The Kantor Group Third Quarter 2014

Transcription

1 The Kantor Group Third Quarter 2014 Charles Kantor Third quarter 2014 update We continue to believe that the current economic expansion could last longer than expected when compared to previous economic cycles. For the three months ending September 30, 2014, various economic releases pointed to a continued recovery in the U.S. Employers added +750,000 jobs, as reported by the Labor department; hiring by employers helped drive down the unemployment rate to 5.9%, the lowest point since July 2008 according to the US Labor department estimate. However, there still remains sluggish growth in real wages, as inflation overall remains subdued. Continued reasons for optimism include positive results from leading indicators, such as the Institute for Supply Management s manufacturing and non-manufacturing indices, which are currently at multi-year highs. Given second quarter corporate earnings growth of approximately 9% according to Bloomberg, we believe corporate earnings could continue experiencing positive improvement going into yearend and be a source of equity market returns going forward. Last quarter we pointed out the potential for muted high yield returns in the second half of 2014 versus those experienced during the first half of the year. We believe that the correction that occurred during the third quarter has effectively reset expectations in the market. High yield spreads have widened to 442 basis points over treasuries as measured by the JPM high yield index, a level we believe more than adequately compensates investors for the default risk they are assuming. We expect default rates to remain well below historical averages as there are only $185 billion of maturities coming due between now and the beginning of This compares to $399 billion of bonds that companies issued in 2013 and the $287 billion issued year to date. At current levels, spreads have once again risen above the median spread from (the last low default rate environment) of 374 bps 1. As a result, we believe the high yield market retains some cushion to absorb further increases in Treasury yields. Given our view that inflation may remain lower for longer, we are less concerned about a meaningful move higher in Treasury yields from present levels during We entered the year believing high yield investors should be rewarded with another coupon clipping year and we maintain that view. Our constructive view on risk assets is not without potential risks. It has become increasingly clear to us that global central bank policy is driving short-term market behavior, with spikes in volatility attributed to speculation on future policy moves. Even as the U.S. Federal Reserve (Fed) winds down the asset purchase program put in place six years ago and markets assess the possibility of a rate hike increase, the European Central Bank (ECB) and the Bank of Japan (BOJ) are committed to further stimulus. We believe that an extended period of ultralow interest rates while positive for an extended business cycle and risk assets has the potential to exacerbate key risks over the long term. Today, with countries and markets diverging, we remain focused on global growth, specifically the potential for deflation in the Eurozone as core CPI in Europe is hovering around zero percent and the German 10-year bund is yielding 1.00% (vs. the 2.50% U.S. 10-year yield) 2. Our near-term outlook for Europe remains one of caution as we believe the ECB and its president, Mario Draghi, have the tools and capacity to do whatever it takes to prevent wider contagion should Europe slip further, as referenced in his speech on July 26, 2012 at the Global Investment Conference in London. 1 Source: FactSet 2 Source: J.P. Morgan 1

2 Most notably in the second quarter we saw a small slowdown in share buybacks from a feverish pace for the past 5 years, as companies begin to shift excess cash flow toward acquisitions and capital expenditures. Corporate activity has picked up year to date as corporate leaders have notably turned more bullish, offering shares and/or cash to purchase targets. Deal making this year is up 39%, compared with the same period last year, according to Dealogic, as $2.7 trillion in deals have been announced this year 3. M&A activity has increased in every sector of the economy this year, as companies turn to acquisitions to fuel growth. We view this as a healthy and natural development to the current expansion and may further support U.S. equity prices at current levels. Furthermore, continued turmoil in the Middle East and tensions still ongoing in Ukraine remind us that the current environment necessitates a flexible approach. We strongly believe the greatest risks to the global economy are still those that are unknown today - be they financial or geopolitical in nature. As always, we are ready and able to adapt if the facts change. We continue to monitor investor sentiment which noticeably has turned from increasingly bullish to slightly more cautious as the picture for global growth remains mixed. In addition as central bank support is slowly removed we remain extremely focused on levels of market risk, as measure by implied equity volatility and credit spreads, in the event that market risk in one area spills over into broader global markets. As we embark onto the third quarter earnings season, we will be focusing on whether the quality of corporate earnings can replace the macro debate around deflation concerns in Europe, geopolitical tension around the world and the spread of certain communicable diseases. As investors with a relatively longer-term view, we remain unwilling to bet against the ingenuity of the corporate managers that lead our businesses. Their willingness to drive innovation, enhance productivity, allocate capital to the best risk-adjusted return and compete on a global scale could, in our opinion, ultimately provide investors with suitable long-term returns for the risks they bear. Kantor Group Performance During the third quarter of 2014, the S&P 500 (including income) increased by approximately 1.13%. In the same period, the composite comprised of our discretionary investment accounts increased by approximately 0.30%, (net of fees), while the equity only portion of our composite increased by approximately 0.67%, (gross of fees). During the third quarter, the top contributors to the performance of our composite portfolio were PetSmart, Athlon Energy, Canadian Pacific Railway, Home Depot and CME Group Inc., the top detractors to performance over the same period were Markit, Wesco Aircraft, Brookfield Infrastructure Partners, Antero Resources and General Motors. 4 From inception on May 31, 2005 to September 30, 2014 our composite total portfolio return on an annualized basis returned a positive 9.64% (net of fees), relative to a 7.80% return for the S&P 500. Our equity only performance (gross of fees) has outperformed that of the S&P 500 index over a three, five year basis and since inception. 3 Source: Bloomberg 4 Please see Table 1 towards the end of this commentary. Reflects the top contributors and detractors, in descending order, to portfolio performance based on individual security performance and portfolio weighting. Information is based upon the manager s composite and additional information regarding the performance contribution calculation methodology and the contribution of all composite account holdings on performance, is available upon request. Specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients. It should not be assumed that any investments in securities identified and described were or will be profitable. The average weightings PetSmart, Athlon Energy, Canadian Pacific Railway, Home Depot, CME Group Inc., Markit, Wesco Aircraft, Brookfield Infrastructure Partners, Antero Resources and General Motors in our composite in the third quarter of 2014 were 3.06%, 1.27%, 2.21%, 1.80%, 1.89%, 1.80%, 1.71%, 2.83%, 1.00% and 1.45% respectively. 2

3 How We Invest Our investments fall into three broad buckets. Growth: companies that are growing their revenues and, as they do so, generate free cash flow that is re-invested in the business at attractive risk-adjusted returns. We find these companies to have believable growth strategies, typically distinguished by high returns on invested capital and attractive competitive positioning. : companies where growth in cash flows can underpin prudent, sustainable, and growing cash returns to our clients in the form of increased dividends, cash distributions, or return of capital. These companies may be characterized by either global strong consumer brands or long duration assets. Long duration assets as we define them tend to be very asset intensive businesses that enjoy regulated-like returns and inflation indexation characteristics. Inflation indexation is particularly important in this environment as it refers to the notion that (i) certain assets may have revenues linked to inflation within commercial agreements or regulatory frameworks, or (ii) the critical nature of the assets and their relatively inelastic demand allow for the ability to pass inflation on to end users via price increases. For our equities, we believe the potential growth in the income stream is more important than the beginning absolute level of income yield. The growth of income provides significant inflation protection over time. Opportunistic: companies where management changes, company reorganizations, merger and acquisition activity, hidden assets, or other market dislocations have the potential to unlock intrinsic value. As all-cap investors with a strong emphasis on small and medium sized companies, we retain the flexibility to invest in any company regardless of size or scale which we believe has the potential to provide attractive risk-adjusted total returns. With a new account, it is generally taking us approximately two months to be approximately 75% invested. We are currently allocating approximately 65%, 25%, and 10% of our clients capital to the growth, total return, and opportunistic investments respectively. Conclusion We maintain our view that higher risk assets such as equities and high yield bonds can present attractive risk adjusted returns for those market participants with a long term time horizon. We believe the continued slack in the U.S. economy and a highly accommodative Federal Reserve may create a longer than expected U.S. business cycle upswing. Given these factors, we are optimistic that the structural issues plaguing the U.S. economy will continue to correct themselves over time. Nevertheless, we are very mindful of the complex world in which we live and invest. The risks of the long-term inflationary effects of continued government intervention remain top of mind. In these difficult economic and financial conditions, we remain dedicated to thinking deeply and creatively and strive always to deliver attractive risk-adjusted returns. Given the vicissitudes of an increasingly global economy, we will also remain flexible in our decisions and open-minded to new ideas across different asset classes and geographies. The Kantor Group 3

4 Table 1: Top Contributors and Detractors for the Quarter 4 Contributors Detractors 1. PetSmart 1. Markit Ltd. 2. Athlon Energy 2. Wesco Aircraft 3. Canadian Pacific Railway 3. Brookfield Infrastructure Partners 4. Home Depot 4. Antero Resources 5. CME Group 5. General Motors Company This material is provided solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Third-party economic or market estimates discussed herein may or may not be realized and no representation is being given regarding such estimates. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Performance is shown for the manager s composite of accounts. Representative portfolio information (characteristics, holdings, weightings, etc.) is based upon the manager s composite. Client accounts are individually managed and may vary significantly from composite performance and representative portfolio information. Unless otherwise indicated, returns shown reflect reinvestment of any dividends and distributions. Portfolio performance is calculated utilizing a total return methodology. The total return calculation is the combination of the change in price of the investments plus any income (or other distributions); it is expressed as a percentage gain or loss in the investment's value. Segment level performance is also calculated employing a total return calculation but focuses exclusively on the investments in that particular segment of the portfolio being measured. For instance, equity only performance represents the total return of the segment of the manager's portfolio allocated to equity securities. Equity only performance excludes the performance of the cash and or fixed income instruments that may also be held in the portfolio and is reflected gross of advisory fees. Unless otherwise stated, performance returns are net of commissions and before the deduction of advisory fees (eg. Gross of Fee performance). Net of Fee performance is after the deduction of advisory fees and commissions. Past performance is no guarantee of future results. Please refer to the attached GIPS compliant composite presentation for complete performance information and important disclosures. Publications referenced herein are intended solely for your information and should not be construed as an endorsement by Neuberger Berman. Neuberger Berman is not responsible for the content of these publications. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index (stock price times number of shares outstanding), with each stock's weight in the Index proportionate to its market value. The "500" is one of the most widely used benchmarks of U.S. equity performance. As of September 16, 2005, S&P switched to a float-adjusted format, which weights only those shares that are available to investors, not all of a company s outstanding shares. The value of the index now reflects the value available in the public markets. Neuberger Berman, LLC is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. The Neuberger Berman name and logo are registered service marks of Neuberger Berman Group LLC Neuberger Berman LLC. All rights reserved. 4

5 The Kantor Group - Investment Performance Annualized Rates of Return (%) (for periods ended September 30, 2014) Since 3Q14 YTD 1 Year 3 Years 5 Years 05/31/05 Total Portfolio Return (Gross of Fees) Total Portfolio Return (Net of Fees) Equity Only Return (Gross of Fees) S&P 500 Index Annual Rates of Return (%) (for periods ended December 31) 7 Mos Total Portfolio Return (Gross of Fees) Total Portfolio Return (Net of Fees) Equity Only Return (Gross of Fees) S&P 500 Index Past performance is no guarantee of future results. Please refer to the attached GIPS compliant composite presentation for complete performance information. Unless otherwise indicated, returns shown reflect reinvestment of any dividends and distributions. Indexes are unmanaged and are not available for direct investment. 5

6 (Gross of Fees) (Net of Fees) The Kantor Group Inception (5/31/05) Equity Only Return (Gross of Fees) Benchmark S&P 500 Index No. of Accounts Market Value Group AUM Total Firm Assets % of Firm Assets Internal Dispersion 3 Year % % % (millions) (millions) (billions) % % % YTD Sep N/A N/A N/A N/A Benchmark 3 Year Compliance Statement Neuberger Berman Group LLC ( NB ) claims compliance with the Global Investment Performance s (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. NB has been independently verified for the periods January 1, 1997 through December 31, The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Definition of the Firm The firm is defined as Neuberger Berman Group LLC ( NB, Neuberger Berman or the Company ). Neuberger Berman is comprised of Neuberger Berman LLC, Neuberger Berman Management LLC, Neuberger Berman Fixed Income LLC, NB Alternative Fund Management LLC, Neuberger Berman Europe Ltd., Neuberger Berman Asia Ltd, Neuberger Berman National Trust Company N.A., Neuberger Berman Trust Company of Delaware N.A., NB Alternatives Advisers LLC and NB Alternative Investment Management LLC. The firm definition above is effective December 31, Prior to that day, there were two firm definitions, Neuberger Berman LLC ( NBLLC ) and Neuberger Berman Fixed Income ( NBFI ). The firm was redefined to adopt the broadest, most meaningful definition of the firm and to align the firm definition to how it now holds itself out to the public. Policies Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Description The Kantor Group ( ) is designed for investors who seek full participation in the broad equity market. The utilizes an all cap investing style with an orientation towards small and mid capitalization companies. The performance schedule is provided as supplemental information to the firm composite. This performance schedule includes all fee paying, discretionary portfolios, regardless of asset size. Effective January 2012, the composite definition was refined to exclude accounts containing a significant allocation to Fixed Income. During his tenure at Neuberger, the investment manager, Charles Kantor, was affiliated with two other management groups within the firm. Charles Kantor managed the accounts in this composite through November 2005 while he was a Portfolio Manager with the Kaminsky Team. A complete list and description of Neuberger Berman's composites and performance results is available upon request. The benchmark is the S&P 500 Index, which is designed to measure the domestic equity market performance. Benchmark Description The benchmark is calculated on a total return basis and is market cap weighted and unmanaged. Additional disclosures for complete benchmark descriptions are available upon request. Reporting Currency Valuations are computed and performance is reported in U.S. dollars Fees Effective January 1, 2006 accounts in the composite were moved to an all inclusive fee schedule which includes investment advisory fees, trading expenses, custody fees, and other administrative fees. (Gross of Fees) is presented before fees and after the deduction of trading expenses. (Net of Fees) is presented after the deduction of fees and trading expenses. Equity Only Return (Gross of Fees) excludes the performance of any cash or fixed income instruments that may also be held in the portfolio. Equity Only Return (Gross of Fees) does not reflect the deduction of fees and beginning January 1, 2006 does not reflect the deduction of trading expenses. Equity Only Return is presented as supplemental information and is not a required part of this presentation. Fee Schedule The annual investment advisory fee, payable quarterly, for each portfolio with a market value of less than $10mn is: 1.5% of the first $2.5mn of market value; 1.4% of the next $2.5mn of market value; 1.3% of the next $2.5mn of market value; 1.2% of the next $2.49mn. For each portfolio with a market value, equal to, or greater than $10mn, the annual fee payable quarterly is: 1.25% of the first $10mn of market value and 0.9% of the remaining value of market value. Internal Dispersion Internal dispersion is calculated using the asset weighted standard deviation of annual gross returns of those portfolios that were in the composite for the entire year. Annualized The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period. The standard deviation is not required for periods prior to

7 Neuberger Berman Equity (Inception 12/31/89) Benchmark (Gross of Fees) (Net of Fees) Equity Only Return (Gross of Fees) S&P 500 Index No. of Accounts Market Value Total Firm Assets % of Firm Assets Internal Dispersion 3 Year Benchmark 3 Year % % % % (millions) (billions) % % % YTD Sep-14 N/A ,748 43,985.4 N/A N/A N/A N/A ,186 38, N/A ,572 29, N/A ,480 23, N/A ,151 26, N/A ,059 22, N/A ,559 12, N/A ,357 41, N/A ,698 32, ,761 8, ,374 17, Compliance Statement Neuberger Berman Group LLC ( NB, Neuberger Berman, the Firm ) claims compliance with the Global Investment Performance s (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Neuberger Berman was independently verified for the period January 1, 2011 to December 31, Prior to December 31, 2011, there were two firm definitions, Neuberger Berman LLC ( NBLLC ) and Neuberger Berman Fixed Income ( NBFI ), which were independently verified for the periods January 1, 1997 to December 31, 2010 and January 1, 1996 to December 31, 2010, respectively. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The NB Equity PAM composite has been examined for the periods January 1, 1997 to December 31, The verification and performance examination reports are available upon request. Definition of the Firm The firm is currently defined for GIPS purposes as Neuberger Berman Group LLC, ( NB, Neuberger Berman, the Firm ), and includes the following subsidiaries: Neuberger Berman LLC, Neuberger Berman Management LLC, Neuberger Berman Fixed Income LLC, Neuberger Berman Europe Ltd., Neuberger Berman Asia Ltd., Neuberger Berman East Asia Ltd., Neuberger Berman Singapore Pte. Ltd., Neuberger Berman Taiwan Ltd, Neuberger Berman Australia Pty. Ltd., Neuberger Berman National Trust Company N.A., Neuberger Berman Trust Company of Delaware N.A., NB Alternatives Advisers LLC and NB Alternative Investment Management LLC. Prior to December 31, 2011, there were two firm definitions for GIPS purposes; Neuberger Berman LLC and Neuberger Berman Fixed Income. Policies Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Description The Private Asset Management ( PAM ) Equity (the ) represents all fee-paying, discretionary equity accounts managed by portfolio managers in the Private Asset Management group of NB. The composite consists of equity oriented portfolios that seek to provide superior returns through broad equity market participation. The portfolios are diversified across industries and are invested primarily in U.S. equities, with the goal of long-term capital appreciation. The includes all fee-paying portfolios with a market value equal to or greater than $250,000 managed on a fully discretionary basis by Neuberger Berman, according to the strategy. The composite was created on January 1, Description (continued) This strategy was revised in March Starting in January 2007, the represents all accounts with equity greater than 75%. A complete list and description of Neuberger Berman's composites and performance results is available upon request. Benchmark Description The benchmark is the S&P 500 Index, which is designed to measure the domestic equity market performance. The benchmark is calculated on a total return basis and is market cap weighted and unmanaged. Additional disclosures for complete benchmark descriptions are available upon request. Reporting Currency Valuations are computed and performance is reported in U.S. dollars Fees Effective January 1, 2006 accounts in the composite were moved to an all inclusive fee schedule which includes investment advisory fees, trading expenses, custody fees, and other administrative fees. (Gross of Fees) is presented before fees and after the deduction of trading expenses. (Net of Fees) is presented after the deduction of fees and trading expenses. Equity Only Return (Gross of Fees) excludes the performance of any cash or fixed income instruments that may also be held in the portfolio. Equity Only Return (Gross of Fees) does not reflect the deduction of fees and beginning January 1, 2006 does not reflect the deduction of trading expenses. Equity Only Return is presented as supplemental information and is not a required part of this presentation. Fee Schedule The annual investment advisory fee, payable quarterly, for each portfolio with a market value of less than $10mn is: 1.5% of the first $2.5mn of market value; 1.4% of the next $2.5mn of market value; 1.3% of the next $2.5mn of market value; 1.2% of the next $2.49mn. For each portfolio with a market value, equal to, or greater than $10mn, the annual fee payable quarterly is: 1.25% of the first $10mn of market value and 0.9% of the remaining value of market value. Internal Dispersion Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were in the composite for the entire year. Annualized The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the 7