Large Cap Growth Strategy Presentation
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Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Large-Cap Growth Strategy
8 West 40th Street , 19th Floor, New York, NY 10018 ● 800.524.LEEB (5332) ● 212.653.1504 phone ● 212.246.3696 fax ● www.leebcapital.com
Contents
I. II. Firm Overview Investment Philosophy Page 3 Page 6 Page 7 Page 10 Page 16
III. Investment Strategy & Process IV. Portfolio Construction V. Appendix
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 2
Why Leeb Capital Management?
• Recognized Thought Leadership: Identification of Critical Mega-Trends and Translation to Investment Performance – Dr. Leeb is the author of eight books, including a NY Times Best Seller. He also sits on various corporate boards where he shares his strategic perspectives on financial markets and natural resources. Extensive Experience: Reputable Investment Committee and Established Methodologies – LCM’s talented Investment Committee employs a disciplined investment process with the goal of outperforming over a complete market cycle. – The Investment Committee utilizes risk controls to improve the portfolio’s risk/reward profile as well as maintain diversification. Impressive Performance: Favorable Long-Term Returns Relative to Comparable Indices, Peers, and Risk* – LCM’s performance track record, which is verified by a reputable outside firm, places it in the upper echelon of similar managers. – Strong returns with a lower risk profile: LCM’s Large-Cap Growth strategy has historically outperformed the S&P 500 in both up and down trending markets since its inception (March 1999). Attentive Customer Service: Comprehensive Portfolio Management, Investment Advice, and Service – Multiple strategies, including Large-Cap Growth, Peak Resources & Energy, and Income & Growth.
•
•
•
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Supplement for full performance information and important disclosures. Page 3
Leeb’s Thought Leadership in Mega-Trends
Advisory: • Head of Advisory Board for Leor Exploration & Production, LLC; Among transactions, sold energy business to Encana for $2.55 billion. • Advisory Board member of Electrum USA Ltd., one of the world’s largest privately held gold exploration companies, and Sunshine Silver Mines Corp., a privately held silver exploration company. Author: “The U.S. dollar is already vulnerable because of our dependency on other nations for basic materials. Out-of-control government spending will foster the perception that the United States is financially irresponsible, making foreigners lose confidence in the dollar.” Game Over: How You Can Prosper in a Shattered Economy (2009) “Prices will likely reach at least $100 a barrel before the decade is out.” – “In fact, there is good reason to think that within a fairly short time, gold, which in the 1990’s was one of the dismal investments around, will be soaring. It’s not far-fetched to think that within a few years gold may reach $1,000 an ounce.” The Oil Factor: Protect Yourself—And Profit— from the Coming Energy Crisis (2004) “For almost two decades, high-tech stocks have soared. But technological progress is slowing, and this slowdown will intersect with other key worldwide trends to create new boom markets.” Defying the Market: Profiting in the Turbulent Post-Technology Market Boom (1999)
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 4
Investment Committee
• Discusses a variety of topics including the economy, monetary policy, the direction of interest rates, energy prices, industrial trends, and other macroeconomic events that could impact a sector or industry • Identifies mega-trends that represent opportunities in the global economy and sectors with high growth rates • Establishes view of relative value expectations for sectors that are likely to outperform • Meets at least once per week • Low Investment Committee turnover; Current members are responsible for majority of track record*
Stephen Leeb, Ph.D. Stephen Leeb, Ph.D.
Chairman Chairman
Patrick DeSouza, Ph.D. Patrick DeSouza, Ph.D.
David Sandell, CFA David Sandell, CFA
Genia Turanova, CFA Genia Turanova, CFA
Roger Conrad, M.A. Roger Conrad, M.A.
Gregory Dorsey Gregory Dorsey
Macroeconomic analysis focuses fundamental research efforts and portfolio construction process; Industry/company earnings and growth estimates informed by top-down research.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Appendix for full Investment Committee biographies.
Page 5
Established Philosophy & Methodology
Our investment methodology seeks to identify:
• Sectors with revenues growing faster than the economy. • Companies in these sectors with consistent revenue and earnings growth. • High-quality stocks with a: – Dominant industry position. – Earnings growth rate greater than the sector average (double-digit preferable). – Superior operating record. – Balance sheet strength. – Reasonable price defined by a below-market Forward P/E to Earnings Growth (PEG) ratio.
We believe superior long-term results are best achieved by selecting growth stocks whose investment value is not fully reflected in current market prices.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 6
Strategy: Combining Top-Down and Bottom-Up
• • • • • • • Top-down macroeconomic overlay concentrates fundamental analytical efforts into outperforming economic sectors and focuses the portfolio construction process. Disciplined security selection process based on bottom-up fundamental research with both qualitative and quantitative techniques. Invests in dominant companies in rapidly growing industries that demonstrate sustainable growth rates and are undervalued relative to their growth prospects. Emphasis on the large-capitalization segment of the market (market cap greater than $3.5 billion). Focused portfolios containing 30 to 40 positions. Portfolio constructed in an effort to maximize reward while minimizing risk; historical performance reflects success of this approach*. Strategy offered as separately managed accounts, or through The Leeb Focus Fund (LCMFX) mutual fund.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Supplement for full performance information and important disclosures. Page 7
Investment Process
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 8
Investment Process
Investment Universe:
• Our stock universe begins with the components of S&P 500 Index. • Additional stocks outside of the S&P 500 Index can be included if they satisfy our fundamental criteria. These stocks could be identified through our bottom-up research, discussions with Wall Street analysts, industry reports, the press, and other publications.
Top-Down Macroeconomic Analysis:
• Macroeconomic analysis focuses fundamental research efforts to core sectors; Industry and company growth estimates informed by top-down research.
Bottom-Up Fundamental Research:
• Companies within core sectors are evaluated to identify candidates that meet the following characteristics: - Addressable market that ties in with the current growth themes - Market/Industry Dominance - Projected growth rate greater the market - Market capitalization greater than $3.5 billion
The resulting Watch List of approximately 150 stocks is further analyzed in the portfolio construction process.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 9
Portfolio Construction
LCM Portfolio Managers utilize established fundamental research processes to delve deeper into the Watch List and construct an investment portfolio. This Bottom-Up research incorporates:
• Dominance & Competitive Analysis – LCM places an emphasis on identifying companies with strong franchises that have:
• • • • Dominant industry position and market share. Franchise defined by differentiable product or service. Market position largely immune to competitive threats (high barriers to entry). Highly predictable revenue and earnings streams.
•
Growth Analysis – Informed by Top-Down Macroeconomic analysis, portfolio companies should exhibit positive growth prospects, including:
• Expectations for sector/industry. • Expectations relative to peers. • Sales growth by market segments.
•
Quality Analysis – LCM concentrates its efforts on finding sound investments that can withstand market turmoil. This quality comes in the form of:
• Balance sheet and financial strength. • Profitability. • Experience and stability of management.
•
Valuation Analysis – Portfolio inclusion requires attractive valuation in addition to the above.
• Forward PEG less than that of the market and/or peers • Attractive Free Cash Flow yield
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 10
Buy Example 1
• Macroeconomic Analysis
Theme: Demographics Core Sector: Healthcare
Investment Investment Universe Universe 500 300-500 Stocks Stocks Bottom-Up Bottom-Up Fundamental Fundamental Research Research Watch List: Watch List 100 Stocks 150 Stocks Portfolio Portfolio Construction Construction Portfolio: Portfolio 30-40 35-45 Stocks Stocks Top-Down Top-Down Macro- Economic Macro- Economic Analysis Analysis
• Security Characteristics at purchase
Capitalization: $18 billion Projected Growth Rate: 13% > S&P = 6% Forward PEG: 1.1 < S&P = 2.1
• Fundamental Research
Major player in drug/health care supply distribution (business dominated by three companies) Dominant in high-margined healthcare IT (revenue base bigger than largest stand-alone player) Profitability and operational metrics improving: • Distribution business profit margins improving with generic drug proliferation & adoption • IT business ramping with industry adoption aided by stimulus grants. Only 3% of revenues, but ¼ of earnings. Tremendous earnings leverage leading to company-wide margin expansion.
• Portfolio Construction
Initial Position Size: 2%
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 11
Buy Example 2
• Macroeconomic Analysis
Theme: Technology Franchise Core Sector: Consumer Technology
Investment Investment Universe Universe 500 300-500 Stocks Stocks Bottom-Up Bottom-Up Fundamental Fundamental Research Research Watch List: Watch List 100 Stocks 150 Stocks Portfolio Portfolio Construction Construction Portfolio: Portfolio 30-40 35-45 Stocks Stocks Top-Down Top-Down Macro- Economic Macro- Economic Analysis Analysis
• Security Characteristics at purchase
Capitalization: $115 billion Projected Growth Rate: 25% > S&P = 7% Forward PEG: 0.9 < S&P = 2.2
• Fundamental Research
Dominant consumer franchise with impressive captive customer base Digital music “halo” effect: garners high-margined sales of computer and cell phones Fundamental strength: • Profit margins expanding, impressive earnings growth of 25%+ • Tremendous free cash flow, strong balance sheet with $20 billion in cash/equivalents
• Portfolio Construction
Initial Position Size: 2%
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 12
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Sell Discipline
LCM Portfolio Managers adhere to strict sell discipline to protect client portfolios. Positions are sold if any of the following occur:
• Stock becomes overpriced – LCM does not use explicit price targets, but rather relies on relative valuation metrics such as the Forward PEG ratio. Stock can be replaced with a better risk/reward opportunity – Portfolio managers are constantly researching for more attractive stocks. Current holdings may be replaced with other securities that demonstrate better upside potential, a more favorable PEG, or a lower risk profile. Company undergoes changes in its business fundamentals – LCM continues to monitor and evaluate a company’s competitive edge; a stock is sold should this be compromised or an event occur that threatens a company’s likelihood of meeting expectations. Such an event may be either macroeconomic or company-specific in nature. Position weight reaches 8% – Individual positions will not exceed 8%. Upon reaching this level, a stock will either be scaled back or sold entirely (depending on valuation and other factors). Price decline of 20% – Any discrepancy in performance relative to a company’s sector and/or the market is reviewed by the Investment Committee. If the cause is fundamental in nature, the stock will be sold from the portfolio.
•
•
•
•
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 13
Sell Example
• Original Thesis
Theme: Chindia ® Core Sector: Consumer Staples Projected Earnings Growth: 12% Forward PEG: 1.6 < S&P 500 = 2.2 • Sell Rationale Company still dominant in consumer products, but facing domestic Chinese competition Higher commodity prices compress profit margins • Harsh consumer environment and competition diminish company’s pricing power Lowered our earnings growth estimates from 12% to single digits • Stock no longer attractively valued on PEG basis (relative to S&P 500)
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 14
Risk Controls
Portfolio Level
Capitalization Capitalization • Max 20% of portfolio may be invested in securities with market-cap below $3.5 billion Sector Limits Sector Limits • Individual sector weight cannot exceed 2 ½ times the sector weighting of the S&P 500 and/or 30% of the portfolio Security Limits Security Limits • Unsponsored ADRs may not exceed 10% of the total portfolio • Credit Quality Credit Quality Portfolio’s average S&P Credit Rating greater than or equal to S&P 500 average
Security Level
Capitalization Capitalization • Seek market-cap greater than $3.5 billion • • Initial Position Size Initial Position Size 2% - 4% based on the risk of the underlying position Investments with market cap less than $3.5 billion have an initial position size of 2% or less • • Position Limits Position Limits 8% maximum weighting Typically not larger than 5%
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 15
Appendix
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 16
Investment Committee
Stephen Leeb, Ph.D., Founder and Chief Investment Officer As Leeb Capital Management’s Investment Committee Chairman, Dr. Leeb uses a systematic approach in evaluating market trends. His team of investment professionals combines knowledge of macro-economic trends, current market conditions and detailed fundamental research about specific companies. They apply this knowledge to guide decisions regarding which stocks are placed in portfolios under the Firm’s management. Dr. Leeb is responsible for coordinating the macro-economic analysis and his fundamental research focuses on the energy, materials, and industrial sectors. Stephen Leeb is the author of eight books. His latest book, Red Alert (Hachette, 2011), outlines how China’s growing prosperity and its demands on increasingly scarce resources threaten the American way of life. Dr. Leeb currently sits on the board of both public and private companies, including the advisory board to two sizeable precious metal exploration companies. He is also a recurring guest on Fox News, Bloomberg, CNN, and other media outlets. Dr. Leeb received his bachelor’s degree in Economics from the University of Pennsylvania’s Wharton School of Business. He then earned his master’s degree in Mathematics and Ph.D. in Psychology from the University of Illinois. Patrick DeSouza, J.D., Ph.D., President Joining Leeb Capital Management as President in 2008, Dr. DeSouza brings leadership experience that will reinforce our capabilities to deliver first-tier performance long-term. Dr. DeSouza is also CEO of the Plain Sight Group, a technology holding company centered at Yale University with various investments in private companies. Plain Sight and its team of Yale scientists have been working with Leeb Capital to develop next generation quantitative tools with the goal of providing Leeb Capital with an analytic edge. In addition to Plain Sight, Pat has twenty years of experience in investment banking and practicing securities law. Over the course of his career, Pat has significant experience with respect to billions of dollars of M&A and corporate finance transactions both in the United States and internationally. Dr. DeSouza has also served at the White House as Director for Inter-American Affairs on the National Security Council. In addition to several articles on economic policy, he is the author of Economic Strategy and National Security (Westview 2000) which includes contributions from former senior members of the Bush and Clinton Administrations. He is currently a visiting lecturer at the Yale Law School where he teaches a course on global wealth management. Dr. DeSouza is a graduate of Columbia College, Yale Law School and Stanford Graduate School where he wrote his doctoral dissertation on foreign investment in the United States. He is a member of the Council on Foreign Relations.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 17
David A. Sandell, CFA, Vice President David Sandell joined Leeb Capital Management in 2004, and currently serves in the capacity of Vice President, Head Trader, and member of the Investment Committee. David provides fundamental research across various sectors while also managing firm operations and business development initiatives. David oversees the management of all client portfolios, while supervising trade allocations, execution and adherence to client-specific objectives, risk tolerance, and restrictions. He also supervises the firm’s performance calculation processes and the observance of applicable standards. David’s market observations have been quoted in the media including Wall Street Journal Radio, Reuters, BNN, and Bloomberg TV and Radio. Mr. Sandell graduated with honors from Washington University in St. Louis with a B.A. degree in finance and psychology. While at Washington University, David worked for Morgan Stanley as sales assistant. David is a CFA charterholder. Genia Turanova, CFA, Portfolio Manager Genia Turanova joined Leeb Capital Management in 2001, and currently serves as a Portfolio Manager and member of the Investment Committee. She provides fundamental research in multiple sectors. Prior to joining the LCM team, Genia was a research analyst with Independence Asset Management LLC in New York. She received her BS degree in Economics from Kharkiv National University (Ukraine), where she later taught for more than nine years. Ms. Turanova earned an MBA in Finance and Investments from the Honors MBA Program at Baruch College, CUNY in 2000. Genia is a CFA charterholder. Gregory Dorsey, Portfolio Manager Greg Dorsey joined the Leeb Group in 2004, and currently serves in the capacity of Portfolio Manager and member of the Investment Committee. Greg brings to the table 20-plus years of experience as a securities analyst and portfolio manager. He has written for and served as editor of several award-winning investment publications over the years and currently contributes to several Leeb Group newsletters. Mr. Dorsey co-authored Dr. Leeb’s latest book, Red Alert. Greg holds a BA degree in Economics and International Relations from the University of Delaware. Roger Conrad, M.A., Portfolio Manager Roger S. Conrad is a Portfolio Manager and member of the Investment Committee. He focuses primarily on securities that provide a combination of income and the potential for long-term capital appreciation. Roger has a long history of advising on income-producing equity securities. In 1989, he founded the Utility Forecaster newsletter, which has been named the Best Financial Advisory by the Newsletter Publishers Association (1997). It presents investment advice on electric, natural gas, communications, water, and foreign utility stocks, bonds and preferred stocks. Roger has worked with Leeb Capital Management’s Chairman, Stephen Leeb, since 1990 in various capacities. He has also co-authored two books with Stephen, Market Timing for the Nineties and The Agile Investor. Roger holds a B.A. in Anthropology from Emory University and a Masters of International Management from the American Graduate School of International Management.
Investment Committee
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 18
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Large-Cap Growth Strategy
8 West 40th Street , 19th Floor, New York, NY 10018 ● 800.524.LEEB (5332) ● 212.653.1504 phone ● 212.246.3696 fax ● www.leebcapital.com
Contents
I. II. Firm Overview Investment Philosophy Page 3 Page 6 Page 7 Page 10 Page 16
III. Investment Strategy & Process IV. Portfolio Construction V. Appendix
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 2
Why Leeb Capital Management?
• Recognized Thought Leadership: Identification of Critical Mega-Trends and Translation to Investment Performance – Dr. Leeb is the author of eight books, including a NY Times Best Seller. He also sits on various corporate boards where he shares his strategic perspectives on financial markets and natural resources. Extensive Experience: Reputable Investment Committee and Established Methodologies – LCM’s talented Investment Committee employs a disciplined investment process with the goal of outperforming over a complete market cycle. – The Investment Committee utilizes risk controls to improve the portfolio’s risk/reward profile as well as maintain diversification. Impressive Performance: Favorable Long-Term Returns Relative to Comparable Indices, Peers, and Risk* – LCM’s performance track record, which is verified by a reputable outside firm, places it in the upper echelon of similar managers. – Strong returns with a lower risk profile: LCM’s Large-Cap Growth strategy has historically outperformed the S&P 500 in both up and down trending markets since its inception (March 1999). Attentive Customer Service: Comprehensive Portfolio Management, Investment Advice, and Service – Multiple strategies, including Large-Cap Growth, Peak Resources & Energy, and Income & Growth.
•
•
•
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Supplement for full performance information and important disclosures. Page 3
Leeb’s Thought Leadership in Mega-Trends
Advisory: • Head of Advisory Board for Leor Exploration & Production, LLC; Among transactions, sold energy business to Encana for $2.55 billion. • Advisory Board member of Electrum USA Ltd., one of the world’s largest privately held gold exploration companies, and Sunshine Silver Mines Corp., a privately held silver exploration company. Author: “The U.S. dollar is already vulnerable because of our dependency on other nations for basic materials. Out-of-control government spending will foster the perception that the United States is financially irresponsible, making foreigners lose confidence in the dollar.” Game Over: How You Can Prosper in a Shattered Economy (2009) “Prices will likely reach at least $100 a barrel before the decade is out.” – “In fact, there is good reason to think that within a fairly short time, gold, which in the 1990’s was one of the dismal investments around, will be soaring. It’s not far-fetched to think that within a few years gold may reach $1,000 an ounce.” The Oil Factor: Protect Yourself—And Profit— from the Coming Energy Crisis (2004) “For almost two decades, high-tech stocks have soared. But technological progress is slowing, and this slowdown will intersect with other key worldwide trends to create new boom markets.” Defying the Market: Profiting in the Turbulent Post-Technology Market Boom (1999)
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 4
Investment Committee
• Discusses a variety of topics including the economy, monetary policy, the direction of interest rates, energy prices, industrial trends, and other macroeconomic events that could impact a sector or industry • Identifies mega-trends that represent opportunities in the global economy and sectors with high growth rates • Establishes view of relative value expectations for sectors that are likely to outperform • Meets at least once per week • Low Investment Committee turnover; Current members are responsible for majority of track record*
Stephen Leeb, Ph.D. Stephen Leeb, Ph.D.
Chairman Chairman
Patrick DeSouza, Ph.D. Patrick DeSouza, Ph.D.
David Sandell, CFA David Sandell, CFA
Genia Turanova, CFA Genia Turanova, CFA
Roger Conrad, M.A. Roger Conrad, M.A.
Gregory Dorsey Gregory Dorsey
Macroeconomic analysis focuses fundamental research efforts and portfolio construction process; Industry/company earnings and growth estimates informed by top-down research.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Appendix for full Investment Committee biographies.
Page 5
Established Philosophy & Methodology
Our investment methodology seeks to identify:
• Sectors with revenues growing faster than the economy. • Companies in these sectors with consistent revenue and earnings growth. • High-quality stocks with a: – Dominant industry position. – Earnings growth rate greater than the sector average (double-digit preferable). – Superior operating record. – Balance sheet strength. – Reasonable price defined by a below-market Forward P/E to Earnings Growth (PEG) ratio.
We believe superior long-term results are best achieved by selecting growth stocks whose investment value is not fully reflected in current market prices.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 6
Strategy: Combining Top-Down and Bottom-Up
• • • • • • • Top-down macroeconomic overlay concentrates fundamental analytical efforts into outperforming economic sectors and focuses the portfolio construction process. Disciplined security selection process based on bottom-up fundamental research with both qualitative and quantitative techniques. Invests in dominant companies in rapidly growing industries that demonstrate sustainable growth rates and are undervalued relative to their growth prospects. Emphasis on the large-capitalization segment of the market (market cap greater than $3.5 billion). Focused portfolios containing 30 to 40 positions. Portfolio constructed in an effort to maximize reward while minimizing risk; historical performance reflects success of this approach*. Strategy offered as separately managed accounts, or through The Leeb Focus Fund (LCMFX) mutual fund.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
* See Supplement for full performance information and important disclosures. Page 7
Investment Process
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 8
Investment Process
Investment Universe:
• Our stock universe begins with the components of S&P 500 Index. • Additional stocks outside of the S&P 500 Index can be included if they satisfy our fundamental criteria. These stocks could be identified through our bottom-up research, discussions with Wall Street analysts, industry reports, the press, and other publications.
Top-Down Macroeconomic Analysis:
• Macroeconomic analysis focuses fundamental research efforts to core sectors; Industry and company growth estimates informed by top-down research.
Bottom-Up Fundamental Research:
• Companies within core sectors are evaluated to identify candidates that meet the following characteristics: - Addressable market that ties in with the current growth themes - Market/Industry Dominance - Projected growth rate greater the market - Market capitalization greater than $3.5 billion
The resulting Watch List of approximately 150 stocks is further analyzed in the portfolio construction process.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 9
Portfolio Construction
LCM Portfolio Managers utilize established fundamental research processes to delve deeper into the Watch List and construct an investment portfolio. This Bottom-Up research incorporates:
• Dominance & Competitive Analysis – LCM places an emphasis on identifying companies with strong franchises that have:
• • • • Dominant industry position and market share. Franchise defined by differentiable product or service. Market position largely immune to competitive threats (high barriers to entry). Highly predictable revenue and earnings streams.
•
Growth Analysis – Informed by Top-Down Macroeconomic analysis, portfolio companies should exhibit positive growth prospects, including:
• Expectations for sector/industry. • Expectations relative to peers. • Sales growth by market segments.
•
Quality Analysis – LCM concentrates its efforts on finding sound investments that can withstand market turmoil. This quality comes in the form of:
• Balance sheet and financial strength. • Profitability. • Experience and stability of management.
•
Valuation Analysis – Portfolio inclusion requires attractive valuation in addition to the above.
• Forward PEG less than that of the market and/or peers • Attractive Free Cash Flow yield
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 10
Buy Example 1
• Macroeconomic Analysis
Theme: Demographics Core Sector: Healthcare
Investment Investment Universe Universe 500 300-500 Stocks Stocks Bottom-Up Bottom-Up Fundamental Fundamental Research Research Watch List: Watch List 100 Stocks 150 Stocks Portfolio Portfolio Construction Construction Portfolio: Portfolio 30-40 35-45 Stocks Stocks Top-Down Top-Down Macro- Economic Macro- Economic Analysis Analysis
• Security Characteristics at purchase
Capitalization: $18 billion Projected Growth Rate: 13% > S&P = 6% Forward PEG: 1.1 < S&P = 2.1
• Fundamental Research
Major player in drug/health care supply distribution (business dominated by three companies) Dominant in high-margined healthcare IT (revenue base bigger than largest stand-alone player) Profitability and operational metrics improving: • Distribution business profit margins improving with generic drug proliferation & adoption • IT business ramping with industry adoption aided by stimulus grants. Only 3% of revenues, but ¼ of earnings. Tremendous earnings leverage leading to company-wide margin expansion.
• Portfolio Construction
Initial Position Size: 2%
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 11
Buy Example 2
• Macroeconomic Analysis
Theme: Technology Franchise Core Sector: Consumer Technology
Investment Investment Universe Universe 500 300-500 Stocks Stocks Bottom-Up Bottom-Up Fundamental Fundamental Research Research Watch List: Watch List 100 Stocks 150 Stocks Portfolio Portfolio Construction Construction Portfolio: Portfolio 30-40 35-45 Stocks Stocks Top-Down Top-Down Macro- Economic Macro- Economic Analysis Analysis
• Security Characteristics at purchase
Capitalization: $115 billion Projected Growth Rate: 25% > S&P = 7% Forward PEG: 0.9 < S&P = 2.2
• Fundamental Research
Dominant consumer franchise with impressive captive customer base Digital music “halo” effect: garners high-margined sales of computer and cell phones Fundamental strength: • Profit margins expanding, impressive earnings growth of 25%+ • Tremendous free cash flow, strong balance sheet with $20 billion in cash/equivalents
• Portfolio Construction
Initial Position Size: 2%
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 12
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Sell Discipline
LCM Portfolio Managers adhere to strict sell discipline to protect client portfolios. Positions are sold if any of the following occur:
• Stock becomes overpriced – LCM does not use explicit price targets, but rather relies on relative valuation metrics such as the Forward PEG ratio. Stock can be replaced with a better risk/reward opportunity – Portfolio managers are constantly researching for more attractive stocks. Current holdings may be replaced with other securities that demonstrate better upside potential, a more favorable PEG, or a lower risk profile. Company undergoes changes in its business fundamentals – LCM continues to monitor and evaluate a company’s competitive edge; a stock is sold should this be compromised or an event occur that threatens a company’s likelihood of meeting expectations. Such an event may be either macroeconomic or company-specific in nature. Position weight reaches 8% – Individual positions will not exceed 8%. Upon reaching this level, a stock will either be scaled back or sold entirely (depending on valuation and other factors). Price decline of 20% – Any discrepancy in performance relative to a company’s sector and/or the market is reviewed by the Investment Committee. If the cause is fundamental in nature, the stock will be sold from the portfolio.
•
•
•
•
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
Page 13
Sell Example
• Original Thesis
Theme: Chindia ® Core Sector: Consumer Staples Projected Earnings Growth: 12% Forward PEG: 1.6 < S&P 500 = 2.2 • Sell Rationale Company still dominant in consumer products, but facing domestic Chinese competition Higher commodity prices compress profit margins • Harsh consumer environment and competition diminish company’s pricing power Lowered our earnings growth estimates from 12% to single digits • Stock no longer attractively valued on PEG basis (relative to S&P 500)
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 14
Risk Controls
Portfolio Level
Capitalization Capitalization • Max 20% of portfolio may be invested in securities with market-cap below $3.5 billion Sector Limits Sector Limits • Individual sector weight cannot exceed 2 ½ times the sector weighting of the S&P 500 and/or 30% of the portfolio Security Limits Security Limits • Unsponsored ADRs may not exceed 10% of the total portfolio • Credit Quality Credit Quality Portfolio’s average S&P Credit Rating greater than or equal to S&P 500 average
Security Level
Capitalization Capitalization • Seek market-cap greater than $3.5 billion • • Initial Position Size Initial Position Size 2% - 4% based on the risk of the underlying position Investments with market cap less than $3.5 billion have an initial position size of 2% or less • • Position Limits Position Limits 8% maximum weighting Typically not larger than 5%
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
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Appendix
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
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Investment Committee
Stephen Leeb, Ph.D., Founder and Chief Investment Officer As Leeb Capital Management’s Investment Committee Chairman, Dr. Leeb uses a systematic approach in evaluating market trends. His team of investment professionals combines knowledge of macro-economic trends, current market conditions and detailed fundamental research about specific companies. They apply this knowledge to guide decisions regarding which stocks are placed in portfolios under the Firm’s management. Dr. Leeb is responsible for coordinating the macro-economic analysis and his fundamental research focuses on the energy, materials, and industrial sectors. Stephen Leeb is the author of eight books. His latest book, Red Alert (Hachette, 2011), outlines how China’s growing prosperity and its demands on increasingly scarce resources threaten the American way of life. Dr. Leeb currently sits on the board of both public and private companies, including the advisory board to two sizeable precious metal exploration companies. He is also a recurring guest on Fox News, Bloomberg, CNN, and other media outlets. Dr. Leeb received his bachelor’s degree in Economics from the University of Pennsylvania’s Wharton School of Business. He then earned his master’s degree in Mathematics and Ph.D. in Psychology from the University of Illinois. Patrick DeSouza, J.D., Ph.D., President Joining Leeb Capital Management as President in 2008, Dr. DeSouza brings leadership experience that will reinforce our capabilities to deliver first-tier performance long-term. Dr. DeSouza is also CEO of the Plain Sight Group, a technology holding company centered at Yale University with various investments in private companies. Plain Sight and its team of Yale scientists have been working with Leeb Capital to develop next generation quantitative tools with the goal of providing Leeb Capital with an analytic edge. In addition to Plain Sight, Pat has twenty years of experience in investment banking and practicing securities law. Over the course of his career, Pat has significant experience with respect to billions of dollars of M&A and corporate finance transactions both in the United States and internationally. Dr. DeSouza has also served at the White House as Director for Inter-American Affairs on the National Security Council. In addition to several articles on economic policy, he is the author of Economic Strategy and National Security (Westview 2000) which includes contributions from former senior members of the Bush and Clinton Administrations. He is currently a visiting lecturer at the Yale Law School where he teaches a course on global wealth management. Dr. DeSouza is a graduate of Columbia College, Yale Law School and Stanford Graduate School where he wrote his doctoral dissertation on foreign investment in the United States. He is a member of the Council on Foreign Relations.
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
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David A. Sandell, CFA, Vice President David Sandell joined Leeb Capital Management in 2004, and currently serves in the capacity of Vice President, Head Trader, and member of the Investment Committee. David provides fundamental research across various sectors while also managing firm operations and business development initiatives. David oversees the management of all client portfolios, while supervising trade allocations, execution and adherence to client-specific objectives, risk tolerance, and restrictions. He also supervises the firm’s performance calculation processes and the observance of applicable standards. David’s market observations have been quoted in the media including Wall Street Journal Radio, Reuters, BNN, and Bloomberg TV and Radio. Mr. Sandell graduated with honors from Washington University in St. Louis with a B.A. degree in finance and psychology. While at Washington University, David worked for Morgan Stanley as sales assistant. David is a CFA charterholder. Genia Turanova, CFA, Portfolio Manager Genia Turanova joined Leeb Capital Management in 2001, and currently serves as a Portfolio Manager and member of the Investment Committee. She provides fundamental research in multiple sectors. Prior to joining the LCM team, Genia was a research analyst with Independence Asset Management LLC in New York. She received her BS degree in Economics from Kharkiv National University (Ukraine), where she later taught for more than nine years. Ms. Turanova earned an MBA in Finance and Investments from the Honors MBA Program at Baruch College, CUNY in 2000. Genia is a CFA charterholder. Gregory Dorsey, Portfolio Manager Greg Dorsey joined the Leeb Group in 2004, and currently serves in the capacity of Portfolio Manager and member of the Investment Committee. Greg brings to the table 20-plus years of experience as a securities analyst and portfolio manager. He has written for and served as editor of several award-winning investment publications over the years and currently contributes to several Leeb Group newsletters. Mr. Dorsey co-authored Dr. Leeb’s latest book, Red Alert. Greg holds a BA degree in Economics and International Relations from the University of Delaware. Roger Conrad, M.A., Portfolio Manager Roger S. Conrad is a Portfolio Manager and member of the Investment Committee. He focuses primarily on securities that provide a combination of income and the potential for long-term capital appreciation. Roger has a long history of advising on income-producing equity securities. In 1989, he founded the Utility Forecaster newsletter, which has been named the Best Financial Advisory by the Newsletter Publishers Association (1997). It presents investment advice on electric, natural gas, communications, water, and foreign utility stocks, bonds and preferred stocks. Roger has worked with Leeb Capital Management’s Chairman, Stephen Leeb, since 1990 in various capacities. He has also co-authored two books with Stephen, Market Timing for the Nineties and The Agile Investor. Roger holds a B.A. in Anthropology from Emory University and a Masters of International Management from the American Graduate School of International Management.
Investment Committee
Leeb
Capital Management, Inc. Management, Inc.
A REGISTERED INVESTMENT ADVISOR AN AFFILIATE OF THE LEEB GROUP
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