Pinnacle Associates Ltd. balanced portfolio is a combination of its equity and bond portfolio strategies. As a long term believer in the rewards of common stock ownership, Pinnacle's balanced portfolio equity holdings range from a low of 40% at our most bearish position to a maximum of 70% when we are most positive on the outlook for the equity market. Pinnacle's allocation to stocks, bonds and cash is based on our proprietary asset allocation model which determines the relative attractiveness of these assets. This model is especially valuable by enabling our clients to benefit from strong equity markets and protect capital during unfavorable market periods.

COMBINATION OF U.S. EQUITY and FIXED INCOME STYLES

Pinnacle's Equity strategy is based on the concept that undervalued securities can be found in any sector of the equity market. While we utilize several traditional measures of valuation, we believe that these traditional measures, while still useful, cannot completely address all of the opportunities that exist in the domestic equity market today. Indeed, over the last thirty years, the security markets have changed, accounting standards have been redefined, and sectors that never existed before now drive market performance. Pinnacle’s All Cap equity strategy strives to utilize both traditional methodologies and innovative valuation measures to build diversified portfolios which deliver superior performance. Regardless of the valuation approach, we employ a consistent bottom-up style that is based on our proprietary fundamental analysis. For a portion of the portfolio, we utilize traditional valuation measures such as low price/book ratio and low price/sales ratio. When we identify attractive securities using these measures, we also look for a catalyst that indicates a change or improvement in the fundamental business health of the company. As opposed to many other managers, we do not focus on a low price/earnings ratio, as we believe that this can often times be a misleading indicator. When a firm has a low P/E, we have found that historically it can often represent the “peak” of a firm’s earnings cycle and actually signal an upcoming decrease in earnings.

Investment Process
We begin with traditional value measures: Price/Book, Price/Sales. Then, we analyze Price/Cash Flow and Price/Private Market Value for expanded valuation companies. Our universe of potential holdings consists of securities with a minimum market capitalization of $100 million and no upside market capitalization limit (at the time of purchase). We apply Pinnacle’s expanded and traditional valuation analysis which yields a watch list of 200 to 300 names at any one point in time. If a company has a positive catalyst, it is added to the portfolio which normally contains 50-70 issues. Purchase decisions are based on company and industry fundamentals, valuation, and fulfillment of our minimum investment criteria. Our All Cap strategy is designed to be a long-term holder of securities. Our sell discipline is comprised of three categories: valuation, company fundamentals and portfolio diversification.

Fixed Income Bond portfolios are invested in intermediate, high quality issues. We are interest rate trend followers and construct bond portfolios generally with an average maturity range of 2 to 6 years based upon our analysis of Federal Reserve policy and macroeconomic conditions. Pinnacle's fixed income strategy serves as an anchor to the equity holdings in a balanced portfolio by reducing overall portfolio volatility as well as providing above average income. Pinnacle Associates Ltd. employs four principles in managing fixed income portfolios:

1. Focus on Identifying the Current Interest Rate Trend

2. Structure a Portfolio's Average Maturity from Zero to Ten Years

3. Adjust a Portfolio's Average Maturity Through a Gradual Shift

4. Invest the Portfolio Primarily in Investment Grade Securities