Class Plus 2 Information Folder and Contract Provisions - Empire Life

3) a relatively low P/E ratio; and4) a proven record of financial performance.Where reference is made to the market capitalization of stocks,this refers to the free float of the stocks. As there is no specificindustry definition of what comprises small, mid or largemarket capitalization stocks, the following is a general guidelinefor our investment in North American equities:Small market capitalization stocks - those stocks with a freefloat of approximately $1 billion or less;Mid market capitalization stocks - those stocks with a free floatof approximately $2 billion or less;Large market capitalization stocks - those stocks with a freefloat of approximately $2 billion or more.12.2.2 Equity Investment Process – U.S. EquitiesEquity investment in the United States, where individualsecurities are selected to meet the fundamental investmentobjectives of a Fund, is achieved through the selection ofindividual securities, ETFs and American Depository Receipts(“ADRs”). The U.S. portion of a Fund may also invest in foreigncurrency exchange forward contracts, currency futures, andcurrency option contracts.Investments will be made primarily in large market capitalizationstocks although small and mid-market capitalization stocks mayalso be held. We define the market capitalization for these U.S.securities the same way as for Canadian equities.ETFs are investments that contain a pool of securitiesrepresenting a specific index such as the S&P/TSX60, the DowJones Industrial Average and the Dow Jones Euro Stoxx 50. Theenhanced liquidity of ETFs provides the opportunity to reactquickly to changing market conditions, allowing for a rapidincrease in the equity weighting for the Fund when marketsare rising and a rapid reduction in the equity weighting whenmarkets are falling.ADRs that are traded in the U.S. are considered North Americaninvestments. ADRs represent receipts for stocks of a foreignbasedcorporation held in the vault of a U.S. bank and entitlingthe shareholder to all dividends and capital gains.12.2.3 Equity Investment Process – Non-NorthAmerican EquitiesGenerally, unless otherwise specified, the investmentphilosophy is a conservative one where preservation of capital isan important consideration. The investment style is bottom-up.It focuses on the fundamentals of individual stocks, where valueis a prime investment criteria. Stocks are purchased to fit into awell-diversified portfolio and the expected investment horizonfor individual holdings is 24 to 36 months or longer.The stock selection process consists of identifying goodcompanies whose stocks are undervalued. We focus on thequality and valuation of individual companies, carefullyevaluating a company and its management. We look formanagement with a proven record of performance, a visionand clear strategy for future success and an orientation towardbuilding shareholder value. Furthermore, we pursue companieswith a strong competitive position, proprietary or innovativeproducts, services or knowledge, and which operate inindustries with high barriers to entry.While our approach is “bottom-up” based, the macroeconomicenvironment is important in terms of forecastingindividual company earnings. In other words, the outlook forthe company, interest rates and other major economic forcesare an important consideration in determining the value ofindividual companies.A company’s financial situation is also of utmost importance.Key financial considerations include:1) a strong balance sheet;2) strong free cash flow;3) a relatively low P/E ratio; and4) a proven record of financial performance.Where reference is made to the market capitalization ofstocks, this refers to the free float of the stocks. As there is nospecific industry definition of what comprises small, mid orlarge market capitalization stocks, the following is a generalguideline for our investment in Non-North American equities:Small market capitalization stocks - those stocks with a freefloat of approximately $2 billion or less;Mid market capitalization stocks - those stocks with a free floatof approximately $10 billion or less;Large market capitalization stocks – those stocks with a freefloat of approximately $10 billion or more.12.2.4 Fixed Income Investment ProcessGenerally, unless otherwise specified, the fixed incomeinvestment philosophy is a conservative one where preservationof capital is an important consideration. The investment styleapplies a mix of interest rate anticipation, curve positioning,country weightings, sector weightings, currency outlooks andactive portfolio management.The average duration of the portfolio is adjusted to reflect ouroutlook for interest rates over the next 12 months. Duration isa measure of the price volatility of a bond and is equal to theweighted average term to maturity of the bond’s cash flows. Theweights are the present values of each cash flow as a percentageof the present value of all cash flows. The greater the duration ofthe bond, the greater its percentage price volatility.27