The investment decision-making process begins by utilizing a screening system to derive our various equity universes. To be considered for investment, companies must pass the following set of growth and quality criteria:

• Strong, consistent growth
• Low-debt balance sheet
• High profitability
• Rising free cash flow

The result of the initial screening process is a more focused list of securities. This list contains companies which have above-average growth and profitability characteristics, low earnings volatility, and low financial/default risk. These companies are then subjected to intensive internal research.

Our research philosophy is founded on the principle that first-hand fundamental research is essential in order to make sound, long-term investment decisions. We place great emphasis on this component of our investment process by committing extensive resources to achieve our results. Our portfolio management team has developed an internal research process that carefully looks at a company from a three-dimensional perspective involving qualitative, financial, and valuation analyses.

Qualitative Analysis
Qualitative analysis assesses the company’s long-term market positioning in terms of market structure and prospects, business model, and competitive advantages. The sustainability of the business model is continuously evaluated in light of changing business conditions. In addition, we evaluate management’s strategies, financial goals, track record, and shareholder value orientation.

Financial Analysis
We rely on our own internal research of each company to understand the near-term drivers and long-term potential of the enterprise, the structure and drivers of profitability and growth, and the capital demands of the business. Financial analysis involves an historical examination of the income statement, cash flow statement, balance sheet, and associated ratios on an absolute and peer relative basis.

Valuation Analysis
The final component of our research process is determining the current and potential value of each company in our universe. We employ a variety of proprietary models to establish the value of a business under base, best, and worst-case scenarios. We have found that it is most effective to look at a company's valuation from many different viewpoints, recognizing the differences in valuation metrics across industries.

The output of the research process is a target price and expected rate of return projection for each company. This helps provide us with a framework for purchasing and selling our stocks.

Our portfolio management and construction process is driven by identifying Quality at a Reasonable Price™. The portfolio construction process involves stock selection and application of diversification guidelines. The process is driven principally by individual stock selection and secondarily by sector exposures.

Key elements in the portfolio construction process involve:

• Applying a diversified sector allocation discipline to avoid over concentration in any single sector.
• Eliminating market timing risk by generally remaining fully invested at all times.
• Maintaining a long-term investment horizon with an average holding period of 3-4 years resulting in low portfolio turnover.