Gramm Financial Center

Our Core Investment Principles


Principle #1
Asset Allocation- The First Step is the Most Important

Contrary to the message that popular consumer finance magazines and rating services relay to investors, market timing and stock selection are not the keys to reaching investment goals. Unfortunately, many investors turn to these sources for guidance and insight, thinking that rankings can predict future success. Ultimately, the most important step in the entire investment process is the first step, where an investor's objectives are carefully defined, then implemented with an allocation among stocks, bonds and cash that is appropriate to their targeted objectives. This is a very difficult step to take when relying upon commercial sources for Financial advice.

Asset allocation is a precise division of the investor's portfolio that sets up the initial boundaries for a portfolio's risk and

return. It becomes the customized blueprint that all other steps in the process must follow.

GFC/SEI believes that an asset allocation approach, not past performance, specific stock picking or trying to time the market, is what will produce positive results. This is not merely an opinion, it is a fact demonstrated by investment professionals and proven, time and again, including in a landmark study by Brinson, Singer and Beebower, first published in 1991 and expanded in 1993. The study concludes that asset allocation - not market timing or stock selection - is the primary determinant of variation in portfolio return.


Asset allocation decisions are the most important factor affecting total portfolio volatility

Variation in Portfolio Return

Principle #2
Portfolio Structure- An Integral Part of the Investment Process

Betting that a particular segment of the market might be a leader generally does not produce winning results. The number and variety of investment choices keep growing all the time- U.S. equity, international equity, U.S. and foreign fixed income and emerging markets. Each of these markets and segments within them have their own characteristics, own return potential and own possibility for volatility.

As a result, GFC/SEI/SEI believes that a division of assets is only the beginning of the asset allocation story. The successful conclusion lies in the portfolio structure itself, a meticulous diversification of assets. 

For example, the U.s. equity market has four distinct sub-asset classes: large cap value, large cap growth, small cap value and small cap growth. Well-designed exposure to each sub-asset class is required to maximize the risk/return characteristics of a portfolio. It is a strategy that is an integral, but too often ignored, part of the entire investment management process.

GFC/SEI's long history of investment research has resulted in designing portfolio structures that not only can access the rewards of individual financial segments, but can substantially reduce the risk associated with inadequate diversification.


Our multi-tiered portfolio structure allows access to a broad base of individual securities to help your money work harder and produce more consistent returns.

For example, a globally diversified portfolio comprised of 60% equity- 40% fixed income offers you access to:

GFC/SEI's Multi-Style, Multi-Manager Approach to Investing

Principle #3
Tax Management- Never Ignore the Tax Implications of Investing

We believe that taxes really do matter. For taxable investors, not factoring in tax implications can significantly reduce their chance to meet their financial objectives. In the mid-1990's. GFC/SEI completed ground-breaking research into the consequence of taxes on investors' total portfolios. The results of our research led us to construct a portfolio approach that incorporates multiple asset classes within a globally diversified approach to tax-managed investing. We employ a special focus on tax management to help investors enhance their after-tax returns and to control taxes. We take the position that taxes play an integral role in the investment process and should be considered when structuring and implementing an investment strategy.

Tax sensitivity is an ongoing process, from portfolio structure to daily monitoring to specialist manger selection.


Taxes can comprise the ability to meet your investment objectives.

Impact of Taxes on Returns
Source: 60% Wilshire 5000, 40% Lehman Aggregate, no liquidation. The Wilshire 5000 and Lehman Aggregate are unmanaged indices and are not available for individual investment.
*Interest income and dividends are taxed annually at historical top marginal tax rates. Capital gains are realized 50% per year and are taxed at the historical long-term capital gains tax rate. Past performance is no guarantee of future results.


Principle #4
Multiple Specialist Managers- Proven to Deliver Consistent Performance

We have found that identifying and managing specialist money managers helps to deliver consistent performance. We call this "managing the managers."

GFC/SEI knows that financial markets each have their own unique style- they move up or down in differing patterns and they react differently to market news. Money managers who specialize in a particular area of a market have the experience necessary to perfect their own investment styles. They not only know where to seek opportunity but how anticipate favorable and unfavorable changes. When this focus is applied to a portfolio with a careful designed asset allocation, it can produce consistent and predictable results.

By contrast, generalist managers tend to "roam" the markets or drift from one style to another,

seeking returns in areas outside their firm's core competencies.

GFC's/SEI's Manager Selection Process
GFC/SEI first begins to "manage the managers" by applying our powerful research capabilities to the selection of managers. "It's a rigorous, step-by-step approach that starts with an investment returns-based evaluation of the management firm itself. It's an approach that shrinks a universe of over 15,000 investment managers down to a handful who meet all of SIO's criteria. It's a process based on SEI's experience with thousands of investment advisors across all market cycles. It''s a process that takes into account the manager's own philosophy and how it tracks with SEI's


Within each of he four major investment styles, SEI uses multiple managers.

For example, in the small cap growth sector, using multiple managers with a highly differentiated investment process helps control risk and enhance returns

Style-Specific Managers
After intensive qualitative reviews, including personal interviews and on-site visits, the specialist money managers are selected. To implement our asset allocation strategies, SEI currently utilizes a global network of over 35 specialist money managers whose management styles complement each other, thus maintaining the risk- controlled portfolio construction that is the hallmark of SEI's investment approach.

SEI's team of research analysts, many of whom hold the CFA Charter, are dedicated to implementing and overseeing the investment process. their responsibilities include the selection of managers, performance optimization and risk control, as well as daily monitoring of the specialist managers.

SEI's Manager Research Process
Performance: We compare a manager's performance against a benchmark relevant to their investment style. In addition to examining absolute returns, we also examine the

consistency in a manager's returns and returns across market cycles.

Philosophy: SEI looks for specialist managers who have a clearly defined investment philosophy and style- such as selecting growth or value, or a preference for large or small companies- that have been consistently applied over a number of years.

Process: We examine how a firm puts its philosophy into action. We look for firms with a commitment to researching new investment opportunities and a discipline in making buy and sell decisions.

People: Because an investment firm's primary assets are its people, we look for stable, well-managed organizations that have the ability to attract and retain outstanding investment management talented. We also look for companies with a team approach to investing, rather than those that may rely solely on the talents of their individual managers.


Our manager research and evaluation process is consistent with our investment philosophy. Fewer than one percent of more than 15,000 money managers meet SEI's demanding selection criteria.

The Best of the Best

Principle #5
Continuous Portfolio Management- Ongoing Review Keeps Investment Objectives on Track

Even the most careful investment plan is subject to the natural movements of markets that mat may cause allocation targets to drift from their original positions and result in unintended risk. Or, client objectives may shift over time as their personal situations change. SEI addresses such inevitable change through its two-step process of continuous portfolio management.

First, the asset mix is systematically rebalanced to its targeted points, helping to reduce risk and keep the investment strategy on track. Next, through ongoing monitoring and manager reviews, SEI ensures that its mangers' investment styles and performance remain consistent with the

objectives of their segment of the investment portfolio. After a manager is chosen, SEI analysts continuously and rigorously monitor their philosophy, process, people and performance. In addition, our advanced technology allows us to monitor the managers every day- checking portfolio holdings and trades and ensuring the "purity" of the investment portfolio.

As a result of SEI's monitoring, managers who deviate from their philosophy or fail to achieve stated goals are subject to replacement.

Managers do not always do what you think they will do. Performance can suffer if managers' roles are not well-defined or if they invest outside of their assigned mandate.

In the chart, each box illustrates a different point in time for a manager whose portfolio is drifting outside of their specified investment mandate.

Large Cap Value

SAMPLE 80% Equity 20% Bond Portfolio


The Active Tax-Managed 80 (ATM 80) Portfolio seeks to provide long-term capital appreciation on an after-tax basis with current income exempt from federal taxes as a secondary goal. This Portfolio is appropriate for investors with a time horizon of five to ten years, seeking to minimize the impact of taxes on their investment returns.

Portfolio Structure

The Portfolio has an 80% commitment to global equities and a 20% allocation to fixed income securities.

The core of the Portfolio is invested in U.S. and international equity securities. The U.S. equity portion of the strategy consists primarily of an actively managed U.S. large cap component. This actively managed large cap allocation will employ tax-management strategies at several levels. Multiple managers will seek to maximize after-tax returns through active security selection combined with tax-sensitive trading. This tax-managed portion of the Portfolio is augmented with allocations to actively managed small company and international equity funds, including emerging markets. These allocations are recommended to enhance after-tax returns, and decrease risk through diversification, while providing the potential for capital appreciation. Style diversification within the equity portion, through the use of specialist money managers, lowers the risks inherent in any one particular management style.

12% of the Portfolio is invested in intermediate-term municipal fixed income securities to provide income exempt from federal taxes and futher reduce the fluctuation of returns. In addition, allocations to high yield bonds, international fixed income, and emerging markets debt provide additional diversification and the potential for further return enhancement.

One percent of the Portfolio is allocated to a tax-free money market instrument, providing liquidity and facilitating transactions.
Asset Class Weightings
Fixed Income 19%
Equity -U.S. 56%
Equity -International 24%
Cash 1%

Portfolio Allocations


portallocation.jpg (30622 bytes)

Portfolio Expense Ratio 1%

Tax-Managed Large Cap
Alliance Capital Management
Mellon Equity Assoc., L.L.C.
Sanford C. Bernstein & Co.
Small Cap Growth
Mazama Capital Mgt., L.L.C.
Capital Mgmt., L.P.
RS Investment
Management Co., L.L.C.*
Sawgrass Asset Mgmt.,
Wall Street Associates
Small Cap Value
Artisan Partners, L.P.
Boston Partners Asset
LSV Asset Management
Mellon Equity Assoc., L.L.C.
Security Capital Global
Capital Mgmt. Group
International Equity
Acadian Asset Management
Capital Guardian Trust Co.
Oechsle International
Advisors, L.L.C.
Scottish Widows Investment
Management, Ltd.
SG Pacific Asset Mgmt.
Emerging Markets Equity
Coronation Asset Management
Credit Suisse Asset Mgmt., Ltd.
Morgan Stanley Asset Mgmt.
Capital Mgmt., L.P.
SG Pacific Asset Management

Intermediate-Term Municipal
Deutsche Asset Mgmt. (PA)
Standish, Ayer & Wood, Inc.
(Nat'l., MA, & NY)
Van Kampen Management, Inc.
(CA & NJ)
High Yield Bond
Credit Suisse Asset
Management, Ltd.
Nomura Corporate Research
and Asset Mgmt.
International Fixed Income
Strategic Fixed Income, L.P.
Emerging Markets Debt
Salomon Brothers
Asset Management, Inc.
Tax-Free Money Market
Weiss, Peck & Greer, L.L.C.
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