The traditional FPA equity investment discipline that has served as the cornerstone upon which the firm's overall investment philosophy was built is implemented by Eric Ende and Steven Geist. Their portfolio research efforts are supported by Gregory A. Herr. Mr. Ende began to apply the quality style with a focus on small/mid-capitalization stocks in 1989. In addition to separate institutional client accounts, Mr. Ende and Mr. Geist manage Source Capital, Inc., a closed-end investment company; and FPA Perennial Fund, Inc. and FPA Paramount Fund, Inc., open-end equity mutual funds.

FPA's small/mid-cap quality approach does not rely on market or economic forecasts, but rather on the selection of individual businesses and a disciplined judgment of the relative attractiveness of the market valuation of these businesses. We believe that owning high return-on-equity companies over the long term produces high shareholder returns and that a patient investor can take advantage of price opportunities or market inefficiencies to periodically acquire the securities of such companies at attractive prices. If the underlying stocks of these companies ultimately reflect or exceed the intrinsic worth of the investment, they can subsequently be sold, with proceeds deployed to more attractive positions.

FPA's goal is to limit downside exposure by minimizing business risk in the selection process and price risk in the purchase and sale of securities. Our philosophy emphasizes the selection of companies that reflect this limited business risk, and yet provide a strong basis for investment potential. Screens for fundamental balance sheet and operating business characteristics are applied to the broad spectrum of public companies in order to construct a universe of potential investments with liquid, unleveraged balance sheets, high return on assets and equity, understandable business plan, and consistent management. The research process combines both historical and current internal financial study with company visits by FPA's portfolio management/analysis team. The resultant universe is monitored on an ongoing basis in order to determine attractive valuations for both purchase and sale decisions. FPA's process attempts to avoid premium P/Es and capitalize on opportunities presented by shifts in market conditions or company-specific changes.

A typical portfolio will consist of 30-40 equity positions. Portfolios generally maintain liquidity reserves of 0-10%. As valuation opportunities appear, these reserves fund new and additional purchases. When security selections have been recognized by the markets and prices have increased, there is a tendency to sell into such strength, rebuilding reserves.