Fall 2020 Navigator - EquityCompass

Fall 2020

NavigatorIn This Issue:

EquityCompass Investment Management, LLC www.equitycompass.com

Can You Hear The Music Playing For Growth Stocks? Sales growth and return on capital are keys to navigating growth stocks. Page 9

Tax-Loss Selling— Don't Wait Until December Our event study shows that most investors get the timing wrong. Page 11

Noise Traders and Information Traders When the market is composed largely of noise traders, it pays to trade on information. Page 13

Who Is On The Other Side Of The Trade? Investors continue to believe changes in short-term stock prices signal they are either right or wrong, but in reality these changes have become more noise than signal. Page 4

If You Do Not Change, You Can Become Extinct! Change is inevitable and, though we may be hesitant, it is better for our well-being to adapt rather than remain cemented in the mindset that ignores new realities. Page 6

Same Income Objective, Different Strategy Approach High-dividend stock strategies provide a compelling alternative for meeting investors’ cash flow goals, amid historically low bond yields and soaring debt levels. Page 7

Contents

This issue of the Navigator explores noise in the stock market—the gap between a company’s intrinsic value and its stock price. Our lead article, “Who Is On The Other Side of the Trade?” points out there is not just one mindset on the other side of every trade, but multiple mindsets which elevate the noise in the market.

Senior Investment Strategist, Richard Cripps, has penned an important commentary, “If You Do Not Change, You Can Become Extinct!” Richard thoughtfully points out that change is upon us whether we like it or not, and that the only way to survive and thrive is to adapt.

Jim DeMasi, Senior Portfolio Manager and head of fixed income strategy, shares his insight about the relative valuation of high-yield bonds in his commentary “Same Income Objective, Different Strategy Approach.” Jim explains that in a rush for income, investors have flocked to high-yield corporate bonds. In doing so, prices have been pushed higher and yields lower creating an unhealthy risk–reward profile. Jim’s suggestion for investors seeking higher income is to consider high-dividend paying stocks—4.0% yields—with higher investment grade credit ratings compared to high-yield bonds.

Tim McCann, Senior Portfolio Manager, has contributed two important commentaries. His first, “Can You Hear the Music Playing for Growth Stocks?” examines the important signals growth investors should look for in a market filled with noise. In his second article, “Tax-Loss Selling—Don’t Wait Until December,” Tim’s research shows why October may be the best time to start thinking about realized tax losses.

Our final commentary, “Noise Traders and Information Traders,” reveals why understanding the differences between these two groups may be the key to successful investing.

At EquityCompass, our investment mantra is know what you own and why you own it. We strongly believe this sage advice can best help investors as they seek to achieve their long-term investment goals.

Sincerely,

CIO Commentary

3NAVIGATOR

04 Who Is On The Other Side Of The Trade?

06 "If You Do Not Change, You Can Become Extinct!"

07 Same Income Objective, Different Strategy Approach

09 Can You Hear The Music Playing For Growth Stocks?

11 Tax-Loss Selling— Don't Wait Until December

13 Noise Traders and Information Traders

14 Investment Portfolios

Robert G. Hagstrom, CFAChief Investment Officer Senior Portfolio Manager

WHO IS ON THE OTHER SIDE OF THE TRADE?

4NAVIGATOR

Investors have the tendency to think about the movement of stock prices from the standpoint of the stock they own— if the stock price goes up, others must be in agreement and if the stock price goes down, others must disagree. When the stock market goes off on a tangent, with manic buying or selling, investors may attribute the exaggerated stock movement to the market’s momentary lapse in judgment and not take it personally. Most other times, investors will interpret changes in their stock prices as a judgment on themselves as being either right or wrong.

However, it is important we understand that the “who” on the other side of the trade is not just one mindset speculating contrarily. Rather, the stock market is surrounded by multiple mindsets all executing various strategies that have nothing to do with an investor’s original investment thesis. Make no mistake, the stock you own is also owned by others executing different strategies, most of which have nothing whatsoever to do with a calculation for the value of a stock.

How many diverse strategies are occurring in the stock market at the same time? The following list is in no way exhaustive but would include:

• Momentum – Exploits the tendency for a stock’s prior price return in an attempt to predict future returns.

• Technical – Uses historical patterns of trading data to chart future market movement.

• Asset Allocation – Apportions a portfolio among various asset classes according to one’s investment goals to balance risk and reward.

• Indexing – Seeks to mimic the return of the broad market by passively investing in a basket of stocks, or a group of stocks that reflect a specific market sector or style.

• Hedging – Attempts to offset short-term price losses by taking opposite positions in a related asset typically involving derivatives such as options and futures contracts to mitigate risk; impacts individual stock prices as others arbitrage the differences. Today,

options volume is greater than stock volume.

• Tax-Loss Selling and Gifting – Minimizes the tax penalty on the potential sale of stocks and the transfer of wealth in a tax-efficient manner; recipients, in turn, indiscriminately sell stocks to raise funds.

• ESG Investing – Limits investments to those that meet the criteria designated by environmental, social, and governance standards.

• Macro Investing – Attempts to profit by taking advantage of patterns in overall economic data (i.e., unemployment, inflation) and political policies.

• Speculation – Trades high risk investments in anticipation they will become more valuable.

• High-Frequency Trading – Transacts a high-volume of orders in fractions of a second using quantitative, algorithmic computer programs.

According to Tim Quast, President of ModernIR, a market structure analytics firm, approximately 13% of the trading volume in the market today accounted for active management compared to 1995 when 85% was attributed to stock pickers. Currently, 16% of trading volume is associated with hedging strategies while 24% is connected to passive investing. That leaves 47%—about half of the daily stock market volume—attributed to high-frequency trading of some sort, including market making and statistical arbitrage.

Quast also points out that between Charles Schwab, Fidelity Investments, E-Trade, Ameritrade, and Robinhood there are more than 47 million retail accounts. Most, if not all, of the trading from these firms is outsourced to high-frequency traders who pay for the order flow and profit from doing so while also being allowed to trade along with these individual accounts. Initially, market regulators looked favorably on high-frequency strategies as an important source of liquidity that worked to reduce the bid-ask spread of stocks. But now the critique is high-frequency trading

contributes to market fragility (flash crashes) and exasperates stock price volatility.

I asked Quast whether or not the significant change in market structure altered how stock prices reflect value. “I submit that stocks reflect the purpose of the market,” said Quast. “When the market’s purpose was investment and capital formation, stock prices reflected that fact. Now, the majority of the market’s volume is driven by other purposes that are much shorter, much less dependent on fundamentals and the market reflects that fact.”

Quast continued, “The market now struggles to assign the proper value to things. This is the byproduct of a market that has been displaced from its original function.” According to Quast, “today, over 60% of the volume in the stock market is something other than an interest in owning what’s being sold.” If there are few active fundamental investors who make up a large part of the market’s volume, then the market’s complexion becomes a reflection of a different class of buyers and sellers who are buying and selling stocks for reasons unrelated to a value proposition.

Undoubtedly the structure of markets has changed dramatically over the past 20 years. There are simply fewer fundamental active investors in the market thinking about the economics of the stocks they own. This being the case, we have to ask, just how important are short-term stock prices in determining whether or not someone has made a smart value investment?

To this day, investors continue to believe the change in short-term stock prices signal they are either right or wrong, but in reality, the change in short-term stock prices has become more noise than signal. And in a communication system—the stock market—noise can have a profound impact on our perception and interaction with others, as well as our analysis of the proficiency of the communication system—the stock market itself.

5Fall 2020

As Richard Cripps, EquityCompass Senior Investment Strategist, rightly points out, nonvalue-based, short-term strategies—high-frequency trading included—are exerting tremendous pressure on stock prices and obscuring the fundamentals of what an investor owns, leaving them to react emotionally to the consequences of intense price volatility. With this being said, the rationale for using short-term stock price changes as a signal of an investor’s well-being, including the use of short-term performance returns, become nonsensical.

Robert G. Hagstrom, CFA, joined EquityCompass as a Senior Portfolio Manager in April 2014 and launched the Global Leaders Portfolio in July 2014. In 2019, Robert was named Chief Investment Officer of EquityCompass. Prior to joining EquityCompass, he was the Chief Investment Strategist of Legg Mason Investment Counsel, and before that, the Portfolio Manager of the Growth Equity Strategy at Legg Mason Capital Management for 14 years. He has also served as President and Chief Investment Officer of Legg Mason Focus Capital and General Partner of Focus Capital Advisory.

Robert is the author of nine investment books, including The New York Times Best Seller, The Warren Buffett Way, The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy, and Investing: The Last Liberal Art. He earned his Bachelor and Masters of Arts degrees from Villanova University and is a member of the CFA Institute and the CFA Society of Philadelphia.

6NAVIGATOR

IF YOU DO NOT CHANGE, YOU CAN BECOME EXTINCT!*

Richard E. Cripps, CFA, founded EquityCompass in 2008. His prior responsibilities include Managing Director of the Portfolio Strategy Group at Stifel Research and Chief Market Strategist and Co-chairman of the investment committee at Legg Mason Wood Walker, Inc. He began his career in 1979 as a Financial Advisor with Legg Mason. The EquityCompass investment philosophy and process were developed by Richard from his broad industry experience authoring numerous investment-related research studies, creating and monitoring portfolio models, and participating in Economic forums that include the White House on policy implications of corporate dividend taxation. Richard has a B.B.A. in Finance from James Madison University where he was also a member of Executive Business Council. He is also a CFA charter holder and member of the Baltimore Security Analyst Society.

[*] Johnson, Spencer. “Who Moved My Cheese?” Vermilion. 1998.

For the seasoned investor, making sense of the stock market in today’s world can be a challenge. The twists and turns of the economy due to the pandemic, upcoming elections, and the pervasive influence of technology have created broad uncertainty, as well as opportunity, for investors. While change is a constant within a dynamic economy, the pace has accelerated in these unusual times. Just how much transformation has occurred remains unclear other than the sharp performance dichotomies that have emerged between companies directly benefiting as a result of adapting to the changing economy compared to those that are less so.

While most of us recognize the importance of adaptability, older investors nonetheless have a lifetime of experience causing them to be as resistant, as they are open, to change. For instance, the dangers of being too anchored to the past would compel investors to minimize equity exposure just as stocks began adapting to new economic realities. For investors that experienced The Great Depression, dividend yields fell below bond yields in the 1950s, signaling a red flag that stocks were overvalued. Later versions of the same warning occurred in the 1980s when dividend yields fell below 4%, followed by the high valuations as measured by book value and earnings in the 1990s.

Today’s warnings are signaled by concerns surrounding leading technology companies at the forefront of stock market gains. While the valuations are high by historical standards, their fundamentals, in terms of revenue growth and generation of free cash flow, have few historical parallels. What is clear is that investors who have been avoiding these companies have been missing out on wealth creation.

Who Moved My Cheese?

One of the most popular books ever written on the subject of change was published in the late 1990s in the midst of the Technology bubble. The story is a parable offering the lesson that change is

inevitable and, though we may be hesitant, it is better for our well-being to adapt rather than remain cemented in the mindset that ignores new realities.

Investors entering, or about to enter, retirement have spent a lifetime of accumulating capital to help fund income withdrawals that can last up to 30 years. They know firsthand the importance of adaptability. The process of decumulating capital presents a special challenge. For some, the purchase of a lifetime income annuity is an investment choice. However, the irrevocable nature of some annuity contracts and understanding that income is partly determined by today’s low interest rates makes the immediate annuity less flexible and adaptable to future economic conditions. Another method for decumulation uses an investor’s age to determine the percentage allocated to fixed income with the remainder designated to equities. This approach suffers from a low overall yield which can curtail the amount and longevity of income.

With a retirement period lasting decades, it is important that a financial plan incorporate adaptability. At EquityCompass, we advocate for a retirement income approach oriented to maximizing a sustainable withdrawal strategy. To help achieve this goal, we believe elements of the plan should consider current income, stability, and growth. The income portion is allocated to high yield equities as well as fixed income. Low duration bonds are implemented to pursue stability, as well as tactical measures that seek to reduce equity exposure during an extended market downturn. In terms of growth, we favor active management that focuses on companies with the ability to generate and compound cash returns over an extended horizon. We believe this approach adheres to the general principles of diversification and asset allocation that seek to achieve the goal of providing lifetime withdrawals and allows the portfolio to adapt to the changing conditions that undoubtedly will unfold in the future.

7Fall 2020

• Over the past decade, investors have flocked to high-yield corporate bonds in pursuit of greater cash flow in a “lower for longer” interest rate environment.

• While the high-yield corporate sector has generally performed well in recent years, the risk/reward profile of sub-investment grade debt has significantly deteriorated.

• High-dividend stock strategies provide a compelling alternative for meeting investors’ cash flow goals, amid historically low bond yields and soaring debt levels.

Extremely low interest rates have been a persistent feature of the economic landscape since the 2008/2009 Financial Crisis. As investment portfolio cash flows have diminished due to lackluster bond yields, investors have increasingly moved further out along the credit risk spectrum to pursue their income objectives. Over the past ten years, the combined assets held by high-yield corporate bond mutual funds and exchange-traded funds (ETFs) have grown by 106%, with $217 billion pouring into vehicles holding sub-investment grade debt.1

Although high-yield corporate bonds generally performed well during the economic expansion of the 2010s, the risk/reward profile of sub-investment grade debt deteriorated significantly over the past several years. In previous economic cycles, credit spreads widened as debt levels increased to compensate investors for assuming greater credit risk. This relationship fractured in recent years, as credit spreads fell well below their long-term averages while the ratio of corporate debt to GDP soared to a record high. Persistent demand for sub-investment grade debt, coupled with unprecedented support for corporate bonds by the Federal Reserve,

suppressed yields below fundamental levels, despite highly elevated systemic leverage and a cloudy economic outlook.

Given the lofty valuations prevalent in the high-yield bond sector, investors have little protection against a litany of potential risks, including higher interest rates, wider credit spreads, and greater default rates. As of July 31, a typical high-yield bond ETF carried an effective duration of approximately 3.0 and a yield of around 5.5%. If market yields in the high-yield debt sector were to increase by 200 basis points, due to some combination of higher Treasury rates or wider credit spreads, the projected market value of a representative ETF would decline by roughly 6%, resulting in a negative annual total return for the investor.

As an alternative to the seemingly expensive high-yield corporate bond sector, dividend stock strategies offer a different approach to accomplish the same objective: to generate adequate and consistent cash flow in a low interest rate environment. Given current valuations, a diversified portfolio of high quality, high-dividend stocks can be created with an average yield

in excess of 4.0%, built exclusively with companies that carry investment grade credit ratings.

In our view, high quality, high-dividend stocks issued by companies with strong balance sheets offer a more compelling alternative to high-yield corporate bonds. Current valuations for high-dividend stocks appear quite reasonable relative to the broader market averages. As discussed in greater detail in our recent report “Dividends – Go With The Flow,” valuations for high-dividend stocks reflect considerable discounts relative to their historical averages. The price-to-earnings (P/E) ratios for high-dividend stocks are hovering near 18-year lows compared to the S&P 500 index.

From a credit quality perspective, investment-grade rated companies generally have much stronger balance sheets and enhanced financial flexibility compared to the more highly leveraged firms that raise funds in the high-yield bond market. With the economy still in the early stages of recovering from the damage unleashed by COVID-19, focusing on companies with investment-grade credit ratings should be a beneficial risk mitigation strategy.

SAME INCOME OBJECTIVE, DIFFERENT STRATEGY APPROACH

37%

42%

47%

52%

4%

9%

14%

19%

3/1/

1990

7/1/

1991

11/1

/199

23/

1/19

947/

1/19

9511

/1/1

996

3/1/

1998

7/1/

1999

11/1

/200

03/

1/20

027/

1/20

0311

/1/2

004

3/1/

2006

7/1/

2007

11/1

/200

83/

1/20

107/

1/20

1111

/1/2

012

3/1/

2014

7/1/

2015

11/1

/201

63/

1/20

187/

1/20

19

Bond Yields Versus Corporate Debt/GDPMarch 1990 to June 2020

High-Yield Bond Index Yield (Left) Corporate Debt/GDP Ratio (Right)

Chart 1

Index yields provided for the Bloomberg Barclays U.S. Corporate High Yield Bond Index Source: Bloomberg Finance, LP

8NAVIGATOR

[1] Source: Investment Company Institute and Bloomberg Finance, L.P.

When comparing dividend stocks to high-yield bonds, it is important to remember that equities have a lower priority in a firm’s capital structure, and common stock dividends are not legal obligations like bond interest payments. Despite occupying a lower rung within the capital stack, high quality, high-dividend stocks may provide some downside risk mitigation relative to high-yield bonds during periods of economic stress and uncertainty. While dividend cuts may temporarily reduce the amount of cash flow generated by a portfolio, they are generally far less destructive to portfolio value than the wave of debt defaults that may occur during an economic recession.

Jim DeMasi, CFA, joined EquityCompass in July 2019 as a Senior Portfolio Manager for fixed income. Prior to joining the portfolio management team, Jim served as the Chief Fixed Income Strategist at Stifel, Nicolaus & Company, Incorporated for 12 years. At Stifel, Jim created investment portfolio and risk management strategies for the firm’s institutional fixed income clients. He published several periodic strategy reports on the fixed income markets, including Bond Market Weekly and Alpha Advisor. Previously, he spent five years at Legg Mason as a fixed income

strategist and 13 years at the Federal Deposit Insurance Corporation in bank supervision. His FDIC career included roles as a bank examiner, bond analyst, and senior capital markets specialist.

Mr. DeMasi has a B.S. in Finance from West Virginia University. He is also a CFA charter holder and member of the Baltimore Security Analyst Society.

9Fall 2020

CAN YOU HEAR THE MUSIC PLAYING FOR GROWTH STOCKS?The theme throughout the Fall Navigator is understanding and distinguishing “noise” in the stock market against the harmonic “signals” that emanate from the economics of the companies one owns.

For dividend paying stocks, the signals investors focus on are their companies’ cash generating abilities coupled with balance sheet quality which allow dividends to be paid to their shareholders.

Growth stocks have signals as well. Like dividend paying stocks, growth stocks also rely on cash earnings but instead of paying dividends, growth companies reinvest their cash back into the business to generate more growth. However, the music that makes growth stocks “sing” and appreciate in price is a function of sales growth and high returns on invested capital.

Return on invested capital (ROIC) measures the amount of operating profits, in percentage terms, generated by each dollar invested in the company’s operations. Think of ROIC as a signal that determines how efficiently a company allocates capital to generate returns. If the company’s capital generates a return above its cost of capital, then it is an attractive and value-creating proposition to reinvest excess cash to fund further growth. These companies are designated as having positive Economic Value Added (EVA). If return on invested capital is below the cost of capital it is considered an unattractive, value destroying endeavor to reinvest in further growth. In those circumstances, a company may be better suited to return excess cash back to investors in the form of dividends, share repurchases, and debt reduction. These companies are referred to as having negative EVA. For growth investors however, strong ROIC and EVA create the music they listen for.

Once a company is deemed to earn high returns on capital above their cost of capital, the next step is to calculate the sales growth to determine how long the growth of sales might last. Ideally, companies with business models that capture meaningful competitive advantages over their peers are most likely to have sustained above-average sales growth for a long period of time—possibly a decade or more. This is what ultimately drives growth stock prices higher for the long run.

At EquityCompass, we studied the relationship between sales growth and returns on capital for S&P 500 Index member companies over a ten year period, 2009—2018. We first began by evaluating all index members as of 12/31/2008 that maintained continued inclusion for the next 10 years. The trailing 3-year sales growth and EVA

were then measured for all companies as of the same date. Next all stocks were segregated separately based on their respective sales growth and EVA status, then also collectively based on the intersection of both. This analysis resulted in four unique buckets— stocks with: (1) negative EVA and below average sales growth, (2) negative EVA and above average sales growth, (3) positive EVA and below average sales growth, and (4) positive EVA and above average sales growth.

Between 2009 and 2018, stocks with above-average sales growth, measured over a trailing three-year period, generated a 14.1% average annual return while those with below-average sales growth produced a 12.3% return. Stocks with positive EVA posted a 15.9% annual return and those with negative EVA delivered an 11.3% return. During

Below Average Above AverageSales Growth

15.0% 17.1%

10.9% 11.9%

12.3% 14.1%

Neg

ativ

ePo

siti

ve

Econ

omic

Val

ue A

dd

(EVA

)

All 13.0%

15.9%

11.3%

All

Illustration 1

Next 10-Year Compound Total Returns of S&P 500 Stocks Based on EVA and Sales Growth As of 12/31/2008 | Source: Bloomberg Finance, LP, FactSet Research Systems Inc.

10NAVIGATOR

Chart 1

Source: Bloomberg Finance, LP Based on all S&P 500 stocks as of 12/31/2008 that maintained continued inclusion in the index through 12/31/2018 | Dividends included | All returns annualized.

17.1%

15.0%

13.0%11.9%

10.9%

8%

10%

12%

14%

16%

18%

Positive EVAPLUS AboveAvg. Sales

Growth(34 Stocks)

Positive EVAPLUS BelowAvg. Sales

Growth(48 Stocks)

S&P 500 IndexMembers

(223 Stocks)

Negative EVAPLUS AboveAvg. Sales

Growth(49 Stocks)

Negative EVAPLUS BelowAvg. Sales

Growth(92 Stocks)

10-Year Performance of S&P 500 Stocks12/31/2008 ‒ 12/31/2018

this same period, the S&P 500 Index generated a 13.0% average annual return.

While sales growth and EVA have independently proven to be meaningful for selection on their own merit, they become even more compelling when we collectively view the intersection of both measures. As Illustration 1 shows, stocks with above average sales growth and positive EVA performed the best at +17.1% while those with below average sales growth and negative EVA were the worst at +10.9%. Once again, a company earning returns above the cost of capital—along with the revenue to sustain it for a long period of time—may be the keys to increasing shareholder value for growth stocks.

Timothy M. McCann is Senior Portfolio Manager for the EquityCompass Core portfolios and Select Quality Growth & Income. Tim is responsible for managing quantitative equity portfolios, investment research, and new product development. He joined the Legg Mason equity marketing department in 2002 as a quantitative analyst and arrived at Stifel as part of the acquisition of

Legg Mason’s Capital Markets Group in December 2005. He led the efforts to develop, refine, and implement the EquityCompass proprietary quantitative models and rules-based investment strategies. He was appointed Portfolio Manager in 2006 and promoted to Senior Portfolio Manager in 2008 overseeing all EquityCompass tactical portfolios. Previously, he worked for a Boston-based financial advisory firm, Morgan Stanley, and UBS Securities (via PaineWebber) in various positions. Tim has a B.A. in business from The College of Notre Dame of Maryland.

11Fall 2020

TAX-LOSS SELLING—DON'T WAIT UNTIL DECEMBERWhile many, if not most, investors wait until mid-to-late December to realize losses for tax purposes, our research suggests they may want to consider doing so much earlier. A tax-loss sale, also known as tax-loss harvesting, is the practice of selling securities for a capital loss in order to offset capital gains and reduce the current year’s tax burden. In many instances, but not all, investors harvest losses typically late in the year with the intention of repurchasing the security after 30 days. Repurchasing the shares, or “substantially similar” securities, before the 30-day period—known as the “wash sale” rule—could disallow the loss.

Tax-loss selling, however, is sort of a “double-edged sword.” On one hand investors have an opportunity to

potentially reduce their tax liability. Unfortunately, this “opportunity” comes as a result of a poor investment. Additionally, angst over a potential lost gain in the position while waiting to repurchase the shares can challenge confidence in the prudency of the decision. We studied the performance of a large set of U.S. stocks over a 17-year period to determine if it would help provide guidance on the decision and timing of this activity.

“Buying low and selling high” is sometimes easier said than done. One concern of selling a position that has already substantially declined is the potential for the stock to “mean revert” and begin to perform favorably after it is sold. Fear of missing out can be a strong emotional force difficult to reconcile

with the additional objective of reducing one’s tax burden. Given tax-loss selling tends to be a collective activity (i.e., investors engage in the activity at the same time), we attempted to discern trends to help maximize the process. Chart 1 clearly shows stocks that have declined 50% or more through the end of October continued the downward trend through mid-December. However, these stocks also experienced a strong rebound through mid-January the following year. Selling these stocks at the end of October and repurchasing them in mid-December seems more advantageous than delaying the sale another month or so.

Additionally we present the results of our study more comprehensively in Table 1 by analyzing the returns of

86889092949698

100102104106

31-Oct 15-Nov 30-Nov 15-Dec 31-Dec 15-Jan

Average of Stocks Down 50% or More Through Oct-31 Average of All Stocks

(-8.1%)+0.7%

+4.8%(-2.6%)+0.8%

+0.3%+1.4%

(-0.2%)+2.5%

(-0.2%)

Chart 1

Average Returns After October 31 Source: EquityCompass

Each investors’ situation is unique. Investors should consult their financial advisor and tax professional to determine if tax-loss selling is suitable for them. EquityCompass Strategies does not provide tax advice and this report should not be viewed as such. This report outlines a study of U.S. listed stocks over a specific 17-year period that may or may not reflect the actual outcomes of any subsequent or historical period, nor is representative of all investment types.

12NAVIGATOR

YTD Stock Returns Through The End of October

Number of Observations

Avg. YTD Return Through Oct-31

Oct-31 toNov-15

Nov-15 toNov-30

Nov-30 toDec-15

Dec-15 toDec-31

Dec-31 toJan-15

Advance 0%–10% 5,365 5.0% 0.6% 1.8% 0.3% 1.6% 0.0%Advance 10% to 20% 4,722 14.9% 0.7% 1.9% 0.2% 1.6% 0.5%Advance 20% to 30% 3,420 24.6% 0.6% 2.1% 0.2% 1.7% 0.6%Advance 30% to 40% 2,183 34.6% 0.9% 2.2% -0.1% 2.0% 1.2%Advance 40% to 50% 1,539 44.7% 1.0% 2.3% -0.1% 1.8% 1.9%Advance more than 50% 3,456 94.7% 1.7% 2.1% 0.3% 2.6% 2.6%Any Advance 20,686 31.6% 0.9% 2.0% 0.2% 1.9% 0.9%Decline 0%–10% 4,852 -4.8% 0.5% 1.8% 0.0% 1.7% -0.2%Decline 10% to 20% 3,324 -14.7% 0.0% 1.9% -0.3% 2.5% -0.5%Decline 20% to 30% 2,219 -24.6% -0.4% 2.1% -1.0% 3.0% -0.3%Decline 30% to 40% 1,463 -34.5% -1.9% 2.0% -1.2% 3.5% -1.3%Decline 40% to 50% 979 -44.8% -2.6% 1.0% -2.0% 3.6% -1.2%Decline more than 50% 1,554 -65.5% -6.7% 1.6% -2.0% 4.8% 2.0%Any Decline 14,391 -22.4% -1.0% 1.8% -0.7% 2.7% -0.2%

All Stocks (Advance or Decline) 35,077 9.4% 0.1% 1.9% -0.2% 2.2% 0.5%

Average Subsequent ReturnsDecember 31, 2002 through 2019 (17 years)

Timothy M. McCann Senior Portfolio Manager

Illustration 1

Average Returns After October 31 Excludes Dividends | Based on stocks in the Russell 3000 Index as of year-end that were also covered by EquityCompass | Source: EquityCompass, FactSet Research Systems Inc.

stocks year-to-date as of the end of October and then subsequent returns in halfmonth intervals thereafter. This table analyzes stocks that have declined and advanced through the end of October.

Our study concludes, stocks that performed well through October continued to advance, while those that had been in a decline continued their downward momentum.

During the 17-year time period analyzed, the more a stock was down through the end of October, the greater the continued loss through mid-December.

13Fall 2020

NOISE TRADERS AND INFORMATION TRADERSIn July 1948, the mathematician Claude E. Shannon published a ground breaking paper for the Bell System Technical Journal titled “A Mathematical Theory of Communication.” Shannon wrote, “The fundamental problem of communication is that of reproducing at one point, either exactly or approximately, a message selected at another point.” 1 In other words, communication theory is very much about getting information, accurately and completely, from point A to point B.

What is the communication system of investing? It is the stock market— stock prices that continually produce messages or sequences of messages. The transmitters of information include analysts, writers, reporters, advisors, portfolio managers, television reporters, and anyone else who is moved to relate information happening in the stock market. The channel might be the television, radio, Internet, websites, newspapers, magazines, journals, analysts’ reports, and even casual conversations passing information from the transmitter to the receiver. The investor’s mind—the receiver—works to reconstruct and process the meaning in all the signals produced by the transmitter and shipped by the channel. The final destination—the investor’s portfolio—reconstructs the information and acts on it.

As outlined in our opening commentary, “Who is On the Other Side of the Trade?” because of the multiple and varied stock picking strategies simultaneously occurring in the stock market, the messaging of the communication system (the stock market) has become more “noise” than “signal.”

Fischer Black was an American economist trained at Harvard. He studied with Marvin Minsky and collaborated with Jack Treynor—two prominent intellectuals who worked to untangle the noise that occurs in both the economy and the stock market. In

1986, Fischer Black delivered the presidential address to the American Finance Association. In his talk, titled simply “Noise,” this well respected academician fearlessly took exception with his colleagues and challenged the widely accepted thesis that prices are efficient. Rather than pure information leading to rational prices, Black believed that most of what is heard in the market is noise, leading to confusion which, in turn, further escalates the level. “Noise,” said Black, “is what makes our observations imperfect.” 2 The net effect of noise in the system, he explained, makes prices less informative for investors as a guide to understanding intrinsic value.

According to Black, “noise trading is trading on noise as if it is information.” 3 In the stock market, there are uninformed investors who look upon noise as if it is information. We have come to learn, noise traders, as a group, typically lose money by not only trading too much but trading on what they perceive to be information while in actuality is reverberating noise.

In addition to “noise traders,” there are also “information traders” in the stock market.

When the market is composed largely of noise traders, it pays to trade on information. Indeed, as the amount of noise increases in the system—the stock market—it increases the profitability for investors to trade on information. Over time, it has been discovered that informed investors can be expected to be well compensated for identifying the inefficiencies caused by uninformed noise traders.

To overcome noise in the communication system, Claude Shannon recommended a “correction device” be placed between the receiver (the investor’s mind) and the destination (the investor’s portfolio). The correcting device would take information from the

channel (i.e., financial news, media, etc.), separate out the noise, and then reconstruct the message so the information most needed arrives correctly to the destination— one’s investment portfolio.

Shannon’s correction system is a perfect metaphor for how we believe investors should process information. The correction device investors need is to focus on the economics of the business one owns rather than obsessing over the stock prices one owns. This correction device filters out the garbled signal that comes from the channel and reconfigures it into the information that is most needed. The measuring stick investors should focus on is the economic progress of their investments.

For investors who own dividend paying stocks, the measuring stick they must focus on is the ability of their companies to pay not only the current dividend but to increase the payout ratio over time. For investors who own growth stocks, the measuring stick is growth in sales concurrent with the ability to reinvest at high rates of return on invested capital. The economic measuring stick for both dividend paying stocks and growth stocks is the key to understanding the growth in intrinsic value of one’s investment over time—not short-term, stock price noise.

At EquityCompass, our investment mantra is know what you own and why you own it. We strongly believe if investors focus on the economics of what they own knowing full well that, over time, the stock market will fairly weight economics, the pathway for investing should be far more successful.

Robert G. Hagstrom, CFA Chief Investment Officer

Senior Portfolio Manager

[1] Shannon, Claude. “A Mathematical Theory of Communication,” The Bell System Technical Journal, (July, 1948): 379-423. [2] Fisher Black, quoted in Peter L. Bernstein, Capital Ideas: The Improbable Origins of Wall Street, (The Free Press: New York, 1992), p. 124. [3] Ibid.

14NAVIGATOR

INVESTMENT PORTFOLIOS

Strategies are based on fundamental, technical, and behavioral insights evolving from the empirical research conducted by EquityCompass professionals since 2001.

We follow a rules-based investment process for portfolio construction and risk control strategies overseen by the Chief Investment Officer, while Senior Portfolio Managers focus on quantitative and qualitative research for stock selection appropriate to the various investment strategies.

EquityCompass is committed to providing full transparency on investment decision-making so that financial advisors and investors can assess risk and return potential.

For updated performance and portfolio statistics, contact your Financial Advisor.

Investment Portfolios Inception Description

Multi-Strategy Asset Allocation

Core Retirement Portfolio (CRP) November 2015

Comprehensive stock/bond portfolio that seeks to provide reliable income and capital appreciation to fund lifetime retirement withdrawals.

Core Investment Portfolio (CIP)

Core Investment Portfolio — Tax-Advantaged (MCIP)

January 2018

Comprehensive stock/bond portfolio that seeks to provide long-term capital appreciation while helping to mitigate risk from bear market drawdowns. With MCIP, the fixed income component, 25% of the total portfolio, is allocated to municipal strategies and tax-advantaged investments.

Core Balanced Portfolio (CBAL)

Core Balanced Portfolio — Tax-Advantaged (MCBAL)

June 2009

January 2010

Stock/bond strategy that seeks to effectively capture market returns while minimizing volatility. With MCBAL, the fixed income component, 40% of the total portfolio, is allocated to municipal strategies and tax-advantaged investments.

Global Equity

Global Leaders Portfolio (GLP) July 2014 Focused portfolio of leading global companies positioned to benefit from the unprecedented growth in worldwide consumer demand.

U.S. Equity

Quality Dividend (QDIV) January 2006

Diversified strategy of high-quality, high-yielding stocks that integrates quantitative and qualitative approaches.

High-Dividend Portfolio (HDP) September 2017

Diversified strategy of common and preferred stocks that seek to generate a high level of current income with dividend growth to cover inflation and a yield that is competitive with U.S. high-yield bond benchmarks.

Select Quality Growth & Income (SQLT)

January 2006

Sector balanced strategy investing in high-quality, underpriced stocks that we believe have favorable value and price momentum characteristics.

15Fall 2020

CORE RETIREMENT PORTFOLIO

Highlights

Growth-oriented asset allocation

Targets a 75/25 stock/bond allocation for higher growth prospects than available through generationally low bond yields

Equity allocation focuses on high-quality large-cap stocks to seek income and growth with lower volatility

Seeks to generate income through high-dividend-paying stocks

Provides diversification and opportunity through global equity exposure

Tactical equity allocation helps mitigate the impact of large stock market declines by reducing equity exposure

Helps respond to market conditions and longer-term trends

Objective

A multi-strategy approach designed to fund retirement withdrawals by addressing four essential needs: (1) income, (2) capital appreciation, (3) stability, and (4) risk mitigation.

Portfolio Characteristics

Current Portfolio Allocation (as of 8/14/2020)

Holdings By Market Cap—Equity

Top Portfolio Holdings By Weight—Equity

Sector Allocation — Equity

Fixed Income Stats

Fixed Income 25%

Equity 75%

For illustrative purposes only and not intended as personalized recommendations. The yield information included is as of the period indicated and should not be considered a recommendation to purchase, hold, or sell any particular security. There is no assurance that any of the yields noted will remain and may vary over time. The specific securities identified and described herein do not represent all of the securities purchased, sold, or recommended to advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. A complete list of all recommendations made by the firm is available upon request.

As of 6/30/2020

%

Information Technology 21.39

Financials 12.26

Consumer Discretionary 11.60

Consumer Staples 11.33

Health Care 10.92

Industrials 8.45

Communication Services 7.98

Energy 5.92

Utilities 4.58

Real Estate 2.90

Materials 2.67

Portfolio

Wtd. Avg. Coupon 1.61

Wtd. Avg. Maturity 3.03

Effective Duration 2.81

Wtd. Avg. Div Yield 0.81

Investment Grade or Above (%) 99.88

%

Large Cap - > $10 bn (%) 91.46

Mid Cap - $3.5 - $10 bn (%) 6.91

Small Cap - < $3.5 bn (%) 1.63

%

Invesco Russell 1000 Equal Weight ETF 10.17

SPDR S&P 500 ETF Trust 9.55

QUALCOMM Incorporated 2.37

PayPal Holdings Inc 2.06

Amazon.com, Inc. 1.68

Alphabet Inc. Class A 1.60

Digital Realty Trust, Inc. 1.48

Apple Inc. 1.43

Gilead Sciences, Inc. 1.41

Estee Lauder Companies Inc. Class A 1.33

Inception November 1, 2015

Number of Holdings 58Benchmark

Annual Turnover - 2019 (%) 18.1

25% Russell 1000 Value TR

25% Barclays U.S. Intermediate Aggregate Bond Index25% HFRI Equity Hedge Index25% MSCI ACWI Index

All charts and tables are calculated by EquityCompass using data provided by FactSet Research Systems, Inc.

16NAVIGATOR

CORE INVESTMENT PORTFOLIO

Highlights

Actively managed, equity-centric portfolio with 75% dedicated to long-term appreciation

Above-average allocation to stocks with exposure to rapidly growing foreign markets

Exposure to large cap global and emerging market stocks as well as small- and mid cap U.S. stocks

Broadly diversified across major economic sectors


Helps to be responsive to market conditions to mitigate significant losses

High-quality fixed income allocation to provide modest income and reduce exposure to volatility over time

Low-to-moderate turnover offering lower investment costs and consideration of tax consequences

Objective

A multi-strategy wealth accumulation approach designed to provide long-term capital appreciation while helping to mitigate risk during bear market drawdowns






Fixed Income Stats


As of 6/30/2020

Fixed Income 25%

Equity 75%

%




Financials 12.84

Health Care 10.25


Industrials 7.06

Materials 2.37

Utilities 2.25

Energy 1.96

Real Estate 1.88

Portfolio






%

Large Cap - > $10 bn (%) 84.68

Mid Cap - $3.5 - $10 bn (%) 6.79

Small Cap - < $3.5 bn (%) 8.54

%

iShares Russell 2000 ETF 4.90


Vanguard FTSE Emerging Markets ETF 4.46

iShares MSCI EAFE ETF 4.35


LVMH Moet Hennessy Louis Vuitton SE 1.61

QUALCOMM Incorporated 1.53



Kroger Co. 1.30

Inception January 1, 2018



25% HFRI Equity Hedge Index25% MSCI ACWI Index25% S&P 500 TR

25% Barclays Intermediate US Govt/Credit Index


17Fall 2020

CORE INVESTMENT PORTFOLIO — TAX-ADVANTAGED

Highlights Objective

A multi-strategy wealth accumulation approach designed to provide long-term capital appreciation while helping to mitigate risk during bear market drawdowns






Fixed Income Stats

Actively managed equity-centric portfolio with 75% dedicated to long-term appreciation

Above-average allocation to stocks with exposure to rapidly growing foreign markets

Exposure to large cap global and emerging market stocks as well as small and mid cap U.S. stocks

Broadly diversified across major economic sectors


Helps to be responsive to market conditions to mitigate significant losses

High-quality fixed income allocation with favorable tax treatment

Low-to-moderate turnover offering lower investment costs and consideration of tax consequences


As of 6/30/2020

Fixed Income 25%

Equity 75%

%




Financials 13.07

Health Care 10.29


Industrials 7.10

Materials 2.40

Utilities 2.28

Energy 1.97

Real Estate 1.92

Portfolio









25% HFRI Equity Hedge Index25% MSCI ACWI Index25% S&P 500 TR

25% Barclays Muni Managed Money Short/Intermediate

%

Large Cap - > $10 bn (%) 84.47

Mid Cap - $3.5 - $10 bn (%) 6.87

Small Cap - < $3.5 bn (%) 8.66

%

iShares Russell 2000 ETF 5.00








Kroger Co. 1.33

Brookfield Asset Management Inc. Class A 1.24


18NAVIGATOR

CORE BALANCED PORTFOLIO

Highlights

A balanced 60/40 stock/bond asset allocation portfolio

Equity allocation, diversified across U.S./international, economic sectors, investment styles, active and passive management, and market capitalization, to provide growth potential

Actively managed fixed income allocation focusing on high credit quality and reducing interest rate risk to minimize portfolio volatility

Stock/bond allocation reviewed annually and adjusted, if necessary, to respond to changing market conditions

Tactical equity manages equity exposure by seeking to reduce portfolio volatility and provide protection from extended market declines

Adheres to a research-based, rules-driven investment process implemented using quantitative models to impose discipline and consistency to investment decisions

Objective

An asset allocation strategy that seeks to effectively capture market returns while minimizing exposure to volatility and providing downside risk mitigation.






Fixed Income Stats


Fixed Income 40%

Equity 60%

As of 6/30/2020

%


Health Care 16.88

Industrials 12.23

Financials 9.74




Materials 4.69

Utilities 3.84

Energy 2.93

Real Estate 2.04

Portfolio Benchmark

Wtd. Avg. Coupon 1.62 3.15

Wtd. Avg. Maturity 3.04 7.84

Effective Duration 2.82 5.79

Wtd. Avg. Div Yield 0.81 2.69

Inv. Grade or Above (%) 99.88 100.00

%

Large Cap - > $10 bn (%) 83.51

Mid Cap - $3.5 - $10 bn (%) 12.88

Small Cap - < $3.5 bn (%) 3.61

%SPDR S&P 500 ETF Trust 16.20



NIKE, Inc. Class B 0.98

Microsoft Corporation 0.94

Teladoc Health, Inc. 0.90

Corcept Therapeutics Incorporated. 0.89

Fastenal Company 0.86

Facebook, Inc. Class A 0.85

Apple Inc. 0.81

Inception June 1, 2009



20% HFRI Equity Hedge Index8% MSCI World ex-U.S. Index32% Russell 3000 Index

40% Barclays Aggregate Bond Index


19Fall 2020

CORE BALANCED PORTFOLIO — TAX-ADVANTAGEDHighlights Objective

Seeks to effectively capture market returns while minimizing exposure to volatility; allocates the fixed income component to municipal bonds appropriate for tax-sensitive investors






Fixed Income Stats

Stock and bond portfolio designed to be the foundation of an investor’s overall portfolio to pursue long-term financial objectives

Strategic stock/bond allocation is reviewed annually, and adjusted if necessary, to better respond to changing market conditions

Tactically allocated equity (using Equity Risk Management Strategy) seeks to potentially provide downside risk mitigation and help control exposure to volatility

Portfolio is diversified across asset classes, active and passive investment approaches, domestic and international stocks, investment styles, and market capitalizations

The actively managed U.S. equity component seeks to outperform by opportunistic stock selection and portfolio tactics

Adheres to a research-based, rules-driven investment process implemented using quantitative models to impose discipline and consistency to investment decisions


As of 6/30/2020

Fixed Income 40%

Equity 60%




40% Barclays Municipal Bond Index20% HFRI Equity Hedge Index8% MSCI World ex-U.S. Index32% Russell 3000 Index

%


Health Care 16.59

Industrials 12.35

Financials 9.70




Materials 5.30

Utilities 4.08

Energy 3.00

Real Estate 1.98

Portfolio Benchmark

Wtd. Avg. Coupon 4.28 4.68

Wtd. Avg. Maturity 8.66 7.89

Effective Duration 4.73 6.03

Wtd. Avg. Div Yield 2.07 2.29

Inv. Grade or Above (%) 91.80 100.00

%

Large Cap - > $10 bn (%) 82.90

Mid Cap - $3.5 - $10 bn (%) 13.35

Small Cap - < $3.5 bn (%) 3.75

%SPDR S&P 500 ETF Trust 14.56



Ecolab Inc. 0.94


Corcept Therapeutics Incorporated. 0.92


Teladoc Health, Inc. 0.90

Fastenal Company 0.88

Facebook, Inc. Class A 0.84


Highlights

Holdings By Market Cap

Invests globally in efforts to benefit from the economic expansion of developing countries and the potentially unprecedented growth in worldwide consumer demand

By 2025, it is estimated that there will be 4.2 billion middle class consumers worldwide—nearly twice as many as in 2010—with purchasing power of $64 trillion

This unprecedented expansion of the world’s middle class, according to McKinsey & Company, is the biggest growth opportunity in the history of capitalism*

Invests in Great Companies which we define as those that:

Produce cash in excess of operating needs that generate a return on invested capital above the cost of capital

Provide stable and consistent returns with the opportunity to compound shareholder value over the long term

Portfolio Strategy

Concentrated, low turnover profile of high-quality global businesses

Seeks to mitigate risk associated with investing directly in emerging market stocks by instead investing in developed economy multinational companies that sell products and services into developing emerging markets

Seeks to provide tax-advantaged returns by minimizing realized short-term taxable gains, while maximizing the benefit of compounding unrealized long-term capital gains

* Winning The $30 Trillion Decathlon: Going for Gold in Emerging Markets, McKinsey & Company, August 2012.† Portfolio weighted average

20NAVIGATOR

GLOBAL LEADERS PORTFOLIO


Objective

Focused portfolio of leading global companies designed to benefit from the unprecedented growth in worldwide consumer demand


Sector Allocation

Geographic Breakdown

Top Portfolio Holdings By Weight

As of 6/30/2020

65.6%8.3%

7.6%

7.6%

4.4%4.0%

2.5%

United StatesUnited KingdomFranceSwitzerlandHong KongCanadaNetherlands

65.6%8.3%

7.6%

7.6%

4.4%4.0%

2.5%


65.6%8.3%

7.6%

7.6%

4.4%4.0%

2.5%


%



Apple Inc. 6.34

Mastercard Incorporated Class A 5.21

Nestle S.A. 4.87



BlackRock, Inc. 4.43

Estee Lauder Companies Inc. Class A 4.39

Unilever PLC 4.24

%

Large Cap - > $10 bn (%) 100.00

Mid Cap - $3.5 - $10 bn (%) --

Small Cap - < $3.5 bn (%) --

Inception July 1, 2014

Number of Holdings 25

Benchmark MSCI ACWI Index

Avg. Dividend Yield (%) 1.4

Avg. Market Cap. ($ Billion)† 377.4

Price / Earnings (1-yr. forecast) 31.6x


%




Financials 12.12


Health Care 3.25

Industrials 2.46


Highlights


Top Portfolio Holdings By Yield

The strategy has three goals:

Invests in stocks based on the following criteria:

Quantitative model selects portfolio candidates based on quality, momentum, valuation, and timeless criteria

Portfolio managers provide insights that leverage fundamental research

Diversified across industry sectors with a sector maximum of 20%

1Seeks To

Provide Asset Preservation

2Seeks To Generate Attractive Current

Income

3Develop

Growth in Current Income

21Fall 2020

QUALITY DIVIDEND PORTFOLIO


Objective

Focused portfolio of high-quality, high-yielding stocks that seeks to provide the highest possible dividend yield within the constraints of quality, capital preservation, and diversification


Sector Allocation

* Portfolio weighted average † Uncertainty regarding corporate earnings due to the impact of the COVID-19 pandemic may have a material impact on estimated dividend payout ratios.

As of 6/30/2020

%

Health Care 19.13

Energy 13.58


Financials 12.64

Industrials 11.72


Utilities 7.90

Real Estate 5.13


Materials 3.00

%

Large Cap - > $10 bn (%) 95.74

Mid Cap - $3.5 - $10 bn (%) 4.26

Small Cap - < $3.5 bn (%) --

%

Exxon Mobil Corporation 7.78

Enbridge Inc. 7.58

Prudential Financial, Inc. 6.90

AT&T Inc. 6.81

Philip Morris International Inc. 6.68

Valero Energy Corporation 6.39

International Paper Company 5.72

Chevron Corporation 5.56

International Business Machines Corporation 5.37

Truist Financial Corporation 4.79



Benchmark Russell 1000 Value TR

Avg. Dividend Yield (%) 4.9%

Avg. Market Cap. ($ Bln.)* 99.2

Price/Earnings (1-yr. forecast) 14.4x

Payout Ratio - 1-yr. forecast† 94.3

S&P Debt Rating 100% Inv. Grade

Dividend Growth - 2020 YTD 4.6%

Annual Turnover - 2019 17.3%


Highlights


Top Portfolio Holdings By Weight

Seeks to generate returns above the broader market without taking undue risk.

The strategy combines selective Portfolio Manager qualitative focus with intensive quantitative analysis to pursue the objectives of capital appreciation and income.

Stock holdings are monitored on an ongoing basis to ensure consistency with the portfolio’s objectives. Changes are also reviewed for tax efficiency.

The portfolio management team has over 35 years combined experience.

The portfolio is best suited for investors with a long-term time horizon.

The strategy has moderate turnover and the dividend yield is expected to be in line with the S&P 500.

22NAVIGATOR

SELECT QUALITY GROWTH & INCOME PORTFOLIO

Objective

Seeks to provide capital appreciation and income through a diversified portfolio of high-quality stocks.


Sector Allocation


† Portfolio weighted average

As of 6/30/2020



Benchmark S&P 500 TR



Price / Earnings (1-yr. forecast) 15.7x


%


Health Care 15.10

Financials 10.89

Industrials 10.18




Utilities 4.03

Energy 2.94

Materials 2.87

Real Estate 2.12

%

Large Cap - > $10 bn (%) 86.16

Mid Cap - $3.5 - $10 bn (%) 10.56

Small Cap - < $3.5 bn (%) 3.29

%

UnitedHealth Group Incorporated 4.57

SS&C Technologies Holdings, Inc. 4.36

Kroger Co. 4.19

Apple Inc. 4.07

Dominion Energy Inc 4.03

E*TRADE Financial Corporation 3.94


Cisco Systems, Inc. 3.86

Constellation Brands, Inc. Class A 3.80

Norfolk Southern Corporation 3.80


23Fall 2020

Highlights


Top Portfolio Holdings By Yield

Cash Flow Alternative to High Yield Corporate Bonds

High corporate debt levels trading at relatively narrow spreads can be indicative of heightened investment risk in that asset class

Developed with this risk in mind, the High-Dividend Portfolio (HDP) is designed to generate a yield similar to high yield corporate bonds, but with higher exposure to investment grade companies

Differentiated Strategy

A unique portfolio for investors desiring a strategy that combines both high yield and broad diversification

Seeks to balance concentration risk and yield in order to derive a cash flow stream well above traditional dividend strategies while maintaining exposure to numerous industry sectors

Proven Investment Process

Combines quantitative and qualitative approaches; screens stocks based on financial and fundamental quality, as well as company means and intent to pay and grow dividends

Managed by dividend-income focused team with extensive credit and portfolio management experience

HIGH-DIVIDEND PORTFOLIO


Objective

Seeks to generate a high level of current income with dividend growth covering inflation and a yield that is competitive with high-yield corporate bonds. Recommended allocation is similar to that of high-yield corporate bonds within a well-diversified investment portfolio.


Sector Allocation

† Portfolio weighted average

As of 6/30/2020

Inception September 1, 2017


Benchmarks

S&P 500 Low Vol High Dvd (SP5LVHDT)

HFRI Yield Alternatives (HFRISRE)



Price / Earnings (1-year forecast) 12.5x


%

Financials 15.74



Utilities 13.80

Health Care 11.81


Real Estate 9.94

Energy 5.67

Materials 2.93

%

Large Cap - > $10 bn (%) 74.25

Mid Cap - $3.5 - $10 bn (%) 19.04

Small Cap - < $3.5 bn (%) 6.70

%

Sixth Street Specialty Lending, Inc. 9.95

Iron Mountain, Inc. 9.48

Omega Healthcare Investors, Inc. 9.01

Altria Group Inc 8.56

Williams Companies, Inc. 8.41

Exxon Mobil Corporation 7.78

AT&T Inc. 6.88

Philip Morris International Inc. 6.68

Huntington Bancshares Inc. 6.64

PPL Corporation 6.42


24NAVIGATOR

Richard E. Cripps, CFASenior Investment Strategist

(443) 224-1231 | [email protected]

Christopher M. MutascioSenior Managing Director


Robert G. Hagstrom, CFAChief Investment Officer, Senior Portfolio Manager(443) 224-1231 | [email protected]

Bernard J. Kavanagh III, CMTSenior Portfolio Manager


Timothy M. McCannSenior Portfolio Manager


Thomas P. Mulroy Senior Portfolio Manager, Executive Vice President


Michael S. SchererSenior Portfolio Manager


Larry Baker, CFASenior Portfolio Advisor


James DeMasi, CFASenior Portfolio Manager


Bobby ThomasDirector of Strategy & Operations


Lauren E. LoughlinAssociate Portfolio Manager


Anthony P. Cersosimo Quantitative Analyst


Samuel W. Cripps Portfolio Analyst


Kenya OverstreetMarketing & Publication Coordinator


EquityCompass Investment Management, LLC (“EquityCompass”) is a Baltimore-based SEC registered investment adviser offering a broad range of portfolio strategies and custom plans for individuals, financial intermediaries, and institutional clients in the U.S. and Europe. Formally organized in 2008, EquityCompass provides portfolio strategies with respect to total assets of approximately $3.8 billion as of August 31, 2020. EquityCompass is a wholly owned subsidiary of Stifel Financial Corp. The EquityCompass team of professionals represents deep industry experience in security analysis, capital markets, and portfolio management. We are committed to a consistent investment process that relies on enduring principles, sound empirical reasoning, and the recognition of a dynamic investment environment with a global reach.

About EquityCompass

Felicia Andrews Administrative Assistant


25Fall 2020

Important Disclosures

EquityCompass Overview: The information contained herein has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data nor is it considered an offer to buy or sell any securities referred to herein. EquityCompass Investment Management, LLC ("EquityCompass") is a wholly owned subsidiary and affiliated SEC registered investment advisor of Stifel Financial Corp. Portfolios based on EquityCompass strategies are available primarily through Stifel, Nicolaus & Company, Incorporated. Affiliates of EquityCompass may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.

Strategy Specific Risks: Any investment involves risks, including a possible loss of principal. Asset allocation does not ensure a profit or protect against loss.

Core Retirement Portfolio. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments. High-dividend paying stocks may carry elevated risks and companies may lower or discontinue dividends at any time. Diversification and/or asset allocation does not ensure a profit or protect against loss. Exchange Traded Funds (ETFs) are subject to market risk, including the possible loss of principal, and may trade for less than their net asset value. ETFs trade like a stock, and there will be brokerage commissions associated with buying and selling exchange traded funds unless trading occurs in a fee-based account. Investors should consider an ETF’s investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

Core Investment Portfolio. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments. Diversification and/or asset allocation does not ensure a profit or protect against loss. Any investment involves risks, including a possible loss of principal. Rebalancing may have tax consequences, which should be discussed with your tax advisor. Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal, and may trade for less than their net asset value. The value of ETFs will fluctuate with the value of the underlying securities. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. Prospectuses are available through your Financial Advisor and include this and other important information.

Core Investment Portfolio—Tax-Advantaged. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments. Diversification and/or asset allocation does not ensure a profit or protect against loss. Any investment involves risks, including a possible loss of principal. Rebalancing may have tax consequences, which should be discussed with your tax advisor. Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal, and may trade for less than their net asset value. The value of ETFs will fluctuate with the value of the underlying securities. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. Prospectuses are available through your Financial Advisor and include this and other important information.

Core Balanced Portfolio. On September 21, 2018, the name of the Tactical Total Core Portfolio was changed to Core Balanced Portfolio. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. The market risk associated with small-cap and mid-cap stocks is generally greater than that associated with large-cap stocks because small-cap and mid-cap stocks tend to experience sharper price fluctuations than large-cap stocks, particularly during bear markets. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. In addition, duration risk measures a debt security’s price sensitivity to interest rate changes. Bonds with higher duration carry more risks and have higher price volatility than bonds with lower duration. Therefore, if interest rates are very low at the time of purchase of the bonds, when interest rates eventually do rise, the price of such lower interest rate bonds will decrease and anyone needing to sell such bonds at that time, rather than holding them to maturity, could realize a loss. When investing in real estate, it is important to note that property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal, and may trade for less than their net asset value. The value of ETFs will fluctuate with the value of the underlying securities. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. Prospectuses are available through your Financial Advisor and include this and other important information.

Core Balanced Portfolio—Tax-Advantaged. On September 21, 2018, the name of the Tactical Total Core—Municipal Portfolio was changed to Core Balanced Portfolio—Tax Advantaged. Fixed income securities are subject to credit risk, interest rate risk, and liquidity risk. In addition, municipal bonds are also subject to state-specific risks, such

as changes in the issuing state’s credit rating, as well as the risk that legislative changes may affect the taxable status of such bonds. Municipal bonds may also have a call feature, entitling the issuer to redeem the bond prior to maturity. Please note, as interest rates rise, bond prices will fall. The market risk associated with small-cap and mid-cap stocks is generally greater than that associated with large-cap stocks because small-cap and mid-cap stocks tend to experience sharper price fluctuations than large-cap stocks, particularly during bear markets. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal, and may trade for less than their net asset value. The value of ETFs will fluctuate with the value of the underlying securities. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. Prospectuses are available through your Financial Advisor and include this and other important information.

High-Dividend Portfolio. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. The market risk associated with small-cap and mid-cap stocks is generally greater than that associated with large-cap stocks because small-cap and mid-cap stocks tend to experience sharper price fluctuations than large-cap stocks, particularly during bear markets. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments. High-dividend paying stocks may carry elevated risks and companies may lower or discontinue dividends at any time. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Rebalancing may have tax consequences, which should be discussed with your tax advisor. Foreign securities potentially entail special risks such as less liquid markets; political and economic instability; lax regulation; and adverse fluctuations in currency exchange rates. Real estate investing is subject to special risks, including tenant default, declining occupancy rates, adverse changes in environmental and zoning regulations, and falling property values and rents due to deteriorating local or national economic conditions. REIT securities listed on a securities exchange may be subject to abrupt or erratic price movements because of interest rate changes and other factors. Non-listed REIT securities may lack sufficient liquidity to enable the Fund to sell them at an advantageous time or to minimize a loss. Distributions from REITs may include a return of capital. A REIT that does not qualify as a REIT under the Internal Revenue Code (“IRC”) will pay taxes on its earnings, which will reduce the dividends paid by the REIT to the Fund. Some REITs are highly leveraged, which may increase the risk of loss.

Global Leaders Portfolio. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Rebalancing may have tax consequences, which should be discussed with your tax advisor.

Quality Dividend Portfolio. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments.

Select Quality Growth & Income Portfolio. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. The market risk associated with small-cap and mid-cap stocks is generally greater than that associated with large-cap stocks because small-cap and mid-cap stocks tend to experience sharper price fluctuations than large-cap stocks, particularly during bear markets. Due to their narrow focus, sector-based investments typically exhibit greater volatility and are generally associated with a high degree of risk.

Equity Risk Management Strategy. Some investments involve unique risks, for example, mutual funds and Exchange Traded Funds (“ETFs”) are subject to the risk that the values will fluctuate with the value of the underlying investments. Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal, and may trade for less than their net asset value. The value of ETFs will fluctuate with the value of the underlying securities. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. Prospectuses are available through your Financial Advisor and include this and other important information.

EquityCompass Benchmark Index Descriptions:

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The S&P 500 Total Return Index tracks both the capital gains of the stocks in the S&P 500 Index over time, and assumes that any cash distributions, such as dividends, are reinvested back into the index. Looking at an index's total return displays a more accurate representation of the index's performance. By assuming dividends are reinvested, you effectively have accounted for stocks in an index that do not issue dividends and instead, reinvest their earnings within the underlying company.

The S&P 500 Low Volatility High Dividend index measures the performance of the 50 least-volatile high dividend-yielding stocks in the S&P 500. The index is designed to serve as a benchmark for income-seeking investors in the U.S. equity market.

The Russell 1000 Index, a subset of the Russell 3000 Index, represents the 1000 top companies by market capitalization in the United States.

The Russell 1000 Value Index measures the performance of those Russell 1000 index companies with lower price-to-book ratios and lower forecasted growth values.

26NAVIGATOR

27Fall 2020

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Bloomberg Barclays Municipal Bond Index measures the performance of the U.S. municipal bond market. It is composed of approximately 1,100 bonds; 60% of which are revenue bonds and 40% of which are state government obligations.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

The Bloomberg Barclays U.S. Intermediate Aggregate Bond Index measures the performance of the U.S. investment grade bond market while removing the longer maturity portions of the broad market benchmarks. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States --- including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

The Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Barclays Municipal Managed Money Short/Intermediate Index is a rules-based, market-value-weighted index engineered for the tax-exempt bond market. To be included in the index, bonds must be rated Aa3/AA- or higher by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Aa3/AA-. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have been issued within the last five years, and must be at least one year from their maturity date. AMT, hospital, housing, tobacco, and airline bonds, along with remarketed issues, taxable municipal bonds, floaters, and derivatives, are excluded from the benchmark.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). Indices are unmanaged, do not include fees and expenses, and it is not possible to invest directly in an index.

The HFRI Equity Hedge (Total) Index (HFRIEHI) is a fund-weighted index of strategies that maintain positions both long and short in primarily equity and equity derivative securities.

The HFRI Yield Alternatives Index is a is a fund‐weighted index of select hedge funds that employ an investment thesis predicated on realization of a spread between related instruments in which one or multiple components of the spread contains a derivative, equity, real estate, MLP or combination of these or other instruments.

MSCI All Country World Index captures large and mid cap representation across 23 Developed Markets and 21 Emerging Market countries. The index returns are presented on a total return basis, which assume reinvestment of all cash distributions (such as dividends). With 2,434 constituents, the index covers approximately 85% of the global investable equity opportunity set.

Indices are unmanaged, do not reflect fees and expenses, and are not available for direct investment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments. Diversification and/or asset allocation does not ensure a profit or protect against loss. Rebalancing may have tax consequences, which should be discussed with your tax advisor.

The holdings list presented in these materials is for illustrative purposes only and is not intended as a personalized recommendation to a particular investor, nor is it intended as a guarantee of the success of the listed positions. All performance results presented are done solely for educational and illustrative purposes and are not intended for trading, or to be considered investment advice. No representation is made that any Strategy, model, or model mix will achieve results similar to those shown in these materials. The information provided should not be considered a recommendation to purchase, sell, or hold a particular security. There is no assurance, as of the date of this publication, that the securities purchased remain in the portfolio or that securities sold have not been repurchased. The securities purchased do not represent the entire portfolio and in the aggregate, may represent a small percentage of the portfolio.

*Total assets combines both Assets Under Management and Assets Under Advisement as of August 31, 2020. Assets Under Management represents the aggregate fair value of all discretionary and non-discretionary assets, including fee paying and non-fee paying portfolios. Assets Under Advisement represent advisory-only assets where the firm provides a model portfolio and does not have trading authority over the assets.

PAST PERFORMANCE CANNOT AND SHOULD NOT BE VIEWED AS AN INDICATOR OF FUTURE PERFORMANCE.

Additional Information Available Upon Request

© 2020 EquityCompass Investment Management, LLC, One South Street, 16th Floor, Baltimore, Maryland 21202. All rights reserved.

EquityCompass Investment ManagementOne South Street, 16th Floor Baltimore, Maryland 21202

www.equitycompass.com (443) 224-1231

email: [email protected]

Date post:	01-Mar-2022
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Fall 2020 Navigator - EquityCompass

Documents