The investment strategy for Heritage Capital’s Top Stocks equity management program is based on a very simple philosophy: “Own the best and ignore the rest.” In short, the focus is on owning only the top rated stocks in each of the S&P 500’s ten industry sectors. Our management approach for the Top Stocks program has three primary tenets:

I. Maintain Sector Weighting equal to S&P 500
II. Own the Top Rated stocks in each Market Sector
III. Manage Risk during Bear Markets

We start by maintaining sector weightings equal to those of the S&P 500 index. Our “sector neutral” approach is employed primarily to ensure that the program benefits from broad market movements. In addition, this strategy helps create a well diversified portfolio.

We then focus our stock selection efforts on the top rated stocks within each sector. Instead of owning the biggest companies in each sector (as the unmanaged S&P 500 Index does), our approach is to own only a select few of the stocks our models rate the best in each sector. Finally, we believe it is imperative to manage risk during Bear Market environments. We believe that no investor, if given a choice, would want to remain fully invested in stocks during severe Bear Market declines (defined as a decline of 20% or more by the S&P 500 Index and lasting more than 3 months). Thus, when the risk of a bear market rises, our big-picture risk management systems strive to reduce exposure to market risk.

Identifying the “Top Stocks”

The Top Stocks program employs a disciplined stock selection method designed to identify the top rated stocks within each industry. Each week, every stock in our universe, which is made up of 1500 of the largest, most liquid stocks traded in the U.S., is ranked in terms of earnings strength and company performance. In addition, the system ranks 10 market sectors, 20 industry groups, and 109 sub-industry groups for performance and momentum. It is important to recognize that this is NOT the typical "earnings momentum" type of formula that became so popular in the late 1990’s. Our system for determining a company’s earnings strength and performance includes hundreds of indicators and includes analysis of:

• Earnings Estimates
  
• Revisions to Earnings Estimates and Momentum of Revisions
  
• Measures for Earnings Surprises
  
• Upside Potential for Earnings Estimates
  
• The Momentum of Company and Industry Performance

In short, only those stocks with the strongest performance and earnings strength "make it" into our Top Stocks universe.

Risk Management Strategies Built In

As anyone who has experienced a bear market can readily attest, man does not live by stock selection alone. Let’s not forget that the average growth fund (as defined by the Lipper Large Cap Growth Fund Index) lost -64% during the bear market period of 3/31/00 - 3/31/03. Therefore, the Top Stocks program employs a long-term risk management strategy.

While we can’t guarantee our objectives will be realized, HCM’s risk management strategies are designed to first identify, and then stay “in tune” with the market’s "big-picture” cycles. This means that when our major market models are in a bullish mode (indicating risk of a bear market is low) we will maintain a fully-invested strategy focusing on the top stocks in each market sector.

However, when our models indicate that market cycles have turned bearish, we will shift our strategy and utilize our proprietary “graduated method” of managing exposure to market risk. During these bearish periods, the goal is to keep exposure to market risk “in-line” with conditions.

A Few Details

Below is a summary of some of the logistical details of the Top Stocks program:

• The portfolio is comprised of approximately 50 Stocks
  
• Positions within each sector are equal weighted (1.5% - 2.2% each)
  
• Top Stock Ratings are recalculated weekly
  
• Minor adjustments to the portfolio are made each week (approximately 2 – 5 positions)
  
• Sector Allocation and all stock holdings are rebalanced monthly
  
• Risk Management assessments are performed weekly
  
• Minimum Account Size: $25,000