Quarterly Client Update - October 2004 We are pleased to enclose your quarterly statements for the quarter ending September 30, 2004. It seems we have had a strong headwind this quarter, in the equities market, due to higher oil prices. Surprisingly, the Fed’s tightening of rates made for a very positive return in the bond market for the quarter. Bonds benefited from short-term fears over the economy losing some of its steam. So far this year has been about protecting our gains from 2003, which we have done successfully. Some of our core managers did not do as well as their benchmark index this quarter. This is expected on a limited basis from time-to-time. The good news is that since we prepared your reports for the quarter, our portfolios have increased another 3%; which is not reflected on your statements. Market Outlook - On a positive note, the election results will soon be decided. The outcome has less effect on the market than you may expect. We feel it is more a question of certain stocks such as drug companies/healthcare, which may be more or less favorable to hold depending on the election results. - Due to rising fuel costs earlier this year, growth shifted from red-hot to merely decent growth. Consumer spending went to gasoline vs. other consumption options. But this can easily shift in the other direction as oil prices improve. - Other somewhat pessimistic factors included leading technology companies announcing below expected earnings, causing the NASDAQ to decline sharply. In addition, there were two straight months of payroll growth that was below expectations. - Positive trends are also in motion. There are lower new unemployment claims. The supply management index (a survey of purchasing and supply managers) has been up continuously since January. This captures trends before government data. - The media and investors seem to be focused on data that lag real economic trends. We cannot expect job growth to return to 1990’s levels. Just as stocks reached unsustainable levels, those employment levels could not be sustained. Excess hiring in previous years then led to layoffs in 2000. - We are approaching the point in the market where pessimism has gone overboard. The over pricing of oil might be the latest speculative bubble. Ultimately, it will reach equilibrium; whereupon stronger market fundamentals will be realized. To put this all in prospective, as we look back the DOW was at 7,286 exactly two years ago. Today it is at 10,204. In roughly five years, it has taken investors nowhere. We have gone from irrational exuberance to irrational pessimism. However, our investment strategies and disciplines have performed approximately +30% above this level. We have done this with a margin of safety through diversification and active asset allocation. Portfolio Update With the anticipation of further Fed interest rate hikes in the third quarter, we further transitioned our bond portfolio from fixed to floating rate. Through 2003, high yield bonds continued to move closer to investment grade status, a reflection of improving corporate balance sheets. Entering this year, we knew the gains from re-rating bonds would slow, and high yield bond funds would look similar in composition to investment grade funds. Pimco High Yield like other high yield funds moved into this area. We decided to trim this position, and purchase ING Senior Income, our floating rate fund. Our overall investment themes have been increasing the market cap of the portfolio, and reducing market dependent return. The natural progression has been to re-evaluate our small cap growth positions. The desire to move upstream in market cap was the primary reason for trimming the William Blair Small Cap Growth fund. The proceeds were used to buy Northtrack Managed Growth (Mid Cap Growth). Through our fund selection, we have invested in funds that derive returns primarily from stock selection, and less form market participation. We decided to sell our Alger MidCap Growth position. The fund was originally purchased as an aggressive way to move disproportionately more than the market. In an oscillating stock market, and negative quarter, we needed to reduce our correlation to market movements. We saw this as an opportunity to sell our Alger position, and use the proceeds to buy CRM Mid Value. Singer Xenos Update Robb Report Worth Magazine has again named Singer Xenos for 2005 as one of The Nation’s 100 Most Exclusive Wealth Advisors in the USA. We are very proud of receiving this honor for the fourth year in a row. Faith Xenos was recently profiled in Gables Living Magazine in an article titled “The Secret of My Success”. She is also planning an upcoming social event with Tiffany’s for the holiday season. Our recent due diligence visit took us to the offices of Cadence Capital Management, and Pioneer Global Asset management. Albert Chu, our analyst spent two days in Boston. The main focus of the Cadence meeting was to re-evaluate the small cap growth universe as a whole, and performance attribution for the Emerging Growth fund. The Pioneer meeting provided an economic overview, and current fixed income challenges. The information was used to set our expectations for upcoming high yield returns, and ongoing formulation of our bond policy. Since we got such a wonderful turnout at our last event, we are planning two upcoming Client Appreciation parties. Plans are underway for the speaker and locations so we will keep you posted. In closing, we are looking forward to a very positive fourth quarter. We intend to benefit from the “January effect” and other upward trends in the market. Please call us to review any questions on your enclosed reports. Eye On The Market Year-To-Date Returns as of 9-30-04