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January 15, 2009

DFA Presentation to TFC Clients

Jim Joslin's Introductory Remarks

On the evening of January 15th, TFC and Aequitas Investment Advisors jointly welcomed some sixty clients to a presentation by Weston Wellington, Dimensional Fund Advisors' (DFA) Director of Research. Held at the Metro Meeting Center on Federal Street, Weston explained why investors owe it to themselves to understand the simple but powerful forces shaping the behavior of capital markets the world over. Sharing his unique historical perspective, he offered a number of guideposts by which investors might filter the sensationalism in the financial media. He also identified a series of important factors which will more than likely improve the odds of achieving a successful long-term investment experience.

Part of the evening was also devoted to how DFA's passive fund management approach is integrated into TFC's client portfolio strategies. As discussed by TFC's Chairman and CEO, Jim Joslin, "our clients' balanced portfolios are built around a value tilt; we lean toward smaller companies and take the global view. DFA's approach in turn is closely tied to the early and continuing academic work emanating from the University of Chicago that DFA founders, Rex Sinquefield and David Booth, apply to DFA's stable of funds. Today, DFA's passive techniques are used in roughly 80 funds across approximately 40 strategies with a combined value of $110 billion. This money is invested for institutions, governments, and investment advisors like yours throughout the world. In our opinion, DFA is the premier designer of passive, structured asset class investment vehicles.

You can find their mutual funds in the Wall Street Journal, but DFA allocates nothing in its P&L to advertising, and there is no 800 number for shareholder inquiries. For retail investors, DFA's minimum initial fund participations start at $2.0 million. If individuals call DFA headquarters in Santa Monica, or their office in Austin, to inquire about investing, they are politely told the firm is only able to provide advice to a limited number of professional investors. Their annual report reflects a frugal approach and a focus on hard facts: over 200 plain-paper pages of tables and charts, but not a single photograph. Their website (www.DFAUS.com) is rich in content, and although clearly aimed at the investment profession, provides valuable insights into how investment markets behave.

Dimensional's investment strategies and processes are equally unorthodox. On behalf of its clients, the firm invests in over 12,000 companies in forty countries. But the firm employs no research analysts recommending stocks to buy or sell, no economists forecasting oil prices or interest rates, and no strategists suggesting when to buy gold, bonds, or real estate. The Director of Investment Strategy doesn't even come to the office regularly - he is a full-time finance professor at the Tuck School of Business at Dartmouth College, in Hanover, New Hampshire."

In his 2008 annual report letter commenting on the financial markets' behavior in 2008, DFA's CEO, David Booth, said, " . . . Although the broad diversification in our portfolios didn't prevent negative performance this year, we believe it helped our shareholders avoid the extreme losses experienced by investors who concentrated their holdings in individual companies, industry sectors, or markets. The unpredictability of stock prices also makes it important for investors to take a hard look at their own portfolios and determine how much risk and what types of risk they should take. Investors who hold asset mixes that accurately reflect their tolerance for risk are better able to withstand down markets. Nobody knows when the capital markets will recover, but over time we can expect them to again offer a premium to investors who are willing to invest in relatively risky assets such as stocks. My view is that investors who have already paid for risk should stay invested and earn the return that can be expected when markets turn around. If markets continue to be so volatile, it's also important to understand that pulling money out of stocks, even for short periods of time, can result in significant missed opportunities."

Another of DFA's approaches is that its trading desk is known as one of the most creative and toughest bargainers in the global investment markets; a reputation that is no disadvantage when transacting on behalf of clients.

This approach may sound like an unlikely recipe for either business or investment success. But the firm has prospered since its founding over twenty-seven years ago, and the ideas underpinning their investment strategies reflect new ways of thinking about money and markets that have permanently reshaped the world of investing. Since joining the select group of investment advisors working with DFA fifteen years ago, our client portfolios have included DFA funds in both the equity and fixed income segments of their balanced accounts. We very much value our long-term relationship with DFA.

Notes from Weston Wellington's Presentation

Beliefs . . .

The equity premium . . .

The value premium . . .

Unrewarded risk . . .

In the past 100 years there have been bear markets just as bad as the current one; this is not unprecedented.

The economic cycle and what is driving stock and bond prices . . .

At the end of the day . . . diversification is the only free lunch.

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