Letter from Management

As investment advisors, we have always admired companies whose management faced difficult challenges and had the persistence and resilience to eventually prevail. In 2001 and 2002, Shaker Investments found itself in the same situation, in the wake of an exceptionally severe market pullback.

During this trying period, we saw our best research and stock selection efforts marginalized. Portfolio holdings that we believed had attractive long-term growth potential, but were not growing in the immediate period, were punished by investor loss of confidence in the market as a whole. Indeed, it wasn’t too long ago that market prognosticators declared that once equities recovered, single-digit returns would be the norm.

What a difference a year has made, both for the markets and for Shaker Investments. Once again, the markets provided investors with dramatic returns, and, once again, Shaker Investments outperformed all of the major indices. What we are most proud of, however, is that Shaker Investments never wavered from its research-driven investment focus to identify and invest in superior small/mid-cap growth companies, a segment that was decidedly out of favor several years ago.

Additionally we retained the large majority of our clients, who understood that our philosophy and process were sound and had produced competitive returns over a 12-year period—and shouldn’t be summarily abandoned in the midst of a market downturn.

In 2003 our emphasis was on “stability” and “improvement.” We were especially intent on keeping our staff of talented investment professionals intact and on enhancing our research and portfolio management process. We believe that the research team, under the direction of Ray Rund, is stronger than ever before, and played a major role in Shaker Investments’ out-performance this past year. Stability was also maintained in other areas at Shaker, including client service, sales, operations, and administration. We are very proud of our people and believe they will continue to be the key to delivering the results that our clients deserve.

However, we do have one change of significance to report. Adam Solomon, our former chairman, has departed Shaker Investments to establish a hedge fund of funds under the name Solomon Lewis LLC. This has been a long-time dream for Adam, and we wish him well. He has been affiliated with Shaker Investments for more than nine years, during which time he helped the firm to grow from a small three-year-old company to where we are today. Adam concerned himself with the business, staff, and marketing sides of our firm, and we benefited significantly from his clear and often prescient strategic thinking. He was and remains a friend and will be missed.

We do not expect the markets in 2004 to deliver the same level of dramatic returns that investors enjoyed last year. However, Shaker Investments retains its strong foundation, and is well-positioned to find companies that will benefit from a healthier worldwide economy. Over the past 12 years, our flagship, small/ mid-cap growth strategy has returned more than 18 percent on an annualized basis. Shaker Fund, our mutual fund, has been rated by The Wall Street Journal as one of the nation’s top ten mid-cap growth funds. The Fund’s assets have grown dramatically in recent months, and we expect this growth to continue.

Although the markets are healthier today than at any time since 2000, this is not a time for complacency, on our part or the part of any investor. Looking ahead, the equities markets may benefit from some key trends, including a rebound in capital spending in the U.S. and improved economic growth across both developed and emerging countries overseas. However, there also may be meaningful challenges. As an investment manager, we have to avoid becoming carried away by market euphoria. This means sticking to our process and doing what we believe we do best: intensively researching companies, one by one.

We appreciate the continued support of our clients, and recognize that our success in 2003 was due in great part to their loyalty, as well as to the loyalty of our employees. Individually and collectively, we at Shaker Investments look forward to another year of adding value to our clients’ portfolios.

Edward P. Hemmelgarn
Chief Executive Officer and
Chief Investment Officer

James R. Janetz
Executive Vice President and
Chief Operating Officer

.