Investment Process

Our investment process consists of three ongoing phases:

PHASE ONE: Understanding the Client’s Needs

We establish an Investment Policy Statement (IPS) for each client. This 6-8 page document incorporates risk considerations, return objectives, cash flow needs, tax issues and other factors specific to the client. The IPS plays the role of roadmap as we apply our overall investment strategy to each individual client situation. It is the basis for determining which investment strategy is most appropriate for the client.

PHASE TWO: Active Investment Management

All our investment strategies begin with a “neutral asset allocation.” The neutral allocation reflects a sensible static asset allocation for a hypothetical long-term investor who is not actively allocating assets. Asset classes included in the “neutral” allocation for our basic portfolio strategies include:

1. High-quality bonds
2. U.S. stocks
3. International stocks
4. Alternative investments

We generally shift away from the neutral allocation only when there are “fat-pitch” opportunities. This usually happens when fear or greed drives prices of certain asset classes to unjustified extremes. At the margin, asset allocation may also be influenced by long-term trends that we are highly confident will have a major impact on the upcoming investment climate. We use scenario analysis to aid in managing each portfolio’s risk exposure. This involves testing the impact on the portfolio of various economic and market scenarios. If necessary, this may result in adjustments to the asset allocation. Throughout our research process, we take advantage of our information network. Our 25-plus years in the investment industry gives us access to respected investors at other investment firms and mutual fund companies around the world. We believe that the ability to tap into their knowledge base and benefit from their research is an important part of our competitive advantage.

PHASE THREE: Research on Specific Investments

Our portfolios are invested primarily (but not exclusively) in mutual funds. We use one of the premier mutual fund research providers in the country to conduct in-depth due diligence on mutual funds and separate account managers. Unlike other due diligence providers their process is not driven primarily by performance history. We have found that historical performance is not a good predictor of future performance. Therefore we focus on often overlooked qualitative factors in addition to quantitative screens. Our due diligence efforts involve several steps which help us identify funds with an identifiable and sustainable edge:

1. We analyze the track record relative to an appropriate benchmark. We consider factors that contributed to the record and whether or not they are repeatable.
2. We spend considerable time getting to know the manager’s investment process with an emphasis on assessing the level of discipline. We prefer stock pickers who make decisions based on a consistently applied discipline, as opposed to relying heavily on intuition.
3. The objective of our due diligence process is to:
   • Identify consistency across team members in their description of the investment approach.
   • Look for characteristics we believe are common to great stock pickers.
   • Assess management’s long-term business model and whether it is aligned with shareholders. Their management of growth is of particular interest.
   • Assess the culture and investment team dynamics so we can form an opinion on the probability of the team staying largely intact.
4. We favor managers who exhibit specific characteristics. These include:
   • A clear passion for the business.
   • An obsession for gaining an edge.
   • A focus on stock picking with limited non-investment responsibilities.
5. A high level of conviction and the ability to think independently.