What are your buy-and-sell disciplines?

Positions are initially screened based on Cerner’s proprietary screening methods which are focused mainly on company balance sheet, cash flow, and dividend payout metrics. Prospective investments must pass all of the screening metrics before further due diligence is performed. Once each candidate is carefully analyzed for earnings quality, an initial price point is established for purchase. Position sizing is based on the PM’s assessment of the risk/reward profile of the investment following the due diligence process and taking into consideration macro economic risk.

Cerner follows a highly disciplined sell process based on strict valuation parameters. We attempt to marry / merge our assessment of intrinsic value with our proprietary screening metrics to come up with an appropriate risk/reward. Once in the portfolio, each position is continually monitored to make sure that financial performance is at least maintained; dividends are maintained without risk of material reduction; and/or the investment becomes fully priced. If a current position is deemed to no longer meet the requirements for an initial purchase, we then look to exit the position.

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How is your investment process repeatable?

The process is both scalable and repeatable as the screening metrics are fixed with the exception of the dividend yield and price multiples. The Cerner screen filters the number of possible positions that have a high probability of success to a manageable number. Due diligence is then applied to this subset of positions. The screening metrics are measured quarterly as we gauge portfolio performance. Finally, the entire investment process is rooted in a company’s ability to generate (and sustain) stable cash flows and the company’s ability and willingness to reinvest those cash flows into sustainable or increasing dividend yields throughout different economic cycles.

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What is Cerner’s competitive advantage?

Cerner has two major advantages over other firms. The first is our proprietary screen that has a proven track record of discovering undervalued equities. The second is the full appreciation for risk that our portfolio managers have. Managers seek a clear understanding of the current risk environment and the current macro environment and do not try to predict future unknowns. Portfolio managers understand the effects of this investor sentiment, but the disciplined process helps mitigate that when making investment decisions.

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What type of market should the strategy outperform or underperform? What are the limitations of the strategy?

Historically, the strategy has outperformed during most economic cycles, particularly during years after a significant sell-off that has left a many mispriced securities available for purchase. The strategy generally underperforms during periods of significantly rising prices, when the market’s tolerance for risk is greater than Cerner’s.

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Cash held seems much higher than most other funds; so why does cash allocation seem to be so high across different market cycles?

The strategy does not mandate full investment and Cerner has been highly disciplined in adhering to this approach. The strategy seeks companies that are trading at very attractive risk/reward valuations. During periods of high market valuations and/or high-risk tolerance in the market, the number of investments that qualify is greatly diminished. During these periods, cash is held until the market presents new opportunities.

While it may be perceived that there is an opportunity cost for holding cash within the portfolio, the performance of the strategy over time has proved that alpha can be consistently achieved without being fully invested. We believe that investing opportunistically and keeping disciplined positions offer a higher risk-adjusted alpha rather than being fully invested throughout different market cycles.

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How is the strategy able to derive strong risk-adjusted returns with low volatility?

Portfolio managers seek companies that have strong cash balance sheets with the proven and sustained ability to generate cash available for shareholders. The strategy identifies these companies once they have reached undervalued prices in the marketplace. As a result, the risk (as represented by price/value) has been greatly reduced by the time it has been identified by the screen. This leaves the portfolio manager with investment candidates that have a high probability of producing risk-adjusted alpha.

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How should a Global Unconstrained strategy fit within a pension fund allocation? Why should it be included as part of a pension fund's mandate?

The strategy has proved that value is not confined by geographic boundaries, market capitalizations or industry sectors. Going wherever value exists increases diversification, generates more reliable income to investors of the strategy, and lowers volatility. With a greater degree of correlation among equities of all sizes, regions, and industries, the best way to reduce beta is by expanding and not constricting the universe of possible investments.

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A lot of managers talk about being bottoms-up stock pickers with a defining methodology. What makes Cerner different?

The primary difference is strategy: Cerner’s is cash- and balance sheet-focused. Cerner also provides greater weight to historic financial performance than managers typically do. For example, our methodology focuses on whether a company has the ability to maintain high levels of cash flow throughout various market cycles. The strategy does not consider earnings estimates as part of the screening criteria as we do not attempt to predict earnings. Historically, most earnings estimates, particularly long-term estimates, ultimately prove to be inaccurate.

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What opportunities do the Cerner approach, philosophy and process reveal that are overlooked by other managers?

Cerner portfolio managers have a high degree of respect for risk during both up and down markets. We believe that price and risk are two sides of the same coin and don’t accept the general premise that one must assume more risk in order to achieve alpha. We believe that to consistently achieve alpha during all market cycles, one must have discipline and require reward premiums commensurate to the degree of risk being offered in the marketplace. This often means holding on to higher levels of cash and for longer periods than most investment managers.

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