Before the advent of pervasive and very inexpensive computers, the only way the investor of less than even $5,000,000 could diversify his portfolio was through the use of mutual funds. Now, individual accounts as small as $100,000 can be effectively managed. There are many reasons why the structure of an individual managed account could be viewed as more superior to that of a mutual fund.

1. Competitive Fees:

Our fees deliver a significant advantage over the Morningstar mutual fund average of 1.04% for intermediate term funds, 1.28% for multisector bond funds, 1.24% for High-yield bond funds and 0.99% for short term bond funds(before considering 12b-1 fees). (Source: Morningstar 1-31-07)

2. A More Logical and Defensive Portfolio Strategy:

We feel is a relative value total return approach geared also to preserve capital in down markets. This stands in stark contrast to high-yield funds’ nearly ubiquitous “high current yield” objective. This yield driven strategy may represent a riskier approach if the manager strives to beat today’s average yield rather than protecting the portfolio against unexpected market and economic downturns. Our strategy is also utilized in our investment grade program, representing a significantly more conservative strategy than “top-down sector rotation/interest rate anticipation” exercises followed by many funds. Our strategy exemplifies the old maxim that it is easier and safer to outperform by excelling in down markets through preservation of capital, not by trying to beat the averages in the more speculative bull markets.

3. More Frequent Reporting and Our Strict Investment Criteria

This provides a much higher degree of client comfort and security. Most funds can invest in most classes of securities allowing them to significantly alter the risk/reward composition of the fund between their semi-annual reporting periods. Of note in the January 10, 2003 edition of The Wall Street Journal is that some bond mutual funds have been buying high yielding dividend stocks to increase yield. Investors will surely be very surprised at some time. Personally, I only want fixed income securities in my fixed income portfolio and stocks in my stock portfolio.

4. No Leverage is a conservative preference.

Most funds can borrow to buy securities on margin and to meet shareholder redemptions in declining markets. Their ability to lever significantly increases the risk to the long-term investor and brings into question the actual liquidity value offered by mutual funds.

5. Exclusive Ownership of Securities

This is an inherent structural advantage of managed accounts. Many professionals feel that in buying a mutual fund you give up one of the most important features of a bond: the maturity! The investor owns each security. The upside potential is totally owned by the investor, not shared as it must be in a mutual fund, and diluted when new shareholders invest. In down markets mutual funds tend to sell en masse, responding to the collective panic of their shareholders. Their required response to the crowd psychology creates an extremely depressed market in which they should be buying the bargains they are forced to create! We can take advantage of the opportunities through the managed account structure.

6. Security Selection is More Focused.

A client’s portfolio will consist of a maximum of approximately 50 preferred issues, whereas the typical fund holds hundreds of issues (“rifle shooting” as opposed to a “shot gun” approach). Statistics for corporate securities show the marginal utility or incremental advantage of diversification disappears around 30 issues. This greater selectivity is felt to be more efficient and the Sharpe Ratio comparisons to the indexes bear this out.

7. No Tax Liabilities for other investor’s gains.

When buying a mutual fund an investor may be buying into large preexisting capital gains, especially if the fund is forced to sell in a subsequent market decline. With a managed account the investor pays taxes only on the gains he or she actually receives.

8. The Investor’s Objectives and Needs Are More
Customized in a managed account.

The separate account permits easy monitoring of the actual cash flow, so the corpus is not invaded through yields overstated by omission of premium amortizations. We can report actual income generated and disbursed net, gross and cumulative over the life of the account, as well as accumulated income. Accounts can be managed to address some particular tax situations.

9. A closed end fund specific difference is No Dilution Potential generally seen in rising markets.

Many closed ends funds have the ability to do rights offerings to grow the size of their fund. If the current investors do not buy the rights (and in doing so increase their investment in the fund) outsiders can buy the rights.

10. No Soft Dollar Arrangements, which are considered impediments to seeking best execution.

An SEC memorandum of June 2003 (WSJ 11/9/03) stated “Softdollar arrangements create incentives for the fund advisers to (i) direct fund brokerage based on the research provided to the adviser rather than the quality of execution provided to the fund, (ii) forego opportunities to recapture brokerage costs for the benefit of the fund, and (iii) cause the fund to overtrade its portfolio to fulfill the adviser’s soft-dollar commitments to its brokers.”