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    Guest Interview:

   Inverness Counsel Inc.

    845 Third Ave.
    New York,NY 10022

    Telephone: 212 207 2100
    Fax: 212 207 2165


    Interview Quarter: 1Q1997

 Robert B. Deans III,

 Managing Director

Q: You have been managing assets since 1967. How did the firm get started?

A: Inverness was formed when the firm for which the original principals of Inverness worked was sold to a larger institution. The group realized that the multi-generational needs and concerns of wealthy individuals was not being addressed in the market. They decided that their concepts and expertise in the field of trust and estate asset management offered an original and valuable contribution in this area. As an independent firm, Inverness concentrates its resources for the sole benefit of the clients and advises them on their personal trust and estate matters as well as their overall portfolio management. We have retained virtually all of our original clients and now manage significantly increased assets for the benefit of the second, third, ... and fourth generations.

Q: How large is the firm now; what are its strengths?

A: Currently, Inverness manages just under $2 billion of which $450 million is institutional money managed for several municipal pension plans. The balance of the assets are managed for approximately 800 individual clients representing about 150 family groups. The major strength of the firm is the personnel and the attention we give to watching over the interests of our clients. Every account is managed by at least two managers who are backstopped by qualified younger associates and a capable operations staff. We believe that several factors help to differentiate Inverness from other money managers. One factor is that the principals of the firm strongly believe that continuity in account management is important in maintaining perspective on the goals and objectives we set for clients. The managers at Inverness have a wide range of experience but the common characteristics are intellectual capability and the determination to deliver the goods for the clients. Another differentiating factor which is important to the clients is that the resources of the entire firm are used only to pursue the interests of those clients. We gain no benefit - and have no interest - in selling any product for a commission. We are completely objective and therefore are able to analyze a situation with a clear and critical perspective. Another key factor which separates Inverness from other managers is the innovative and successful concepts we use in order to help them preserve their assets and protect those assets from excessive taxes and fees.

Q: What sort of investment style is used?

A: Inverness believes that long term growth in assets is achieved most successfully by owning common stocks. The investment style of the firm - which has never changed - favors conventional analysis of financial statements to determine the value of individual securities. The equity selection process is bottom-up using fundamental screening to narrow the universe and conventional analysis by our Investment Committee for final selection. The firm offers several distinct investment styles within this framework since our clients present us with a wide range of interests and goals. We maintain a list of “Core” investment selections, a wider list of “Focus” selections, and a more comprehensive “Basic” list. The stocks on these various lists are all followed continuously by managers who are individually responsible for the specific sectors. One of our most interesting strategies - one which is drawing an increasing amount of attention - is the Inverness Enhanced Dow. This is a unique investment discipline that we developed in response to requests from several wealthy clients with extended investment horizons who want to be invested in U.S. equities. Four of the managers in the company have reponsibility for monitoring and administering this program. Paul Norwood is the head of Inverness operations in Texas and he and Adams McHenry co-developed the concept and pioneered its use in their accounts. Paul supervised an extensive back-testing and monitors the monthly results of the strategy. George Garfield and Rob Deans, who both operate in the New York headquarters, are the corporate officers responsible for compliance, documentation, and marketing. Several of the individual managers in both offices have accounts with assets committed to management in this style.

Q: Tell us more about the investment philosophy of this Inverness Enhanced Dow and how the concept was developed.

A: As mentioned earlier, Inverness has always used a variety of fundamental analytic screens which focus on rates of change in order to help with our selection process. The entire universe of equities under consideration exceeds 3,000 issues; historically, those issues which have satisfied the screening process have tended to outperform the market averages. In practice, too many issues surpass the hurdle and/or move repeatedly in and out of consideration. Excessive turnover and widely scattered holdings tend to make conscientious monitoring across large numbers of individual accounts a difficult and impractical procedure. Intuition suggested - and subsequent research verified - that the screening process could be used successfully on a smaller universe of candidates. Therefore, we focused on a limited group of stocks with the intent to outperform the wider market averages. The group selected as the universe of candidates was the Dow Jones Industrial Average. Public research and simple observation have shown that the Dow and the more inclusive S&P 500 have historically produced remarkably similar performance results over the long term. The S&P 500 is the standard against which performance tends to be measured; the Dow remains the most widely recognized market barometer in the world. The objective of the Inverness Enhanced Dow strategy is to outperform the S&P 500 with a limited portfolio characterized by low volatility, low turnover, and reduced risk.

Q: How would you characterize this strategy?

A: It is a “Sell” discipline. A decision to “Buy” is made only to open an account with 5% positions in twenty stocks. After that initial decision, the catalyst for subsequent action is the failure of a current holding to maintain its ranking within the program at which time that stock is sold and replaced with a 5% position in the highest ranking stock which is not yet owned.

Q: Is there a risk in being limited to the universe of the thirty Dow stocks?

A: There is risk in being limited to the stocks in the Dow. There is also reward. The largest part of the risk is that which is inherent in the equities market. However, the program seeks to outperform the averages against which we are measured without exposing an account to increased market risk. The reward is that, historically, the program has a record of risk which is measurably less than the market as a whole (according to standard industry measurement methodology) while using a limited universe of diversified large-cap stocks to outperform the benchmarks.

Q: How do you determine which stocks will be bought or sold?

A: We use a unique process in which the thirty candidates are ranked monthly in order to identify those which present a specific set of desired fundamental corporate financial characteristics. The data used to rank the stocks is supplied by an independent third party source with a record for accuracy and consistency. A continuing process of subjective analysis and basic research ensures that statistical anomalies or aberrations do not corrupt the program. Ninety to one hundred percent of assets assigned for management in this style are invested in the top twenty stocks.

Q: Do you automatically sell a stock which falls below #20?

A: No. As a matter of fact, a stock is not sold unless it falls to a ranking below #25. Research indicated that turnover was drastically reduced in this manner while returns, volatility, and risk were not adversely impacted. As mentioned earlier, selections are monitored by the Investment Committee. Three particular scenarios will bring attention to a specific stock: holdings which maintain their rankings yet persistently underperform the market holdings which are moving into the lower rankings (#20-25) ... whether from below or above sudden substantial moves in the ranking of a stock. In all these cases, the Committee reviews and examines the stock and tries to determine whether the program, the public, the company, or the “Street” is misguided in their expectations or projections. We have not yet seen fit to override the program.

Q: Is this a “Black Box” system?

A: To others, yes, this is a “Black Box” since they do not know the mechanics of the system. To us, it is not. It is an extension of our style which relies on fundamentals and relative values. We utilize the data supplied by an independent third party and verify its accuracy and consistency. We have consolidated these variables into a strategy which fits the Inverness methodology.

Q: Is this a market timing strategy?

A: Definitely not! On the contrary, it avoids market timing and subjective emotional input because more than ninety percent of assets committed to the strategy are always invested. A comparative analysis of the cumulative monthly returns shows that the strategy has not outperformed the S&P 500 or the DJIA by wide margins consistently every month. Rather, it has outperformed spectacularly in several scattered periods. These periods of outperformance have allowed clients in the program to benefit from the subsequent compounding of increased assets. The program does require discipline, diligence, and patience both from the client and from Inverness.

Q: How certain are you that this strategy will continue to work?

A: There are inherent risks in the securities market but this program has a history of outperforming the benchmark S&P 500 with a measurably reduced amount of market risk. Of course, past performance is no guarantee of future results. However, we feel confident that this strategy will satisfy the goals which we and our clients have decided to pursue in terms of increasing assets over an extended time horizon.

Q: Do you ever face liquidity problems?

A: No ... or rather not yet. The universe of stocks is the thirty Dow stocks. The daily average volume of trades in these issues is very large. The market cap of the stocks ranges from that of General Electric ($165 billion) to Union Carbide ($5.5 billion). This discipline does not experience the common liquidity problems which confront a program that utilizes a small-cap universe to outperform market averages. In the current investment environment, trades in these issues can be done in a myriad of ways using any or all of several trading arenas - the New York Stock Exchange, brokers, the third market, Instinet, or foreign exchanges. We currently have one client who prefers to have Enhanced Dow trades transacted through offshore exchanges for tax reasons and this is not a difficult request to fulfill with this universe.

Q: Do you foresee any need to close the program to new money due to size?

A: Again, this speaks to the liquidity issue. We have not yet found that there is any difficulty trading these stocks in large blocks. The strategy is designed to avoid generating large numbers of trades. The current number of accounts and the amount of money committed to the strategy has not yet inhibited the trading in the program

Q: How do you deal with cash?

A: Cash is meant to be a residual portion of any account which has assets committed to the Enhanced Dow style. There is a small amount of cash left after an initial trade to open an account to allow for transaction costs, slippage, or custody fees. Cash also accumulates in an account due to dividend payments. The cash balances are used when monthly trades are transacted or when a holding needs to be rebalanced.

Q: What kind of annual turnover does the strategy experience?

A: The program generated 18 trades in 1996 - 9 sales, 9 buys (excluding distributions and spin-offs). According to standard industry measurement technique, the turnover was just under forty percent; ninety percent of the gains realized in 1996 were long term gains. These observations affirm the underlying thesis that, as a group, the stocks selected by the discipline are the best of the thirty stock universe and that their performance is not affected by short term market perceptions.

Q: Are you surprised that the volatility is so low?

A: No, the universe of stocks is restricted to the thirty DJIA stocks so there should not be any wide diversion from the market volatility. The program was specifically intended to avoid excess market risk, to control trading and transaction costs, and to focus on a recognized and limited universe of stocks.

Q: Do you miss any sector allocation with this methodology?

A: Yes ... and no. Yes, there are certain sectors which are not included in the universe of the thirty Dow Jones stocks. No, we do not miss not having them included. The strategy was not intended to be a sector inclusive mirror of the S&P 500 or the economy. It was designed to outperform certain averages using a limited universe. It is interesting to note that, in addition to the widely defined sectors within the DJIA iself, there is ample representation in the area of international interests since many of the thirty DJIA companies have significant overseas exposure.

Q: How are the research strengths of the portfolio managers utilized?

A: As mentioned earlier, there is maintenance and oversight involved in working with this strategy. Part of the success of the strategy is due to our efforts in monitoring the thirty stocks as they move in the rankings - recognizing when to sell a holding and establishing a position in a stock with better fundamentals.

Q: Can this strategy be copied; does anyone else do this?

A: As far as we know, there are no other programs which focus on a limited number of stocks in this manner and have a comparable history or performance record. The strategy is comparable to the well-known market averaging strategy except that, rather than periodically buying stocks and holding them for an undetermined extended time, the Inverness Enhanced Dow has a discipline for selling holdings and replacing them with better stocks. The strategy is also comparable to the widely used method of purchasing those stocks in the DJIA which have the greatest yield except that the Inverness Enhanced Dow establishes positions in undervalued stocks with quality fundamentals - not the Dogs of the Dow - and, again, the discipline gives an exit strategy.

Q: Will this strategy ever be altered?

A: We foresee no need to alter the Inverness Enhanced Dow strategy. We have started work on several interesting variations with regard to structure, product, goals, and universe of stocks in an effort to address varying needs and attract other groups of investors. One of the areas which offers significant potential is foreign offshore assets. Inverness has been selected to manage a portion of the funds in the Oxford Strategic Fund which is a newly listed fund on the Dublin Stock Exchange. Unlike a fund of funds (where several funds are pooled into one fund and one share class), or a manager of managers (where one can invest with several separate account managers through one vehicle), this fund of managers is a mutual fund which allocates its resources among several different share classes. Each share class has a separate manager selected on the basis of a ten year performance record. The result is a fund with uncorrelated market risk which allows an investor flexible access to outstanding management with a low fee basis. As a firm which specializes in investment counsel, Inverness maintains individual relationships with each client to identify and pursue their particular goals. The Enhanced Dow strategy has proven to be adaptable in terms of helping to develop comprehensive investment strategies. This process includes adjusting the discipline when requested to comply with individual considerations. This flexibility is appealing to both individual and institutional investors with varying time horizons. There are no real limitations to the applicability of this discipline except that, at Inverness, we have no interest in managing a strategy or selling a concept which does not fit in with our pursuit of value investing and quality performance.

Q: What are the advantages of this strategy?

There are many advantages in using the Inverness Enhanced Dow strategy: The goals of the program are easily identified and measurable against several industry standards. The specific goal is relative outperformance as measured against the S&P 500. The ancillary goals are low risk, low volatility, and low turnover. Each of these aspects have been consistently monitored and the discipline is measurably better than the benchmark S&P 500. The universe of stocks is a limited number of high-cap, liquid, recognizable, dividend-paying, quality rated, widely followed U. S. equities. The methodology is simple and objective; it is a “sell” discipline. It eliminates market timing and emotion while designating both exit and entry levels for specific stocks (not groups or industries). The data used is fundamental corporate financial data provided by an independent third party source with a record for accuracy and consistency. The strategy is effective and applicable to both individual and institutional accounts, whether taxable or not. The strategy works.

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