Time Horizons & Perspective Presented by Matthew Zuck, CFA
Discussion of SKBA’s Conceptual Process
Necessity of Simplification to enable comprehension & discussion
Inevitability of information leakage between levels of abstraction
Country / Systemic Risks
Flash, HFT, Rebates
+/- 70% of volume with no concept of “valuation”
$4 Trillion in Collateral Accounts?
$2T to outperform by 2%+20% to justify fees?
What do prices set in these markets tell you?
Country / Systemic Risks
Risk of Fire
Excess Reserves at the Fed
$855 B x 7 ?
If we recover this is the systemic problem.
Country / Systemic Risks
Risk of Ice
Expanding Structural Deficits
Bernholz 40% Deficit Threshold
If we don’t recover this is the systemic problem.
Fire and Ice by Robert Frost
Some say the world will end in fire,
Some say in ice...
But the world is not going to end.
Our job is to manage through the risk & uncertainty.
So many variables your head could explode.
Human memory has places for about 5-7 items.
Distill Macro outlook to a set of scenarios capturing different valuation states while paying attention to key systemic risks.
SKBA’s U.S. Economic Scenarios Outlook and returns are subject to change and should not be viewed as a promise of future performance. Bond Heaven Double Dip Better Than 08 0.5 -2.0 Recession Still Nothing Boom Time Again 1.5 4.0 Perfection Poor Still Super 3.0 2.5 Historical Norm Pretty Ugly Not Too Good 3.5 1.5 Stagflation Really Ugly Happy Days Are Here Again 5.0 4.5 Boom T-Bonds Stocks Inflation Real GDP Estimated Return Outlook 2-Year Horizon
Reported Versus SKBA Normalized S&P 500 Earnings Per Share Forecasts are subject to change and should not be viewed as a promise of future performance Source: FactSet/S&P Compustat and SKBA Estimates
2 Year Multi-Scenario Outcomes & Estimated Returns * Estimated Returns are subject to change and should not be viewed as a promise of future performance.
The multi-scenario process helps us • gauge the general direction of the markets , and offers a • disciplined framework for considering the range of possible outcomes . SKBA Historical Probabilities of Rolling 2-Year Outcomes *Estimated Returns are subject to change and should not be viewed as a promise of future performance. ** 30-Year T-Bond returns are calculated using Merrill's 30-Year T-bond Index.
SKBA’s Investment Process – Sector Allocation Economic Outlook Multi-Scenario Analysis Top Down Sector Allocation Company Specific Outlook Fundamentally Driven Bottom Up
Where we are now
A Recession & Reforms
impaired by the recent drop in demand.
impaired by the expected changes in regulation.
You Are Here
Sectors Targeted for Reform
Should anything and everything be tradable?
Scale & Scope vs Prudent Leverage
What’s the cost of carbon?
Investment & Innovation
Is some level of health care a human right?
Demand from Demographics, Development Reform
Sector Weights 3Q 2009 Data shown is from a representative account of the Socially Responsible Value (SRV) Composite. Included as supplemental information and complements a full disclosure presentation, which can be found in the disclosure section of this presentation.
SRV - Sector Weights 3Q’08 vs. 3Q’09 Data shown is from a representative account of the Socially Responsible Value (SRV) Composite. Included as supplemental information and complements a full disclosure presentation, which can be found in the disclosure section of this presentation. The portfolio is actively managed. Sector exposures slowly change over time based on both bottom-up research inputs and top-down macroeconomic perspectives.
SKBA Investment Process: Valuation Filters Valuation Filter VALUATION DISCIPLINES, Relative Dividend Yield (RDY) and Relative Market Cap to Revenues (RMCR), further limit the list of eligible securities.
Relative Market Cap to Revenues (RMCR)
The Market Cap to Revenues (MCR) ratio discounts combinations of expected Growth Rates & Profit Margins.
Low RMCR, compared to a company’s history, identifies when the growth and margin expectations discounted in the price of the stock are lower than they have historically been.
Fundamental research helps us determine if the expectations in the market price are unduly pessimistic.
Relative Dividend Yield (RDY)
If the board of the company sets the dividend based on the long-term earning power of the company then the dividend is a signal of earning power .
High RDY compared to a company’s history identifies when the Market has a pessimistic view of the company’s underlying earning power.
Fundamental research helps us decide if we agree with the market or the company’s board.
SRV Sell Criteria
Any combination of the following factors:
Stock reaches price target
Better use of investment capital
Deteriorating social profile
Weighting exceeds 5% of portfolio
Managing Company Specific Risk These basic rules are designed to help control risk at the company level .
SRV - Composite Performance Past performance is not indicative of future results. Refer to disclosures in the back of the book for details on the Composite.
SKBA Socially Responsible Value Strategy: Performance through Market Cycles Past performance is not indicative of future results. Included as supplemental information and complements a full disclosure presentation, which can be found in the disclosure section of this presentation. Returns are shown gross of fee due to the nature of the PSN database.
SKBA’s Equity Investment Philosophy
Disclosures and General Information
N.A. - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. 3Q09 data is currently undergoing examination and as such may be subject to change. Socially Responsible Value Composite Annual Disclosure Presentation Socially Responsible Value Composite contains all fee-paying, separately-managed discretionary accounts, both equity-only and the equity portion of balanced accounts, that employ SKBA's Socially Responsible Value (SRV) strategy. SRV is a mid-to-large-capitalization value-oriented investment philosophy that seeks to achieve long-term capital appreciation by investing in undervalued equity securities as identified by SKBA's Relative Dividend Yield (RDY) and/or Relative Market Capitalization to Revenues (RMCR) valuation disciplines. For comparison purposes the composite is measured against the Russell 1000 Value Index. For general market comparison purposes, the composite is also measured against the S&P 500 Index. As of January 1, 2000, institutional and private client accounts with $100,000 minimum market values at inception were included in this composite. Beginning April 1, 2002, equity portions of balanced accounts that met the minimum size are also included in the composite. SKBA Capital Management, LLC (“SKBA”) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). SKBA, an investment advisory firm registered with the Securities & Exchange Commission, was founded in 1989 as an independent investment advisory firm. In 1999, SKBA became an affiliate of Convergent Capital Management LLC (“CCM”). In 2003 CCM was acquired by City National Corporation. SKBA manages a variety of equity, fixed-income & balanced assets for U.S. institutional and high net worth clients. Firm assets under management are defined as all institutional & private client accounts managed by SKBA. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Non-fee-paying accounts were included in the composite prior to September 30, 2008, and those portfolios made up less than 4% of the composite. Composite performance is presented net of foreign withholding taxes. Capital gains, dividends and interest received on ADR's may be subject to withholding tax imposed by the country of origin and such taxes may not be recoverable. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. The annual composite dispersion is an asset-weighted standard deviation calculated for the accounts in the Composite the entire year. Additional information regarding policies for calculating and reporting returns is available upon request. Standard Fee Schedule: For accounts up to $25 million: 1.00% on the first $2 million, 0.85% on the next $3 million, 0.50% on the next $20 million. For accounts over $25 million: 0.50% on the first $25 million, 0.35% on the next $25 million, 0.30% on the next $25 million, and 0.25% on the next $25 million. For accounts over $100 million: 0.33% on the first $100 million, 0.25% on the next $50 million, 0.20% on the next $100 million, and 0.15% on the next $100 million. Actual investment advisory fees incurred by clients may vary. Beginning April 1, 2002, carve-outs are included in this composite and cash reserve returns are allocated to equity returns relative to (in proportion to) the size of the equity weight within the total weight of stocks and bonds. The Socially Responsible Value Composite was created January 1, 2000. Compliance with GIPS has been verified firm-wide by Ashland Partners & Company LLP from January 1, 1996 through June 30, 2009. In addition, a performance examination was conducted on the Socially Responsible Value Composite beginning January 1, 2000.
Focused on investment strategies & client service
An affiliate of Convergent Capital Management LLC, a $19 billion organization in terms of assets under management (as of 6/30/09)
SKBA - The Senior Investment Professionals Trading 1995 Matthew D. Zuck, SVP & Director of Corporate Development 1976 Shelley H. Mann, SVP & Director of Trading Detailed bios are available in the back of the presentation book. 1991 Josh J. Rothé, President & Director of Research 1976 Andrew W. Bischel, CEO & CIO 1965 Kenneth J. Kaplan, Chairman Year Started in the Industry Senior Investment Team