OUR INVESTMENT PROCESS

Spear Capital has a complete investment process that uses asset allocation and security selection to manage client accounts. Each client is interviewed to determine their personal risk tolerance early in our investment process to ensure that a proper match is made with one of our five management styles.

One part of our guiding philosophy is to test as much of our investment process as possible. We do this by using model-based, quantitative processes, which lend themselves very well to backtesting over multi-year investment periods. While there is no guarantee that SCMI will meet the objectives for each management style, our backtesting gives us a high degree of confidence that our strategies can outperform the overall market as measured by the Standard & Poors (S&P) 500 index on a risk-adjusted basis over multi-year periods.

Risk Level

Risk level varies according to each management style at SCMI. Investors who follow sound strategies and are willing to accept substantial risk are generally rewarded with outstanding returns over the long run. Investors who are unwilling to accept large amounts of risk generally achieve smaller returns over time.

The challenge for any investor is to understand their own risk tolerance so that they can develop and follow a comprehensive investment strategy that will work for them over complete market cycles. Failure to properly assess one's risk tolerance level often leads to the investor changing strategies at times determined by anxiety rather than analysis, and this in turn typically causes a dramatic decrease in performance. For example, if you believe you have a higher risk tolerance than you really do, you may invest using a high-volatility strategy and the first time your account suffers a serious correction, you may panic and sell at the bottom, locking in substantial and unnecessary losses.

SCMI uses a proprietary risk tolerance worksheet to help our clients effectively gauge their psychological willingness to accept market risk. We currently categorize risk tolerance on a scale from 1 to 9 (with 1 being very conservative and 9 being very aggressive).

Asset Allocation

Asset allocation is dividing one's investable assets among different classes of investments such as cash, bonds, and stocks. We believe that effective asset allocation is the best way to control market risk. Most research studies support this perspective.

SCMI uses a proprietary, backtested tactical asset allocation system (TAAS) designed to maximize likely return for a given expected risk at any point in time. The system uses currently available fundamental data for the various asset classes to determine expected return, expected risk, and expected correlation between asset classes.

While past performance is no guarantee of future return, our backtests over the past 6-, 10-, 20-, and 40-year periods show that our TAAS would have provided outstanding risk-adjusted returns over our entire spectrum of risk tolerances when compared to standard benchmarks like the S&P 500 index.

Security Selection

Security selection is the portion of the investment process where SCMI can potentially add the most value to client portfolios. The security selection process at SCMI is a multifactor equity ranking system (MERS). This multifactor system selectively weights many pieces of fundamental data (hence the name "multifactor") for each stock in our database. These weighted, multiple factors are then added together to generate a total score of expected return over the next 12-month period for each stock. Stocks are then ranked according to their expected returns and the top ranked stocks are included in our model portfolios.

The weights for each of these fundamental factors are determined from the relationships between these factors and subsequent annual market returns over a 45-year period starting in 1951 and extending to 1996, a period that included many very different market cycles. This is our "design period" of market data. To complete our research, we then backtest each of these selection model strategies from 1997 onward, a "test period" that also includes different types of markets, in order to assure that the strategies would have performed as well in this more current market environment as they did during the design period.

Asset Allocation + Security Selection

We use our stock selection system to select the securities for the stock portion of our overall asset allocation mix at any given time. This combines two powerful systems to maximize your likely return, given your own risk tolerance level.

Portfolio Construction

These combined strategies are executed by placing trades through a sophisticated order management system provided by our selected broker dealer, Fidelity Registered Investment Advisor Group – a division of Fidelity Investments, on specific rebalance dates. These dates are determined based on backtests of different rebalancing frequencies.

Investment Level

SCMI has a complete investment process that is designed to effectively manage an entire individual or institutional investment portfolio over multi-year periods. We view each client as an individual who has a specific return objective and risk tolerance. Because of this individualized and "holistic" view, we are able to provide a complete solution for individuals seeking risk-appropriate, goal-directed management for their entire investment portfolio.

Client Service

We review client account performance at least monthly, and more frequently if there are substantial changes in the market or in a client's personal or financial situation. Each client receives a quarterly report that includes commentary from the President of the firm, Gregory Spear, a listing of current portfolio holdings, and a comprehensive performance summary. On an annual basis, SCMI holds conference calls and personal meetings with clients to ensure that their accounts are being managed in a manner that is consistent with their investment objectives and accurately reflects any changes to their personal or financial situation.

SCMI service representatives and portfolio managers are accessible by telephone, email and fax during market hours and by appointment at other times. For most clients, account holdings and history can be viewed on-line 24 hours a day, 7 days a week.

For an appointment to discuss our services, please call (860) 242-6400, or e-mail us at: consensus@spearcapital.com.