Small Cap Investment Process

Mutual TRADERS is a fundamental, bottom-up investment manager. We understand

that each company is unique and consider these differences in selecting companies that make good investments. The first step in our investment process is to screen the relevant universe to identify companies likely to outperform based on their financial characteristics using Tactic Blueprint Methodology. The approximately 150 best companies identified in our screening process are put through a second more rigorous review. In this step, we develop an investment thesis for each company. This thesis must be tested. The test generally includes conversations with the company’s management team and industry specialists, review of the company’s financial reports, analysis of industry and company-specific studies, and independent field research. We seek companies in attractive industries with developed strategies, talented and honest management teams, sufficient funding, and strong financial results. The experience and different perspectives of our investment team are an advantage in determining which companies are best positioned to meet or exceed expectations. We eliminate from consideration any company that does not pass our exhaustive fundamental analysis.

The final step in our investment process is to construct a portfolio that includes those stocks we expect to have the best performance and that effectively manages risk. Our clients are primarily concerned about the risk of meaningfully underperforming the assigned benchmark. Hence, we focus our attention on reducing this possibility. We use a statistical approach called downside deviation to measure the likelihood of significant underperformance. Using this information, we select investments that blend together to manage downside risk. We reconstruct the portfolio until downside deviation is within acceptable limits. The result is a client portfolio of stocks with high expected excess returns and limited risk of meaningful underperformance

Small Cap Sell Discipline

The key to Mutual TRADERS’ approach is discipline. We call it “crowding out”. A stock is sold if either of the following situations arises:

a.) the company’s prospects deteriorate as a result of poor business plan execution, new competitors, management changes, a souring business environment or other adverse effects; or

b.) our investment process identifies a company with superior return and risk characteristics. In this situation, the more attractive stock would force us to sell the less attractive stock so that we continue to own only our best investment ideas.