Investment Manager Due Diligence and Asset Allocation Philosophies

Investment Manager Due Diligence

Initial Investment Manager Selection There are literally thousands of investment management rms to choose from. Selecting investment management rms to manage assets successfully is one of the most valuable services Brinker Capital provides. We have no afliation with any investment management rm, so our interests are solely aligned with yours. When an investment manager should no longer be recommended we objectively make that decision. We maintain relationships with more than 50 investment management rms representing over 70 investment disciplines. These rms are among the worlds premier institutional and private client investment management rmscompanies we have thoroughly analyzed and selected based upon their proven investment management expertise. Our Investment Management Group follows a disciplined process in selecting these rms and reviewing them on an ongoing basis. We analyze rms based on the soundness of their investment process, the quality of their professionals, the consistency of their performance, and their capacity for investing successfully in the future. Our practice is to limit the number of managers we recommend. This allows us
Representative Quantitative Criteria for Manager Selection Rolling performance Downside performance Calendar year performance Information ratio Sharpe ratio Relative volatility Absolute volatility Downside volatility Sector weights Relative sector weights Performance attribution Manager tenure Employee turnover Manager compensation

to develop solid working relationships with each money management rm, fully understand their investment approach, and closely monitor each manager on an ongoing basis. We continually seek investment management rms that will be solid additions to our current managers or capable replacements for rms we no longer recommend.

Selecting investment management rms is one of the most valuable services Brinker Capital provides.

We take ve important steps before we select an investment management rm:

l. Identify potential managers

We identify potential money managers through various industry databases or by referral. Then we run a series of quantitative screens utilizing Zephyr Style Analysis, Mobius, Nelson and other databases to determine if they meet our criteria.
2. Interview rm portfolio managers

If the money management rm meets our quantitative criteria, we have an initial meeting with its portfolio managers. During this meeting, we gain a detailed understanding of their investment process.
3. Complete a detailed questionnaire

If we continue to have an interest in the rm after the initial meeting, we ask the rm to complete a very detailed Investment Manager Questionnaire. The questionnaire helps us to gather important information in terms of the history of the rm, its people, buy and sell processes and detailed performance.
4. Visit manager

After a thorough review of the Investment Manager Questionnaire, we meet with the investment management rm at their location. Meeting the entire investment management team and watching their process in motion is a critical step in the manager selection process.
5. Obtain consensus

Finally, before recommending any rm, we seek consensus from the entire Brinker Capital Investment Management Group. Only when the group agrees that it would serve the best interests of our clients to bring the investment manager on board does the rm earn a place on Brinker Capitals list of recommended money managers.

Investment Manager Due Diligence

Ongoing Investment Manager Due Diligence In an ever changing world, ongoing investment manager due diligence is critical to your investment success. After we select an investment manager, we continuously monitor their investment style, performance, philosophy and people to ensure that they continue to meet our rigorous requirements. The Brinker Capital Investment Management Group monitors managers in every sense of the word. Listed below are examples of the various components that comprise our ongoing due diligence process. These checks and balances are performed monthly, quarterly and annually. Daily/Weekly: Daily review of investment manager activity is the rst place to uncover management inconsistencies. Quite often, early detection of trading patterns or performance that is out of character can be a signal that an investment manager may be drifting from its style, requiring further investigation. Monthly: Although we have a long term investment philosophy, we do not overlook the short
Ongoing Investment Manager Due Diligence Daily/Weekly
I Look for signicant change. I Monitor performance.

term. Monthly performance checks to compare investment managers to their appropriate index allow us to measure relative performance. Substantial deviation of performance or portfolio activity is a signal for us to research the reason for the deviation. How we react is based on the conclusions we reach after our analysis. Quarterly: On a quarterly basis, we use sophisticated software-group packages and databases to analyze each investment managers peer performance, risk adjusted performance and style consistency. This review helps us to ensure that client goals and objectives are being achieved. Annually: Review of our annual Investment Manager Questionnaire and the rms ADV, as well as at least one visit during the year, allow us to thoroughly analyze the investment managers in our program.

Monthly
I Review relative performance. I Monitor portfolio activity.

Quarterly
I Monitor style consistency. I Analyze performance. I Review investment updates.

Annually
I Meet with managers. I Review managed account questionnaire. I Review updated ADV or prospectus.

Asset Allocation
Asset Class Recommendations The Brinker Capital Investment Management Group develops asset class and portfolio construction strategies based on an investors risk and return objectives and time horizon. We believe in properly allocated portfolios, and we make portfolio recommendations that seek to enhance returns as well as manage risk. Our approach to asset allocation is highly disciplined. We do not chase the latest fad in investing nor do we overweight an asset class that is in favor at a certain time. We combine different asset classesequity and xed incomeand different stylesvalue, growth, large cap, mid cap, and small capto create comprehensive portfolios that work for the long term. We do not make any betsno asset class bets, style bets, or market capitalization bets. Our asset allocation recommendations are based upon historical long-term returns, correlation, and volatility of various asset classes and sub-asset classes. As you can see from the chart below, different asset classes perform well at different times. Maintaining a diversied asset allocation can help lessen a portfolios overall volatility.

Best Performing Asset Classes Annual Returns 1984-2003 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
Annualized Return 19842003

Short Term Reserves

US Bonds

Large Company US Stocks

Small Company US Stocks

International Stocks

Indices used to represent asset class are as follows: Short Term Reserves, Citigroup 3-month T-bill Index; US Bonds, Lehman Brothers Government/Credit Intermediate Bond Index; Large Company Stocks, S&P 500 Index; Small Company Stocks, Russell 2000 Index; International Stocks, MSCI EAFE Index. Numbers circled represent asset class with highest return for the year.

1.1% 1.7% 4.1% 6.0% 4.7% 5.1% 5.3% 5.3% 5.8% 4.2% 3.1% 3.6% 5.8% 7.9% 8.6% 6.8% 5.9% 6.2% 7.8% 10% 5.4%

4.3% 9.8% 9.0% 10.1% 0.4% 8.4% 7.9% 4.1% 15.3% -1.9% 8.8% 7.2% 14.6% 9.2% 12.8% 6.7% 3.7% 13.1% 18.1% 14.4% 8.7%

28.7% -22.1% -11.9% -9.1% 21.0% 28.6% 33.4% 23.0% 37.6% 1.3% 10.1% 7.6% 30.5% -3.1% 31.7% 16.6% 5.3% 18.7% 31.7% 6.2% 13.0%

47.3% -20.5% 2.5% -3.0% 21.3% -2.6% 22.4% 16.5% 28.4% -1.8% 18.9% 18.4% 46.1% -19.5% 16.2% 24.9% -8.8% 5.7% 31.1% -7.3% 10.2%

39.2% -15.6% -21.2% -14.0% 27.3% 20.3% 2.1% 6.3% 11.6% 8.1% 32.9% -11.9% 12.5% -23.2% 10.8% 28.6% 24.9% 69.9% 56.7% 7.9% 11.1%
Source: Zephyr Associates

Asset Allocation

It is this asset allocation philosophy that serves as the foundation for constructing a multiple manager, multiple style portfolio to meet the specic goals and objectives of each investor. Portfolio ConstructionAn Art and a Science We pride ourselves in building diversied portfolios that are based on an investors objectives and risk tolerance, and on our extensive knowledge of the investment managers that we select. When building portfolios, we combine asset classes and investment disciplines that seek to give investors the most consistent and highest return possible based on an appropriate level of risk. Brinker Capital builds well balanced portfolios that include a mix of value and growth stocks, large, mid and small capitalization stocks, and the appropriate amount of international and xed income securities. We believe that proper diversication is critical to long-term success, as evidenced by the chart below. A diversied portfolio, combining asset classes, provides a smoother ride over the long term.

Asset Allocation Risk & Reward Rolling Five Year Returns, January 1950 December 2003

Return Average Return Largest Gain Largest Loss 12.4% 29.6% -4.2% 11.2% 26.6% -1.9% 10.0% 23.6% .03% 8.8% 20.6% 1.6% 7.6% 19.8% 2.0% 6.4% 19.5% .06%

Portfolio Mix 100% Stocks No Bonds

80% Stocks 20% Bonds

60% Stocks 40% Bonds

40% Stocks 60% Bonds

20% Stocks 80% Bonds

No Stocks 100% Bonds

Source: Crandall & Pierce

Stocks: Standard & Poors 500 Stock Index, Bonds: 5 Year Treasury Bonds.

Asset Allocation

We combine managers that complement each other within a portfolio. Critically important to our portfolio construction process is the understanding that an analysis of a single investment managers risk and return is not indicative of how that same investment manager performs in a diversied portfolio. (See chart below.) Therefore, our portfolio construction process involves analyzing the combination of managers in a portfolio as one entity. We look for managers that have attractive correlations to one another and that have complementary characteristics in terms of sector weights and security weights. Quantitative analysis is performed to determine attractive correlations among managers. These screens show us how managers t together. We then use our handson experience to analyze the portfolios on a qualitative basis based on our knowledge of each investment management rm and their specic approach to investing. Our portfolio construction process is both a disciplined art and a science that we have developed over the years. We believe in our disciplined approach to investing. Over the past 15 years, we have worked to develop the highest quality investment manager due diligence and asset allocation investment processes. Brinker Capital can provide you with the investment services you need to meet your investment goals.

Manager Risk/Return Representative Total Portfolio vs. Individual Managers and S&P 500 Index January 1998 December 2003
25%

20%

Note: Total Portfolio is equal to 50% Domestic Equity, 10% International Equity and 40% Taxable Fixed Income. It is representative of a diversied allocation for a long-term investment of $1 million or more. Returns are gross total returns and reect annual portfolio rebalancing. S&P 500 Index is an unmanaged index of stocks and is not included in the representative portfolio.

15%

Return

Small Cap Equity Mid Cap Core Equity

10%

Total Portfolio Core Fixed Income

5%

Large Cap Value Equity International Equity

Large Cap Growth Equity S&P 500 Index

0% 0% 10% 20% 30% 35%

Standard Deviation
Source: Zephyr Associates

Our Guiding Principles

Our guiding principlesobjectivity, discipline, and perspectiveform the foundation for the value and condence that we provide to you. Objectivity We have no afliation with any investment management rm. Our interests are solely aligned with yours. When a manager should no longer be recommended we can objectively make that decision. Discipline Over the years, we have created highly specialized processes ranging from investment manager selection and ongoing review, to asset class and portfolio construction, to performance reporting. We take great care in developing and following disciplined approaches to investing. Perspective By maintaining relationships with many of the nest investment managers in the world, Brinker Capitals capacity to serve as an investment consultant and strategist is strengthened. In turn, we utilize this knowledge to recommend investment strategies built with unique perspective and experience. We are committed to maintaining these principles and to providing the highest quality investment management services.

1150 First Avenue, Suite 501 King of Prussia, PA 19406 www.brinkercapital.com 800-333-4573

BC-3-04-1M