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									Private Client Total Portfolio Management

Dalton Investments - Overview
Dalton Investments – Private Client Services Overview
    Our mission is to provide High Net Worth Individuals customized superior portfolio management.
    Through discussion, we jointly determine your investment objectives and then structure portfolios
    designed to meet these objectives. We adjust as needed based on your changing circumstances and
    market opportunities.


►   Dalton Investments was founded in 1998 as an SEC registered Investment Advisor
►   Dalton Manages $1.1 billion of assets for institutions and individuals
►   Investment Strategies include customized portfolios as well as commingled funds investing in Japanese
    equities, Greater China Equities, Small-cap U.S. equities and Large Cap equities
       The common theme underlying all of our investment strategies is rigorous investment analysis and
        scrupulous risk control
►   Our head office is located in Los Angeles. We have research teams located in Shanghai and Tokyo

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Role of Investment Advisor

►   Help define investment goals and proper investment horizon
►   Construct asset allocation
►   Keep investment expenses and taxes low
►   Rebalance Portfolio
►   Provide counseling to client not to chase investment returns nor shy away from poorly performing asset
►   Keep investor’s eye on the ultimate goal
►   Stay abreast of client’s changing circumstances and adjust portfolio when warranted by changed
    circumstances (marriage, children, and large change in wealth)


►   Client pays investment Advisor, Advisor receives no commissions or other fees hence Advisor has no
    conflict of interest. Fees are disclosed and transparent to investor
►   In traditional brokerage model, advisors have incentives to push high commission products or
    proprietary funds. Advisor may have conflict of interest. Fees may be undisclosed

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Your Investment Advisor – Steve Persky

►   Steve Persky, CFA - Dalton’s Private Client Portfolio Manager is a seasoned investor with twenty five
    years of professional financial experience:
       Portfolio Manager for Dalton’s Global Hedged Distressed strategy since 1998
       Portfolio Manager, Payden & Rygel ($5 billion AUM)
       Vice President, Salomon Brothers - High Yield / Investment Grade Debt Trader
       Senior Credit Officer, Citibank
       A.B. Harvard College, CFA Charterholder
       The Private Client Group has Assets Under management of $40 MM. Current Relationships total 20

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Investment Philosophy

                        DALTON INVESTMENTS
Dalton Investment Private Client Core Beliefs

►   Asset Allocation drives investment returns
►   Risk and Return are related
►   Diversification is essential
►   Key factors which have provided higher returns are smaller cap stocks and value stocks
►   Stock picking is not a successful strategy:
       Expensive fees and transactions costs
       Not tax efficient
►   Mutual Fund picking is not a successful strategy as there is very limited persistence of out performance
►   Performance chasing is a losing strategy
►   Maintaining asset allocation and rebalancing provides long term success
►   Emphasize low cost and tax efficient implementation

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Risk & Return – Cash is not King

►   Risk and return are closely related
►   Investing in low risk short term money market and treasury bills produces returns similar to the rate of
►   After tax, these cash and cash-equivalent investments yield less than inflation


                                                                  Return (%)      StDev

                       S&P 500 Index                                 10.36        20.20
                       U.S. Small Cap                                11.77        31.01
                       U.S. Microcap                                 12.64        39.21
                       Consumer Price Index                           3.05         4.29
                       One Month T-Bills                              3.70         3.12
                       Long Term Gov't Bond                           5.50         9.25
                       Long Term Corp Bonds                           5.90         8.59
                       Source: DFA

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Asset Allocation Drives Returns

►   The higher the percentage of risky assets (stocks) the higher the expected returns
►   The greater the percentage of cash instruments, the lower the return
►   Academic studies show that asset allocation explains over 90% of portfolio returns


                                  Asset Allocation (a)

                                Cash (%)                 Stock (%)           Return (%)   StDev

                                    100                        0                3.70        3.12
                                     90                       10                4.55        3.42
                                     80                       20                5.35        4.70
                                     70                       30                6.12        6.39
                                     60                       40                6.85        8.25
                                     50                       50                7.53       10.18
                                     40                       60                8.18       12.15
                                     30                       70                8.79       14.15
                                     20                       80                9.35       16.16
                                     10                       90                9.88       18.17
                                      0                      100               10.36       20.20
                        (a) Stock is S&P 500 Index, Cash is 1 Month T Bill
                        Source: DFA

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Common Investor Errors

►   Hope for the long term (e.g. retirement) but focus on near term performance rather than the risk of
    outliving their assets
►   Take too much risk by failing to diversify
►   Take too little risk by maintaining too much cash
►   Chase performance
►   Fail to consider the consequences of taxes and inappropriately high investment costs

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Core Investment Strategy

►   Provide total investment management which emphasizes
       Asset allocation
       Portfolio construction consistent with investment horizon
       Minimized costs and taxes
►   Use index Funds (mutual fund or ETF) to provide low-cost, tax advantaged portfolio construction

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What is Risk?

►   Risk is usually defined as the standard deviation of returns but another way of thinking about risk is the
    likelihood that investments fail to achieve the intended purpose for the assets

►   One key risk that is often overlooked by many investors is the risk of outliving their assets
       Investors tend to focus on the short term ups and downs of their portfolios
       They are less worried about whether their investment will support them throughout their retirement
       Approximately 40% of 65 year old individuals will live to 90 (a)
       Married couples who are 65 years old have a 63% chance that at least one spouse will live to 90 (a)

                                                                       Life Expectancy

                               Current Age                          Male                 Female

                                      65                              81                       84

                                      75                              85                       87

                               (a) US Census Bureau
                               (b) Social Security Administration

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Reduce Risk Without Sacrificing Return

►   Diversification is critical
       Diversification is one of the “free lunches” in the investment world
►   Combining international equities, for example, with U.S. equities reduces the standard deviation (ups
    and downs) of returns without sacrificing performance
►   Adding a micro cap allocation increases expected returns with a modestly sloped increased risk profile

                          Date Range: 1/1/26 – 12/31/05

                                                            Microcap/S&P mixture


                                 11.00%   11.20% 11.40%   11.60%    11.80% 12.00%      12.20%   12.40% 12.60%   12.80%
                                                                   Annualized return

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Build Portfolios to Increase Returns


►   Small capitalization stocks have higher returns than large cap stocks
       Smaller companies (small-cap stocks) are riskier than larger well know companies
       Small-cap stocks must have higher expected returns to induce investors to assume
        the higher risk

►   “Value” or low price to book stocks have higher returns than growth stocks (high price to book)
       Value stocks are companies with low price to book and low Price/earnings and tend to be
        out of favor
       The stock may be suffering from poor company or sector performance
       To induce investors to invest in these less sought after companies, the expected return must be
        higher than for companies that are doing very well and are very popular (high price to book or
        high P/E)

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Building Portfolios to Increase Returns (cont.)

                     Small Cap vs. Large Cap

                US Small Cap               13.6%
                US Large Cap               10.5
                Premium                        3.1%

                                         Large Cap Value vs. Large Cap

                                      US Large Cap Value          12.3%
                                      US Large Cap                10.5
                                      Premium                      1.8%

                                                                Small Cap Value vs. Small Cap

                                                             US Small Cap Value          16.1%
                                                             US Small Cap                13.6
                                                             Premium                      2.5%

  Source: DFA

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Other Ways to Improve Performance

►   Reduce investment expenses and taxes
       Investment expenses directly reduce performance
       Taxes also directly reduce returns in a taxable portfolio
       A slight increase in expenses or taxes can have a huge impact on long term total return because
        of compounding


                                                               Impact of .5% Added Expenses

                               Years       Future Value        Future Value      Net Effect

                                  10               $176                $168              8%
                                  25               $688                $596             92%
                                  40             $4,666              $3,834            832%

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Lowering Portfolio Expenses

►   Lower the cost of investment management
       Index Funds and ETF have very low fund expenses as compared to actively managed funds
       The Vanguard S&P 500 index fund was the in the top 15% of large cap mutual funds! We might
        expect that an index fund should have a median return
       Index fund fees are generally 1% less than actively managed funds

                                            INDEX VS. MANAGED PERFORMANCE                   (a)

                                            Period (Years)                             Percentile

                                                  1                                               13%
                                                  3                                               12%
                                                  5                                               16%

►   Another hidden cost of actively managed funds is transactions costs
       Every time a fund trades, it must pay commission as well as some bid/offer spread
       The more a fund trades, the higher are these costs

    (a) DFA Large Cap Index Fund versus Other Large Cap Funds (U.S.) through 9/9/06.

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Lower Taxes

►   Taxes are like fees
►   Actively managed funds generate higher levels of taxes particularly onerous short term gains
►   Index Funds which have significantly less turnover generate less taxable income and so are more

                                          2005 Taxable Distributions

                               S&P 500 SPDR                              1.7%
                               Fidelity Magellan Fund                    3.7%
                               American/WAMU Fund                        3.3%

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History is Yesterday

►   Most mutual funds are sold based on their historical performance
►   Much attention is devoted to analysis of the best mutual funds
►   Unfortunately, there is no evidence that high performing mutual funds persist in generating above
    average performance
►   An investment strategy of choosing the top funds each year does not generate returns superior to
    investing in index funds


                                           1991-1995         1996-2002    1996-2000    2001-2002

               Top 30 Funds                     28.2%              2.1%        31.0%       (22.8)%
               Average Fund                     15.7%              4.7%        15.2%       (17.2)%
               S&P 500                          16.6%              6.9%        18.4%       (17.2)%
               Source: DFA

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Performance Chasing

►   Performance chasing is a losing strategy
►   Most investors make the mistake of wanting to buy what has been going up a lot and sell what has been
    doing badly
►   This is similar to buying growth stocks and avoiding value stocks
►   It is the natural instinct but it leads to poor performance. The successful strategy is not intuitive
►   It is to buy what has been out of favor and sell what has been performing best
►   When this is done on a systematic basis (once or twice a year) it is called rebalancing
►   In rebalancing, an investor reduces the asset class that has done well and has grown to be a large
    percentage of the portfolio while purchasing increasing the poorly performing asset
►   Buy low - Sell High

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►   Focus on investment goals and time horizon when determining about how much risk to take – there is a
    significant risk of not achieving investment goals because of insufficient high risk/high return assets
►   Utilize diversification by employing international equities, U.S equities and perhaps real estate and
►   Overweight small cap stock and value stocks
►   Keep investment expenses low by employing low cost index funds and ETF
►   Minimize taxes by investing in low turnover and tax managed strategies (index funds and ETF)
►   Do not engage in performance chasing
►   Do stick to your investment allocations and rebalance

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