Portfolio Management

Management Style
The Fund’s portfolio manager buys stocks that he believes present good growth potential at a reasonable price. The equity portion of the Fund is focused on holdings in sectors that the manager believes are likely to grow faster than the overall GDP growth rate. The portfolio manager favors companies that he believes are large, industry-leading U.S. and foreign firms with highly capable management, strong balance sheets, and consistent earnings growth. Stocks are purchased at prices that reflect what he believes are good value relative to their industry peers. Bond holdings are mostly short- to medium-term U.S. government agency bonds and high-grade corporate bonds.

To determine the stock/bond/cash allocation, the portfolio manager considers the current level and anticipated direction of domestic interest rates, the level of equity valuations, and the global economy’s effect on the U.S. economy and financial markets. The bond component produces income and moderates price swings in volatile markets. Cash is a buffering element and provides for opportunistic equity purchases.

Portfolio Commentary (as of December 31, 2007)
Market volatility in 2007 — primarily the result of a weak housing market, the related subprime mortgage crisis, and the ripple effect they had together on the U.S. and global economies — caused considerable challenges for investors. In addition to lower home prices, the consumer continued to come under pressure from higher energy, food, and other commodity costs.

The Federal Reserve (Fed) cut rates in 2007, providing some support for the equity markets, but many investors felt the rate cuts were not aggressive enough. Global economies grew faster than the U.S. economy during this period, providing investment opportunities in the foreign markets as well as with U.S. companies with high foreign sales exposure. Oil, gold, silver, and food crop prices showed robust growth in 2007 due to increasing worldwide demand along with a rising fear of inflation.

Against this backdrop of uncertainty, the major indices managed to post positive total returns for 2007. For the one-year period ended December 31, 2007, the S&P 500 Index returned 5.49%; the NASDAQ Composite Index returned 10.66%; and the Lehman Brothers U.S. Aggregate Bond Index returned 6.97%.

The U.S. financial services sector took the greatest hit in 2007, along with industries closely tied to the housing market. The S&P 500 financial sector returned -18.63% for the one-year period ended December 31, 2007. The Pax World Balanced Fund was underweighted in financials throughout 2007 which helped relative performance for the Fund.

While it is too early to predict whether the U.S. economy will fall into a recession, we anticipate that gross domestic product (GDP) will slow substantially in the first half of 2008 with a potential rebound in economic growth in the second half of the year. We believe we are in a period of “stagflation” during which economic growth slows while commodity prices rise. Housing and energy prices should continue to impact consumer spending this year. Average energy prices are expected to be higher in 2008 than in 2007, and housing prices should continue to be flat to down. The presidential race may add some additional uncertainty to the market this year.

The combination of these factors will likely create a climate of uncertainty and increasing volatility. We believe the S&P 500 Index will finish 2008 with a total return in the low to mid single-digits. If the Fed continues to lower rates, and equity valuations continue to look attractive, especially relative to bond yields, total return could be somewhat higher.

At the start of 2008, the Fund will continue to overweight equities versus fixed income investments. Within equities, we will continue to look for attractive markets overseas, while moving into U.S. stocks with defensive characteristics (staples and healthcare). In the fixed income portion, we will maintain a low bond duration and high average credit quality. A relatively new theme for the Fund is our increasing exposure to commodities such as gold, food crops, and silver. We believe worldwide demand will continue for these items along with the need for a potential hedge against inflation. We expect the Fed to aggressively lower rates to try and stave off a recession. This could result in a flare-up of inflation. The Fund will continue to utilize exchange traded funds to achieve this increased exposure to commodities. We also continue to seek out infrastructure-related stocks both here and abroad.

We sold two of our holdings — Cemex and Abbot Laboratories — because they no longer met our environmental, social, and governance (ESG) criteria. We increased the Fund’s position in Seaspan (0.5%*), a container shipping company, which we feel is well positioned to take advantage of increasing international trade. Recent volatility has allowed us to add some quality financial services stocks at attractive prices such as investment bank Goldman Sachs (0.6%*) and mutual fund family BlackRock, Inc. (0.1%*).

This commentary does not constitute an endorsement of any company’s attractiveness as an investment.

*Portfolio holdings as of 12/31/07.