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Risk Management

Each step of Cardinal’s investment process, from idea generation to portfolio management, is designed to optimize returns while minimizing the risk of losing money. Cardinal’s rigorous vetting process and buy discipline filter out securities that do not meet our stringent risk/return requirements. Continual in-depth research and analysis ensure that we are highly sensitive to changes in company fundamentals that would result in an accretion or dilution of shareholder value.

Specifically, we believe that our focus on cash flow mitigates risk as companies which generate substantial free cash flow are frequently able to take advantage of weak equity markets by repurchasing stock, paying dividends or pursuing strategic alternatives. In addition, our high hurdle rate, focus on stable and predictable businesses and conservative forecasting all tend to mitigate company-specific risk.

Cardinal controls stock-specific risk by limiting individual position sizes to a maximum of 4% at cost and 5% at market in the small cap related portfolios (one percentage point more in the smid and mid cap accounts). To manage common business risk, we limit our holdings in any single industry to 15% of the portfolio, but in practice we have rarely owned more than 10%.

All investment decisions are made by consensus among the portfolio managers. This team approach has proven to be an effective method in managing risk.