Mr. Andrews: Cardinal is an independent, employee-owned investment management firm located in Raleigh, N.C. We have approximately 140 million under management, most of that is domestic equities. We do have a non-U.S. equity product, which we began in July of 2007. We manage fixed income for the clients for which we manage balanced portfolios. We are 100% employee owned. We have been in business since 1992, so we have over 18 years of GIPS-compliant, verified performance. Our investment goal is to beat the respective index, whether it's the S&P 500 for the domestic equities or the EAFE Index for the non-U.S. equities, or the Barclays Government/Corporate Bond Index for fixed income portfolios or a weighted average of all of those for a balanced portfolio, net of our fees at significantly reduced risk. And we've done that over the long term. Our process starts with a statistical screen. We screen 10,000 U.S. securities each week, and we screen 12,000 non-U.S. securities each month. We are looking for companies that are statistically significantly cheap relative to their own historical valuations. We are looking for companies that are one standard deviation cheap on multiple metrics of valuation, such as price to earnings, price to cash flow, price to sales, price book value, etc. That greatly reduces those lists of 10,000 U.S. and 12,000 non-U.S. securities into a much more manageable listing of companies that we then begin to dig further into.
We have historically conducted our own research. We do have access to outside research and use that as well of course. But primarily we do our own research; we read 10-Ks, 10-Qs and everything available, transcripts of conference calls, etc. What we are looking for are very high-quality companies that have good balance sheets; very importantly, they have a competitive advantage or a core competency that provides barriers to entry to competitors - dominant share of market would provide an indication of that - and technological advantage or important intellectual property would provide examples. We are looking for high-quality companies that have demonstrated long-term growth, superior return on assets and possess stable, proven management. We like dividends, and most of our equities do pay dividends. Most of those have also increased their dividends in the last year. We look for growth; we look for companies that are not in secular decline but temporarily out of favor. We find the company that is one or more standard deviations cheap on multiple metrics, that meets all of the other criteria we have established - such as a solid management, good balance sheet, core competency or barriers to entry, dominant share of market, etc. We expect a reversion to the mean of those valuation metrics over a three-year period on average. They most often overshoot that normal historical metric, whether it's price to earning, price to cash flow, price to sales, etc. We begin to look at them with an eye to sell when they are one standard deviation expensive, so our model works on both sides - it gives buy signals and gives sell signals. At that point, of course, we are looking at an exit opportunity for those securities. We always try to have a long list of companies to move into and to backfill with following a divestiture. We have very long holding periods. An average turnover is once every five years. As a result, we are very tax efficient for the taxable investor. A very long-holding period is tax efficient for the taxable investor and produces very little trading friction.
Over the past 10 years, as of Sept. 30, 2009, the last date for which I have PSN database performance rankings at this time, our large-cap core U.S. equity portfolio produced a positive 5.05% pa gross return and ranked in the top-three percentile of the PSN large-cap core U.S. equity manager database. The S&P 500 index returned a negative 0.15% return over this same period. Our beta over the 10-year period, averaging 0.77, ranked in the lowest-seven percentile of similar managers. So we outperformed approximately 97% of the other large-cap core managers in terms of return but with less risk (beta) than 93% of those same managers. As a result, our alpha measured by PSN over those 10 years was positive, 4.40%, and ranked in the top-seven percentile of all other large-cap core managers.
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