June 2019 Investment Commentary & Performance

¹Comments and opinions expressed reflect solely the personal views of Anthony Lombardi as of 6/28/19, 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.
JUNE 2019 INVESTMENT COMMENTARY1

Pivot 2.0, A Toy Story: “Beyond…To Infinity!”
Feed Me! The market’s insatiable appetite for protein to fuel its continued growth has not only led to
expectations for multiple Federal Reserve interest rate cuts, but a willingness to readily absorb a significant level
of IPO activity, as well as increasingly assign ever higher valuation multiples across the
traditional growth complex, resulting in expanded multiples versus the rest of the
market, notably value. A new form of derivatives are increasingly in play, although not
premised on financial instruments, but rather companies with business models that
offer plant-based meat; cannabis-oriented products from beverages, recreational-, CBD-
and medicinal-oriented; ride-sharing companies offering basic taxi and other delivery services yet providing no
clear path to near- or intermediate-term profitability; commercial real estate owner/developers offering shared
office space that apparently can easily front-run their IPO with a potential multi-billion
dollar credit line; and commitments of billions of dollars to SPACs (where capital may sit
idle and not be deployed for years) at the fastest pace since the onset of the global
financial crisis. Investment process and conviction remain keys for us, particularly against
the backdrop of a playground filled with emotional swings in the market, led in part by a
“pivot-to-patience” first signaled by the Fed earlier this year, and more recently “Pivot 2.0” in which the Fed has
signaled multiple, potential interest rate cuts having entered the calculus. We remain quite mindful playtime for
the kids of the market may be a relatively short recess, with some finding themselves in after school detention
for pushing around, and bullying valuations too hard. Infinity is not a good mindset when pricing assets.

As illustrated below, at the end of 2Q19, the disparity between Growth and Value reached very wide levels, a
gap that would be even more significant utilizing our LCV portfolio valuation metrics. While only one part of a
broader mosaic, such data points have increasingly served to drive our intense focus upon capital protection
measures in our portfolio actions during the past year, even if that generates underperformance in our portfolio
returns in the short-term.
At the core, the market is a discounting mechanism, and we remain vigilant as to where the pendulum swings
at any given point. As noted in the past, cumulatively, such swings serve as building blocks 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 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. We like how our portfolio positioning has migrated over
the past three years, unwavering on process discipline, and always mindful of the ever-evolving mosaic.
Portfolio Positioning & Review
Having deployed capital advantageously during 1Q19, with liquidity kept on hand by having kept our guard up,
we returned to a higher cash bias during 2Q19, further solidifying MOS through a combination of active portfolio
changes. Recall, during 4Q17, 1Q18, 2Q18, 3Q18 such actions led to consecutively, yet methodically, higher
portfolio liquidity at the end of each period. Notably, in 3Q18, we made an active decision to increase our cash
target +100bps, to 2.50% from 1.50%, in combination with an active decision to reduce allocations to TECH, IND,
and CD, while increasing allocations to HC and CS (Staples). While our cash target of 2.50% was not raised during
4Q18, we believed it prudent to maintain, while also acting to incrementally desensitize cyclical exposures by
further reducing ENE and correspondingly increasing CS sector target weights. The latter continuing our nibbling
in a defensive sector that had, at the time, only recently become somewhat compelling. Our contrarian genes
and available opportunity set aided in keeping our hand steady in the aftermath of the market’s emotional
gyrations in 4Q18, leading us to take additional actions during 1Q19. Notably, we reduced our target Cash level
150bps, eliminated our exposure to the Real Estate sector, while increasing our target weights in CS and Comm
Services sectors. Given the strong reversal in the market during 1H19, combined with valuation expansion
witnessed, we furthered previous moves in the portfolio during 2Q19 by actively reducing our target weighting
in TECH, increasing our weighting in CS (Staples) and raising our Cash target to its highest level since inception
(3.00%). As noted in prior commentaries during 2018, we chose not to ignore strong performance in our
portfolio, coincided against 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. While interest rate traction appears to have stalled for the moment, we continue to believe our
actions serve to reinforce a protective mindset, while still maintaining an optimistic long-term posture in our
portfolio positioning. By prudently underscoring our focus on overall MOS, the portfolio’s performance was
served well during a volatile 2018 and, following our actions in 1Q19 & 2Q19, we believe is positioned well for
the second half of 2019 and beyond. We are not concerned about more recent relative underperformance, as
our focus remains on the long-term horizon, and the risk/reward prism we are viewing through.
Our LCV portfolio exposure remained allocated to 10 of 11 sectors, with an emphasis on issues 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 acceptable paradigm as our value conscious and investment process simply will
not allow us to pay any multiple for quality. We don’t do Growth, we don’t do GARP; it doesn’t mean such styles
are without credibility. While important to understand and have perspective of such styles, they are simply not
our belief or process approach, nor have they ever been. We have always been hardwired, contrarian, value
investors, conscious of risk factors, and continually 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. That said, we are never

married to one view as valuations, sentiment and process drive our decision-making. By way of example, such
patience paid dividends during 2H18 & 1Q19 as we felt the combination of our long-term time horizon and
valuation compression in certain defensive areas hit risk/reward levels that became appealing. As opportunities
present themselves, we have increasingly nibbled and reallocated our portfolio with a contrarian mindset.
Despite having maintained a higher cash target during the past few quarters, 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. As to the latter, our decision to reduce our
Technology sector weighting via a full position Sale of a long-term holding during the second quarter reflected
such discipline. Not only has deployment of investable capital in this manner 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. 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. Clearly, however, as evidenced by our positioning changes during the past year,
such opportunities are not as vast, nor inexpensive as was the case 5-10 years ago.
Key Trades & Attribution
We seeded our 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
2Q19, notable actions included:
 Sector/Cash Target Weighting Changes:
o Cash (+)
o Consumer Staples (+)
o Information Technology (-)
 Position Target Weighting Changes & Rebalance Trades across several sectors:
o Technology
o Consumer Staples
o Consumer Discretionary
o Communication Services
o Materials
o Industrials
o Financials
o Healthcare
o Energy
One FULL position SALE, two FULL spinoff SALEs, and two sector weight changes; 26 portfolio holdings. Our
activity level remained high in the second quarter (2Q19) given opportunities presented in the backdrop,
allowing us to underscore our convictions and remain steadfast in executing our investment process. While our
investment discipline is generally characterized by low turnover, when action is dictated by process, we execute
accordingly—there is never hesitation with a stated process. We have repeatedly stated that we neither date,
nor fall in love with any stock or sector, nor attempt to justify going beyond embedded process constraints as
reasons for portfolio exposures. Our target sector weightings are influenced by top-down and bottom-up views,

while fundamentals, valuation and psychology drive stock level decisions. For the second consecutive quarter,
we executed full position SALEs (including spin-off related), amongst other activity which included changes to
two (2) sector target weightings and numerous rebalance (up and down) trades to position target weightings,
cumulatively touching nine (9) sectors. Given the strength of the market rebound off late December levels,
combined with broader market valuation levels, we returned to our prior bias for higher Cash and defensiveness.
Recall our actions in 2018 to reduce sector weightings in Technology, Industrials, & Consumer Discretionary, while
also increasing sector weightings in Consumer Staples and Healthcare. We further built upon this portfolio trend
during the first and second quarter of 2019, by eliminating exposure to Real Estate (1Q19), increasing
Communication Services (1Q19), increasing our Staples sector weighting (1Q19 & 2Q19), lowering our
Technology sector weighting (2Q19), and increasing our Cash target (2Q19). At the end of 2Q19, there were a
total of 26 target positions held in our LCV portfolio, diversified across 10 of 11 sectors. We do not view portfolio
actions taken during 2018-2019 as wholesale changes, but continuation of measured and timely modification to
our long-standing optimistic stance, founded upon our investment process for which we had long pre-
telegraphed. Indicative of this migration is the combined underweight allocation to HC and CS, which stood at
only -145bps at quarter-end, a vastly different level compared to nearly -1,200bps at the end of 3Q16; a shift
that occurred through a combination of valuation compression and active portfolio allocation decisions. Perhaps
most notably, we increased our target weighting in CS by 500bps during the past year, a sector we had long
abhorred due to valuation and fundamentals. On a weighted average basis, the market capitalization of our
portfolio holdings was $136.6 billion, a decline of 5.5% compared to the prior quarter, a level of decline greater
than the portfolio’s total return of +0.9% during the same period. The decrease in capitalization reflects portfolio
changes we made in sector and target holding weightings during 2Q19, notably a full position sale in Technology
where the security’s market cap was ~$240 billion. Further, we increased our Staples weighting +100bps,
allocating to an existing security where the market cap was below $100 billion, as well as raising our Cash target.
MOS remains 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 2Q19 with 3.1% cash, significantly higher vs 1.0% in 1Q19. Our cash target
weighting had been raised to 2.5% from 1.5% during 3Q18, remain unchanged in 4Q18, reduced during 1Q19 to
1.0% and raised to 3.0% in 2Q19. 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. As noted, our
LCV portfolio comprised just 26 total equity positions at quarter-end. 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
serve to protect capital in very much the same way. And, when process and valuation present opportunity, we
look to not only reallocate capital but deploy excess cash levels accordingly. 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. As we have noted previously, with our sector band targets
set at 0.5x to 1.5x respective S&P 500 capitalization weights, should a sector’s size fall materially below certain
predefined thresholds our process further allows for optionality for a 0% sector target with redeployment of
available capital into other sectors, or Cash. Recall we utilized this 0% optionality with the Real Estate sector
during 1Q19. At quarter-end, the only other sectors near, or within this 0% optionality range included Materials
and Utilities.
Investment Performance. For the June quarter, our LCV portfolio generated total return of 0.9% vs the Russell
1000 Value (R1KV) return of 3.8%, and broader S&P 500 return of 4.3%. For rolling one year-ended June 2019,
our LCV portfolio generated total return of 4.9% vs R1KV return of 8.5% and broader S&P 500 return of 10.4%.
During the past three quarter’s, the swing in performance has been notable. The negative 4Q18 absolute total
return represented the weakest quarter, while the absolute total return of our LCV portfolio in 1Q19 marked
the strongest since inception. Despite a modestly positive absolute return in 2Q19, our portfolio’s relative
underperformance of ~-295bps vs R1KV in 2Q19 was the weakest since inception, driven primarily by Security
Selection, with a partial offset provided by Allocation. Compared to the broader market (S&P 500), where
underperformance of ~-340bps was the second weakest since inception, Security Selection detracted ~-390bps,
while Allocation served as a modest offset. For the rolling 1-year, our portfolio’s relative underperformance of
~-360bps vs R1KV was driven by weak Security Selection ~-515bps, offset by a contribution of ~+160from
Allocation. Compared to the broader market, rolling 1-year underperformance of ~-560bps was driven by drags
in Security Selection of ~-530bps and Allocation of ~-30bp. Despite weak quarterly relative performance in 1Q19
and 2Q19, and a market environment characterized by significant volatility, our portfolio’s returns on a rolling 2-
year and 3-year basis remain meaningfully above that of our primary style benchmark, the R1KV. As noted in
prior commentaries, most critical in our discipline is the ability to protect in downside market environments, by
an unrelenting focus on MOS and process, given long-term preservation of capital has much more to do with
absolute loss of capital than upside return participation. We remain humbly confident that our process and
execution will continue to prove beneficial in this dynamic over the long-term.

Our portfolio’s characteristics continue to reflect a disciplined, contrarian, and value-oriented process. As
illustrated in the tables on page one, staying mindful of general market valuation levels, and more importantly
that of our LCV portfolio, has long remained paramount. Heading into 2018, the protection offered by the
valuation discount in our portfolio versus our primary benchmark and the broader market was significant and
served us well during market weakness experienced in the front- and back-end quarters of the year, while also
allowing for upside capture during 2Q18 & 3Q18. While generally comfortable with the investment backdrop,
during late 4Q17 and throughout 2018 we had alluded our radar remained dialed-up to material, incremental
valuation multiple migration without corresponding fundamentals improving. As a result, we made increasingly
active moves in the portfolio during 2018 to solidify cheapness, as well as desensitizing some cyclicality. As
evidenced by outperformance in our longer-term comparative investment returns, our re-positioning has proved
beneficial in the 2-yr and 3-yr window. Despite this longer-term outperformance, however, our LCV portfolio
still remains materially cheaper across nearly every valuation metric, notably boasting higher FCF & dividend
yields, lower P/E’s (trailing & forward) and EBITDA multiples, and lower P/S and P/B compared to the broader
S&P 500 and R1KV, the latter our primary benchmark. 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 +303bps
premium and 20% discount (vs R1KV), respectively. In lieu of the interest rate backdrop, and growing appetite
by company managements to take on incremental financial leverage, we have continued to keenly monitor
balance sheet trends, as well as EBITDA multiples. Having first eclipsed 9x during 3Q18, our portfolio’s EV/EBITDA
multiple hit a new high of 9.2x in 1Q19, driven in part by our decision to increase target weights in Consumer
Staples and Communication Services. At end of 2Q19, this multiple remained near its high, at 9.0x.
Comparatively, however, our portfolio remains at a discount to both the S&P 500 and R1KV EV/EBITDA multiples
of ~12x and ~11x, respectively. Noteworthy is the valuation divergence between Growth and Value which has
ascended to levels that have grabbed our attention the past few quarters.
From attribution standpoint, 2Q19 drag from Selection far exceeded positive contribution from Allocation.
Specifically, versus the R1KV, Security Selection and Allocation during June quarter amounted to ~-370bps and
~+75bps, respectively. Energy, Staples, Communication Services and Real Estate were the most significant
contributors in total attribution, while Consumer Discretionary, Financials and Technology were the most
significant detractors. By Allocation, Energy, Healthcare and Real Estate sectors had the largest positive
attribution, while Energy and Consumer Discretionary were the largest detractors. By Stock Selection, Staples
and Communication Services were the largest contributors, while Consumer Discretionary and Financials were
the largest drags. On an absolute basis, four sectors in our portfolio posted negative returns quarter/quarter,
led by Energy and Consumer Discretionary. By comparison, only the Energy sector in the R1KV posted a
sequential decline. Our targeted cash position was increased to 3.00% in 2Q19, up 200bps sequentially, as our
bias to build liquidity became a compelling opportunity considering underlying valuations and our target
weighting reduction in the Technology sector. For the full quarter our cash position was a negative contributor
juxtaposed against a respectful upside performance by the R1KV, resulting in ~-10bps of attribution drag.
Technology: DECREASE weighting -300bps; 1 FULL position SALE: 20.0%-->17.0%; 3 rebalance trades: 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 latter part of 2017 and much of 2018 we were active in
reallocations and rebalances within TECH given material appreciation in position holdings, all which occurred in

the shadow of the broader market’s growth-oriented rally. The fact that we have continued to be active within
TECH is not surprising given the sector has been a key market driver and our process forces a natural reallocation
amongst portfolio holdings. During 2Q19, with continuation of a strong rally off December trough, we executed
one FULL position SALE and three position rebalances, two down to target, and a third up to target weight.
Cumulatively, our activity in the quarter represented ~470bps of aggregate portfolio market value, the largest
component of this allocation driven by the FULL SALE of Cisco Systems (CSCO).
Full Sale of CSCO: For the past 20 years, we have actively followed and completed detailed research and analysis
on the TECH sector, and CSCO specifically. At inception of our LCV portfolio, CSCO was added with an initial
target weighting of 4.00%--subsequently increased to 5.00%, and ultimately lowered to 3.00% (in 2 separate -
100bps reductions)--prior to its subsequent sale in 2Q19. More notable, our research and valuation work
conducted in mid-2011, with the shares trading at ~$16 (less than 10x forward EPS) ultimately led to an
investment position in the company, premised on multiple identified positive investment factors which
remained relevant at the time of our LCV portfolio’s seeding in 1Q16. CSCO’s share price performance over the
past 10-yrs, and since inception of our LCV portfolio, have performed well against fundamental improvement,
successful execution of both an executive management and business model transition (including divestitures,
acquisitions and organic investment/growth), combined with favorable balance sheet and cash flow dynamics;
to include shareholder friendly capital management. Specifically, at time of sale, CSCO’s 10-yr total return was
+261%, compared to +478%, +281% and +224% for the S&P Tech sector, S&P500 and R1KV, respectively.
Although generally subpar comparatively over the past 10-years, share price performance improved during our
holding period, whereby the stock generated +126% total return, versus +108%, +59% and +47% for the S&P
Tech sector, S&P 500 and R1KV, respectively. At time of sale, sentiment on CSCO shares reflected a generally
bullish view, with a ~65%/35% Buy/Hold-Sell consensus opinion, as compared to a 40%/60% respective split 10
years ago. Further, consensus 12-month target price for CSCO was $55 versus $37, 2-years prior. During the
previous 1.5 years relative to our full sale, consensus EPS had climbed +25%, to $3.83. Although CSCO
management has successfully been transitioning the business model to software/services/security, the legacy
router/switching business (high margin, high cash flow, low/declining growth) still serves to keep valuation
multiples below several other prominent Tech companies. That said, CSCO valuation multiples have climbed
materially, evidenced by FCF yield of 5.4%, 14.2x EV/EBITDA, 16x fwd P/E, 21x LTM P/E, 5.8x P/B and 5.0x P/S.
Perhaps most notably, the market has rewarded CSCO with high valuation relative to its expected growth, and
the company’s net cash position has burned lower owing to aggressive (and favorable) capital management.
Specifically, CSCO’s PEG ratio (utilizing FY2 estimates) was 2.1x at time of our sale, versus 1.0x 10-yrs ago and
0.7x at the 2008 low. Net cash as a percentage of market cap was 4.7% at time of sale, versus 20.0% 10 years
prior. While we take no issue with management, its execution, nor the quality of the company’s balance sheet
and its strong cash flows, CSCO was simply not as compelling, nor contrarian as was the case 10 years ago, nor
at time of inception of our LCV portfolio. Our increasing concerns regarding broader market valuation levels, for
which Tech has played an integral part, combined with contrarian opportunities elsewhere, led us to reallocate
CSCO’s 3.00% target weighting into Staples and Cash.
At our newly lowered 17.0%, compared to the S&P 500, our portfolio’s target weight allocation for TECH at the
end of June represented an underweighting of ~-445bps, although still a material overweighting of ~1,105bps
versus R1KV. Our process compliant maximum weight for TECH was ~32% at quarter-end, providing significant

headroom in portfolio exposure should compelling opportunities present, while also highlighting the valuation
expansion that has occurred in the sector for which we are increasingly mindful.
Consumer Staples: INCREASE Sector weighting +100bps; 1 target raised, 2 rebalances to target: 9.0%-->10.0%
For the 4th
consecutive quarter, we raised our target in CS +100bps, and fully allocated the increase to an existing
target position, thus raising our CS target weight +500bps during the past four quarters. We had 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, as noted in our September 2018
commentary, we are contrarians, seeking compelling valuations and MOS wherever present. With respect to CS,
we remained patient and awaited the pendulum to swing increasingly in our direction, while simultaneously
maintaining our high conviction level in more attractive cyclical sectors. Of note, the increase in Staples
weighting was funded by the 300bps made available by our FULL SALE of CSCO in Tech, a reallocation that reflects
our contrarian DNA quite strongly. Despite four consecutive quarterly increases, it is notable our CS sector target
weighting of 10.00% remains below the maximum weighting of ~11% allowed per process, reflective of discipline
and our belief that more valuation compression, and/or business model stress was, and still may be possible.
One need not look further than the hemorrhage in shares of Kraft Heinz, Kellogg, Conagra, Kroger and others
throughout the sector as proof statement. As we have noted in prior commentaries, CS has been among the
most bruised defensive sectors given its representation in the S&P 500 was cut in half during the past decade,
falling from 14% to less than 7% in 3Q18. It’s the same degradation that has recently begun presenting some
contrarian opportunity, for which we have remained disciplined and patient. In addition to the most recent
increase of +100bps allocated to an existing target position, we also rebalanced it up later in the quarter, while
also separately rebalancing down another position to target weighting. Cumulatively, actions taken in the
quarter comprised ~195bps 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 an overweight of ~+275bps and ~+125bps,
respectively.
Materials: No Sector weighting change; 3 Rebalance trades to target, 2 Spin-Off related sales: 3.0%
Given the market capitalization representation in the S&P 500, we have had one position holding in the Materials
(MAT) sector since inception. Compared to the S&P 500 and R1KV, our portfolio’s target weight allocation for
MAT at quarter-end was an overweight of ~+20bps and an underweight of ~-145bps, respectively. At less than
3.0% market cap weighting in the S&P 500, the MAT sector presents optionality in our process to have 0%
exposure, for which we have not exercised since inception. During 2Q19, we executed 3 rebalance trades UP to
target weighting, 2 which were tied directly to corporate actions resulting in spinoffs of separately traded public
companies from our one holding. As the new entities did not align with our fundamental interests from a
portfolio construction perspective, and presented undesirable risk/reward, we opted to execute FULL sales of
each, and redeploy into our existing MAT holding. Prior to either of the two spins, we had executed the 1st
of 3
rebalances in this same holding. Cumulatively, including sales of the “spin co’s”, our actions taken in 2Q19
comprised ~370bps of aggregate portfolio market value, of which ~180bps was related to the sales.
Cons. Discretionary: No Sector weighting change; 5 Rebalance trades to target: 12.5%
Along with TECH, IND, and FIN, the CD sector has comprised a significant part of our portfolio’s cyclical bias. As
has been the case in prior quarters, we relied upon compelling valuation and contrarian instincts during 2Q19 in
seizing opportunity presented to execute rebalance trades in CD, raising two positions UP to target weightings,

both twice in the period. Still yet another position holding was rebalanced DOWN to target. While holdings in
the CD sector have been a significant source of attribution drag during the past year, and we are cognizant of
the fundamental reasons, our conviction in the positions remains steadfast for the long-term. We also take
comfort in our CD rebalances given we have peeled off some cyclical exposure in the portfolio as well has having
added to cash target during the past year. Cumulatively, actions taken in 2Q19 comprised ~195bps of aggregate
portfolio market value. At quarter-end, our sector target allocation represented an overweight of ~+230bps
versus the S&P 500 and ~+655bps versus R1KV. As with TECH, our process compliant maximum weight for CD at
quarter-end provides headroom for additional portfolio exposure given an upside limit of ~15%. However, we
remain quite mindful that AMZN comprises ~3.5% of the 10% aggregate market capitalization weighting in the
S&P 500 CD sector. Thus, our current CD target weight is quite full when adjusting for this one name.
Industrials: No Sector weighting change; 2 Rebalance trades to target: 12.0%
Along with TECH, CD, and FIN, the IND sector has comprised a significant part of our portfolio’s cyclical bias. As
has been the case in TECH, we acted during past year to reduce our IND target weighting, serving to desensitize
cyclical risks, particularly when viewed in context of increases to CS, HC, Comm Svcs and Cash targets. That said,
we continue to actively monitor several potential contrarian IND opportunities where sentiment is negative, and
additions could prove compelling to our portfolio at more attractive valuations. During 2Q19, we executed 2
rebalance trades in IND, both DOWN to target weightings. Cumulatively, actions taken in the quarter comprised
~80bps of aggregate portfolio market value. Compared to the S&P 500 and R1KV, our portfolio’s target weight
allocation for IND at quarter-end was an overweight of ~+265bps and ~+230bps, respectively.
Financials: No Sector weighting change; 1 Rebalance trade to target: 19.0%
Along with TECH, CD, and IND, the FIN sector has comprised a significant part of our portfolio’s cyclical bias.
Unlike TECH and IND, however, we have acted during the past year to increase our target weighting in FIN given
our conviction level, compelling valuations and healthy balance sheets of the companies we are targeting for
position holdings. While we did not change our sector weighting in 2Q19, we did execute one rebalance trade
DOWN to target comprising ~50bps of aggregate portfolio market value. Compared to the S&P 500 and R1KV,
our portfolio’s target weight allocation for FIN at quarter-end was an overweight of ~+590bps and an
underweight of ~-440bps, respectively.
Healthcare: No Sector weighting change; 2 Rebalance trades to target: 10.0%
While not as negative as our CS stance, for some time we had viewed the HC sector as fundamentally
unattractive in the context of our long-standing bullish view of macroeconomic and corporate profit trends.
However, in 3Q18 we raised our weighting +100bps to its current 10.0%, utilizing significant appreciation in
target holdings in cyclical sectors for redeployment to the underperforming, underweight HC sector which had
begun to offer increasingly compelling valuation. At the time, we noted that we had been wading, not diving
into the sector. That said, we always we remain cognizant of all parts of our process. While no change to target
weights were made during 2Q19, we did execute 2 rebalance trades, one UP and one DOWN to target weight.
For the quarter, rebalance actions in HC cumulatively represented ~130bps of aggregate portfolio market value.
Compared to the S&P 500 and R1KV, our portfolio’s HC allocation remains underweight vs both benchmarks, ~-
420bps and ~-290bps, respectively.

Communication Services: No Sector weighting change; 1 Rebalance trade to target: 9.0%
As noted in our December commentary, we believed our targeted holdings in Healthcare, Staples, Comm Svcs,
along with our Cash allocation, comprising nearly 28% at year-end, provided defensive attributes against our
cyclical exposures in the portfolio; and, we have also increasingly nibbled in HC and Staples during 2018-2019 as
more compelling, select valuations have arose. On the heels of having raised our Comm Svcs sector weighting in
1Q19, we maintained our target in 2Q19. We did, however, execute one rebalance trade DOWN to target
weighting in the quarter, comprising ~50bps of aggregate portfolio market value. We continue to like the mix of
assets that comprise our Comm Svcs sector, with each of the three business models owned contributing secularly
to our overall portfolio in various ways, and with favorable balance sheet and cash flow attributes. Additionally,
we continue to believe our allocation provides defensive attributes, as well as leverage to participate in upside,
both to the economy and markets. At quarter-end, our target weighting in Comm Svcs represented an
underweight of ~-120bps and overweight of ~+100bps, compared to the S&P 500 and R1KV, respectively.
Energy: No Sector weighting change; first rebalance trade UP to target in some time: 3.0%
Our fundamental concerns with respect to the Energy sector remain unaltered, and we reiterate our belief the
sector to be a quintessential “value trap”. Select fundamental drivers are unlike any other sector. Notably, the
S&P 500 Energy weighting at quarter-end was ~5.0%, a level well off the ~15.0% weighting reached 10-years
ago; and placing our allowable process maximum for the sector at ~7.6% allocation. The S&P Energy sector would
require a market capitalization weight of at least 6% before forcing us to move our allocation higher on a process
basis alone. That said, we honor our investment process and rebalanced one ENE position UP to target, the first
such move since 4Q17. At quarter-end, our target weighting in ENE represented an underweight of ~-205bps
and ~-625bps, compared to the S&P 500 and R1KV, respectively.
Four sectors remain at target allocations of 3.00% or lower
Our portfolio currently has four of eleven sectors retaining target weightings of 3.00% or less; Energy (3.00%),
Materials (3.00%), Utilities (1.50%) and Real Estate (0.00%). Weightings in all these sectors remain in alignment
with our broader investment views, expected backdrop, and, process discipline and constraints. With our radar
remained dialed up, our inclination remains one which is more likely to result in further moderation in our
cyclical exposure should contrarian opportunities continue to present in traditionally more defensive sectors,
implying that most of these sectors, ex-UTEs, are unlikely to be targeted for increased weighting. Cash allocation
could also continue to play a part in such moderation.
Cash target: INCREASED +200bps: 1.00%-->3.00%
As noted in our June 2018 commentary, we believed building cash 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%. During 4Q18 we maintained our target at
2.50% but brought it down in 1Q19 given the late December sell off. With the strong 1H19 market rally and
corresponding expansion in valuation multiples, we again took the opportunity in 2Q19 to solidify aggregate
MOS in our portfolio with an increase in Cash target to 3.00% from 1.00%, combined with reduction in Tech and
increase in Staples sector target weightings. From a market value perspective, our Cash level was 3.1% at
quarter-end, versus 1.0% at the end of March.

Market and Economic Backdrop
Since inception, 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 clearly played out and became consensus over time. However,
our vigilance works both ways and, as indicated in our commentaries during 2018, our radar had been
increasingly 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 ongoing allocation and rebalance actions 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; political investigations; technology data/privacy
concerns; geopolitical tensions and events around the world, to include increasing crystallization on trade and
tariffs; ongoing developments in North Korea; Brexit chaos; a fluctuating dollar; spiking market volatility;
constant oil price reversals; hemorrhage in Emerging Markets; swings in economic data at home; rising corporate
board governance issues; terrorist and civilian-based societal attacks; new Fed Chairman and member mix on
FOMC; speed of monetary policy normalization through rate and balance sheet actions; related pivots and
patience. More recently, volatility, pessimism and negative headlines arose like the Phoenix in 4Q18, driving a
notable market sell-off, and the bifurcation of performance across investment styles and regions that had
remained status quo witnessed a notable breakdown, only to be followed by a strong 1H19 reversal. We remain
unsurprised by the pendulum action in the market, particularly in lieu of monetary and fiscal backdrops,
geopolitical tensions, increased volatility and underlying emotional swings. As noted in our March 2018
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. As we stated in our December commentary,
given the unraveling and unnerving that occurred in 4Q18, we expected this trend would continue in 2019-2020.
While the market rebound witnessed during 1H19 fit neatly into these expectations, we maintain focus upon
our process discipline. With our typical investment horizon of 3-5 years, we continue to believe we are looking
forward squarely into a period that will likely have data points and fundamental developments serving to impact
the underlying mosaic, resulting in higher levels of emphasis on MOS. In the context of the domestic political
landscape, we find it noteworthy that any investor with a 5-year horizon must now view through a lens
encompassing a time frame (2024) that captures, with 100% certainty, an electorate process resulting in a
different Presidential administration, as well as mix in members of the US Senate, House and Gubernatorial
positions. More specifically, over the next 5 years, the market will be discounting the impacts of subsequent
policy agenda that will result from the following political backdrop:
o 2020 Elections: Presidential, House (D’s control by 37 seats; all 435 up for vote), Senate (R’s
control by 6 seats; 34 up for vote, 22 R, 12 D), Governor (R control by 4, 11 up for vote; 7 R, 4 D)
o 2022 Elections: House (435 up), Senate (34 seats up for vote; 22 R, 12 D), Governor (36 up)
o 2024 Elections: Presidential, House (435 up), Senate (33 up; 21 D, 10 R, 2 Ind), Governor (resid)

S&P 500 performance adds to its strong first quarter showing with a 4.3% total return; Growth > Value
The fourth quarter’s (2018) broad, aggressive market sell-off, made a violent swing back towards beta in the
1H19, led by one of the strongest quarters in a decade in 1Q19, with continued strength into 2Q19. Specifically,
the broader market’s +13.7% total return was followed by a +4.3% total return in 2Q19. By sector, the market
was paced by Financials, Materials, Technology and Consumer Discretionary which posted total returns of +8.0%,
+6.5%, +6.1% and +5.3% respectively. Energy was the only S&P 500 sector in the red, at -2.8%. The Fed’s “Pivot
2.0” on the heels of its “pivot-to-patience” serverd to alleviate concerns about an inverted yield curve, and
potential broader macro/earnings slowdown. Growth (as measured by Russell 1000 Growth Index—R1KG)
posted a +4.6% total return, moderately outperforming Value by ~+80bps. Emerging Markets (as measured by
MSCI EM index) managed to keep its head slightly above water, at +0.7% on the heels of posting a +9.9% total
return in 1Q19. While EM’s rolling 1-year total return finally broke into the black, its comparative return
remained well below growth, at ~1,005bps, representing a sizeable swing from its ~400bps rolling 1-year
advantage at the end of 2Q17; a distinctive swing in just 2 years. Similarly, Value has also retained an edge over
EM due to the depth and length of EM’s underperformance, swinging from a rolling 1-yr deficit of -1,825bps at
end of 1Q18 to a favorable ~690bps differential at end of 2Q19; but ½ the advantage vs prior quarter. As to U.S.
interest rates and spreads, despite the “pivot-to-patience” and “Pivot 2.0” by the Fed and corresponding action
in long rates, our secular view has not changed. Specifically, 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 (upward) pressure and/or
potential inversion, as we have previously stated such concerns would alleviate over subsequent quarters---the
near 100bps decline in 1-yr Treasury yield since the Nov 2018 peak has served to affirmed this view.
Global markets (total returns $USD) ex-China, continued participating in 1H19 recovery with bifurcation across
geographic theaters remaining a theme in the backdrop: Swiss +8.6% (vs +12.5% 1Q19), Brazil +7.7% (vs +2.5%
1Q19), France +7.5% (vs +11.1% 1Q19), Germany +7.1% (vs +7.8% 1Q19), Australia +6.8% (vs +12.4% 1Q19),
Japan +3.2%(vs +7.0% 1Q19), India +2.9% (vs +8.0% 1Q19), Mexico +2.8% (vs +5.4% 1Q19), UK +0.9% (vs +11.6%
1Q19), Hong Kong +0.4% (vs +12.6% 1Q19) and China -9.2% vs (+38.0% 1Q19). For the quarter, on the heels of
the prior quarter’s +13.1%, the S&P 500 posted a +3.8% price increase, modestly below the performance of the
R1KG at +4.3% and slightly ahead of the R1KV at +3.2%. With respect to domestic markets, Technology, Energy
and Consumer Discretionary drove a large part of the positive attribution of Growth over Value. Financials were
the most significant detractor for Growth vs Value, followed by drags from Industrials and Healthcare. 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 remained Technology and Consumer Discretionary, while the most significant
underweights were Financials and Energy. Between Growth and Value, Utilities continue to close the weighting
gap differential to Energy. Specifically, the continued decline in Energy market capitalization, and underlying
strength in Utilities has resulted in a ~650bps positive differential in Value vs Growth UTES weighting, nearing
the ~890bps differential for Energy.
10-yr yield ranged 1.99% to 2.60%; plummet from 7-yr high to close near low for quarter. Notably, the bottom
end of the range, which came near quarter-end, represented a 125bps decline from November 2018 peak (a 7-

year high). For the quarter, the 10-yr traversed a 61bps range, hitting an early-quarter high of 2.60% in mid-
April, prior to its consistent decline in the final two months of the quarter. Increased uncertainty related to the
ultimate outcome of Trade/Tariff negotiations remained a key driver of the declining rate backdrop, with macro-
related slowdown concerns igniting the Fed’s “Pivot 2.0”. Despite the dramatic shift since November, the close
at quarter-end did not breach the 2Q16 quarter-end low, nor the 5-year low of 1.36%. Although it has held at
levels above these prior lows, counter to our prior comments, the 10-yr has now given up the entirety of the
initial spike during the first few days following the 2016 US Presidential election. Despite this evaporation, yields
are responding dynamically to various macroeconomic, fiscal and geopolitical factors—we believe such action
will continue, particularly in lieu of “Pivot 2.0”, albeit not in perfect linear fashion. Against this dynamic rate
backdrop, major US equity indices have been able to power to numerous record all-time highs, across several
broader benchmarks. While this was not the case during 4Q18, as heightened fears of Fed policy error
metastasized against the backdrop of a potential slowdown and/or fears of a recession, the powerful rally
registered in 1H19 powered the S&P 500 to a yet another new all-time high during 2Q19.
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%
4Q18: 2.69%
1Q19: 2.41%
2Q19: 2.01%
Yield curve slope melt still on radar; we reiterate we are mindful but it’s still not a primary concern. As we
have noted in prior commentaries, while aware of potential curve inversion, our focus remains 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 for several quarters, and we have highlighted ongoing adjustments
in our portfolio positioning—largely which have been process and valuation driven. 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. At the current time, we like the portfolio opportunities we have
targeted, as well as the pace at which we have made changes. Across the term structure of the yield curve there
are modestly different dynamics, but generally there has been a broad melting of upward slope. Thus, there has
been a notable change in the backdrop for which markets have reacted. Of note, we provided a detailed review
of longer-term historical term-structure spreads in our first-quarter commentary. As we highlighted, over the
prior 40+ years, the average slope in the 2yr-10yr has been ~95bps (updated to include 2Q19). There have been
4 notable inversion periods in this term structure, with each followed by a recession and each with successively
lower absolute levels in the 10yr yield. Of the four inversion periods, the most severe occurred in the late ‘70’s-
early ‘80’s, owing to the massive swings in volatility, the absolute level of interest rates (and inflation, oil prices,
etc.), the extraordinary duration of the inversion and the duration and deepness of the subsequent recession(s),

which stretched from 1980-1982. It’s a time period we remember living through quite clearly. What gives us
comfort as it relates to the current time period, is the low absolute level of interest rates, low level of inflation,
high levels of employment & aggregate growth trends, the strong cash/balance sheet positions of companies in
the aggregate, strong capital and liquidity position of banks, credit spreads that have not bubbled up to any of
the extremes in prior cycles, ongoing expense/margin focus of management teams, the US’s more favorable
position relative to other countries/markets (Developed & Emerging) and a Fed that has hit the pause button,
and signaled “Pivot 2.0”. It’s these fundamentals that we will continue to monitor for any degradation, as well
as any sustainable impacts from ongoing trade-related policies and negotiations. While our prior comments
stated we didn’t assign a high probability to monetary policy in which the Fed would cut rates, we did note that:
“overnight, the Fed could easily (pivot once again) restore positive slope in the curve if it were inclined by its
internal forecasts.” It is increasingly apparent “Pivot 2.0” will serve to help restore the positive slope, potentially
alleviating macro concerns.
It remains about expectations. We continue to believe data dependency will remain among the foundational
pillars of monetary policy. For us, our thinking has not changed, in fact it has solidified, given we feel our
expectations played out in prior quarters. We highlighted in past: “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 would not be surprised to see a more fluid pace of change regarding monetary policy should
situations warrant….and/or more action steps than currently discounted by the market.” To us, the market had
an epiphany during 4Q18 and finally realized there was potential the Fed chair might indeed be leading the
FOMC on a more rapid path to policy normalization (via combination of rates and/or balance sheet) than was
generally assumed by consensus. As a result, expectations required adjustment as consensus was clearly
surprised by the magnitude of the gap between potential and actual. The music and chairs reversed during 1Q19,
as it was the Fed who had an epiphany, deciding to pivot, pause and be patient. During 2Q19, the Fed further
shifted with “Pivot 2.0” as all indications point to a potential rate cut (cycle). We believe our comments in our
4Q18 commentary served to underscore such change and our investment philosophy and discipline: “Whether
rate and balance sheet policy previously anticipated by the FOMC remain on course or are altered in some fashion
based upon financial market signals, the wake-up call in 4Q18 on its own had value as a discount mechanism. As
noted previously, a market with a swinging pendulum, rife with emotion, fits neatly into our process”
The accelerated compression, and inversion at certain term structures, in the yield curve is just one example of
more fluid changes in the backdrop versus a stale dynamic the market had been previously accustomed during
much of the 10-year recovery. So too has been the related rise in equity market volatility whereby 2018-2019
has witnessed more severity than 2016-2017. Going forward, our expectations remain the same. Specifically,
magnitude of changes in policy 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 over the intermediate and long-term. As we have repeatedly noted, the underlying
mosaic and interplay of 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.
Changes in capital allocations and management priorities remain key front-burners, playing out as expected.
Our expectations had long been corporate actions would 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, they also vary by sector. Continued strong underlying
performance of the stock market and simple mathematics 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. Intermittent periods such as the broad decline in 4Q18, across market capitalizations and
sectors, may temporarily present valuation multiples that are more appetizing for astute buyback activity. That
said, we reiterate that 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
liquidity resides, with several companies boasting cash-rich balance sheets, and several large acquisitions have
been announced in the sector during the past 1-2 years. As we have previously alluded, however, one caveat
with respect to Technology sector is the potential risks (and opportunities) related to data security/privacy which
requires monitoring given it may increasingly cause redirection of cash for investment and/regulatory purposes.
Material change to business models, particularly expectation for long term future growth and margins, remains
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. The political winds that have stirred more
recently about the inserting the hand of government into the capital allocation pot we find to be more about
speculative drama, versus leading to real restrictions.
M&A and IPOs. Deal appetite spanning sectors and geographies continues to reflect high confidence of
management and boards to take on risk and allocate capital. Among the more notable M&A announcements in
2Q19 were: United Technologies/Raytheon ($90 bil stock), AbbVie/Allergan ($84 bil cash/stock), Occidental
Petroleum/Anadarko Petroleum ($55 bil cash/stock), Eldorado Resorts/Caesars Entertainment ($27 bil
cash/stock), Global Payments Inc/Total System Services ($25 bil stock), salesforce.com Inc/Tableau Software
($14 bil stock) and Pfizer Inc/Array BioPharma ($11 bil cash). The continued mix of sectors involved in deals
during the quarter remains among a key highlight of deal activity. But, as we noted last quarter, perhaps the
most notable news item has been the return of the IPO market in backdrop, headlined by numerous new and
sizeable issues that in total are expected to result in an IPO calendar generating ~$1 trillion of new market value
during 2019. Amongst the parade of names coming to market in 2Q19 on the heels of Lyft and Levi’s in 1Q19:
Uber Technologies ($8bil), Chewy Inc ($1 bil), Slack Technologies ($1 bil via direct listing) and Crowdstrike
Holdings ($0.7 bil).
Pivots in volatility appear to track Trade, Fed and rates. 2Q19 volatility witnessed its most severe spike in early
May on the heels of tweet activity by President Trump that more tariff hikes were likely on Chinese goods. As

was the case in 1Q18, the beast seemed to be calmed with the signaling of “Pivot 2.0” by the Fed’s, as well as
the renewed possibility that trade negotiations would get back on track with the help of a meeting of the minds
at G-20 meeting late in the quarter in Japan. As measured by the CBOE (VIX), market volatility spiked midway
through the quarter, hitting a high of ~23 following an early quarter low of ~11, before closing at ~15, which was
the average for 2Q19. 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, and
the average, ~19. Interestingly, the average level for the VIX actually declines, to ~15, when the time horizon is
narrowed to just 2016-forward--a period that includes a February 2018 spike (to 50), an immediate, post-UK
“Brexit” vote increase in late June 2016 (to ~26), November 2016 US election spike (~23) and the most recent
4Q18 spike (~36). During the current 10-year equity bull market, there have been only 5 periods in which the
VIX spiked above 40, a level not breached by the 4Q18 market tantrum. In fact, the VIX had been relatively well-
contained against prior FOMC decisions; confirmation of a (then) new Fed Chair, intra-meeting commentary
regarding rate/balance sheet policy; swirling, divisive and emotional political winds blowing in Washington, tax
legislation/enactment and reduced regulation, geopolitical events including trade/tariffs & disruptions across
the globe, intermittent sell-offs in Tech (long the market’s anchor tenant), speculative swings in crypto
currencies, cannabis plays and the recent return of the IPO market.
Dollar trended modestly higher through May, before ending lower for quarter. We have long been of the view
that an overly dire outcome for the US Dollar is an unlikely scenario in the near-to-intermediate term given the
confluence of global events, relative strength of the U.S. economic backdrop, and perceived safety of U.S. capital
markets. As noted in our March 2018 commentary, implications of any potentially sustained trade-related
changes due to tariffs, negative or positive, certainly bears monitoring. For the quarter, the Dollar index (DXY)
declined ~1%, giving up an intra-quarter gain of ~1% through late May. The Dollar has largely been holding up
reasonably well the past 4-5 years reflecting in part, continued undercurrents in DC related to monetary, fiscal
and trade-related policy, lower interest rates abroad, and flight to safety from regions outside the US. The
Dollar’s strength has had negative impacts on several Emerging Markets during its continued run higher, some
which remain under financial duress. The Fed’s “Pivot 2.0” and expectations for lower rates served as a catalyst
for the Dollar to give back its intra-quarter appreciation during 2Q19. For the rolling 1-year, the Dollar index
posted a modest 1% rise to 96.1. As noted in prior comments, the DXY remains well-above financial crisis lows
of ~70 reached in 1Q08 and remains only ~7% off its 10-year high of ~103 in 1Q17.
Gold safety good for another ~10%; Oil drops another 5%. As measured from 2Q14, Gold hit a 5-year high late
in 2Q19, equal to $1,439. The metal has tended to catch bids on renewed fears and heightened volatility in other
asset classes. During 2Q19 Gold built upon its +9% increase over the previous two quarters, rising +10% at the
close. Gold’s rise occurred against a backdrop of the Fed’s Pivot 2.0, declining yields, continued Dollar stability
and a VIX that remained contained relative to its massive spike in 4Q18. Following a nearly 40% decline in 4Q18,
and +33% increase in 1Q19, oil’s performance reversed lower with the front-end contract for WTI finishing down
5%, closing at $58.47. More notable, crude declined nearly 18% intra-quarter, prior to rallying in the tail-end of
the period. At the quarter-end price, the commodity still sits nearly 46% below its 5-year high (June 2014). As
we noted in our September commentary, outages, logistic constraints and sanction-related constraints clearly
had an impact on crude’s short-term move higher during 2018 but was 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 have
remained steadfast in our long-term pessimistic view, particularly for the Energy equity sector. As evident in our
300bp reduction in sector allocation during 2017-18 and Energy’s modest ~5% S&P 500 market capitalization
representation, we remain in no rush to add portfolio exposure to a sector where process limits our maximum
allocation (~7.5%), and compelling opportunities exist elsewhere without risks of certain oligopolistic variables.
1Q19 Real GDP +3.2% (y/y) and +3.1% (q/q); 2Q19E: +2.6% y/y, +1.8% q/q. Versus FY 2018, forward estimates
for FY 2019, 2020 and 2021 are currently +2.5%, +1.8% and +1.9%, respectively, stable vs 90 days prior. The
slowing in 2020 is driven by a combination of Consumer and Government spending, reduced Investment and
increased imports, while 2021 is more heavily tilted to continuation of a Government spending slowdown. A
major infrastructure initiative, if passed, could serve to alter estimates. 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
June print (for May figures) coming in at 75k, the second sub-100K report in 2019, likely due to a variety of policy
uncertainties during 1H19. We do not dismiss theses below average figures given economic data points in the
US, and globally, have illustrated some weakness during the first half, for which we remain mindful of in the
context of portfolio exposures. Forward median forecasted payroll gains for 2019-2021 are in a range of ~120k-
165k/month, levels which have witnessed continued stability and upside trajectory as we expected. The
unemployment rate has leveled at a multi-decade low, as well as remaining at post-recession lows of 3.6%-3.7%,
having declined ~650 bps from its previous peak. Estimates for 2019 and 2020 have remained at these lower
levels and currently stand at 3.7% each, with expectations of a modest rise to 3.9% in 2021. As noted in prior
commentaries, acceleration in aggregate economic growth had long-proved difficult despite an improving labor
market backdrop. However, 2017’s breach above 3% (Q/Q) real GDP was a notable change which we called-out,
a level which came without fiscal policy injection at the time. Given subsequent enactment of tax legislation and
corresponding response by companies regarding capital management and resource plans, the underlying
traction and lift in GDP that followed was unsurprising. The latest shift in the data marking some slowdown, the
pivots by the Fed, and ongoing trade policy negotiations and bipartisanship at home are all variables in the
mosaic that bear watching for any sustained level of degradation in growth—all which is in line with our radar
being dialed up and ongoing desensitizing of some cyclicality in the portfolio.
Despite the market’s spastic convulsions over the past couple quarters, we would reiterate FOMC
commentary has continually underscored policy maker’s data dependency, including viewing through a global
lens 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 that materially impact anticipated
trajectory in growth and inflation, both which remain in the care and custody of the FOMC. We have repeatedly
stated, monitoring price and wage inflation metrics remains at the forefront for us given the extended period
for which global monetary stimulants have existed, and when combined with injected Fiscal accelerants. Despite
occasional soft spots in economic data, we have been steadfast that 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, a trend indirectly referenced by the Fed
Chairman in early 2018 when alluding to the Phillips curve having broken down relative to historical
relationships. 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 that led to bonus compensation, wage
and hiring increases, and capital/resource investments suggest, however, that operating costs may have reached
the point of headwind status, and serve to detract from incremental operating leverage, placing critical focus on
monitoring margin trends. This continues to be where we see some of the more notable risks to the near-to-
intermediate backdrop---a higher probability of moderating earnings growth via declining operating leverage,
NOT an outright or severely deep economic recession. Our portfolio positioning actions during the past year have
been mindful of this risk.
Monitoring the degree of offsets to tailwinds in the Five and Dime earnings picture remains paramount.
Heading into 2Q19 earnings season, based on FactSet data, aggregate S&P 500 EPS on a reported basis are
estimated to post a year/year decrease of ~-3%, versus +20% gains posted for FY18, and lower than the -0.3%
reported decline in 1Q19. Thus, this would be the second consecutive y/y earnings decline for the S&P 500.
Compared to March 31st, estimated 2Q19 earnings growth for the S&P 500 has declined over 200bps from the
-0.5% growth originally projected and continues a downtick trend from the massive jump in expectations
witnessed heading into 2018. This is now the fourth consecutive quarter in which estimates reverted to a typical
trend of heading lower during a quarter. Prior trajectories during past earnings seasons leading into reports, had
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 2Q19 revenue growth
forecasts of +3.8% have also declined nearly 100bps vs estimates at the end of 1Q19, implying incremental
negative operating leverage. Furthermore, the current 2Q19 revenue estimate represents a sequential decline
from the +5.3%, +7.2%, +9.2% and +10.1% revenue gains in 1Q19, 4Q18, 3Q18 and 2Q18, respectively.
We had a long-held bullish view on corporate fundamentals but have been slowly pulling in our horns during
past 12-18 months. While aggregate profit margins implied in current forecasts, and overall condition of balance
sheets continue to be factors helping to reinforce a relatively positive stance, we have clearly been mindful of
offsets to tailwinds in the broader earnings picture. Basic math of the market has supported the margin
trajectory given the underlying mix and weighting of high-level sector contributors, notably Technology,
representing nearly ~22% of S&P 500 market cap. As called out in 3Q18, however, post the index reconstitution,
TECH is ~400 bps below its representation at quarter-end June 2018 despite 1H19’s strong growth rally.
Conversely, Energy sector’s weighting has been materially compressed over the course of the past few years and
currently represents ~5% of S&P 500 market cap but has transitioned from the precipice of negative
comparisons. Notably, Energy earnings and revenue growth for FY18 were ~+112% and ~ +18%, but for FY19, the
sector is expected to be fully out of the “anomaly” period, as estimated earnings and revenue growth dials down
to DECLINES of -11% and -3%, respectively; levels well BELOW the broader S&P 500. Outside of Technology,
Healthcare and Financials are near equals (14.2% & 13.1%) in market cap representation, with three additional
sectors at ~9%-10% weights. Most notable within Financials, we continue to believe the banks have a favorable

runway with green lights on capital plans, strong credit, a strong and/or expanding economy, prospect for rising
interest rates over the intermediate-to-long term, ability to manage the term structure of rates, reduced
regulation as well as the tailwind of lower tax burden and generally domestic-centric business models.
Consolidation is a wildcard. With Tech, Healthcare, Financials and Communication Services now comprising
~60% of the S&P market cap; Consumer Staples having absorbed material degradation in revenue, earnings and
sentiment; additional tailwind of lower corporate taxes fully embedded in estimates; it would appear revenue
and earnings to be reasonably well-anchored in the near- to intermediate-term, with some incremental support
potentially coming from potential resolution of geopolitical issues. That said, the current rate of growth for FY19
is premised on a quarterly hockey stick trajectory, and due to negative expectations in 2Q19, is only at low-single
digits for the year. Should earnings decline in 2Q19 as expected, it will represent the 2nd quarter in 12 for which
there was a negative year-over-year comparison. On a reported earnings basis, only 5 of 11 sectors are expected
to be in positive territory for the quarter, led by Utilities, Healthcare, Comm Svcs, Financials and Real Estate. Not
one sector is estimated to post double-digit gains, which had been more typical throughout 2018. Materials and
Technology are expected to be among the weakest, with the most attention being on TECH due to its 22% sector
representation. Energy’s renewed fallout, despite only a 5% market weight, will garner a spotlight as well.
Degradation in the earnings outlook for FY2019 vs March forecasts places current estimates for top-line growth
at ~4% (vs 5%) and earnings growth of ~2.6% (vs ~3.2%), while FY20 has dropped moderately to ~5% and ~11%,
around the levels which we affectionately call a “Five & Dime” market backdrop (5% top and 10% bottom-line
growth). As noted in prior commentaries, enacted tax legislation initially generated some spare change, or
cushion, against the original baseline sans tax. As quarters and fundamentals have rolled forward, however, the
cushion and tailwinds have thinned—there is no more cushion or tailwind. By sector, the earnings picture has
once again become more bifurcated, with Financials and Energy currently at the extreme tails of expectations
for FY19. Unlike in prior quarters, these are not immaterial sectors in market capitalization. With wider and more
volatile distribution of earnings expectations across sectors, and with Technology revenue/earnings growth
estimates below the aggregate index, the relevancy of monitoring all sectors has taken on increased importance.
All else constant, we believe the basic math of the market’s forward P/E suggests, given the recent rally, it has
adjusted to a more rich valuation based upon the underlying sector mix, macro concerns and lower (discount)
rate environment: Technology sector’s high profit margins and historically higher growth will be closely
examined at 20x forward EPS; the Financial sector trading at ~12x forward EPS appears to be discounting a flat
to inverted curve and some credit risks; the benefit of cyclical tailwinds have played-out within Industrials and
Consumer Discretionary; and Energy having witnessed another earnings cut again trades in line with the market
average at 17x forward. As previously noted, with revenue and earnings moderation, profit margins in the
aggregate, and by sector, will remain critical to monitor in the current and subsequent quarters. We believe this
to be a key determinant of the market’s ability to sustain and hit record levels or succumb to further downside
and/or be subjected to higher levels of volatility. As an active, and concentrated, LCV manager, we will continue
our opportunistic pursuit, and do so against what we envision in the unfolding 3- to 5-year time horizon.
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 repeatedly noted selective areas of the market

as expensive, many of the cyclical areas within our value-based discipline had 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 have been viewed challenging. We always 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 had 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
2016 US elections, and not universal across the macroeconomic, sector or individual stock landscape.
Nevertheless, as we have underscored during the past several quarters, 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 past several quarters to solidify cheapness in our portfolio and be protective of capital. We
are not married to any stock or sector, as our increased exposure to Staples, Healthcare, Communication
Services and Cash, and reduced allocations to Technology, Industrials, Consumer Discretionary, Energy and
Real Estate 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
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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
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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
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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.

June 2019 Investment Commentary & Performance

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June 2019 Investment Commentary & Performance