical Corp. (ENMC) develops, manufactures, and distributes orthopedic implant de-vices and rehabilitation products and services which are used to treat patients with muscu-loskeletal conditions. The company consists of two divisions: Surgical Implant, which offers reconstructive joint products such as knee, hip, shoulder, and spinal implants, and Orthopedic Rehabilitation, which offers a comprehensive line of products and services used in rehabilitative procedures, pain management, and soft goods for use before and after surgery. ENMC operates primarily in the United States, but approximately 20% of sales are generated internationally. ENMC has been broadening its product base through both acquisition and innovation to provide a continuum of care from surgery, to rehabilitation, to home therapy. While the company is smaller than many of its competitors, Encore has made a name for itself with a few niche prod-ucts, especially its electrotherapy pain relief procedures, and has gained a decent market share in many of the more common products. The company is in the process of divesting some of the unrelated business components of its recent acquisitions to focus on its core competencies. With its present strategy, ENMC should be able to grow earnings by approximately 25% annu-ally over the next three years .

Horizon Health Corporation (HORC) provides a focused range of healthcare services on both an in- and out-patient basis through three primary business lines: Contract Management, Em-ployee Assistance Program (EAP) Management Services, and Hospital Services. In the area of Contract Management, the company leads the industry in market share for behavioral health programs and has further diversified into the area of physical rehabilitation programs. The EAP division provides behavioral health programming to corporations, government agencies, and other third party administrators and has also been an industry leader. Finally, HORC’s new, acquisition-driven Hospital Services group provides behavioral healthcare on an inpatient basis using 14 facilities in 10 different states. HORC is nearing the end of its reorganization initiative of 2005, resulting in a company that is focused on its core competencies. Even with this narrowed focus, the company managed to maintain a diversified revenue base that will facilitate smooth earnings growth. Horizon has a strong reputation in its markets in addition to being an industry leader. Based on company strategy and industry characteristics, HORC can easily achieve earnings growth of 15 to 20% annually for the next five years.

Horizon Health HORC Weight (%) 1.89Price as of 4/30/2006 $20.90 P/E (ttm) 42.14






LCA-Vision, Inc. (LCAV) provides laser vision correction services under the LasikPlus brand. The company owns and operates closed-access fixed-site laser vision correction centers in the United States and Canada that employ laser technology to help and correct three of the most common vision impairments: nearsightedness, farsightedness, and astigmatism. LCA-Vision is the only US company that focuses exclusively on laser vision correction services. It’s competi-tors include local providers, hospitals, and independent optometrists. LCAV has performed over 400,000 of the estimated 4 million total procedures performed in the United States since 1995. LCA-Vision has grown at an exceptional rate over the past three years. With approximately 60 million people eligible for treatment and only a 10% market share, the company should be able to grow earnings by an average of 35% over the next five years. To facilitate this growth, LCAV plans to open at least 12 new locations annually, with each store becoming profitable within 2-3 months. The company has the financial resources to support its aggressive expan-sion plans with $111 million in cash on hand, consistent generation of positive operating cash flow, and no debt on the balance sheet. Since the current market is fragmented and under-penetrated, we believe that LCA-Vision has significant growth potential as a specialized pro-vider.

LCA-Vision LCAV Weight (%) 2.41Price as of 4/30/2006 $56.16 P/E (ttm) 38.48





LifeCell LIFC Weight (%) 2.10Price as of 4/30/2006 $27.04 P/E (ttm) 73.64






LifeCell Corporation (LIFC) engages in the development and marketing of human-derived tis-sue-based products for use in reconstructive, urogynecologic, and orthopedic surgical proce-dures to repair soft tissue defects. It develops regenerative human tissue matrices, a three-dimensional structures that contains vascular channels, proteins, and growth factor binding sites, which provide templates for the regeneration of normal human tissue. LIFC has had a very volatile run over the holding period in the AIM Fund mainly due to the unexpected news that a supplier of tissue for LIFC had illegally obtained organs and tissues. Despite the negative news, the aging of the baby boomers in U.S. economy will generate the increased need for tissue reconstruction for the next 5 to 10 years. LIFC should be able to main-tain 8 to 10% revenue and 10 to 15% earnings growth for the next five years.

Matria Healthcare, Inc. (MATR) provides disease management services and related products to self-insured employers, private and government sponsored health plans, pharmaceutical compa-nies, and individual patients. The company operates in North and South America, Europe, and Asia, with 75% of sales generated in the United States. MATR consists of two operating seg-ments: Health Enhancement and Women’s and Children’s Health. The company offers disease management services for diabetes, cardiovascular disease, respiratory disorders, cancer, obesity, depression, chronic pain, a variety of maternity related problems, and other chronic conditions. MATR also offers a line of diabetes products and provides an online health and wellness site. The disease management industry has grown significantly in recent years and is poised to con-tinue this trend due to current demographics. Matria is the 5th largest provider of disease man-agement services and focuses primarily on self-insured Fortune 1000 companies that are ne-glected by the larger firms and tend to offer higher profit margins than contracts negotiated with health plans. MATR has been working towards its goal of becoming a one-stop shop for dis-ease management services by acquiring smaller companies, and while integrating these acquisi-tions may be tricky, long-run prospects for the company look good. The company has the po-tential to grow earnings by an average of 25% annually.

Matria Healthcare MATR Weight (%) 0.68Price as of 4/30/2006 $30.69 P/E (ttm) -






Serologicals Corporation (SERO) provides consumable biological products and enabling tech-nologies and services to life science companies and research institutions worldwide. The com-pany’s products, technologies, and services are used in various activities, including basic re-search, drug discovery, diagnosis, and bio-manufacturing. Serologicals operates through two segments: Bio-processing Products and Services and Research Products and Services. The Bio-processing segment sells a variety of cell culture products and offers the world’s most compre-hensive line of blood typing reagents. The Research segment sells various research products, including specialty reagents, kits, antibodies, and molecular biology tools, to research custom-ers and sells monoclonal antibodies, conjugates, antibody blends, and molecular biology-based detection kits for use in diagnostic laboratories. In addition to discovering, manufacturing, and selling products, the company offers contract research services to its customers. SERO is the market leader in many of its product lines and focuses its energy in areas where the company has some sort of competitive advantage. The company has demonstrated sustainable organic revenue growth, which has been complemented by growth through focused acquisi-tions. Additionally, most of Serologicals’ revenues are generated from patent protected prod-ucts in segments where the company is a market leader. The combined result of the shift in Se-rologicals’ revenue mix toward higher margin Research segment products and services, the in-troduction of new products, and an increasing market share in existing markets should be a growth rate around 15% annually over the next three years. Note: Millipore Corp. (MIL) agreed to buy SERO for $1.4 billion in cash ($31.55 per share) on April 26, 2006. The AIM Fund student managers voted to sell SERO at the market opening on May 1. Industrial Materials 15.8% of AIM Equity Fund Analyst: Michael Hepp The industrial materials sector is among the largest of the economic sectors. Within this broad classification, there are many sub-industries: steel, metals, chemicals, auto parts, industrial ma-chinery, agriculture, transportation equipment, electrical equipment, plus many others. Every-thing produced by this sector finds its way into all other facets of the economy. The perform-ance of the sector is, therefore, tied directly to the fluctuations of the overall business cycle.

Serologicals SERO Weight (%) 2.57Price as of 4/30/2006 $31.12 P/E (ttm) 100.00






The industrial materials sector has provided excellent growth opportunities for the AIM Fund since September 2005. For the most part, strong economic growth was the main driver of the sector’s performance. Prior to the holding period, the outlook for the sector was somewhat grim. At that time many companies faced eroding margins in addition to slowing economic conditions. Fortunately, many firms maintained strong pricing power and the economy per-formed exceptionally well during the past seven months. The AIM Fund currently holds eight industrial materials firms. We trimmed our positions in two companies: Multi-Fineline Electronix (MFLX) and Oregon Steel Mills (OS). We did this to lower their weightings in the portfolio and to secure gains realized on the investments. The sales were made in January and the proceeds were used to purchase Compass Minerals Interna-tional (CMP) in February, 2006.

Argon ST (STST) is a defense contractor that engineers and produces technological systems for the United States government and approved allies. Its concentration lies within the C4ISR mar-ket: command, control, communications, computers, intelligence, surveillance, and reconnais-sance systems. Therefore, Argon ST’s sensors and imaging devices may be found on surface ships, unmanned aerial vehicles (UAV), and other military platforms. Argon ST offers a range of devices that have proven themselves exceptionally useful for an increasingly techno-centric military. While contracts in the weapons procurement sub-sector are liable to be modified or even cancelled, STST’s sensors and their other technological devices are not as prone to budg-etary restraint. The Quadrennial Defense Review was released in February 2006. It reinforced our belief that Argon ST stands to gain contracts due to their expertise in C4ISR. Intelligence and reconnais-sance are becoming more sought after in the War on Terror. For example, demand for real-time UAV imagery for pinpoint accuracy means the military will continue to expand its inventory of UAVs and the sensors built inside them. The modernization of our military is an ongoing effort dependent not solely on current obligations, since the ultimate goal is preparing for and antici-pating future transgressions. STST remains an attractive holding in the AIM Fund.

ARGON ST STST Weight (%) 2.14Price as of 4/30/2006 $33.23 P/E (ttm) 30.96






Astec Industries (ASTE) designs, engineers and manufactures equipment and components used in the road construction and mining industries. ASTE’s products are used in nearly every proc-ess of road construction - from quarrying minerals to laying the road itself. The company also produces underground construction equipment, such as directional borers and trenchers. The road construction industry will see a revival in 2006 after a prolonged drought of federal highway spending. In 2005, the federal government passed a $286 billion highway bill, which will nearly double current highway spending. Additional funds from local governments will likely follow as well. We believe ASTE will benefit substantially from the new legislation, as its customers will see a growing number of new projects over the next five to six years.

Badger Meter (BMI) markets and manufactures products using flow measurements and control technologies. The company’s products fall into two categories: residential and commercial wa-ter meters and industrial meters. Residential and commercial water meters are mainly sold to utilities and constitute the majority of the company’s sales. Industrial meters, which have a wide range of applications, comprise the remainder of BMI’s sales. Highly rated products and a steady stream of innovations put BMI in a position where it can easily capitalize on the water meter replacement cycle. The current replacement cycle is de-fined by the transition to automatic read meters from traditional manual read meters. These are high margin products and will provide Badger Meter with steady revenue growth of 5% for the next three to four years.

Astec Industries ASTE Weight (%) 2.39Price as of 4/30/2006 $39.35 P/E (ttm) 29.71





Badger Meter BMI Weight (%) 2.65Price as of 4/30/2006 $61.68 P/E (ttm) 31.61






Compass Minerals International (CMP) is the second leading salt producer in North America. The company operates 11 production facilities, including the largest rock salt mine in the world in Goderich, Ontario. CMP’s product lines include salt for highway deicing, consumer deicing, water conditioning, consumer and industrial food preparation, agriculture and industrial appli-cations. In addition, Compass Minerals is North America’s leading producer of sulfate potash, which is used in the production of specialty fertilizers for high-value crops and turf. With stable demand and steady price increases year after year, CMP should expect healthy cash flows well into the future. While CMP mines and refines one of the simplest and most abun-dant chemicals, it maintains a healthy advantage over its rivals through its size and its ability to keep fixed costs relatively low. CMP’s continued focus on increasing dividends should make it a very favorable investment despite a relatively low expected sales growth rate of 4%.

Delta and Pine Land Company (DLP) is primarily engaged in the breeding, production, condi-tioning, and marketing of proprietary varieties of cotton planting seed in the United States and other cotton producing nations. The company holds licensing agreements with Monsanto and Syngenta concerning gene technology, which enables cotton planters to utilize highly special-ized herbicides, insecticides and fertilizers. In addition, the company breeds soybean plants, which are often grown in place of cotton.

Compass Minerals International CMP Weight (%) 2.07Price as of 4/30/2006 $26.33 P/E (ttm) 31.30

52-Week High $27.24 P/Book -52-Week Low $21.81 P/Sales 1.13

Holding Period Return (%) 17.51 ROA (%) 4.12Market Capitalization ($Mil) 838 ROE (%) -



Delta and Pine Land DLP Weight (%) 1.86Price as of 4/30/2006 $29.58 P/E (ttm) 34.87






The United States’ strong position in the world cotton market and the high demand for high quality fibers translates into more acreage planted this year and in following years. We believe DLP will benefit from its position in this industry in 2006 and in coming years. The company plans to repurchase outstanding shares and to expand its international presence, which will fur-ther boost its financial performance in the coming years.

Multi-Fineline Electronix (MFLX) designs and manufacturers printed circuit and value-added component assembly solutions to the electronics industry. Current applications for its products include mobile telephones and smart mobile devices, portable bar code scanners, personal digi-tal assistants (PDAs), power supplies, and consumable medical sensors. Revenue growth for MFLX is one of the most notable features of this company. The demand for electronic devices with more flexibility, more content, and more technology along with the company’s ability to capture new customers will drive revenue growth above 20% for the next two years. Multi-Fineline’s success with its largest customer, Motorola, creates some major risks. One in particular is the company’s dependence on Motorola for over 70% of its total sales. We believe additional production capacity acquired in its acquisition of MFS Technol-ogy will allow the company to add new customers and to reduce its dependency on Motorola.

Multi-Fineline Electronix M FLX Weight (%) 1.73Price as of 4/30/2006 $58.28 P/E (ttm) 31.32





Oregon Steel Mills OS Weight (%) 2.29Price as of 4/30/2006 $49.53 P/E (ttm) 15.64






Oregon Steel Mills (OS) and its subsidiaries operate two steel mills and nine finishing facilities in the Western United States and Canada. The company manufactures and markets a broad line of specialty and commodity steel products. It emphasizes the cost efficient production of higher margin specialty steel products, especially large-diameter pipes, and targets a diverse customer base located primarily in the Western U.S. and Canada. We believe Oregon Steel Mills is well positioned in the specialty steel industry. Demand for the company’s large-diameter pipes is expected to be strong in 2006 due to a growing number of pipeline construction projects. Additionally, steel prices should remain at favorable levels throughout 2006, which will keep margins in line with management’s goals. After taking a hit to earnings in 2005 from costs related to retooling facilities and adding capacity, OS Mills should realize earnings in 2006 of $4.00 per share.

Randgold Resources (GOLD) engages in the mining, exploration, and development of gold de-posits in West Africa. Its two operating mines, Morila and the Luolo, are located in Mali. Ad-ditionally, the company is conducting a feasibility study on Tongon Project in the Ivory Coast so that they can add a third deposit by late 2008. Randgold Resources has displayed substantial growth in the past year and is in a position to benefit in both the short-lived commodity boom as well as in a long-term environment. Geopolitical concerns, inflationary pressures, a weakening U.S. dollar, and increased demand for gold have led it to 25-year highs. Gold currently sits at $654/oz., while Randgold’s produc-tion costs are $211/oz. Recent growth has come from the opening of the Luolo mine, with its first bullion shipments coming to market in November 2005. Ensuing underground expansion on the Luolo mine offers an opportunity for further growth. Also, GOLD’s joint-venture coop-eration with foreign governments has given them opportunities for 159 potential targets in six African nations. Finally, the aging and degradation of their competitors’ traditionally strong mines in southern Africa, juxtaposed with expansion in East and West Africa, puts Randgold Resources on an expansionary path within a potentially consolidating market.

Randgold Resources ADR GOLD Weight (%) 2.61Price as of 4/30/2006 $24.34 P/E (ttm) 67.88






Media 1.3% of AIM Equity Fund Analyst: Paul Zandt The media sector consists of five major segments: radio, broadcast television, cable television, publishing, and film and TV production. The media sector has been by far the poorest perform-ing sector in the past year. All media segments produced negative returns in 2005. Most seg-ments have experienced a rebound so far in 2006 with the exception of radio, which has pro-duced double digit negative returns since the first of the year. The traditional media sector continues to be negatively impacted by the growth of “new media” – specifically the Internet, satellite radio, and cable television. With people increasingly turning to the Internet for their news, newspaper readership continues to decline. Audience erosion is also a growing problem for terrestrial radio and broadcast cable television as more listeners use MP3 players, such as iPods, and as audiences continue to defect to satellite radio and television. 2005 was a particularly harsh year for radio and television with the absence of political adver-tising and Olympic coverage, both which boosted revenues and net income in 2004. 2006 reve-nues have been lower than expected thus far and the industry continues to face weak margins.

Beasley Broadcast Group (BBGI) owns 41 radio stations in a total of ten large and mid-sized markets, including Atlanta, Boston, Miami, and Philadelphia. These stations (26 FM and 15 AM) offer a variety of formats, including news, sports talk, religious, Spanish-language, coun-try, adult contemporary, urban, and oldies. A principle component of Beasley’s operating strat-egy involves developing clusters of radio stations that improve operating efficiencies in the markets they serve. The company also strives to establish and maintain a strong local brand identity in each of those markets. Both strategies will be important as the company faces chal-lenges from satellite and digital radio in the coming years. BBGI’s stock price was stable until mid-February, when the price fell in response to poor re-ports on fourth quarter 2005 earnings and fiscal year 2005 net income. 2005 earnings were hurt by one of Beasley’s Miami stations losing the broadcast rights to Miami Dolphins football games. The company also recorded a $2 million impairment charge for its broadcast licenses in its Augusta market cluster. Beasley also expects first quarter 2006 revenue to be down 7% over the previous year. In the longer term, company chairman and CEO, George Beasley, believes his company will be well-positioned for the future as it continues to convert its stations to high-definition radio broadcasts.

Beasley Broadcast Group A BBGI Weight (%) 0.55Price as of 4/30/2006 $9.41 P/E (ttm) 22.23






Salem Communications (SALM) is a radio broadcasting company specializing in religious pro-gramming. The company currently owns and operates 105 radio stations around the country, with 68 stations serving the 25 largest U.S. markets, including New York, Los Angeles and Chicago. SALM has also developed a radio network that offers talk, news, and music content with Christian and family themes to listeners around the United States. Salem has been aggres-sively expanding in recent years and continues to focus on acquisitions in the top 50 U.S. radio markets. Salem’s stock produced strong returns during its first month in the AIM Fund but then began to fall in early November 2005. The stock price reached a 52-week low in early March 2006 - shortly after a negative fourth quarter 2005 earnings report that, while matching analysts’ ex-pectations, was less than earnings in the fourth quarter 2004. The company cited the lack of political advertising and industry-wide softening for the lackluster fourth quarter performance. Salem executives expect a 3-4% increase in first quarter 2006 net broadcasting revenue over the first quarter of 2005, an estimate that was reaffirmed in late April. As a result, the company’s stock recently regained some of the ground it lost since early November. Longer term, Salem Communications continues to pursue a rather aggressive growth strategy as it strengthens its niche as the nation’s leading religious broadcaster. With this strategy, SALM seems better able than most radio companies to withstand the increasing competitive pressures from satellite ra-dio and the Internet. Software 3.7% of AIM Equity Fund Analyst: Christopher Cunningham The software sector covers a wide variety of companies, with a similarly broad customer base. There seems to be a general consensus that the sector splits evenly into at least two sub-groups, though to facilitate stock research and election, we used a three-category approach. These groups, Application Software, Application Development and Deployment, and Business Infra-structure, allow for the distinction between custom application software, Enterprise Resource Planning (ERP), Supply Chain Management (SCM), Customer Relationship Management (CRM), application servers, and programming tools.

Salem Communications A SALM Weight (%) 0.68Price as of 4/30/2006 $15.28 P/E (ttm) 30.51






The software sector had good relative performance over our holding period. One of the largest drivers of this growth was the relatively strong corporate demand for viable software solutions. The fourth quarter is usually a strong one for the sector during periods of economic expansion and 2005 was no exception. Demand for efficiency and compliance of daily business opera-tions growth was mirrored by growth in software sales as companies developed more adept technologies to deal with an increasingly wider need. We sold our position in Serena Software, Inc. (SRNA) after Silver Lake Partners announced its intentions to acquire SRNA in November.

Quality Systems, Inc. (QSII) designs, develops, and markets its software for healthcare infor-mation systems that automate and improve the efficiency of certain administrative tasks to den-tal and other specific practice groups, as well as to hospital organizations, ambulatory care cen-ters, and other medical and health centers. The success of the firm depends on the continued success of the healthcare sector, as well as the growing desire among professionals to add effi-ciency to their businesses. QSII has maintained strong sales growth by offering superior products that allow their clients to work more efficiently at lower costs. Weaker than expected revenue and earnings growth, cou-pled with uncertainty regarding a proxy battle from last summer and its implications, signifi-cantly hurt the stock returns over the past few months. As the proxy issue is resolved, all cur-rent information puts QSII in a strong position. Continued emphasis on the NextGen product division and focusing on general healthcare institutions allows QSII to embrace an increasingly larger client group. We believe this company is capable of 20% growth in annual revenues and earnings for the next several years.

Quality Systems QSII Weight (%) 0.83Price as of 4/30/2006 $33.56 P/E (ttm) 43.82






Stratasys, Inc. (SSYS) develops, manufactures, designs, markets, and services its own line of rapid prototyping devices. These devices allow customers, such as engineers, to quickly print 3D models or generate models out of plastic and other materials of their own design directly from a computer workstation. This technology allows for more efficient model production and testing for SSYS’s clients, which saves time and money in R&D. Stratasys’ broad client base is one of its significant competitive advantages in this industry. With continued development of more powerful and affordable products like the new printer unveiled on April 13th, SSYS has great potential for growth in future years. Stratasys has done a commendable job supplying its clients with fast, efficient, cost-effective products. SSYS offers rapid-prototyping machines in low- through high-cost options, allowing the company to serve a diverse group of needs from clients of varied sizes. Future growth is expected to be consistent with the past years, especially in light of the recent news of the new Large-Format Printer offered for under $30,000, a first ever for the industry.

Synaptics (SYNA) designs and ships the touch sensitive software on laptop computers, and similar handheld products, such as portable digital music players, mobile phones, and other de-vices, that allows the user to maneuver on the media screen. Other software and applications provided by the company enable the proper functioning of some mice, keyboards, monitors, and other peripherals of standing PC’s. The company’s future success is contingent on its continued production of superior products for an expanding market of clients. The failure with Apple’s iPod contracts has hurt the company, but there is talk of future business between the two, which would assuredly augment SYNA’s skimpy revenues reported in January 2006.

Stratasys SSYS Weight (%) 2.17Price as of 4/30/2006 $32.75 P/E (ttm) 32.41





Synaptics SYNA Weight (%) 1.21Price as of 4/30/2006 $26.22 P/E (ttm) 22.53






SYNA revenues are based entirely on the sales of its software products. The company has built stronger expectations for the upcoming year, largely due to managements’ efforts to boost mar-keting in 2006. Telecommunications 2.0% of AIM Equity Fund Analyst: Jason Toellner There are two major segments within the telecommunications sector: Telecommunications Ser-vices and Wireless Services. Telecommunications services provide the basic services necessary for local and national communication. Wireless services provide wireless technology for com-munication needs. Since the inception of the AIM Fund, the telecommunications sector has per-formed very well due to the rapid adoption of and shift towards wireless services and technol-ogy globally. Strong growth in handsets has stimulated the range of services available to cus-tomers at a local level as well as a national level. Since the inception of the AIM Fund, only one telecommunications stock reached a sell point and that was TIM Participacoes (TSU). TSU was sold as it reached the upper sell limit since it was driven by strong wireless growth in Brazil and the overall strong performance of the Latin America market.

North Pittsburg Systems, Inc. (NPSI), through its subsidiaries, provides telecommunication ser-vices and equipment in western Pennsylvania and Pittsburgh. The ranges of services that NPSI offers include: broadband services, long distance services, internet services, private branch ex-change systems, and local exchange carrier services. NPSI has seen strong price appreciation in 2006 due to the solid performance it put forth in the fourth quarter and fiscal year of 2005. NPSI has done a marvelous job of adapting and transi-tioning its technological capabilities to the current telecommunications environment. NPSI also has strong working relationships with Verizon and Sprint, which will help NPSI further expand their wireless capabilities. NPSI will continue on its 6 to 8% revenue and 10 to15% earnings growth well into the coming years.

North Pittsburgh Systems NPSI Weight (%) 0.94Price as of 4/30/2006 $22.75 P/E (ttm) 14.63






Shenandoah Telecommunications (SHEN) provides regulated and unregulated telecommunica-tion services through its nine wholly owned subsidiaries. The services provided by SHEN in-clude: traditional fixed line telephone service, wireless personal communications service under the brand name 'Sprint,' cellular telephone, cable television, unregulated communications equip-ment sales and services, Internet access, and paging services. SHEN has been able maintain solid growth in 2006 due to strong operating margins. SHEN has done a solid job in maintaining growth in all nine of its subsidiaries and continues to expand into newer markets within the region. The merger of Sprint and Nextel has expanded SHEN’s network capabilities, which will not be fully realized until the end of 2006. SHEN should be able to maintain a 5 to 8% revenue and 8 to10% EPS growth into the coming years. Utilities 3.4% of AIM Equity Fund Analyst: Scott Kennedy There are three sub-sectors within the utilities sector: electric, natural gas, and water utilities. Since September 2005, the stock performance of electric and natural gas utilities has been dic-tated by the rise in energy prices. For water utilities, the performance momentum is attributable to a shift in viewpoints toward water being a scarce commodity, which has led to a surge in in-vestment dollars and talk of consolidation. The utilities sector offers opportunities whether in-vesting in either growth or value companies.

Shenandoah Telecomm SHEN Weight (%) 0.90Price as of 4/30/2006 $42.70 P/E (ttm) 30.66





Ormat Technologies ORA Weight (%) 1.30Price as of 4/30/2006 $34.21 P/E (ttm) 70.25






Ormat Technologies (ORA) is a vertically integrated geothermal and recovered energy producer for electric utilities. They design, develop, build, own, and operate clean and environmentally friendly geothermal power plants and then sell the electricity generated. Additional long-term growth will be supplemented by their recovered energy business. Ormat benefited greatly by two factors: a rise in energy prices and increased demand for cheap, renewable sources of en-ergy. Favorable legislation has been enacted in 21 states that will require an increasing percent-age of electricity supplied by electric utilities to be supplied from renewable energy resources. Geothermal energy is a small portion of the nation’s renewable sources, despite being more reli-able. ORA underwent several steps to increase their stake in energy production. The most important was in February 2006, when they filed a $1.0 billion shelf registration that will be used in con-struction of geothermal facilities. Other options include possible acquisitions and repurchase of its own shares. This raises the possibility that ORA could use cash proceeds to purchase sig-nificant geothermal properties operated by Calpine Corp., if the bankrupt company was forced to sell any or all of its 19 plants.

Pike Electric (PEC) provides outsourced electric distribution and transmission services, focus-ing primarily on the maintenance, upgrade, and extension of overhead and underground sub-500 kV power lines. Its customer base is comprised of 150 electric utilities, cooperatives, and municipalities in 19 contiguous states from Pennsylvania to Florida and Texas. In addition, it is widely recognized as a leader in storm restoration services. Storm restoration was the main profit driver in 2005, due to the massive cleanups particularly after Hurricanes Katrina and Rita. PEC has grown both through acquisitions and also as a byproduct of storm restoration con-tracts. Additionally, future infrastructure needs are likely to become increasingly outsourced now that utilities are making efforts to lower costs. By offering professional services in a geo-graphic area that experiences severe storms as well as increased electric demand due to popula-tion shifts, Pike stands to benefit from badly needed electric infrastructure improvement con-tracts.

Pike Electric PEC Weight (%) 0.88Price as of 4/30/2006 $19.13 P/E (ttm) -


Holding Period Return (%) -4.35 ROA (%) -0.54Market Capitalization ($Mil) 616 ROE (%) -

Beta 0.50 2005 EPS -$0.11Dividend Yield (%) 0.00 2006 EPS (est.) $1.45



Southwest Water Company (SWWC) owns and operates rate-regulated public water utilities in California, New Mexico, Oklahoma, and Texas through its Utilities group. It also owns waste-water facilities in New Mexico, Texas, and Alabama through its Services group. Unlike most other water utilities, Southwest Water Company has split its operations into 40% utility and 60% services. SWWC continues to benefit through acquisition, specifically Monarch Utilities and Novus Utilities. They have expanded their operations into wastewater services by winning multiple new contracts. SWWC will see continued growth due to their ability to secure regula-tory rate increases as well as multiply and diversify their customer base. Furthermore, investing in water companies recently became easier with the introduction of an exchange-traded fund, which drove up stock prices of companies within the water sub-sector. This sub-sector is poised to continue growing robustly, as more attention is paid to this rediscovered commodity. AIM Equity Fund Sector Performance The sectors in the AIM Equity Fund were allocated based on Morningstar categories. The fol-lowing table displays the sector return performance relative to the Morningstar universe of com-mon stocks with market capitalizations between $250 million and $1 billion.

Southwest Water SWWC Weight (%) 0.99Price as of 4/30/2006 $15.27 P/E (ttm) 45.56





AIM Equity Fund Sector Performance (Holding Period Ending 4/30/2006)

SectorHolding Period Return

Average Beta

Holding Period Return

Average Beta

Holding Period Return

Risk-Adjusted Return

Business Services 19.6% 1.49 16.7% 1.12 2.9% -1.7%Consumer Goods 9.7% 1.05 14.7% 1.06 -5.0% -4.6%Consumer Services 2.3% 1.15 12.5% 1.12 -10.3% -9.3%Energy 24.4% 0.69 0.8% 0.82 23.6% 34.3%Financial Services 8.8% 0.69 6.1% 1.16 2.8% 7.6%Hardware 6.5% 2.90 15.8% 1.56 -9.2% -7.8%Healthcare 42.6% 1.73 4.0% 1.21 38.6% 21.3%Industrial Materials 67.2% 0.80 23.6% 1.21 43.6% 64.5%Media -24.7% 0.99 -27.4% 1.01 2.6% 2.1%Software 30.4% 2.07 9.0% 1.27 21.5% 7.7%Telecommunications 51.0% 0.54 -6.2% 1.16 57.2% 99.7%Utilities 28.7% 0.75 -1.7% 1.06 30.4% 39.8%

AIM Fund Morningstar Differential


AIM Equity Fund Top 10 Holdings (as of 4/30/2006)

Name Symbol Industry Market Value Weight (%)

Korn/Ferry International KFY Consultants $19,530 3.22Vineyard National Bancorp VNBC Regional Banks $18,986 3.13W-H Energy Services WHQ Oil & Gas $18,090 2.98Encore Medical ENMC Medical Equipment $16,440 2.71Badger Meter BMI Machinery $16,037 2.65Randgold Resources ADR GOLD Gold & Silver $15,821 2.61Serologicals SERO Drugs $15,560 2.57Maidenform Brands MFB Apparel Makers $15,510 2.56LCA-Vision LCAV Medical Equipment $14,602 2.41Astec Industries ASTE Construction Machinery $14,560 2.40

AIM Equity Fund Statement of Operations (Holding Period Ending 4/30/2006)Income:Dividend Income $1,678Interest Income $1,480 Sub-Total $3,158

Expenses:Commissions -$2,002 Sub-Total -$2,002

Net Asset Gain/Loss:Realized Gain/Loss $21,282Unrealized Gain/Loss $82,852 Sub-Total $104,134

Net Increase/Decrease in Net Assets from Operations $105,290

AIM Equity Fund Statement of Changes in Net Assets (as of 4/30/2006)Beginning Cash (9/27/2005) $500,000Net Increase/Decrease in Net Assets from Operations $105,290Ending Cash (4/30/2006) $946Market Value of Holdings $606,235

Dividends Receivable $292


AIM Fixed Income Fund Initial Strategy and Holdings. In January 2006, the student managers of the AIM Fixed Income Fund developed a strategy to outperform the benchmark (Lehman Brothers Aggregate Bond Index) by 20 annualized basis points. The strategy included a shorter duration than the bench-mark and a portfolio that included high yield investments. In implementing the strategy, the as-sets selected for inclusion in the AIM Fund were low-cost fixed income ETFs and index mutual funds. The following table shows the AIM Fixed Income Fund holdings as of April 30, 2006:

The characteristics of AIM Fixed Income Fund are presented in the next table. As of the end of the holding period, the AIM Fund’s duration was approximately 10% lower than the benchmark and the expected yield to maturity was almost 20 basis points above the Lehman Aggregate Bond Index.

AIM Fund Fixed Income Portfolio Holdings (as of 4/30/2006)

Name Symbol Category Value of Holdings

Cash Cash $393iShares Lehman 1-3 Year Treasury Bond SHY Short Govt $57,928iShares Lehman 7-10 Year Treasury IEF Inter Govt $72,729Vanguard GNMA VFIIX Mort Backed $123,893Vanguard High-Yield Corporate VWEHX High Yld Corp $100,820iShares Lehman Aggregate Bond Index AGG Bond Index $142,898Total $498,660

AIM Fixed Income Fund Characteristics (as of 4/30/2006)

Holding Weight Average Duration

Average Yield to Maturity

Money Fund 0.1% 0.00 4.00iShares Lehman 1-3 Year Treasury Bond 11.6% 1.74 4.86iShares Lehman 7-10 Year Treasury 14.6% 6.56 4.98iShares Lehman Aggregate Bond 28.7% 4.68 5.51Vanguard GNMA 24.9% 3.34 5.60Vanguard High-Yield Corporate 20.2% 4.32 7.11Total 100.0% 4.21 5.70

Lehman Aggregate Bond Index 4.68 5.53


Since the inception of the AIM Fixed Income Fund on January 30, 2006, the U.S. bond market has seen a strong sell-off as a result of two Federal Reserve rate increases. On January 31 and March 28, the Federal Reserve’s Board of Governors voted to increase Fed Funds by 25 basis points to 4.50% and 4.75%, respectively. These were the 14th and 15th consecutive rate in-creases since June 2004. As shown in the chart below, the yield curve was nearly flat at the end of January with returns of about 4.50% priced across all Treasury maturities. February’s fixed income market saw an inverted yield curve for the first time since early 2000, while March and April witnessed a pro-nounced steepening of yield curves both in the U.S. and foreign bond markets. The 50 basis point increase in the long-end of the yield curve resulted in lower bond prices during the three month holding period – the Lehman Aggregate Bond Index recorded a –0.98% total return.

Interest Rate Forecast and Strategy. Several key fundamental factors still point toward higher U.S. rates and a steeper yield curve over the remainder of the year. First, growth in other coun-tries has improved significantly in the first quarter of 2006 leading to expectations that the Bank of Japan and the European Central Bank will increase interest rates. The stronger growth abroad has lifted real U.S. interest rates back to the traditional 2.5% level - with an inflation premium of about 2.5%. A second factor lifting real U.S. interest rates has been the strength of the do-mestic economy in the first quarter of 2006. Strong job growth and rising wages have contrib-uted to accelerating income - restrained slightly by the ongoing sharp rise in energy prices. The stronger-than-expected demand for domestic labor and the higher embedded energy prices also have produced a slight increase in long-term inflation expectations over the holding period.

U.S. Treasuries Yield Curve (End-of-Month During Holding Period)

4.30

4.40

4.50

4.60

4.70

4.80

4.90

5.00

5.10

5.20

5.30

3 mo Treasury 2 yr Treasury 5 yr Treasury 10 yr Treasury 30 yr Treasury

Yie

ld to

Mat

urity

31-Jan-06 28-Feb-06 31-Mar-06 28-Apr-06


In the second half of 2006, the potential for a significant decline in the housing sector, along with higher energy prices, could finally cause the U.S. consumer to reduce their spending rate. Depending upon the actions of the consumer, which account for about 70% of U.S. economic activity, the Federal Reserve might actually be required to cut the Fed Funds rate in early 2007 to stimulate the economy. In short, we project that one more Fed Funds rate increase to 5.00% will occur in May and that the Fed will pause after that point. In that context, we believe the long-end of the yield curve will continue to rise to approximately 5.25 to 5.50% and the short-end of the curve will be approximately 5.00% by the end of the third quarter of 2006. The student managers of the AIM Fund are not forecasting a U.S. recession in 2006 – despite the inverted yield curve in February. In fact, we are forecasting healthy corporate profits for the remainder of 2006 and strong balance sheets. As a result, we continue to hold a shorter duration portfolio with up to 20% of the Fund’s weighting in high yield securities. The following table shows the sector weightings of the AIM Fund versus the benchmark as of the end of the April 30, 2006 holding period. The AIM Fund will continue to hold open-ended index mutual funds and ETFs to assist in im-plementing top-down strategies, such as sector allocations and duration management. The idea of purchasing individual fixed income securities was explored, but the relatively small size of the AIM Fund prohibited efficient execution at institutional pricing levels and the realization of

Fixed Income Sector DistributionAIM Fixed Income Fund (April 2006)

Sector Weight Average Duration


Corporate 27.2% 4.97 6.50US Government 36.7% 5.80 5.16

Mortgage Backed Securities 35.0% 3.96 5.67Foreign Government 0.7% 4.26 5.48

State/Other 0.5% 5.86 5.12Total 100.0% 4.21 5.70

Lehman Aggregate Bond Index (April 2006)

Sector Weight Average Duration


Corporate 24.5% 5.68 5.83US Government 36.3% 5.87 5.14

Mortgage Backed Securities 35.4% 4.57 5.74Foreign Government 2.5% 4.26 5.48

State/Other 1.3% 7.90 5.51Total 100.0% 4.68 5.53


prudent levels of diversification. Another issue was the inability of the AIM Fund to gain access to deep and liquid inventories. While the use of ETFs and mutual funds does prevent student managers from making bottoms-up fixed income decisions like those of an active bond fund manager, it does not detract from the educational benefits. The expansion in the number and composition of fixed income ETFs and index mutual funds has allowed more variety and op-tions for the AIM Fund student managers. Performance and Statement of Operations. Holding period return information for the AIM Fixed Income Fund was presented in the first section of this report. The following chart shows the cumulative active return relative to the benchmark. At the end of the holding period the AIM Fund was 45 basis points above the Lehman Aggregate Bond Index.

The following table presents the AIM Fixed Income Fund’s statement of operations as of April 30, 2006. The AIM Fund’s total return was -0.53% versus –0.98% for the benchmark during the holding period.

AIM Fixed Income Fund vs. Lehman Aggregate Bond Index(Cumulative Active Return as of 4/30/2006)

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

2/1/2006 2/15/2006 3/1/2006 3/15/2006 3/29/2006 4/12/2006 4/26/2006

Cum

ulat

ive

Act

ive

Ret

urn


AIM Fixed Income Fund Statement of Operations (Holding Period Ending 4/30/2006)Income:Dividends/Interest Reinvested $2,845Interest Income Received in Cash $6,071 Sub-Total $8,916

Expenses:Commissions -$140 Sub-Total -$140

Net Asset Gain/Loss:Realized Gain/Loss -$1,976Unrealized Gain/Loss -$8,533 Sub-Total -$10,509

Net Increase/Decrease in Net Assets from Operations -$1,733

AIM Fixed Income Fund Statement of Changes in Net Assets (as of 4/30/2006)Beginning Cash (1/28/2006) $500,000Net Increase/Decrease in Net Assets from Operations -$1,733Ending Cash (4/30/2006) $393Market Value of Holdings $498,660

Dividends/Interest Receivable $998




Contact: Dr. David S. Krause Director, AIM Program College of Business Administration Finance Department Marquette University P.O. Box 1881 Milwaukee, WI 53201-1881 Telephone: (414) 288-1457 Email: [email protected]

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Applied Investment Management Program Student … Investment Management Program Student Managed Fund 2005 ... thank you to Christina Gasser, ... John Potter – Cortina Asset