Dreher Capital Management allocates financial assets and makes investment selections based on risk. The underlying belief in this philosophy is that through research it is possible to determine, at least on a relative basis, the risk of an investment. If this is true, investors can control the amount of risk they take by analysis and choice. The firm believes that additional control of investment risk can be accomplished through the use of diversification, which is also a cornerstone of the firm's investment philosophy. The corollary to this philosophy is that through research it is NOT possible to determine rates of return. Accordingly, in managing investments, it is the firm's job to help clients take risk efficiently(1).

1. Importantly, the firm does not believe this line of reasoning necessarily leads to indexing, nor does it preclude changing allocations based on perceived market conditions. And, while asset allocation can control investment choices under this philosophy, investment selection based on judgment is not inconsistent with the philosophy.

At Dreher Capital Management, to help clients formulate an Investment strategy to allocate financial resources between fixed-income and equity investments, we divide investmests into four risk-based categories;

Level I: Conservative Income Investments
Investments in this category include cash, Government and corporate bonds and notes rated in the top four investment categories by Moody's and/or Standard and Poor's and mutual funds investing in these securitites.

Level II: Aggressive Income Investments, or Income and Growth
Investments in this category include utility stocks and stocks of companies providing special situation income opportunities, as well as non-investment grade bonds. More examples include preferred stocks, convertible debentures, Real Estate Investment Trust, and mutual funds which invest in these securities.

Level III: Conservative Growth Investments
In this category, investors place their principal at risk in exchange for the possibility of higher returns than are generally available in the Conservative and Aggressive Income categories. Investments include common stocks of larger domestic corporations(larger in both sales and capitalization). This category also may include securities which are convertible into equities, and mutual funds investing in these securities. Although investments in this category pay dividends generally, they are expected to return more from price appreciation than from current income, so they tend to exhibit more volatility than investments in the Conservative and Aggressive Income categories.

Level IV: Aggressive Growth Investments
Investments in this category include stocks of smaller domestic companies and foreign corporations. Most investments in this category pay little if any dividends, and investment gains thereby are expected only from price appreciation, so volatility is generally higher than for investments in the Conservative Growth category. Mutual funds buying these securities also may be used. Further risks in this category can include the limited liquidity characteristic of smaller capitalization companies and fluctuations in foreign exchange rates, as well as the success(or lack thereof) of the currency hedging techniques employed by mutual funds buying foreign securities.

Investment Styles:

Investment style is the most important determinant used by the firm in selecting mutual funds. Empirical studies have found only two basic investment styles: growth and value. Since these styles have a tendency to produce different results for specific time periods, diversification between them can reduce portfolio volatility. Mutual funds specializing in one or the other styles can assist portfolio managers to achieve their desired exposure levels to each style. A fund that changes from one style to the other is undesirable. The firm has found a few fund managers who got rich using their talents to employ one style of investment selection, and they are not concerned about quarterly or even yearly returns: they are either hard-core growth investors or hard-core value investors, so one always knows what the money is doing.

Number of Companies:

Purchase of a mutual fund in a portfolio provides instant diversification, giving investors exposure to more stocks and industries than possible using their own resources.

Portfolio Balance:

Sector funds (classified as Level IV investments by the firm) can provide specific exposures needed to create balance in the portfolio. For example, consider investors whose Investment Strategies call for a large emphasis on income investments. Intrinsically, these portfolios are sensitive to inflation which can erode the purchasing power of their income and principal. To offset such a risk, investors could purchase a mutual fund specializing in energy companies: the idea being that rising prices would benefit companies that produce something as essential as energy.

Another example would be global or foreign mutual funds for investors desiring exposure to markets wherein Dreher Capital Management has little or no expertise. Technology and biotechnology are two more examples demonstrating how mutual funds can provide an important means for diversification and expand investment acumen.

Historical Return:

By themselves, historical returns are not good criteria for choosing a mutual fund. In fact, as Morningstar has stated, many times historical returns produce a negative correlation with future returns. Empirical evidence, according to Morningstar, has shown that when a mutual fund attracts a sudden increase in funds, fully 90% of the money arrives after the mutual fund has had its biggest gains.

At Dreher Capital Management, the firm would rather buy a fund specializing in one style whose results had languished for a time, rather than the latest "star" portfolio manager of the day.

Screening:

Many of the popular investment magazines screen mutual funds according to a myriad of variables. They produce lists of best funds in down markets, best in up markets, best for income and so forth. Dreher Capital Management believes these lists create an illusion of security. As stated previously, the firm believes all investment entails risk. No screening process can remove risk. Risk comes with the territory.

The firm relies on a few fund managers who have their own money in the funds and who have demonstrated an ability to make money specializing in one investment style.

Management Fees:

Clients should be aware that the use of mutual funds (even NO-Load funds) in their portfolios managed by Dreher Capital Management subjects them to double fees, since they are actually paying the mutual fund a management fee at the same time they are paying Dreher Capital Management.

Dreher Capital Management does not try to be all things to all people. Some individuals will find they are particularly suited to the firm's way of doing business; others won't.

Size and Services:

Competitors of the firm range in size from smaller investment advisers to the largest brokerage firms and bank trust departments, as well as many mutual fund groups who have recently decided to advise clients alongside their fund offerings which already charge management fees. Many of these competitors offer additional services such as estate planning and income tax preparation.

Dreher Capital Management considers itself efficiently run, able to deliver a valuable service at competitive prices. The firm has no plans to expand its services. It can recommend competent professionals in the fields of estate planning and income tax advice. Although the firm would like to have more assets under management, it does not want to grow out of its present organizational structure.

Advantages:

Direct Access:

Individuals thinking of Dreher Capital Management for managing investments should realize that as clients they will always talk to the same person. Unlike other institutions, where new faces greet clients almost monthly, Dreher Capital Management has only two portfolio managers. When you talk to the firm, you know who is managing the money and you are talking with the person responsible, for better or worse.

Fees Versus Commissions:

In the short run, Dreher Capital Management cannot guarantee its services will cost less than the average brokerage company, whose representatives like to say they "provide the advice for free." However, over the long term, the firm believes its services become very cost effective for four basic reasons:

1. Commissions can be reduced through the use of discount brokers or a negotiated commission schedule with the present broker.

2. Trading activity is usually reduced.

3. NO-Load mutual funds eliminate costly up-front charges and hidden exit charges.

4. Better results over the long term stemming from objective management: the firm's fees rise with the size of its accounts, so it has only one agenda and it is the same as the client's.

Don't hire the firm to:

Trade Options and Futures

Invest in Exotic Derivatives

Go In and Out of The Market Based on Timing Models These activities require valuable resources (mainly time) the firm needs to pursue its interests in finding good stocks, bonds and NO-Load mutual funds.

Dreher Capital Management and The Community:

The firm believes in a responsibility to support the communities from which it derives its livelihood. Specifically, the firm focuses on educational causes (with a broad interpretation of education) for its donations. Through a Holiday Season program of giving, Dreher Capital Management has contributed over $2,000 to educational institutions such as Lawndale Community School of Chicago, Hillsdale College of Hillsdale, Michigan, the Salina, Kansas Board of Education Fund and the Prancing Horse Riding School of Moore County, NC. The firm has also pledged to the Annual Fund at Sandhills Community College.