Capital Management's investment process begins with a thorough understanding of the client's investment objectives. Portfolio objectives are tailored to each client's specific requirements in a highly personalized manner. Risk tolerance is compared relative to return expectations and redefined in terms of interest rate risk and credit quality constraints. Active management, employing both fundamental and value analysis, is then utilized to design an optimal portfolio structure in line with the client's guidelines and objectives.

Our investment discipline is designed to identify fundamental growth opportunities within the fixed income markets, while overlaying a value component to quantify risk. The fundamental analysis concentrates on identifying quality and strength in the economy, the various bond sectors, and individual issuers. Value is measured in terms of relative comparisons and exposure to downside risk. Emphasis is placed on adding value through multiple diversified strategies, while maintaining risk at a minimum.

Capital Management's styles are designed to offer a broad range of maturities and each is tailored to fit a client's specific investment objectives and constraints. We separate our fixed income investment styles into five distinct areas:

Money Market/Cash Management

Average maturity of 60 days or less
• High quality investments, with A1/P1 minimum quality on commercial paper
• The Ambassador Money Market Fund is Rule 2a-7 compliant
• Benchmark is the 3-month Treasury Bill rate

Enhanced Cash Management

• Maturity range is 0-3 years, with a duration average of 1-1.5 years
• Credit risk levels are a function of client objectives
• Can be structured to match a specific cash flow stream
• Benchmark is the Barclays Capital 1-3 year Government Index

Government / Credit

• Maturity range is 0-30 years, with a duration average of 4.5-5.5 years
• Minimum average credit quality of AA
• Investments comprised of Treasury, Agency and Corporate securities
• Benchmark is the Barclays Capital Government/Credit Index

Core Bond

• Maturity range of 0-30 years, with a duration average of 4-5 years
• Minimum average credit quality of AA
• Investments comprised of Treasury, Agency, Corporate, Asset-backed, and Mortgage-backed securities
• Benchmark is the Barclays Capital Aggregate Index

Core Bond Plus

• Maturity range of 0-30 years, with a duration average of 4-5 years
• Minimum average credit quality of AA
• Investments comprised of fixed income securities issued in U.S. dollars and non-U.S. dollars, including government and investment grade debt, non-investment grade debt, asset-backed and mortgage-backed securities, Eurobonds, 144A securities and emerging market debt
• Benchmark is the Barclays Capital Aggregate Index

Our overall investment philosophy and style have remained constant since the inception of our firm. However, the strategies and analytical tools we employ are fluid and designed to adjust to changing market conditions.

approach for shorter maturity (under 3 years) portfolios follows the guidelines of safety, liquidity and yield.

Safety
The safety component of our approach has as its main objective the preservation of portfolio principal. The two best ways of protecting principal is through portfolio diversification and a comprehensive analysis of the credits in the portfolio. We maintain a large number of holdings in our portfolios for diversification and also generate credit research on all of our short-term credit holdings.

Liquidity
In order to enhance portfolio yield and performance, our goal is to maintain cash availability, while maximizing the maturity structure of the portfolio. We analyze current and historical cashflow data to determine patterns and identify trends that occur throughout the year.

Yield
The most important factor in determining the average performance of a short-maturity portfolio will be the length of its average maturity. The client's time horizon, liquidity requirements and loss constraints will determine the proper average maturity, or duration, of the portfolio. Once set, the duration would remain a passive decision and would only be adjusted in the event of a change in cashflow expectations. Active portfolio decisions would be employed in the management of yield curve and sector weightings. These are areas that we feel are exploitable and will add to portfolio performance over the long run.

approach for long maturity, core bond portfolios can be segregated into the following areas:

Duration Management
Similar to many bond managers, we believe that it is difficult to consistently make accurate long-term interest rate predictions. As a result, we generally maintain the duration of our portfolios close to their respective benchmark index levels. However, we also believe that opportunities occur periodically when short-term interest rate movements are more predictable and exploitable. Furthermore, interest rate movements are a factor in many other types of fixed income strategy decisions, such as yield curve positioning. We therefore have developed a short-term interest rate model designed to identify Federal Reserve policy changes.

Yield Curve Positioning
Historically, the yield curve has a long-term relationship with the movement of the economy along the economic cycle. Our fundamental analysis compares the shape of the yield curve relative to our perceived strength of the economy. Value in the curve is measured using statistical measurements to compare historical averages.

Sector/Quality Management
Our fundamental research compares the yield premium received for accepting higher risk levels relative to the underlying strength of the economy. Value, again, is measured using historical averages based on the tendency for yield premiums to return to mean levels.

Security Selection
We use traditional fundamental analysis to search for companies with strong growth characteristics in industries that exhibit long-term stability. Our proprietary credit model (Ambassador Credit Score) concentrates on downside risk analysis, with an emphasis on principal preservation. Our value approach addresses reasonable price analysis and compares the pricing levels of similar companies.