We use the Russell 2000 Index as our performance benchmark but we consider our available universe to include about 2,500 stocks. We narrow the large number of potential investment ideas into a more manageable list through a combination of quantitative and qualitative screenings. Qualitatively, we hold hundreds of individual meetings annually with the senior management teams of small-cap companies. Quantitatively, we have developed a series of proprietary screens over the years that we believe allow us to more efficiently focus our time and effort. We do not use those tools to select stocks that go into clients’ portfolios but, rather, to help us locate sectors of the market or specific companies where we want to do more research. In selecting appropriate investments for our clients’ portfolios, we look for the following qualities:

Industry Factors

• Favorable supply/demand dynamics
• Competitive environment that allows for attractive returns on capital
• Industry/company demand drivers bottoming or improving

Financial Health

• Clean balance sheet
• Free-cash-flow neutral to positive
• Stable to improving margins, returns and earnings

Management

• Focused on long-term value creation
• Reasonable plan for the business
• Compensation incentives aligned with shareholders

Sell Discipline

We initially establish target buy and sell prices for each security, but fundamental shifts in a company’s financial situation may cause us to adjust those targets. We typically will sell a holding if any of the following conditions occur:

• The stock reaches its target price and there is no compelling reason to adjust that target
• We could better use the money elsewhere
• The stock’s fundamentals deteriorate or the thesis we used to buy the stock materially changes
• The company’s market capitalization exceeds the limits of our investment mandate
• The holding becomes too large a percentage of the overall portfolio

A Word About Risk

Investments in small-cap companies generally involve greater risks than investing in larger capitalization companies. Small-cap companies often have narrower commercial markets and more limited managerial and financial resources than larger, more established companies. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a fund’s portfolio. Additionally, small-cap companies may have less market liquidity than larger companies.

Investments in value stocks are subject to the risk that their true worth may not be fully realized by the market. This may result in the value stocks’ prices remaining undervalued for extended periods of time. The fund’s performance also may be affected adversely if value stocks remain unpopular with, or lose favor among, investors.

Eagle Boston Investment Management is a wholly owned subsidiary of Eagle Asset Management.