Investment Themes for Client Portfolios

These general themes will persist in our investable markets for the next 3-5 years. Some of these will be persistent whereas some will be transient from time to time. Overall, these will have
direct bearing on portfolio performance going forward.

Asset Allocation and risk:

We are still in a secular Bear Market and have been since July 2000 and this threatens to be one of the longest in history. The average bear market has been 9.5 years with the longest in excess of 16 years. Our current secular Bear market may be ending but the volatility we have endured for the past 9-12 months still gives one pause on the investment direction to take.

I am taking a wait and see point of view and I favor high quality dividend paying stocks with a good exposure to companies with demonstrated growth of earnings, market share, and produce
products and services we will need to live our lives.

Here are the trends I am following and acting upon as I invest client assets.

Ø Equity markets both domestic and international are in a secular Bear market and could remain
so for the next 3-5 years but potential exists in equity even after a significant recovery from the March 2009 bottom.
o
Expected annual returns for the period will be below historical average (9.5%) with elevated volatility
o
Interest rates will be low for the next three years but eventually will rise as inflation increases
o
Economic Growth will remain anemic (< 3%) combined with unemployment rate above the
historical average (4-6%). Unemployment will likely remain above 7% for the next two – three years.
o
Fixed income bubble – low rates will eventually translate to a rising rate environment, increasing inflation risk and reinvestment risk.
o
Money will flow from fixed income to equities
o
Equity dividend rate for the S&P 500 will continue to rise (currently about 2%)
o
Expected rate of return for equities for the next five years is between 5-9% per annum, less than the historical rate of 9.5 for the S&P 500 going back to 1926

Ø Infrastructure
Rebuild and improvement – This area has been neglected in nearly every developed nation on the planet. Essentially governments have been maintaining at the lowest level possible. It is now time to pay the piper so to speak.
o
Applies to Domestic and International Markets
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Transportation
§ Highways
§ Railroad
§ Airports
§ Seaport improvements
o
Water
§ Purification
§ Desalination
§ Pipelines
§ Infrastructure (average age in the USA is extremely
long)
o
Power
§ Nuclear
§ Natural Gas
§ Electricity
Ø Healthcare
for an aging America – The Baby Boomer generation will demand higher level of care to maintain a very active lifestyle and this applies in all developed markets as well. Everything from new drugs to artificial joints to preventive healthcare will be driving forces in this sector.
o
Pharmaceutical companies over healthcare providers
§ Uncertainty of the Affordable Healthcare Act in the future
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Biotech and artificial instruments (knees, hips, etc.)
o
Research and development of new drugs for old diseases (diabetes, heart disease, and cancer)

Ø National Defense – The drawdown of the U.S. Military will make our (over) reliance on technology even more important. This combined with the aging of our war-fighting equipment will ensure money for national defense will remain high on the priority of any administration or
Congress.
o
Increased technology requirements to compensate for fewer troops
o
Aging military equipment and infrastructure
o
Unstable world in general

Ø Growth of the middle class in Emerging Markets – As much as other nations may dislike the
Western developed nations, these countries want the products we have developed and mannufactured and continue to do so. Agriculture and the ability to make processes and land more efficient will drive this sector.
o
Increased demand for food rich in calories and protein
o
Increased need for arable land and more efficient agricultural methods/fertilizer/water
§ Fertilizer
§ Equipment
§ Research

Ø Increasing demand for energy from all sources – Fossil fuels will be around for the next 100+ years and we as a culture need to get it more efficiently as well as develop alternatives for the future
o
Oil/Gas exploration in domestic areas
§ Gulf of Mexico
§ Oil Sand extraction
§ Pipeline construction and
o
Transport and refinement
§ Rail
§ Sea
§ Pipeline
o
Infrastructure – Has been ignored for far too long

Ø Overall Valuations in Equity markets are still below historical levels – Equity markets are the least expensive we have seen in two generations but volatility remains – These sectors are especially compelling:
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Financial
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Manufacturing
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Consumer