September 2018 Investment Commentary & Performance

¹Comments and opinions expressed reflect solely the personal views of Anthony Lombardi as of 9/30/18, and not any other individual or firm. Such views
are not a recommendation to buy or sell any security, fund or portfolio. Any investment decision should be made in consultation with a financial advisor.
SEPTEMBER 2018 INVESTMENT COMMENTARY1

High Noon Clock Bongs
While the proverbial broken clock is right twice a day, the market pendulum, along with participant’s emotions
and behaviors, always ticks and tocks. As noted in the past, cumulatively, such swings serve as a building block
in our constant assault seeking out opportunities for entry into, and exit from, investment
positions. Most importantly, as inoculated value investors, we place a premium on staying true
to our investment process with an unrelenting focus on MOS (margin of safety). As we have
for nearly three decades in this business, we vigilantly listen--to the market, the macro
backdrop, sector and company news flow, and the corresponding swings in investor
psychology. With our typical investment horizon targeted at ~3-5 years, implicit in such a
holding period is not simply low turnover (and low cost), but a time-period integral to an
investment discipline undeterred by short-term events and emotions. Given our large cap
value process is contrarian, high-conviction, and concentrated, we need not scramble
adjusting our long-standing views, or portfolio positioning, due to weekly, monthly or
quarterly events. As part of our disciplined implementation, we overlay longer-term secular views pertaining to
the broader macroeconomic and market backdrop, resulting in active sector and stock exposures. The
foundation of our disciplined investment process and philosophy does not allow for it to be radically altered, nor
portfolio stock selection and sector allocation be impacted in the same vein. Given investment backdrops do not
formulate overnight, portfolio construction, in our opinion, should be the result of a broader mosaic that does
not succumb to near-term emotions and current events. Whether a function of near- or intermediate-term
fundamentals, and/or investor psychology, our focus remains on recognizing, assessing and seizing upon
valuations that potentially present opportunities, be they BUY or SELL.
Source: Wikipedia

Numerous highs reached during the third-quarter despite TNT and pending midterms. While we continue to
believe the fuse on trade/tariffs may be longer and lead to a much smaller stockpile than generally perceived,
there remains a high level of angst and tension as to resolution. In a nation where the first
word is “United”, the growing proximity of midterm congressional elections has served to
ramp the political divide increasingly to new heights. The “A’s have it”, as the combined
market value of Apple and Amazon hit $2 trillion, with Alphabet (parent of Google) and
Microsoft not far behind in adding an incremental $2 trillion more. Employment, confidence
and GDP levels are at highs. Merger and acquisition activity continued to flow, with several
energy-related transactions entering the fray, but the notable deal was Comcast’s “sky-high” premium for
international distribution assets, in a winner take all weekend auction with the Fox. The S&P 500, Russell 1000
Growth, NASDAQ Composite, Dow Jones Industrials, Russell 2000 and Russell 3000 all hit record highs. Michael
Dell, who decades earlier was known as the innovative, young gun, entrepreneurial game-changer of his time,
but who eventually decided privatization was best, appears to be changing course and desires to re-emerge into
the spotlight of the public markets. Tilray, a cannabis company with ~$155 million in estimated 2019 revenues,
climbed nearly 1,200% in less than 60 days, reaching a market capitalization of more than $15 billion, perhaps
driven by some bitcoin being cashed-in to fund the heightened speculation. Without question, however, the
most notable high came in the form of some smoke & mirrors, as a sleep- and free cash flow-deprived founder
of TSLA lit-up a firestorm of issues with a smoke-fest podcast and a now infamous tweet regarding privatization,
which subsequently led to an SEC settlement, including a mandated unseating from his role as chairman. We
continue to like our current portfolio positioning, are unwavering on process discipline and we always listen to
the bong of the market by being mindful of the ever-evolving mosaic.
Portfolio Positioning & Review
Within the purview of our concentrated, contrarian LCV strategy, we have held a long-standing optimistic
perspective of the opportunities seen across several sectors of the US stock market, despite broader valuation
multiples of major indices. However, we have been mindful not to let our guard down, and simply ride the
market’s swell. With our radar increasingly dialed up over the course of the past few quarters, we have taken
the opportunity afforded in our investment process to liquidate full-position winners, while also raising interim
cash levels when we deemed appropriate through targeted rebalancing. During 4Q17, 1Q18 and 2Q18, such
actions led to consecutively higher portfolio liquidity at the end of each period but in the context of no target
weight change to our cash position. In 3Q18, however, we made an active decision to increase our cash target
+100bps, to 2.50% from 1.50%. With strong performance in our portfolio, coincided with broader equity market
appreciation, select underlying valuation multiple expansion, upward traction in interest rates and potentially
more challenging forward earnings comparisons during the next two years, we believed it prudent to underscore
our focus on solidifying overall MOS. As discussed in detail below, taken in combination, our actions to reduce
allocations to TECH, IND, and CD; increase allocations to HC and CS (where we have been patiently awaiting
more compelling valuation and/or negative sentiment); and raise target weighting Cash, all serve to reinforce a
protective mindset, while still maintaining an optimistic posture in our portfolio positioning. We like the
portfolio, we honor the investment process and we believe retaining higher cash an appealing position heading
into the final quarter of 2018.
Source: Getty Images

Our LCV portfolio remains fully exposed to all 11 sectors of the market, with a favorable disposition to
traditionally cyclical areas, possessing compelling valuations, financial statement strength, and where near-
term psychology serves to compensate for risk, providing the inherent MOS we seek when investing over a 3- to
5-year time horizon. Straying to own safety at any price has never been an unacceptable paradigm as our value
conscious and investment process simply will not allow us to pay any multiple for quality. While conscious of risk
factors, we are investors viewing through a risk/reward prism, in active pursuit of opportunities providing the
right balance. We seek companies offering a combination of cheapness, a contrarian view, possessing stable
long-term balance sheets and attractive FCF characteristics. As regular readers of our commentary are fully
aware, we have long found “traditionally defensive” areas of the large-cap market simply too rich. A notable
example, we continually called out the ongoing decline of Consumer Staples sector, which fell below 7% (vs
nearly 11% 1Q16) representation in the S&P 500 during June 2018 quarter. In large part, the lack of traditionally
defensive attributes to contribute downside protection, such as the case in CS, we believe has been due to
valuation multiples across such sectors having been at, or above, the market, particularly when viewed on a
purely GAAP basis. Throw in some growth, margin and increasing competitive issues and it is clear why such
sectors have not presented as compelling in our process. More importantly, we had no issue readily identifying
quality, balance sheet strength, and cash flows at much cheaper levels, in various other sectors providing
consistency with our long-standing, bullish/cyclical view. Not only has deployment of investable capital in such
areas been more acceptable to our contrarian, value-based discipline, but also in recognition that forward long-
term returns are typically related to point-of-entry valuation multiples.
That said, we are never married to one view as valuations, sentiment and process drive our decision-making.
Such patience paid dividends during 3Q18 as we felt the combination of our 3- to 5-year time horizon and
valuation compression in certain defensive areas hit risk/reward levels that became appealing. Given
opportunities came our way, as contrarians, we began to nibble and reallocate within our portfolio. While we
increased our cash target, we are still finding, buying and remaining owners of cheapness, MOS and compelling
free cash flow (FCF), while at the same time we are sellers when valuation criteria or process constraints are
breached. When juxtaposed against our belief favorable operating leverage opportunities still exist in the
economy, and amongst companies we target, we remain steadfast in how we aim to position our LCV portfolio.
Key Trades & Attribution
We seeded a concentrated LCV strategy during the first quarter 2016. Since inception, as opportunities have
been presented, we have made several active portfolio decisions, at both the stock and sector level. During
3Q18, notable actions included:
 2 Position Sales
o Technology
o Industrials
 2 New Position Purchases
o Technology
o Consumer Stapes

 Sector & position target weighting changes; rebalance trades across several sectors; Cash
o Technology
o Consumer Discretionary
o Industrials
o Healthcare
o Consumer Staples
o Financials
o Materials
o Cash target
 New sector allocated within process constraints
o Communications Services
It was a busy quarter marked by several items reaching trigger levels. The backdrop set the stage for activity
level across the portfolio to be the most significant since inception, owing to targeted opportunities that
underscored our convictions, and where we were steadfast in our investment process disciplines. While our
investment discipline is characterized by low turnover, when action is dictated by our investment process, we
execute accordingly; we neither date, nor fall in love with any stock or sector, nor attempt to justify going beyond
embedded process constraints. Recall we had made numerous changes heading into 2018 and during the 1H18,
citing the economic and market backdrop, as well as absolute and relative performance of individual holdings in
our LCV portfolio during the prior two and a half years. In hindsight, these active decisions proved timely, and
we believe the same holds true for actions undertaken in the most recent quarter. Our target sector weightings
are influenced by top-down and bottom-up views, while fundamentals, valuation and psychology drive stock
level decisions. During the quarter, we executed two (2) full position SALEs and two (2) new position BUYs.
Additionally, we made active changes to five (6) sector target weighting allocations, as well as our Cash target
weighting. Notably, these changes were separate and distinct from the newly created Communications Services
sector, which drew reallocation of market capitalization from the Technology, Consumer Discretionary and
Telecom Services sectors. We further executed five (5) target holding position weighting changes across several
sectors, as well as rebalanced (up & down) numerous individual holdings, cumulatively touching eight (8) sectors
in the portfolio. Our preexisting bias to raise cash and seize opportunities in compelling contrarian opportunities,
was also a variable in our activity during 3Q18. While numerous, we do not view portfolio actions taken in the
quarter as wholesale changes, but a measured modification to our long-standing optimistic stance. We have
telegraphed the same during prior quarters. Despite the activity, the weighted average market capitalization of
our holdings was unchanged vs prior quarter, at $151 billion. As always, MOS is our principal guide for which we
are compelled by process to follow. Quarter-end target and market value weights for our LCV portfolio are
detailed below.

On a market value basis, we ended 3Q18 with slightly lower cash position compared to 2Q18, vs 4.0%. Notable
during the quarter, we raised our cash target weighting to 2.5% from 1.5%. Recall, from a process perspective,
our targeted cash range is designed to provide flexibility, to allow for repositioning within a highly concentrated,
yet diversified portfolio. While we are long-term investors, we have a stated preference to monetize winners,
and/or sell-down positions based on discipline, in so doing avoid placing capital at risk by simply holding
investments as place-markers or allowing exposures to become excessive when selective rebalance is more
appropriate. MOS is paramount for us and is critical in limiting potential downside. Holding a position that has
attained valuation levels no longer representative of attractive risk/reward only serves to create undo
diversification risk and is simply an unacceptable practice. With protection of capital a covenant we are unwilling
to break, we firmly believe in utilizing process-permitted cash level when situations dictate, to adhere to this
core investment principle. Similarly, significant rebalancing trades we have executed have served to protect
capital in very much the same way. Such discipline is among several key distinguishing characteristics in our
process. We simply have no penchant to manage a portfolio structured with individual positions not
representative of our high convictions, and firmly believe in a concentrated list of holdings, yet one diversified
across market sectors. With our sector band targets at 0.5x to 1.5x respective S&P 500 weights, should a sector’s
size fall materially below certain predefined thresholds our process does allow for optionality to have a 0% sector
target with redeployment of available capital into other sectors, or cash.
Investment Performance. For the September quarter, our LCV portfolio generated total return of +7.03% vs the
Russell 1000 Value (R1KV) return of +5.70%, and broader S&P 500 return of +7.71%. For rolling one year-ended
September 2018, our LCV portfolio generated total return of +21.8% vs R1KV return of +9.4% and broader S&P
500 return of +17.9%. The absolute total return of our LCV portfolio in 3Q18 marked the third highest level since
inception, exceeded by +9.2% and +7.4% returns posted in 4Q17 and 4Q16, respectively. Our portfolio’s
outperformance of 133bps vs R1KV in 3Q18 was driven by strong Security Selection and a modest contribution
from Allocation, with Selection aided by a corporate acquisition, and previously executed rebalancing of

positions to target levels. Compared to the broader market, Security Selection was a drag of nearly 100bps,
partially offset by a more modest 30bps contribution from Allocation. Most importantly, coming well before
expectations for upside, the ability to protect in downside market environments remains critical to longer-term
preservation of capital and a reflection of our unrelenting focus on MOS and process.
Our portfolio’s characteristics continue to reflect a disciplined, contrarian, and value-oriented process. While
generally comfortable with the investment backdrop, we have alluded for several quarters that our radar
remained dialed-up to material, incremental valuation multiple migration without corresponding fundamentals
improving. Despite ongoing strong outperformance, our LCV portfolio continues to remain materially cheaper
across nearly every valuation metric, notably boasting higher FCF & dividend yields, lower forward P/E and
EBITDA multiples, and lower P/S compared to the broader S&P 500 and R1KV, the latter our primary benchmark.
As illustrated in the tables on page one, staying mindful of general market valuation levels, and more importantly
that of our LCV portfolio, remains paramount. Heading into 2018, the protection offered by the valuation
discount in our portfolio versus our primary benchmark and the broader market was significant, serving us well
during market weakness experienced in 1Q18, as well as the subsequent rebound during 2Q18 & 3Q18. At
period-end, meaningful valuation gaps between our LCV portfolio and R1KV remained intact, with FCF yield and
EV/EBITDA being notable examples at a +227bps premium and 16% discount (vs R1KV), respectively. In lieu of
interest rates, and appetites by management to take on incremental leverage, we continue to keenly monitor
the balance sheet leverage, as well as the portfolio’s EBITDA multiple which eclipsed 9x and is now at its highest
level since inception. Comparatively, the S&P 500 and R1KV multiples are ~12x and ~11x, respectively.
From attribution standpoint, versus R1KV, contribution from Selection far exceeded that from Allocation.
Specifically, contribution from Security Selection and Allocation during the September quarter amounted to
~+105bps and ~+25bps, respectively. Technology, Energy and Industrials were the most significant contributors
in total attribution, while Consumer Discretionary and Financials were the most significant detractors. By
Allocation, Energy and Technology sectors had the largest positive attribution, while Consumer Discretionary
and Healthcare were the largest detractors. By Stock Selection, Technology and Industrials were the largest
contributors, while Consumer Discretionary and Financials were the largest drags. On an absolute basis, our
portfolio had three sectors experience declines quarter/quarter, represented by Consumer Discretionary, Real
Estate and Materials. By comparison, there were no sectors in the R1KV to have posted a sequential decline. Our
targeted cash position was raised to 2.50% from 1.50%, an increase reflective of our bias the past few quarters
to maintain a higher level of liquidity. From a contribution perspective, our cash position was a headwind during
a strong performance quarter, resulting in a detraction of 15bps.
Communications Services: New Sector a roll-up of TEL, with some CD and TECH; No Purchases; target: 7%
As we highlighted in our prior commentary, we were well prepared for a newly comprised Communications
Services sector. In late September the Communications Services sector was formed through the combination of
the old Telecom Services sector and extraction of several stocks across the Technology and Consumer
Discretionary sectors. Versus a weighting of ~2% for legacy TEL at the time of the roll-up, VZ and AT&T now find
themselves sharing a much larger playground with the likes of Facebook, Alphabet, Comcast, Disney, CBS, Netflix
and Twitter. While no reconstitution is perfect, having followed the TMT (Technology-Media-Telecom) space for
20-years, we believe this was a “no-brainer”. The convergence in and between business models, has been an

ongoing secular trend for some time, and any comparative analysis has required tracking a multitude of names,
many which were not public or even in their current form 10-20 years ago. In the aggregate, a little more than
200bps of weight was contributed into Communication Services by Media stocks previously in the CD sector,
with much larger contribution of 600bps coming out of TECH. Compared to the S&P 500 our portfolio’s target
weight allocation for Comm Svcs was an underweight of ~-305bps at the end of September.
Technology: DECREASE Sector weighting -200bps; 1 FULL sale, 1 New Purchase, 2 rebalance: 22.0%-->20.0%
We have been cyclically biased for an extended period, with TECH amongst the most significant sector allocations
providing related exposure in our LCV portfolio. During the previous three quarters we were quite active in
reallocations and rebalances within TECH given material appreciation in position holdings, which occurred in the
shadow of the broader market’s growth-oriented rally. During 3Q18, Broadcom announced the acquisition of
CA Technologies (CA), terms of the deal which provided an all-cash transaction valued at $44.50. Notably, we
held CA in our portfolio, a highly contrarian name for which we had conviction several years prior, evidenced by
our 5% target weight. Our primary work on CA was completed well before inception of our LCV portfolio.
Immediately post the definitive announcement, we fully exited our CA position (equal to 6%+ market value
weight) driven by a basic mantra, for which we have repeatedly underscored: "we have a stated preference to
monetize winners, and/or sell-down positions based on discipline, in so doing avoid placing capital at risk by
simply holding investments as place-markers…MOS is paramount for us and is critical in limiting potential
downside. Holding a position that has attained valuation levels no longer representative of attractive risk/reward
only serves to create undo diversification risk; and is simply an unacceptable practice." Annualized total return
of +22% since inception exceeded that of the S&P 500 and R1KV performance, +19% and 15%, respectively. With
a definitive all-cash offer, a buyer in Broadcom which experienced a recent deal breakup with Qualcomm, and
strategic rationale not a slam dunk, this was a relatively easy sell decision. At time of purchase, the attributes of
CA were compelling in the context of our TECH sector weighting, the company’s high margin software centric
exposure, attractive balance sheet and free cash flow dynamics underscored by a model that possessed modest
cap ex intensity, capital returns in the form of both dividend and buybacks, refreshed senior management team
and the prospect for both business momentum restoration and/or it being an acquisition target. Comparison of
CA’s valuation attributes at PurchaseSale were as follows:
 FCF yield: ~8%~6%
 Div Yield: ~3.4%2.4%
 EV/EBITDA: ~7x~11x
 P/E est: ~12x~16x
 P/S: ~3x~4.5x
 P/B: ~2x~3x
 Analyst rating: 71% Hold/Sell100% Hold
Further making for the sale of CA was an opportunity to Buy another TECH stock for which we have been
monitoring for an extended period. In contrast to the 5% target weight in CA, however, we purchased this new
position at an initial weight of 3%, resulting in a 200bp reduction in our TECH sector weighting. Notably, with the
corresponding carve out of ~600bps from TECH to the new Communications Services sector, our revised TECH

sector weighting is near neutral (vs S&P 500 process benchmark) as compared to a prior underweight. At time
of purchase, the new position offered compelling attributes, including: 9%+ FCF yield, 4%+ div yield, P/Est ~10x
and EV/EBITDA ~8x. From a contrarian standpoint the shares underperformed the S&P 500, S&P Tech Sector and
the R1KV during the prior 5 years, and sentiment as defined by consensus ratings has been negative. The
company fit neatly into our broad mix of existing TECH holdings in terms of business model attributes, and we
believe is additive to aggregate portfolio MOS.
Separate from the Sale and Buy in TECH, we also executed two position rebalances, both down to target weights,
(-75bps) and (-45bps), respectively. The fact that we have been active within TECH throughout 2018, touching
all our holdings, is not surprising given the sector has been a key market driver. Cumulatively, our activity in the
current quarter represented ~1,020bps of aggregate portfolio market value. Compared to the S&P 500, our
portfolio’s target weight allocation for TECH was an underweight of ~100bps at the end of September.
Industrials: DECREASE Sector weighting -300bps; 1 Full Sale; 2 rebalance trades to target: 15.0%-->12.0%
As alluded in our June commentary, we were transparent that process dictated a pending reduction in our IND
sector target weighting. Notably, our target had been at our allowable process maximum weight of 15.0%, with
the sector having comprised part of our long-standing, favorable cyclical view on the market and economy.
However, the combination of ongoing decline in the S&P 500 IND sector representation, and increasing
representation by other sectors, served to lower the maximum allowable process weight for IND to ~14% at the
end of 2Q18. IND sector weighting in the S&P 500 has continued to experience a decline during the past 5-10
years, despite strong contributions of the sectors largest capitalization names. Versus a 10-year peak of ~11.5%,
the sector hit 9.5% in July, a level representing the low-end of a 5-year range of 9.5%-11.0%. During 3Q18, in
combination with increasingly compelling opportunities outside IND, and our unrelenting focus on MOS, we
followed through in executing a sector weighting decrease of -300bps. Despite opportunities within IND, such
action was critical to remaining compliant with our investment process, as well as listening to one of many data
points in our discipline.
To meet our process constraint at the sector level, and reduce IND to compliant weighting, we executed the full
Sale of Emerson Electric (EMR), which was a 3% target position. From inception to Sale, EMR shares generated
annualized total return of +21%, compared to +19%, +18% and +16% for the S&P 500, S&P Industrials and R1KV,
respectively. At time of sale, EMR consensus rating mix was 48% Buy/4% Sell and had witnessed an expansion
to more expensive valuation multiples during our holding period. Specifically, FCF yield of 4.8%, EV/EBITDA of
13x, P/Est of 23x, P/B of 5.3x and P/S of 2.7x. Among select attributes appealing at time of purchase were EMR’s
A-rated balance sheet, FCF generation, dividend history, global presence, a “parts player to the road” and a
stealth Technology play within IND combined with strong management. At purchase, EMR commanded a FCF
yield of ~6%, EV/EBITDA of ~9x, P/Est of ~16x, P/B of ~4x and P/S of ~1.8x, and ratings mix of 18% Buy/14% Sell.
Separate from the Sale of EMR, we also rebalanced two IND positions up to target weightings, comprising
~150bp of market value. In total, including the EMR sale, we utilized ~450bps of aggregate portfolio market value
in the sector during the quarter, and, despite our process-driven reduction, we retained an overweight exposure.
Specifically, compared to the S&P 500 and R1KV, our portfolio’s targeted overweight allocation for IND was
~230bps and ~395bps, respectively, at the end of September.

Cons. Discretionary: DECREASE Sector weighting -500bps; Re-duction, -distribution, -balance: 17.5%-->12.5%
While on the surface our -500bp decrease in CD sector target weight would appear extreme, however, there
were numerous underlying drivers responsible for the change. Along with TECH and TEL, the CD sector was
impacted during 3Q18 by the redistribution of market capitalization into a newly created Communications
Services Sector. Principally, the composition of assets that were shifted from CD to Comm Svcs were Media-
related companies where we have had exposure in the portfolio. Recall in previous quarters, we underscored
our convictions in the CD sector by raising the target weight near the maximum allowed by our process at the
time. During the September quarter, we focused on three positions for rebalance, two down to target weight
and one up. Notably, one of the positions rebalanced down, we subsequently lowered its target weight -100bps
to 4.00% later in the quarter. The combination of the rebalance and target reduction on this holding represented
the 5th
related reduction we have taken on the position during 2018. The recasting of CD, TECH and TEL sectors
at quarter-end further impacted this holding, which transitioned from CD to the new Comm Svcs sector. Thus,
one portfolio holding was responsible for driving our entire -500bps sector target, in large part due to sector
reclassification. Cumulatively, excluding the 400bps of reclass, actions taken in the quarter comprised ~260bps
of aggregate portfolio market value. Along with TECH, IND, and FIN, the CD sector has comprised a significant
part of our portfolio’s cyclical bias, and it has contributed materially to total attribution in 2018. At quarter-end,
despite the reclass, our sector target allocation of 12.5% represented an active overweight of ~220bps versus
the S&P 500. Our process compliant maximum weight for CD was 15.5% at quarter-end.
Financials: INCREASE Sector weighting +200bps; 2 rebalance trades to target: 17.0%-->19.0%
Along with TECH, IND, and CD, the FIN sector has comprised a significant part of our portfolio’s cyclical bias.
While sector target weightings in TECH, IND and CD were reduced during 3Q18, we utilized these funds, in part,
to source a sector weighting increase in FIN by +200bps. Specifically, two (2) existing positions were raised
+100bps each, further underscoring our high conviction in our target holdings within FIN, as well as general
macroeconomic optimism. In addition to the target weighting increases, we also rebalanced three (3) positions
up to full weight. Notably, within the FIN sector, our LCV portfolio has had no ownership in Insurance as we have
a long-standing view it is an inappropriate time to have such exposure in lieu of many such companies being
bond proxies, compounded by rising interest rates, historically low catastrophe loss experience, increasing
competitive pricing and business model experimentation, and capital return programs in the late innings when
compared to bank counterparts. Cumulatively, actions taken in 3Q18 comprised ~365bps of aggregate portfolio
market value. We believe select areas of FIN sector offer compelling opportunity and MOS against the backdrop
for which we have detailed. Compared to the S&P 500 and R1KV, our portfolio’s target weight allocation for FIN
was an overweight of ~570bps and an underweight of ~380bps, respectively, at the end of September.
Cons. Staples: INCREASE Sector weighting +200bps; 1 New Purchase; 1 rebalance trade to target: 5.0%-->7.0%
We have long believed CS to be fundamentally unattractive and overvalued, particularly when viewed in the
context of our long-standing bullish view of macroeconomic and corporate profit trends. However, we are also
contrarians, seeking compelling valuations and MOS wherever they are present. Every asset has a bid-ask price.
With respect to CS, we have been patient and have waited for the pendulum to swing increasingly in our
direction, while simultaneously maintaining our high conviction level in more attractive cyclical sectors. During
the quarter, as opportunity presented, we purchased a new target position in CS with an initial weighting of
2.00%, driving an equal 200bps increase in the aggregate sector weighting. Despite the increase, it is notable our

new CS sector target weighting of 7.00% remains well below the maximum weighting of ~10% allowed per
process, reflective of our belief that more valuation compression, and/or business model stress remains a likely
possibility. CS has been among the most bruised defensive sectors as its representation in the S&P 500 has been
cut in half during the past decade, falling from 14% to less than 7% currently. At an initial 2% target, our newly
added CS position provides ample opportunity to raise further, while also presenting with favorable valuation
and contrarian sentiment. Specifically, 50% Hold/Sell-rated, combined with FCF yield materially greater than our
portfolio, forward P/E of ~14x, and P/B and P/S near 1x. In addition to the new position purchase, we also
rebalanced another up to target weighting. Cumulatively, actions taken in the quarter comprised ~280bps of
aggregate portfolio market value. Compared to the S&P 500 and R1KV, our portfolio’s target weight allocation
for CS at quarter-end was near neutral at overweight of ~30bps and underweight of ~-20bps, respectively.
Healthcare: INCREASE Sector weighting +100bps; 1 rebalance trade to target: 9.0%-->10%
While not as negative as our CS stance, we have viewed the HC sector as fundamentally unattractive when
viewed in the context of our long-standing bullish view of macroeconomic and corporate profit trends. However,
last quarter we utilized significant appreciation in target holdings in cyclical sectors, TECH and CD, for
redeployment to the underperforming, underweight HC sector which had begun to offer increasingly compelling
valuation during the previous few quarters. We noted that we were wading, not diving into the sector. During
the September quarter we went for a deeper swim by raising our HC sector weighting +100bps to 10.0%, utilizing
an existing target position, as conviction is a foundational pillar of our process. Notably, the increase in HC target
weighting was funded by the 600bps+ of market value raised through the sale of CA in TECH. At the same time,
we rebalanced down an existing HC position to target weight, reflecting that we remain cognizant of all parts of
our process. For the quarter, our actions in HC cumulatively represented ~175bps of aggregate portfolio market
value. Compared to the S&P 500 and R1KV, our portfolio’s targeted underweight allocation for HC was ~-505bps
and ~-520bps, respectively, at the end of September.
Four sectors at target allocations of 4.00% or lower; Telecom drops off list; Energy pessimism unchanged
Our portfolio currently has four of eleven sectors where target weightings are 4.00% or less; Energy (4.00%),
Materials (3.00%), Real Estate (1.50%) and Utilities (1.50%). Telecom (3.00%) was previously part of this list but
the roll-up into a new Communications Services sector makes for a considerably larger footprint. In fact, our
process minimum weighting for Communications Services is ~5%, which serves to exclude it from the 4.00% list.
Weightings in Energy, Materials, Real Estate and Utilities remain in alignment with our broader investment
views, expected backdrop and process constraints, and all underscore our cyclical bias. Energy continues to
remain our most pronounced exception, with our portfolio allocation emphasizing a strategic decision to be
prudent and mindful of our long-standing concerns. Despite a +21% move in WTI YTD18, the S&P 500 Energy
weighting at quarter-end was at ~6.0%, a level well off the ~15.0% weighting reached 10-years ago; and
placing our allowable process maximum for the sector at ~9.0% allocation. Strategically, we desire a
meaningful underweight, which at quarter-end was ~-200bps and ~-675bps below the S&P 500 and R1KV,
respectively. Notably, despite our targeted underweight in Energy and the WTI’s +21% appreciation YTD, our
portfolio’s relative performance has not been dramatically impacted. We remain quite comfortable at a 4.00%
allocation and would not hesitate to reduce should process and/or opportunities warrant, either within, or
outside the sector. Our fundamental concerns remain unaltered, and we reiterate our belief the sector to be a
quintessential “value trap”. Select fundamental drivers are unlike any other sector which, in our opinion, lead to

questionable long-term forecasts in the context of a low standard deviation distribution. The S&P 500 Energy
sector would require an 8% weight level before forcing us to move our allocation higher on a process basis alone.
Within MAT and TEL (prior to Comm Svcs) sectors, we rebalanced 1 position each, up to target weights. The
rebalance in MAT was our first since our LCV portfolio’s original seeding. In aggregate, these actions cumulatively
represented ~55bps of aggregate portfolio market value. Compared to the S&P 500 and R1KV, our portfolio’s
targeted overweight allocation for MAT was ~+55bps and an underweight of ~-90bps, respectively, at the end
of September. As previously noted, our target weight in the newly created Comm Svcs sector is 7.00%, which
represents an underweight of ~-305bps compared to the S&P 500.
Cash target INCREASED +100bps: 1.50%-->2.50%
As noted in our prior commentary, we believed building cash level an appealing position heading into 3Q18.
During 4Q17, 1Q18 and 2Q18, such actions led to consecutively higher portfolio liquidity at the end of each
period but in the context of no target weight change to cash. In 3Q18, however, we made an active decision to
increase our portfolio’s cash target +100bps, to 2.50% from 1.50%. From a market value perspective, cash level
was 3.0% at quarter-end, versus 4.0% at the end of June.
Market and Economic Backdrop
We have repeatedly underscored our belief that a good amount of operating leverage existed that could be
readily monetized for the benefit of shareholders/consumers should top-line revenue (& GDP) growth move
sustainably higher; a dynamic that has clearly played out and become consensus. However, our vigilance works
both ways and, as indicated in our previous commentaries, our radar has been dialed up: “should macro-related
conditions deteriorate, or it become(s) increasingly difficult to discover new compelling opportunities; valuation
characteristics, balance sheet and/or cash flow attributes become more challenging, we will change course per
process discipline.” Process, opportunities and MOS will always be our guide, which our recent allocation and
rebalance actions continue to reflect.
For much of this elongated recovery, the broader US equity market has been able to absorb a multitude of
events, to include the ongoing political landscape at home; technology data/privacy concerns; geopolitical
tensions and events around the world, to include increasing crystallization on trade and tariffs; ongoing
developments in North Korea; a fluctuating dollar; spiking market volatility; oil price reversal; hemorrhage in
Emerging Markets; improving economic data at home; rising board governance issues in context of internal
allegations; terrorist and civilian-based societal attacks; new Fed Chairman and mix on FOMC; prospects for the
speed of continued normalization of monetary policy through rate and balance sheet actions; Notably, the
market shrugged off a weak, and volatile first quarter, with a bounce back in the second and third quarters.
Recall, the first quarter decline coincided with the valuation multiple expansion we had alluded in prior reports.
Bifurcation of performance across investment styles and regions remained status quo. As noted in our
September 2017, December 2017 and March 2018 commentaries, there was clear rotation underway from
Growth/Emerging Markets to Value in the latter part of each quarter. In the June quarter, the levee breached
with major declines in the MSCI Emerging Market index, while Growth remained in favor. Deterioration in EM
continued during the September quarter which appeared to serve as a catalyst for search for safety in more
developed markets, notably US equities. We remained unsurprised by the pendulum action in the market,

particularly in lieu of monetary and fiscal backdrops, geopolitical tensions, increased volatility and underlying
emotional swings. In our opinion, adding fuel to the ongoing unwind in EM has likely been capital allocations
previously made partly on perception international markets offered a more compelling opportunity. As noted in
our March commentary, we expected the style-shifting dynamic to have the potential to remain an underlying
pillar during 2018, which would also align well against our investment process. With one quarter remaining in
2018, in our opinion, this trend will continue to be the case, as well as into the new year.
For the quarter, the S&P 500 posted a 7.7% total return, Growth > Value, while EM hangover continues.
Contrary to prior quarters, there was a bit of a mix shift away from certain cyclical areas in terms of absolute
performance, paced by Healthcare, Technology and Industrials posting positive total returns of +14.5%, +12.3%
and +10.0x.x%, respectively. While Consumer Staples lagged the broader market, it was a notable relative
improvement from prior poor showings in which negative total returns were posted. In fact, there were no S&P
500 sectors in the red. Cyclical areas of Materials and Energy were the weakest performers in total return in the
quarter, along with defensive (rate-sensitive) sectors of Real Estate and Utilities. Growth (as measured by Russell
1000 Growth Index—R1KG) posted a +9.2% total return, meaningfully outperforming Value for the seventh
consecutive quarter, with a ~345bps differential. As noted above, Emerging Markets (as measured by MSCI EM
index) posted a decline of -1.0% total return, further delinking major indices. The weak showing for EM placed
has now placed its rolling 1-year total return at ~2,700bps below Growth, a significant swing from its ~400bps
rolling 1-year advantage at the end of 2Q17. With the ongoing hemorrhage, Value extended its gains over EM,
swinging from a rolling 1-yr deficit of -1,825bps at end of 1Q18 to a favorable ~995bps differential at end of
3Q18. As to U.S. interest rates and spreads, we have long maintained that an extended path lower ended several
quarters ago—a view, at the time, founded upon broad expectations for improved economic growth, higher (but
not runaway) inflation, and changes in monetary (tighter) and fiscal (expansionary) policy. We have also not
shared the market’s concerns regarding short-end curve pressure or potential inversion, and further believed
such concerns would alleviate over subsequent quarters.
Globally, stock markets (total returns measured in U.S. Dollars) remained volatile and bifurcated across several
geographic theaters, continuing an ongoing theme in the backdrop: Mexico +10.3% (vs -3.9% 2Q18), Swiss +7.4%
(-3.1% vs 2Q18), Japan +6.2% (vs -0.2% 2Q18), Brazil +4.8% (vs -27.1% 2Q18), France 2.8%, Australia +0.1%,
Germany -1.0%, UK -1.8%, Hong Kong -2.2%, India -3.1% (+2.7% 2Q18), and China -13.2% (-17.1% 2Q18). For the
quarter, the S&P 500 posted a 7.2% price increase, below the positive price performance of the R1KG at +8.9%
but comparatively stronger than the R1KV at +5.0%. With respect to domestic markets, Technology and
Consumer Discretionary drove a large part of the positive attribution of Growth over Value. Healthcare was the
most significant detractor for Growth vs Value. As we noted in our prior commentaries, when comparing Growth
vs Value, any performance differential will likely be driven, principally, by four sectors. Specifically, the most
significant positive weighting differentials between Growth and Value at quarter-end were Technology and
Consumer Discretionary, while most significant underweights were Financials and Energy.
Quarterly range for 10-year yield, 2.81% to 3.10%, with first 3%+ close. While the 10-yr did not eclipse the prior
quarter’s high of 3.11%, it did record the first quarterly close above 3.00% in five years (4Q13). Excluding a short
dip to nearly 2.00% (3Q17), the 10-yr has not only managed to hold its initial spike during first few days following
the 2016 US Presidential election but has clearly been reacting more dynamically to various macroeconomic,

fiscal and geopolitical factors. We believe this action will continue, albeit not in perfect linear fashion. Against
this rate backdrop, major US equity indices have been able to power to numerous record all-time highs, including
in 3Q18 across several broader benchmarks, to include the S&P 500, Russell 1000 Growth, NASDAQ Composite,
Dow Industrials, Russell 2000, and Russell 3000. The Russell 1000 Value did not break a new high, in large part
due to heavy concentration in Financials, which have lagged, and modest exposure to Technology.
10-Yr Qtr-End
4Q15: 2.27%
2Q16: 1.47%
4Q16: 2.45%
2Q17: 2.31%
4Q17: 2.41%
2Q18: 2.86%
3Q18: 3.06%
Yield curve slope compresses further, albeit more modestly; but still not a primary concern for us. As noted
last quarter, while aware of potential curve inversion, we remain focused upon aggregate interest rate levels,
cash flow, balance sheet dynamics, capital allocation and margin trends. Neither the slope of the curve, or it’s
dynamics, at this juncture is a primary concern for us in this regard. Far be it from us to be Pollyanna, as our
radar has been dialed up the past several quarters. Should an inversion pan out and is a function of, or related
to, a deterioration in fundamentals, that would cause us to make further adjustments in our thinking and
positioning. Using 1yr-10yr spread, which had expanded to ~165bps at year-end 2016, compressed notably
during 2017, declining to ~140bps at end of 1Q17, to ~110bps at end of 2Q17, ~105bps at end of 3Q17, ~65bps
at end of both 4Q17 and 1Q18, ~55bps at end of 2Q18 and ~50bps at end of 3Q18. The 1yr-10yr spread level is
well below the ~200bps average over the past 10-years, a notable change in the backdrop. The acceleration in
slope compression during the past 2 years has largely been driven by a rising short-end and, until recently,
modest pressure on the long-end. In our opinion, this has been a function of anticipated and actual Fed action,
alleviated concerns regarding a stalled Fiscal agenda, and firming economic data juxtaposed against well-
contained inflation. Given the backdrop, we are inclined to believe a potential reversion to mean (slope) is more
likely to be driven by a rise in the long-end of curve than a short-end decline, implying a possible 4.00%+ 10-yr.
Under a new Fed Chairman and changes to members of policy-making committee, we continue to believe data
dependency remains among the foundational pillars of monetary policy. Magnitude of changes are expected to
be justified by the macroeconomic backdrop—the latter which we have been positively disposed for some time
and are expected to continue driving interest rate movements and broader policy agenda. The underlying mosaic
and interplay of new Fed leadership, economic data points (domestic and international), Fiscal policy agenda
and spending discipline, corporate balance sheet and profit trends will continue to be monitored. Secondary to
these forces will be any longer-term impacts of sustained trade tariffs/negotiations across individual market
sectors, which may, or may not change primary variables in the economic and business profit equations. As
previously noted, we are 10 years out from the global financial crisis, and on more stable economic ground, with
improved conditions for corporate and consumer fundamentals. At this stage of the domestic economic,
monetary and fiscal policy cycles, we remain less focused upon unit count of rate increases anticipated by the

market and more biased to the level of potential rate changes, and the corresponding impact such step-changes
could serve to vastly exceed market expectations. We maintain our view with respect to U.S. monetary policy
underscored in our December 2016 commentary: “…we would not be surprised to see a more fluid pace of
change regarding monetary policy should situations warrant. This would include the possibility of at least one
50bp change amongst the current unit count of rate change decisions anticipated, and/or more action steps than
currently discounted by the market.” The accelerated compression in the yield curve highlighted above is just
one example of more fluid changes in the backdrop versus a stale dynamic previously, as is any related rise in
equity market volatility. A market with a swinging pendulum fits neatly into our process.
Changes in capital allocations and management priorities remain key front-burners, playing out as expected.
Our expectations have been for corporate actions that lead to a re-ranking of capital management priorities
given a more a favorable tax code, increasing deregulation, improving economic activity and executive
management confidence, along with a corresponding increase in capital and human resource investments. While
such changes could have negative implications for the level and/or pace of share repurchases and dividend
increases witnessed during the earlier stages of recovery since the trough of the financial crisis, they also vary
by sector. To this end, given underlying performance of the stock market, simple mathematics continue to
suggest lower marginal buying power of previously approved, and remaining buyback authorizations. Still further
yet, Finance 101 suggests higher valuation multiples present as less appetizing to corporate CFO’s and
Treasurers, acting as an incremental constraint to share buybacks. That said, we reiterate that even with large
repatriations of internationally domiciled cash, the possibility exists that some companies may still deploy part
of this dry powder into “high multiple” buybacks. Technology is where a lot of this liquidity resides with several
companies boasting cash-rich balance sheets. As we have alluded previously, however, new potential risks and
opportunities require monitoring within the Technology sector and may cause some redirection of cash. Material
change to business models, particularly expectation for long term future growth and margins, will be notable to
monitor, no matter the sector or company. As is typically the case, earnings and free cash flow generation will
serve as key drivers of the ultimate determinant of capital allocation across sectors and industries, led by the
respective fundamental backdrops of each.
M&A. Deal appetite spanning sectors and geographies continues to reflect high confidence of management and
boards to take on risk and allocate capital. The recently concluded bidding war between Disney and Comcast,
for assets of Twentieth Century Fox and Sky, underscores the backdrop, notably the extent to which Comcast
final premium offered to win the Sky assets. Excluding a misguided tweet regarding Tesla going private, some of
the more notable announcements in 3Q18 were: Energy Transfer Equity LP/Energy Transfer Partners LP rollup
($26 bil stock), Broadcom/CA Technologies ($18 bil cash), CK Asset Holdings-led consortium/APA Group ($16 bil
cash), BP PLC/Petrohawk Energy Corp ($11 bil cash), Brookfield Asset Management/Forest City Realty Trust ($10
bil cash), and Diamondback Energy/Energen Corp ($9 bil stock).
Volatility remains a no go for launch. With equity indices hitting new highs and continuing a rebound off a weak
1Q18, US equity markets managing through a maze of trade/tariffs scenarios, mid-term elections pending, rising
interest rates, record unemployment, wage-inflation scares, GDP ticking 4% and waters remaining calm around
North Korea, volatility, as measured by the CBOE Volatility Index (VIX), remains subdued ending 3Q18 at 12.1.
As we have noted previously, since 1990, a year marked by the precipice of a multiyear financial crisis (and

recession) involving S&L’s and commercial banks, the low mark on the VIX has been 9.1, and the average, 19.3.
During the past several quarters, exceptions were the February 2018 spike (to 37), an immediate, post-UK
“Brexit” vote increase in late June 2016 (to 25.8), a less prominent increase in September 2016, and the
November 2016 spike (to 22.5) after the U.S presidential election. Recent FOMC decisions; confirmation of a
new Fed Chair, intra-meeting commentary regarding rate/balance sheet policy; swirling, divisive and emotional
political winds blowing in Washington, tax legislation and reduced regulation, geopolitical events including
trade/tariffs & disruptions across the globe, intermittent sell-offs in Tech (long the market’s anchor tenant) the
past few quarters, and more recent speculative swing in crypto currencies and cannabis plays, all have had LESS
of an impact on the VIX than wage inflation scares, Brexit vote results or the U.S. presidential election of 2016.
Dollar unchanged, holding its gain of 5% in 2Q18. Given the confluence of global events, relative strength of the
U.S. economic backdrop, and perceived safety of U.S. capital markets, we have long been of the view that an
overly dire outcome for the US Dollar will remain an unlikely scenario in the near-to-intermediate term. As noted
in our March 2018 commentary, implications of any potentially sustained trade-related changes due to tariffs,
negative or positive, will certainly bear monitoring. For the quarter, the Dollar index (DXY) bounced a bit, but
ended holding onto the 5% increase posted in 2Q18, reflecting in part, continued undercurrents in DC related to
monetary, fiscal and trade-related policy, rising interest rates domestically, and potentially flight to safety from
regions outside the US. The Dollar’s strength has also had negative impacts on several Emerging Markets, some
which are under increasing financial duress. As noted in prior comments, the DXY remains well-above the
financial crisis lows of ~70 reached in 1Q08, and ~8% off its 10-year high of ~103 in 1Q17.
Gold continued lower while Oil held its bid. Gold, which had hit a 1-year high of nearly $1,360 in late January,
declined 5% in 3Q18 on heels of 7% drop in prior quarter. The drop in Gold has occurred against a backdrop of
continued Dollar strength and the VIX having remained subdued post a 1Q18 spike. Oil held its underlying bid
following a strong performance in the prior quarter. With a near 18% gain in 2Q18, the front-end contract for
WTI finished relatively unchanged in 3Q18, closing at $73.25, but not before a 13% decline intra-quarter. Despite
strong gains and momentum during the past couple quarters, Oil remains more than 30% below its 2014 high.
Outages, logistic constraints and sanction-related constraints clearly have had an impact on crude’s move higher
but not something for which we would peg any long-term modeling. Beyond risks and concerns we have
previously highlighted with respect to inventories, technological benefits and change, potential production cut
slippage amongst OPEC, and production triggers being pulled by U.S. producers, a further constraint on
materially higher price levels is potential headwinds to economic growth that could metastasize with such a
corresponding rise in WTI. Against this backdrop we remain steadfast in our long-term pessimistic view,
particularly for the equity sector. As evident in our 200bp reduction in sector allocation during 2017, and
Energy’s modest 6% S&P 500 market capitalization representation, we remain in no rush to add portfolio
exposure to the sector given process limits our allocation to ~9%, and compelling opportunities exist elsewhere
without the risks of certain oligopolistic decisions.
2Q18 Real GDP +2.9% (y/y) and clips +4.2% (q/q); 3Q18E: +3.0% y/y, +3.0% q/q. Forward estimates for FY 2018,
2019 and 2020 are currently +2.9%, +2.5% and +1.9%, respectively, with only ’19 having seen a modest uptick
vs 90 days prior. We have repeatedly highlighted the underlying strength of the employment backdrop, which
has yet to crack based on latest hiring trends and record low jobless claims. Versus crisis level losses of ~

900k/month in 2008-09, the labor market has witnessed continued improvement, generally posting nonfarm
payroll gains of ~150k-300k/month since 2013, with the September print (for August figures) of 201k above
estimate. Forward median forecasts for 2018-2020 are in a range of ~130k-195k/month, levels which have
witnessed upside trajectory as we expected. The unemployment rate has leveled at 2-decade low, equal to the
April 2000 rate, as well as remaining at post-recession lows of 3.9%, having declined 600 bps from its previous
peak. Estimates for 2018, 2019 and 2020 have trended lower and currently stand at 3.9% 3.6% and 3.8%,
respectively, with the Fed Chairman earlier this year alluding to the Phillips curve breaking down relative to
historical relationships. As noted in prior commentaries, acceleration in aggregate economic growth had long-
proved difficult despite an improving labor market backdrop. However, last year’s breach above 3% (Q/Q) on
real GDP was a notable change which we called-out and came without fiscal policy injection. Given enactment
of tax legislation and response by companies regarding capital management and resource plans, the subsequent
firming in underlying traction is not surprising. FOMC commentary has continually underscored policy maker’s
data dependency and includes viewing through a global lense with eyes (peripherally) on more than just U.S.
economic conditions. To this end, trade-related developments will certainly be scrutinized for any longer-term
impacts serving to materially impact the anticipated trajectory in growth and inflation, which are in the prevue
of the FOMC. Given the extended period for which global monetary stimulants have existed, combined with
newly injected Fiscal accelerants, monitoring price and wage inflation metrics remains at the forefront for us.
Despite occasional soft spots in economic data, we have been steadfast aggregate growth, wage and price
pressure would continue to warm. However, inflation still bears the most burden versus history given increasing
number of business models founded upon low-cost and/or price competition. Specifically, many new business
concepts successfully introduced within the past decade or two, have been premised upon high-volume low-
margin strategies, where price points and distribution are key competitive differentiators. Tax policy and
subsequent corporate actions leading to bonus compensation, wage and hiring increases suggest, however, that
operating costs may have now have reached the point of material incremental operating leverage contribution,
and places critical focus on monitoring margin trends.
Five and Dime earnings picture intact but we continue to monitor degree of offsets to tailwinds. Heading into
3Q18 earnings season, based on FactSet data, aggregate S&P 500 EPS on a reported basis are estimated to be
post a year/year increase of ~+20%, versus the +25% gain posted in 2Q18. Compared to June 30th, the estimated
3Q18 earnings growth for the S&P 500 has declined a full percentage point from the +21% growth originally
projected, and a downtick from the massive jump in expectations witnessed heading into 2018. This has been
the first quarter in some time in which estimates reverted to a typical trend of heading lower during a quarter.
Recent trajectories during past earnings seasons, leading into reports, increased due to a combination of lower
cuts by analysts, enacted tax legislation, regulatory climate, a reduced level of negative guidance by companies,
and generally easing comps in the more pressured sectors. Prior to tax legislation, some of the easier comps
were previously expected to fade but were pushed out due to the tax-related tailwind, serving to help spur
momentum on the top and bottom line. Top-line revenue growth forecasts of 7.5% for 3Q18 have held steady
vs estimates at end of 2Q18, albeit lower than actual +10.1% recorded in June quarter. We have had a long-held
bullish view on corporate fundamentals. Profit margins and operating leverage implied in current forecasts
continue to be factors helping to reinforce this positive stance. Basic math of the market has supported the
margin trajectory given the underlying mix and weighting of high-level sector contributors, notably Technology,
representing 21% of S&P 500 market cap. However, post reconstitution, TECH is now ~500 bps below its

representation at quarter-end June 2018. Conversely, the Energy sector’s weighting has been materially
compressed over the course of the past few years and currently represents 6% of S&P 500 market cap but has
transitioned from the precipice of negative comparisons: Current earnings and revenue projections for FY18 are
at ~ +100% and ~ +18%, but by FY19, the Energy sector is expected to be out of the “anomaly” period, as earnings
and revenue growth is expected to dial down to +25% and +5%, respectively; the latter being at par with the
S&P. Outside of Technology, Healthcare and Financials are near equals in market cap representation, with three
additional sectors at 10% weights. Most notable within Financials (13.3% market cap), we continue to believe
the banks have a favorable runway with green lights on capital plans, strong credit, an expanding economy, rising
interest rates, reduced regulation as well as the tailwind of lower tax burden and generally domestic business
models. With Tech, Financials and Healthcare now comprising ~50% (60% including the new Comm Svcs sector)
of the S&P market cap, additional tailwind of lower corporate taxes fully embedded in estimates, revenue and
earnings appears to be reasonably well-anchored in the near- to intermediate-term, with some incremental
support potentially coming from other sectors. Should earnings growth increase in 3Q18 as expected, it will
represent the 9th
consecutive quarter of year-over-year improvement. On a reported earnings basis, all 11
sectors are expected to be in positive territory for the quarter, with Consumer Staples, Real Estate and Utilities
the weakest. Energy and Financials are expected to contribute the highest earnings growth. With revenue and
earnings moderation, profit margins in the aggregate, and by sector, will be critical to monitor in the current and
subsequent quarters as we believe this will be a key determinant of the market’s ability to sustain record levels.
The outlook for 2019 has bled marginally higher vs June forecasts, currently calling for estimated top-line growth
of ~5% and earnings growth of ~10%, levels which we have affectionately called a “Five & Dime” market
backdrop (5% top and 10% bottom-line growth). As noted in prior commentaries, enacted tax legislation has
generated some spare change, or cushion, against the original baseline sans tax. By sector, the picture is quite
different, with bifurcation in earnings led by Energy and (legacy) Telecom at the extreme tails of expectations
for FY19. As these sectors are materially smaller (pre-reconstitution) in market capitalization, we reiterate the
more relevant story to monitor remains those sectors within the tails. All else constant, we believe the basic
math of the market’s forward P/E suggests it has not been as rich as generally perceived during the pendency of
this expansion when viewed in the context of the underlying mix: Technology sector’s high profit margins and
higher growth, the Financial sector trading at ~12x forward EPS, the benefit of cyclical tailwinds having
materialized within Industrials and Consumer Discretionary, and Energy having traded well above the market
average for some time, though now at 17x forward estimates.
Bottom line: As contrarians, we have been attracted to many facets in the backdrop noted above, particularly
those that underscore the fundamental and emotional swings that are part of any natural market environment.
It is the short-to-intermediate term fluctuations which provide the right backdrop for us to position our portfolio
for the long-term at both the sector and security level. While we have repeatedly noted selective areas of the
market as expensive, many of the cyclical areas within our value-based discipline, have presented as quite
compelling to us for quite some time. If one simply places on blinders, and focuses on the aggregate level of the
market, to include broader market earnings growth, valuation metrics, GDP growth, and nominal debt levels the
backdrop might be viewed challenging. We prefer to go deeper, into sectors and individual stocks, assess related
fundamentals and metrics, place broader macroeconomic measures such as GDP growth into context, and break
apart aggregate metrics such as debt into more relevant measures such as net debt, interest costs and service

coverage ratios, etc. In so doing, we have been quite bullish as to the opportunity set in our concentrated yet
diversified large cap value strategy. That is not to say the opportunity set would be the same for other investors
in different or less-concentrated strategies. As long-term investors, we remain focused on executing a consistent
process, buying cheapness and not over-paying for quality. As disciplined contrarians, mindful of capital
protection, we have long found the cyclical sectors, ex-energy/commodities, home to stocks with the most
compelling valuations relative to the broader market. Given our contrarian nature, we are also cognizant of
consensus having moved in our direction, although much of the change was back-end loaded post US elections,
and not universal across the macroeconomic, sector or individual stock landscape. Nevertheless, we have grown
increasingly sensitive to the shifts that have occurred, for which our portfolio decisions have reflected. With our
radar dialed up for changes that cause swings in the pendulum too far in any one direction, we have made it a
point to take actions during the last several quarters to solidify cheapness in our portfolio and be protective of
capital. We are not married to any stock or sector, as recent increased exposure to Staples and Healthcare, and
reduced allocations to Technology, Industrials and Consumer Discretionary indicate. This is a transparent
exercise and can clearly be seen in the valuation characteristics of our LCV portfolio as compared to the broader
market, our key benchmark (R1KV) and the entire LCV equity peer group. Conviction is key for us and is reflected
in our portfolio actions. Most importantly, with any company, it is those possessing characteristics strong in
balance sheet and free-cash flow, combined with compelling equity valuation, that garner our attention--these
remain the type of roommates we prefer when seeking opportunity and MOS.
AAL
Document is meant to be used in its entirety. Reference to prior quarterly and monthly publications is noted.
Views expressed represent personal assessment of privately managed separate account and market environment as of the date indicated, and should not
be considered a recommendation to buy, hold or sell any security, and should not be relied on as research or investment advice. Information is as of the
date indicated and subject to change. All market and other related information relied upon and mentioned is from market data sources viewed as reliable.
No guarantees are made regarding accuracy.
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes
are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.
The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of
the U.S. Stock market.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures the performance of the large-
cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth
values. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a
trademark of the Russell Investment Group.
iShares® Funds are distributed by BlackRock Investments, LLC. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Russell
Investment Group. Nor does this company make any representation regarding the advisability of investing in iShares Funds. BlackRock is not affiliated with
the company listed above. iShares® and BlackRock® are registered trademarks of BlackRock, Inc., or its subsidiaries.
MSCI Emerging Market index is an index created by Morgan Stanley Capital International (MSCI), designed to measure equity market performance in
global emerging markets. The Emerging Markets Index is a float-adjusted market capitalization index. MSCI®, and the MSCI index names are registered
trademarks of MSCI Inc. or its affiliates.
Where noted, S&P 500® Index, Russell 1000® Value Index, Russell 1000® Growth Index, iShares® Russell 1000 Value ETF and MSCI® Emerging Market Index
are referenced with abbreviations and respective footnotes. Abbreviations include S&P 500, R1KV, R1KG and MSCI EM. Use of iShares ETF for a respective

index is footnoted accordingly and/or mentioned as such. Performance commentary comparisons are made in reference to iShares, unless otherwise
noted.
Performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will
fluctuate, and when sold, may be worth more or less than original cost.
Returns for less than one year are not annualized.

September 2018 Investment Commentary & Performance

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September 2018 Investment Commentary & Performance