Account Maintenance, Reviews and Rebalancing

�Action is the antidote to despair.� Unknown

As the third quarter closed we reviewed accounts for tax management in non-qualified accounts, specific asset and manager reviews, and deviations from their stated asset allocation objectives. This is a customary part of our year-end planning for your accounts.

We can honestly tell you that we are growing weary of adding value to accounts by tax loss selling. However, for accounts that have realized gains in 2002 we are conducting wash sales or selling one manager and replacing with another manager to realize losses to offset realized gains. In some cases we will realize losses to book them for the calendar year. This will reduce the tax basis in the positions and allow any unused losses to be carried forward and used against gains in subsequent years.

Of the 8 equity asset classes employed in our portfolios, we have approximately 30 recommended managers. Presently, we have no managers that are under a microscope for deletion from our recommended list. We have eliminated several managers throughout the past year. The obvious reasons for eliminating a manager is performance. However, absolute performance is not always the performance benchmark. More times than not the under performance is measured more against a similar investment objective i.e. small stocks against small stocks, not small stocks vs. S&P 500.

We also review managers for changes in their personnel. Janus Funds are an example of an investment management group that has been a revolving door filled with internal political strife over the last 5+ years. No matter what kind of business, it is imperative that the working atmosphere is entrepreneurial, supports the free exchange of ideas and works toward a common goal and philosophy. From small firms (Baron Capital, Longleaf Partners) to large firms (American Funds, Oppenheimer, Templeton) we believe these characteristics are well represented in our portfolios.

We also review assets or managers in respect to how they compliment existing managers within the portfolio. For example in the International Stock asset class we had two managers that were core holdings with a growth/value blend, large cap bias and had significant stock overlap; i.e. owned many of the same stocks. We believe both management teams are excellent managers. However, owning each in the same portfolio became redundant. Therefore, we reallocated one of the manager�s allocation to a manager that had a more value-orientation, a multi-cap portfolio with very little stock overlap to the other core holding.

We have spent a great deal of time and effort analyzing the asset class allocations in our portfolios. We are making no changes to the global strategy. Our bias to value stocks and managers, our inclusion of small stocks and our international allocation are appropriate for where we think investors will best benefit from the markets in the next 3-5 years. In addition we remain short-term in our fixed income portfolios. Bond ladders are being constructed in maturities of 1-5 years.

With extreme volatility in the equity markets and no changes to the asset class allocations, the consequence is that a number of portfolios have become imbalanced or under-weighted in the equity asset classes. This is particular true for the large domestic and international asset classes. One of the values of our asset allocation discipline is that it creates an automatic buy low/sell high action. As the equity markets are deteriorating our reallocation reports will signify that a Large Cap Value Stock weighting that is modeled at 15% has dropped to 13%. We will either sell from an asset class that is currently over-weighted or we will allocate cash equivalents that are being held for investment opportunities.

We do believe this rebalancing discipline does eliminate many of the emotions associated with the timing of buys or sells and in particular the difficulty of allocating capital to equity markets at market lows. In addition to enhancing performance, rebalancing maintains the overall risk level of the portfolio. As we have reviewed new client portfolios over the last three years there has been one common mistake many of these investors have made. The investors became significantly over-weighted in Large Cap Growth Stocks. These stocks experienced unprecedented investment performance. However, the investors had no sell discipline to rebalance their portfolios. Therefore, their portfolios grew in risk as the equity allocation grew. Unfortunately this increasing risk has exacerbated poor portfolio performance during the last 2 � years.

We are confident the processes implemented on your behalf will enhance the long-term performance of your capital. This performance can be achieved in a prudent and secure manner with the disciplines outlined.


O c t o b e r 2 0 0 2

Account Maintenance, Reviews and Rebalancing �Action is the antidote to despair.� Unknown As the third quarter closed we reviewed accounts for tax management in non-qualified accounts, specific asset and manager reviews, and deviations from their stated asset allocation objectives. This is a customary part of our year-end planning for your accounts. We can honestly tell you that we are growing weary of adding value to accounts by tax loss selling. However, for accounts that have realized gains in 2002 we are conducting wash sales or selling one manager and replacing with another manager to realize losses to offset realized gains. In some cases we will realize losses to book them for the calendar year. This will reduce the tax basis in the positions and allow any unused losses to be carried forward and used against gains in subsequent years. Of the 8 equity asset classes employed in our portfolios, we have approximately 30 recommended managers. Presently, we have no managers that are under a microscope for deletion from our recommended list. We have eliminated several managers throughout the past year. The obvious reasons for eliminating a manager is performance. However, absolute performance is not always the performance benchmark. More times than not the under performance is measured more against a similar investment objective i.e. small stocks against small stocks, not small stocks vs. S&P 500. We also review managers for changes in their personnel. Janus Funds are an example of an investment management group that has been a revolving door filled with internal political strife over the last 5+ years. No matter what kind of business, it is imperative that the working atmosphere is entrepreneurial, supports the free exchange of ideas and works toward a common goal and philosophy. From small firms (Baron Capital, Longleaf Partners) to large firms (American Funds, Oppenheimer, Templeton) we believe these characteristics are well represented in our portfolios. We also review assets or managers in respect to how they compliment existing managers within the portfolio. For example in the International Stock asset class we had two managers that were core holdings with a growth/value blend, large cap bias and had significant stock overlap; i.e. owned many of the same stocks. We believe both management teams are excellent managers. However, owning each in the same portfolio became redundant. Therefore, we reallocated one of the manager�s allocation to a manager that had a more value-orientation, a multi-cap portfolio with very little stock overlap to the other core holding. We have spent a great deal of time and effort analyzing the asset class allocations in our portfolios. We are making no changes to the global strategy. Our bias to value stocks and managers, our inclusion of small stocks and our international allocation are appropriate for where we think investors will best benefit from the markets in the next 3-5 years. In addition we remain short-term in our fixed income portfolios. Bond ladders are being constructed in maturities of 1-5 years. With extreme volatility in the equity markets and no changes to the asset class allocations, the consequence is that a number of portfolios have become imbalanced or under-weighted in the equity asset classes. This is particular true for the large domestic and international asset classes. One of the values of our asset allocation discipline is that it creates an automatic buy low/sell high action. As the equity markets are deteriorating our reallocation reports will signify that a Large Cap Value Stock weighting that is modeled at 15% has dropped to 13%. We will either sell from an asset class that is currently over-weighted or we will allocate cash equivalents that are being held for investment opportunities. We do believe this rebalancing discipline does eliminate many of the emotions associated with the timing of buys or sells and in particular the difficulty of allocating capital to equity markets at market lows. In addition to enhancing performance, rebalancing maintains the overall risk level of the portfolio. As we have reviewed new client portfolios over the last three years there has been one common mistake many of these investors have made. The investors became significantly over-weighted in Large Cap Growth Stocks. These stocks experienced unprecedented investment performance. However, the investors had no sell discipline to rebalance their portfolios. Therefore, their portfolios grew in risk as the equity allocation grew. Unfortunately this increasing risk has exacerbated poor portfolio performance during the last 2 � years. We are confident the processes implemented on your behalf will enhance the long-term performance of your capital. This performance can be achieved in a prudent and secure manner with the disciplines outlined.

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The opinions expressed in this report are those of the author and are not necessarily the same as Howe Barnes Investments or its research department. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Howe Barnes and/or its affiliates may have an interest in, or from time to time trade or make markets in, the securities of issues discussed herein. Member of New York Stock Exchange Member Securities Investor Protection Corporation