Investment Philosophy

Today, as never before, the world's capital markets are interrelated and interdependent. Political and social events play as significant a role in financial markets as economic factors. LM Capital Group uses Global Scenario Planning to bring focus to these events. Global Scenario Planning is a structured, team-based methodology that helps identify the most- attractive environments for investment and serves as a risk-management tool. LM Capital's superior investment performance demonstrates that consistent application of this process adds value for our clients. LM Capital believes this process to be a suitable, long-term, conservative management style that responds to long-term fundamental trends. It is risk averse, yet globally comprehensive in nature.

Investment Process

I. Matrix Construction

LM Capital Group bases investment decisions upon economic fundamental analysis. The analysis begins with the concept that money is a commodity, whose price or interest rate, is governed by the laws of supply and demand. When the supply of money exceeds demand, the trend in interest rates should be down; therefore, macro-economic, political and international factors influence this equation. To achieve a consensus on the perceived direction of interest rates, LM Capital's Investment Strategy Group builds a matrix composed of the following six crucial economic factors:

• Inflation
• Employment
• Trade Balance
• Budget Deficits
• International Influences
• GDP Economic Indicators

II. Trend Identification

By applying fundamental economic analysis, the Investment Strategy Group scores the matrix indicators on a numeric scale with a double weighting for Inflation and Economic Indicators. Examination of the matrix assists in determining the most-attractive fixed-income markets and aids in identifying capital flows between countries. The Trend Identification scores determine how the portfolio will be positioned relative to the assigned benchmark with respect to average maturity, duration, sector allocation and within the constraints imposed by the client's investment policy.

III. Portfolio Construction

Based upon fundamental analysis and the Trend Identification scores, LM Capital will adjust the portfolio's asset allocation among Treasury, Agency, Mortgage-Backed, and Corporate securities. The firm attempts to maintain a minimum 15% exposure to Treasury securities at all times and generally employs a laddered maturity structure. The firm generally avoids the use of arbitrage and alternative debt instruments, but may employ structuring techniques such as "barbells" and "laddering".

IV. Security Selection

Individual security selections are based upon specific criteria developed by the Investment Strategy Group. LM Capital uses screening techniques to help identify the types of securities that fit within the investment policy structure. Bonds are evaluated on the basis of duration, convexity, call features, quality, yield-to-maturity and other factors to ensure that each security meets the investment guidelines and embodies the plan sponsor and LM Capital's investment policies. The portfolio quality rating averages "AA" or "A" in domestic mandates and the credit quality of each domestic security must be investment grade "BBB" or its equivalent and higher. Emerging market debt denominated in US dollars may be used on an opportunistic basis if allowed by the client's investment policy. LM Capital avoids the use of derivative instruments. Technical analysis is employed only after a decision has been made to buy or sell a security. It is used to gauge current market sentiment and relative strength. With this method, tactical market entry and exit points can be identified.

V. Situation Analysis

Once the initial portfolio allocation and construction process is complete, it is followed by a "what-if" scenario planning stage that examines what market reaction may occur in response to unexpected future events, either political, economic or social. This allows LM Capital to be proactive in managing client portfolios in changing economic environments. Portfolio characteristics are reviewed with special attention focused on the average duration, maturity and sector allocation that would be appropriate for a one- to three-year holding period. This investment approach minimizes trading costs.

Sell Discipline

Aside from portfolio duration adjustments or sector reallocations, individual issues may be sold based upon changes in the security versus LM Capital's bond criteria. All bonds held within a client's investment portfolio must continue to meet the firm's requirements for purchase. With this in mind, a change in credit quality, valuation or liquidity may trigger the Investment Strategy Group to sell a bond from the portfolio.

Although LM Capital spends a great deal of time exploring the impact of potential political, social and economic events through its Global Scenario Planning process, it does not make radical changes in reaction to near-term movements. Thus, the strategy will not perform well for short periods in markets that are reacting to unanticipated short-term events. LM Capital focuses on long-term investment trends.