We have a disciplined approach to investment management. When investing client assets in individual stocks we generally focus on high quality, large capitalized U.S. companies. Dividends comprise an important component of equity returns, and they play a significant role in the selection process. We do not hold the belief that a portfolio must always be fully invested. While we are long term investors, history has shown that there are periods of time when other asset classes may present the potential for better risk adjusted rates of return than high quality common stocks. In the event that we don’t see value in the equity market, or we find there to be historically high levels of risk, such adverse market conditions would result in higher cash allocations in our portfolios until we are able to find value in the stock market.

When we are buying stocks, we focus our efforts on determining which sectors are coming into favor and which are moving out of favor. Some professional investors tend to focus most of their efforts on analyzing stocks. However, the majority of the risk in any individual stock is in the market and the sector. It is necessary to understand which sectors are supporting higher market prices and which sectors aren’t before analyzing the individual security. Our proprietary market and sector analysis narrows the portfolio focus to a select group of stocks that appear fundamentally and technically sound.

There are many different investment strategies and investment styles that have been successful over time. We believe a sound investment portfolio combines different strategies and styles to limit portfolio risk and maximize long-term returns. For this reason, we understand that our approach to individual equity management may not be suitable for a client’s entire equity allocation. As a result, we use our own proprietary weighting system to manage a model asset allocation that incorporates multiple investment strategies and investment styles in combination with our own. We apply the same rigorous analysis to outside investment managers that we do to our own large-cap equity portfolio holdings, so that we can build a balanced and diversified equity portfolio.

Bonds provide higher levels of income than can be achieved from common stocks. They also decrease the volatility of a portfolio. Our fixed income objective is to generate a reliable income stream over a specified period of time, and to preserve principal for reinvestment at maturity. This is accomplished by building laddered portfolios of investment grade debt securities.

Process

To achieve the proper balance between equity and fixed-income investments, we carefully evaluate each client’s situation, taking into account his or her financial goals, cash flow needs, tax situation, age, and risk tolerance. This ensures that the portfolio is structured to reflect each client’s unique circumstances. An ongoing review of client objectives will ensure that we maintain an appropriate balance between stocks, bonds and cash. History has taught us that asset allocation is the primary determinant of portfolio performance.

Once we have determined the optimal asset allocation, we implement proprietary equity and fixed-income models that overweight those market segments and investment styles that we believe will outperform in the future. As we rebalance or make strategic adjustments to our models, we make appropriate adjustments to clients’ portfolios.

Our equity portfolios combine individual stock holdings with exchange traded funds (ETFs) and mutual fund shares that invest in the remaining asset classes and investment styles. Our bond portfolios comprise laddered maturities of taxable and tax-free debt securities, as well as mutual funds focused on specialized areas of the bond market that are not suitable for the purchase of individual securities.

In order for an outside money manager or mutual fund to be selected for our portfolios, we prefer that the three- and five-year performance figures remain in the top quartile for the manager’s respective asset class and investment style. We review our outside managers on a quarterly basis for performance, management changes, and style or market cap drift.

Discipline

We believe that investing in quality companies over the long term is one of the most tax efficient forms of investing.

Fundamental analysis determines what we buy. It measures the health of the market, leads us to market sectors that are likely to outperform the broad market, and identifies the premier companies in each sector that are best positioned to outperform.

Our fundamental analysis involves:

• Developing top-down investment concepts based on macroeconomic and geopolitical realities.
• Identifying sectors of the market that will benefit from these realities.
• Selecting companies within these sectors that will benefit from catalysts, such as a change in business conditions or government policies, through accelerated earnings growth or a positive change in investor perception.
• Technical analysis determines when we buy. While it is often wrongly thought to be a market timing tool, it is really a risk management tool. It measures market, sector and company price risk, and identifies optimal entry and exit points for positions.

Our technical analysis involves:

• Monitoring market, sector and stock price levels to determine whether supply or demand is in control.
• Measuring the relative strength of each sector and the individual stocks in each sector in order to overweight our exposure to those sectors and stocks that are poised to outperform.
• We combine these two methods of analysis to build a portfolio of individual stocks that we believe will outperform the Standard & Poors 500 Index over the long term.

Our sell discipline is a function of:

• The maturity of the investment concept or the failure of a catalyst to materialize as expected.
• A change in the risk level of the overall market that warrants reducing equity exposure.
• The deterioration in the technical outlook for the stock or its respective sector.
• Reducing the size of a position that has exceeded a reasonable percentage of the overall portfolio.

Our fixed income discipline involves:

• Identifying attractive sectors based on a client’s tax status, time horizon, and income needs.
• Seeking out attractively priced securities in each sector based on credit risk analysis and the current interest rate environment.
• Building a laddered portfolio focused on income and safety of principal. We will only buy investment grade securities.
• Making moderate and gradual duration adjustments based on changes in the yield curve. Effective management of interest rate risk is a vital component of the process.