iab presentation

Investment Advisory Board Presentation

2016 Spring Real-Time Portfolio Management

“The past, the present, and the future are really one: they are today” - Harriet Beecher Stowe

Agenda

● Economic Overview ● Portfolio Allocation Summary ● Transactions YTD ● Portfolio Performance YTD ● Sector Updates● Proposal for Reducing Cash Allocation

Economic Overview

• US labor market indicators are strengthening– Unemployment, Labor Force Participation Rate, and initial jobless

claims are showing positive signs• Brent crude oil has increased 29% since the start of 2016• Corporate earnings are underperforming

– Thomson Reuters is projecting a 6.1% decline in Q1 earnings for S&P 500 companies

• FOMC concluded their third meeting of the year on April 27– Interest rates remained unchanged due to low GDP growth

expectations for US Economy1 Theo Francis and Kate Linebaugh, “U.S. Corporate Profits on Pace for Third Straight Decline,” The Wall Street Journal (2016).

1

Summary & ETF’s

Consumer Goods Current Holdings

Healthcare Current Holdings

Technology & Telecommunication Current Holdings

EMUIT Current Holdings

Financials Current Holdings

YTD Transactions

Portfolio Performance Dec 31/2015 - March 31/2016

*Return as of 3/31/2016

Dividends

*Return as of 3/31/2016

Top Best and Worst performing stocks

Gainers LosersMichael Kors (KORS) +42.19% Ambarella (AMBA) -19.81%

Royal Gold (RGLD) +40.46% CBRE Group Inc (CBG) -16.66%

Enbridge Inc (ENB) +17.23% Novartis AG (NVS) -15.81%

Walmart (WMT) +11.73% Biogen Inc (BIIB) -15.03%

3M Co (MMM) +10.61% PJT Partners Inc (PJT) -14.99%

*Return as of 3/31/2016

Risk/Volatility

• Portfolio Beta average: 1.0545

• Active Return Average: -210 basis points

*Return as of 3/31/2016

Portfolio S&P 500

Average annualized standard deviation

10.23% 17.60%

Sector Performance

South Hill Fund Excluding Cash

South Hill Fund Total

Market S&P

Consumer 70 39.6 302

Tech -24 -13.7 217

EMUIT 84 47.7 624

Healthcare -92 -51.8 -593

Financials -144 -81.6 -560

In Basis Points

*Return as of 3/31/2016

Consumer GoodsSteve Ashe | Suba Chakraborty | Alissa Cugliari | Clay Curran

Consumer Goods Transactions● Michael Kors: Purchased 42 shares at $56.27● Wal-Mart: Purchased 74 shares at $69.43● Ecolab: Sold 45 shares at $115.12

WMT Walmart

DIS Disney

IFF Int’l Fragrance

KO Coca Cola

KORS Michael Kors

SBUX Starbucks

Consumer Goods Market Conditions

Wal-Mart has the strongest sustainable growth

ROE x Plowback = Sustainable growth

WMT 20.88% .77 16.08%

TGT 18.05% .80 14.44%

COST 13.42% .74 9.93%

Wal-Mart Stores Inc. Valuation

Purchase Price: $69.50See Appendix

FCFE ValuationEstimate: $100.64

HealthcareStephanie O’Brien | Alex Leone | Anthony Skretny | Nick Vargas

AMGN Amgen

BIIB Biogen

GILD Gilead

JNJ Johnson & Johnson

MYL Mylan

NVS Novartis

UNH UnitedHealth Group

ZBH Zimmer Biomet

Current Holdings With UNH Trade

Opportunities● Aging global population● Longer life expectancy

● Increase in chronic diseases– Obesity, high cholesterol,

dementia● Emerging economies

– Increased access to healthcare

Risks● Political uncertainty● Potential drug pricing reform● Affordable Care Act

Healthcare Industry Outlook

Healthcare Recent Trades

● Purchased Amgen– Relatively low-risk investment within the biopharmaceutical sector– Recently invested heavily into R&D – 12 drugs currently in Phase 3 testing and 22 in the preliminary

stages– See Appendix B

● Placed limit order on UnitedHealth Group ($126.87)– Huge upside potential for international expansion – Opportunity to increase profit margins by exiting 34 states where

they’re currently making losses– Optum unit is a major competitive advantage

Inception:● March 28th● 35 shares of AMGN at $149.24

($5,223.40)

Performance:● Currently: $160.56 (4/28 closing price)● Forecasted dividends of $1.00 on June

8th (ex-dividend date of May 13th)● As of 4/29

– $5,619.60– Up 7.59% since purchase

Amgen Purchase

Technology and TelecommunicationChris Forrest | Taulant Gashi | Parin Kaba | Zamar Malik | Romano Meza Leal

Tech & Telecom HoldingsQCOM Qualcomm

AAPL Apple

AMBA Ambarella

AMT American Tower

EMCE EMC Corp.

FDS FactSet Research

GOOG Alphabet Class C

GOOGL Alphabet Class A

IRBT iRobot

Recent Trades

Purchased Apple on April 20:● Increased holding by 30 shares to 85 total● Market value of $9,031.38 (4/27)

Rationale: ● Beta of 0.95 (Valueline April 1, 2016)● Conservative Growth

– g: 10%, stable growth: 5%● Undervalued 47.11% at $108 (April 17, 2016)

– See Appendix C● Focused in reducing cash drag

Performance

Apple Statement on Tuesday (4/26)● 2nd quarter sales declined 13%

– $50.6 billion, $58 billion in previous year– Analysts estimated $52 billion (Bloomberg survey)

● Net income declined to $10.5 billion● 3rd quarter sales will be $41 to $43 billion

– Analysts estimated $47.4 billion (Bloomberg survey)

Performance

At Tuesday’s Close in New York (4/26)● Market Capitalization $519.4 billion● Growth opportunities in services● Expanding Apple Pay into China, Singapore, Australia

(CNET.com, Apple.com)

EMUIT(Energy, Materials, Utilities, Industrials, Transportation)

Alek Peters | Brian Krakower | Matthew Corcoran | Michael Maddahi

HON Honeywell

CBI Chicago Bridge & Iron

ENB Enbridge

LYB Lyondellbasell

MMM 3M

OXY Occidental Petroleum

RGLD Royal Gold

UNP Union Pacific

WY Weyerhaeuser

VLO Valero

Position Changes● Occidental Petroleum

– Sold 38 shares at $69.39● Valero Energy Corporation

– Purchased 42 shares at $63.16● Honeywell International

– Purchased 27 shares at $114.41

Occidental Petroleum• 72% of revenues from oil exploration and production• More geopolitical and volatility risk than refiners• Depressed oil prices forcing producers to take on debt• 30.28% overvaluation (03/07)

– See Appendix J

Rationale

Valero Energy Corporation● Maintaining oil exposure

– Refining vs. production● Reduce Middle East exposure

– Decreases overall risk– USA, UK, Canada

● Largest independent petroleum refiner in US

● 16% Undervaluation (03/07)– See Appendix J

Honeywell International Inc.● Highly diversified company● Operating in various business

segments● Historically higher returns than

competitors

● Higher growth potential● 32.35% Undervaluation (04/14)

– See Appendix K

Rationale

Recent Activity

● 1Q 2016 Earnings: May 3● Current Price: $60.91● Down 3.58% since purchase

*As of 04/28 close

Valero Energy Corporation Honeywell International Inc

● Beat earnings estimate by $0.03 per share and revenue estimate by $150 million

● $5 Billion Stock Buyback plan● Current Price: $114.62● Up 0.17% since purchase

FinancialsBrandon Stern | Brennan D’Angelo | JB Allred | Tamal Rahman

FINANCIALS

Interest RatesShort: 0.27%Mid: 0.59%Long: 0.39%

Rationale:● Confidence in leadership● Successful restructuring

– Large consumer banking segment

● Undervalued sector– DDM: 12.50% undervalued– Tgt. Price: $66.58– See Appendix Q

● Net Interest Margin: 2.03%

Performance:● Up 3.75% from proposal on April

13th● Up 8.15% from before earnings

*As of 04/27 close

J.P. Morgan Chase

Rationale:● New exposure of a growth

stock– Expanding consumer

credit services– Projected dividend

issuance● 3.91% Undervalued● Innovative business

platforms● Net Interest Margin 19.04%

Performance:● Up 11.56% since purchase

(3/9/2016)● See Appendix L

*As of 04/27 close

Synchrony Financial

Synchrony FinancialRevenue Breakdown:

2015 Actual 2015 Percentage 2012-2015 Growth

Retail Card $7,425 68.5% 24.04%

Care Credit $1,717 15.8% 25.70%

Payment Solutions

$1,691 15.6% 16.94%

*Bloomberg Data (In millions of USD) as of 4/27/16

The 2020 Real-Time Plan

● Step 1: Weight positions based on macroeconomic approach– Sectors should hold approximately 6 companies

● Step 2: Sell off the weakest companies on a valuation basis in order to reach this requirement

● Step 3: Divide the remaining cash into remaining holdings proportionally over the course of about 4 years

Quasi Dollar-Cost AveragingWe propose to increase our equity exposure by 15% per year until we

reach a more desireable structure with less cash exposure.

In a no-growth portfolio, this process would take about four years to complete.

SPY Limit Order Proposal

Outlay: Spring 2016

Wrap-Up● Highlighted Key Economic Drivers● Summarized Portfolio● YTD Performance● Recent Trades● Sector Breakdowns● Proposal for Reducing Cash

Appendix A -Amgen Major Drugs● Enbrel is the #1 prescribed rheumatoid arthritis injection. Makes

up 24.8% of AMGN sales

● Neulasta/Neupogen prevent infections in patients undergoing chemotherapy. Makes up 21.8% of sales

● Aranesp and Epogen treat anemia in patients who are HIV+ and undergoing chemotherapy. Make up 17.6% of sales

Appendix B - Amgen Valuation

Based on our valuation, AMGN was undervalued by 15.45% at the time of purchase.

Appendix C - APPLE

Appendix D- APPLE

Appendix E - APPLE

April 17 2016

Appendix F - APPLE

April 17 2016

Appendix G - APPLE

April 28 2016

Appendix H - APPLE

April 28 2016

Appendix I - Comparable Analysis

Apple Microsoft

Current Price 94.83 (4/28/2016) 51.02 (4/27/2016)

Beta 1.44 1.23

Required Return Used 17.81% 15.5%

Debt/Asset 22.2% 20%

Undervaluation % -3.48% -41.72%

Growth Assumption Used 10% for 3 years, 5% stable 10% for 3 years, 5% stable

Forward P/E 9.5 17

EV/EBITDA 4.99 9.94

Appendix J - EMUIT Valuation Valero (VLO) Occidental Petroleum (OXY)

Current Price (03/07 Open) 63.15 70.07

Beta 1.35 1.25

Required Return Used 9.98% 9.46%

Debt/Asset 16.35 15.85

Undervaluation % 16.03% undervalued 30.28% overvalued

Growth Assumption used Valueline 3Yr Proj Earnings Valueline 3Yr Proj Earnings

Forward P/E 8.43 (12/31/17) 52.03 (12/31/17)

EV/EBITDA 4.06 11.62

Appendix K - EMUIT Valution Honeywell (HON)

Current Price (4/14 Closing) $114.52

Beta .92

Required Return Used 10.83%

Debt/Asset 24.7

Undervaluation % 32.25%

Growth Assumption Used Valueline/Bloomberg

Forward P/E (12/31/17) 15.82

EV/EBITDA 12.04

Appendix L - Synchrony Financial

Appendix M - Synchrony Financial

Appendix N - Synchrony Financial

Appendix O - Comparables Analysis Synchrony Discover (Benchmark)

Beta (2yr adj.-Bloomberg) 1.156 1.042

Required Return 9.95% 9.25%

Debt/Asset 28.9% 28.4%

Undervaluation Pct (DDM) 3.91% 35.02%

Forward PE 10.8 9.81

EV/EBITA 6.98 6.08

*Bloomberg as of 4/28/2016

Appendix P - Synchrony Valuation

Appendix Q - J.P. Morgan Chase Valuation

SPY- 6 Mo.

SPY- 1 Yr.

SPY- 3 Yr.