The first step in our investment process, and in many ways the most important part, is developing a full understanding of our clients' financial needs and goals. Every one of our clients is unique, and before we invest a dime of your money, your personal KIM account manager works with you to understand your total financial situation. They'll help you develop or refine your personal investment objectives, goals and tolerance for risk. And in conjunction with our investment committee, they will examine and evaluate your current investments and tax situation. Only then will we begin to formulate an investment strategy for you. To make sure that strategy stays consistent with your needs, your KIM account manager will stay in close touch with you, so that any changes in your circumstances are promptly reflected in the management of your account. Although KIM has discretionary trading authority on your account, you will always be made aware of activity in your account through trade confirmations and account statements, as well as KIM quarterly reports

Once we understand your needs, the next step in the process of building a portfolio for you is to develop your asset allocation mix.

Asset Allocation
We use a five-factor equity model to help us systematically collect and process information to assist in the asset allocation decisions. The factors include: Valuations, Corporate Earnings Growth, Interest Rates, Sentiment, and Liquidity. Under each factor, we collect a variety of quantitative data. We generate this data internally, from contact with the portfolio managers and the research staffs from our underlying funds, and from third-party research sources.

After developing your asset allocation mix, we then select individual funds for each asset class.

Fund Selection
Like you, when we select funds, we need to find fund managers that we believe are honest, competent, and have a process we believe will add value and be appropriate. The best way to do this is to meet with the portfolio managers that we invest with directly. Our goal is "turn over more rocks" than the competition. Each week, we typically meet with portfolio managers or hear portfolio presentations on 10-15 different funds. Meeting and communicating with managers directly is critical to how we manage money.

We also do a great deal of quantitative work -- some of it proprietary. There are two fundamental ways of conducting this sort of analysis -- and we do both. First, we can examine the portfolio holdings themselves and how they evolve. Another form of analysis is called returns-based analysis. This is where we look at the last year of daily return data for a fund and compare those returns versus a variety of benchmark index returns using regression analysis. While this sophisticated -- and expensive -- form of analysis isn’t perfect, it does usually provide clues that a fund manager is altering his or her market exposures and risk characteristics, well before it shows up in published data-. This analysis is also critical for how we manage portfolios.

When we are considering a fund for your portfolio there are basically two essential questions we have to answer. First, does the fund manager have predictable behavior in terms of portfolio attributes and risk characteristics? We need to understand how each fund in a client portfolio will interact with the other funds you hold. Second, does the fund manager have the ability to generate long-term excess returns relative to peers and other comparable alternatives?

To answer these questions, there are a variety of questions we need to ask that we call the seven Ps:

1. Product
   In short, what is the fund and what is the fund trying to accomplish?

2. Price
   How much does it cost?
   Expense ratios
   Turnover ratios -- a rough measure of transaction costs
   For taxable accounts, we examine a manager’s tax awareness or efficiency.

3. People
   Who’s running the show?
   What resources do they have?
   Are they competitive? Disciplined?
   Do they have a repeatable process?
   Passionate about what they do?
   What’s their edge?
   How are they compensated?
   Do they invest in their own fund?

4. Philosophy
   What does the management believe in?
   What are their objectives?

5. Process
   What are the nuts and bolts of how they buy and sell?
   How do they construct a portfolio?
   How do they monitor risk?

6. Portfolio positioning
   How is the portfolio positioned relative to its own history?
   Relative to its benchmark?
   Relative to its peer group?
   Relative to what they told us and what we understand about the portfolio?

7. Performance
   What are the drivers of returns?
   What are the risk characteristics?
   Historically speaking, have they proven that they can pick the best stocks?
   How has relative performance been?
   For taxable accounts, how tax efficient is the portfolio management?

Again, these are some of the questions we ask when we meet with portfolio managers. We also talk to a variety of people within the industry, often collecting good and bad peer reviews. Sources of information range from scuttlebutt off of trading desks to miscellaneous comments by various marketing people -- who are often competing against each other. We’ll look anywhere for insights into who’s hot and who’s not. Who’s on the rise and who’s losing interest?

After we have built your portfolio we constantly monitor it against changes in the markets, the underlying fundamentals of the individual funds and your own financial situation to ensure that it continues to meet your goals and objectives.

Sell Discipline
We will sell a fund basically for two reasons: fund behavior or due to a change in our portfolio strategy. Regarding fund behavior, some reasons include:

Is there a significant organizational or managerial change?
Is there a philosophical change in the fund’s process?
Is fund behavior unexpected?
Has the asset base grown too large?
And, are the returns inadequate given the investment style and mandate?

Regarding selling a fund due to our portfolio strategy:

Do we need to rebalance to manage our over-all risk characteristics?
Do we need to reposition to align the portfolio with our current market outlook?
For taxable accounts, can we harvest a tax loss?
And, do we have a better fund idea in the same market area?