BakerEllisLLC_Philosophy

Our philosophy: We believe that the greatest returns are found in stocks reflecting low expectations. As value investors, we focus on areas that are out of favor or overlooked by the broader market. Through a rigorous adherence to our investment discipline, we seek to identify companies that are trading at a discount to their intrinsic value and provide us with a margin of safety in our investment.

Academic focus: Our strategy is based on both decades of industry experience and academic research. Although the most talented investors of the modern age — from Benjamin Graham to Warren Buffett — have followed a value strategy, only relatively recently has a significant body of academic research supported this approach over investing in higher-priced growth stocks. Research by Eugene Fama of the University of Chicago and Kenneth French of MIT shows that value investing has outperformed a growth strategy by an average of 15.5% to 11% over more than three decades.

In addition, a considerable body of research shows that small stocks tend to outperform large stocks over a long period of time. One reason for this is that small companies often can maintain higher growth rates than big companies, which fall prey to the laws of large numbers. Over rolling 20-year time periods from 1926 through 2001, studies show the smallest 20% of stocks outperformed the S&P 500 a full 77% of the time.

Baker Ellis follow a flex-value approach, seeking value among all asset classes and taking advantage of our ability to consider small- and micro-cap opportunities that may be unavailable to large institutions due to liquidity constraints.

Investment process: We utilize a bottom-up methodology, seeking to identify stocks that are trading at prices below our estimate of their intrinsic value. In analyzing prospects for investment, we focus on cash flow because it is less subject to accounting manipulation than reported earnings. We seek to purchase companies with strong management, good growth prospects and healthy balance sheets.

We build broadly diversified portfolios to minimize individual stock risk and capture favorable returns from a broad variety of asset classes. Depending on client objectives, our accounts may include individual domestic and foreign equities, low-cost passive funds in targeted areas and fixed-income instruments.

Turnover in our portfolios is low. We believe that wealth is created through long-term ownership of good businesses, purchased at attractive prices. Because each account is individually managed, we are able to consider tax efficiency of transactions where appropriate.

Working with us: At Baker Ellis, clients work directly with the principals, who also are your portfolio managers. We have no sales representatives or relationship managers. If you call Baker Ellis, one of the partners is likely to answer the phone and have instant familiarity with your account and objectives.

Before accepting an account for investment, we develop a personalized Investment Policy Statement that serves as a roadmap for our work together. This document helps guide us in the appropriate allocation of assets among equities and fixed-income instruments. We meet regularly with our clients to review progress and to make sure that your account reflects your current needs, objectives and investment horizon.

We manage accounts on an individual basis through a major custodian such as Fidelity Investments. We may conduct trades through the primary custodian or other brokerages who offer expertise in specialized areas. Clients receive monthly statements from the custodian, as well as quarterly performance reports and commentary from us.

Fees: We operate on a fee-only basis, with no incentive to sell any product. Our fee structure is simple, and generally includes most transaction costs. Our performance is reported net of fees.

Ethics: Baker Ellis adheres to the highest possible ethical standards in all aspects of our operations. We choose to avoid conflicts of interest even when they are commonly accepted in the industry. We have no soft-dollar relationships, or agreements to channel client commission dollars to specific brokerages in exchange for products or services. We conduct no investment banking activities that could affect the independence of our analysis. Our sole focus is on creating and preserving wealth for our clients.