Quarterly Investor Update March 2018

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1 Quarterly Investor Update March 2018

2 Today s Speakers 2

3 Topics Market Overview Investment Philosophy and Process Portfolio Performance and Attribution (2017) Portfolio Changes Current Portfolio Positioning Question & Answer Session 3

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5 Market Update Markets hit all-time highs in January Return of volatility in U.S. markets, which is normal Interest rates, remain low but are rising Tax reform viewed as a catalyst Corporate earnings are strong Overall, market is no longer cheap nor exceedingly expensive Our conclusion Maintain our discipline, focus our research efforts and accept that volatility and higher rates will be in our future 5

6 Return of volatility in U.S. markets, which is normal Jan 2017 Source: Golub Group, JP Morgan Asset Management 6

7 Market Update Markets hit all-time highs in January Return of volatility in U.S. markets, which is normal Interest rates, remain low but are rising Tax reform viewed as a catalyst Corporate earnings are strong Overall, market is no longer cheap nor exceedingly expensive Our conclusion Maintain our discipline, focus our research efforts and accept that volatility and higher rates will be in our future 7

8 Investment Philosophy Good businesses with strong competitive advantages Honest and able management Margin of Safety: buy at a discount to intrinsic value Strong balance sheets Long-term orientation 8

9 What do we do after entering a new position? Review quarterly and annual results Conduct periodic interviews with management Review our valuation assumptions at least once a quarter Interview competitors in the industry Participate in industry conferences Monitor industry and company-specific news 9

10 Our Ongoing Due Diligence and Process Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 10

11 When do we add, trim or exit a position? Add Trim or Exit Why When Why When Allocate more capital to the most attractive positions Lower the cost basis New information increased conviction in the original thesis Stock declined in price & ongoing research work supports the thesis Control downside risk when the margin of safety shrinks Trim or exit when the business trades around intrinsic value Always exit when new information suggests our thesis is wrong 11

12 When the thesis is wrong Thesis key components Estimate of future earnings ( earnings power ) Fair value of the earnings power Time horizon: 3-5 years How do we validate a thesis? Research! Research! Research! Extensive debate among investment team members The thesis is deemed wrong whenever the earnings power or the valuation miss our initial estimates over the time horizon Important things to remember It s inevitable that we will be wrong on the thesis from time to time Our entire focus after buying a stock is on thesis validation A decline in the stock price doesn t necessarily mean the thesis is broken 12

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14 Position Performance Winners Losers +55% -21% +49% -18% +47% -16% Performance figures represent the percentage change in price during Individual accounts may vary. 14

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16 Portfolio Changes Since Last Call New Buys Added Exited Trimmed These actions reflect changes to the Golub Group Equity model. Individual results and actions may vary due to client-specific circumstances. 16

17 General Electric (GE) New Buy Thesis Industrial conglomerate that owns seven wide moat businesses Dominant market position in all business segments Concerns regarding reported earnings and GE Capital led to a major selloff in the stock Potential to improve profitability in Power segment Attractive Valuation GE Stock Price $32 $28 $24 $20 $16 $12 Buy Recent Developments New management team outlined a turnaround plan New board members with impressive backgrounds appointed to the board Adoption of new accounting standards point to more conservative approach to financial reporting Research Activity Reviewed earnings and filings Participated in two industry conferences Interviewed CFO Interview Morningstar analyst Conducted four interviews with industry experts Decision Stock trades substantially below intrinsic value Initiate a position in the stock This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 17

18 Facebook (FB) New Buy Thesis 2bn+ users share personal info and interests, providing advertisers w/ high ROI Secular shift to digital ads also opens market to small businesses Users and revenue growing faster overseas Concern about changes to News Feed, declining engagement, and fake news overblown Valuation attractive FB Stock Price $200 $180 $160 $140 $120 Buy Recent Developments Research Activity FB Q4 results Global MAU +15%, US and Canada +3%, DAU 1.4bn Continued faster growth overseas Slow user growth in US offset by price Revenue +47%, EBIT margin 57% TWTR Q4 MAU +4% to 330mm Revenue +2% to $732mm, break-even profitability SNAP Q4 Quarterly average DAU 187mm, unprofitable Reviewed earnings and filings Reviewed management presentations at conferences Reviewed competitor earnings and filings Interviewed former employees Interviewed industry analysts Upcoming meeting w/ FB representatives in Menlo Park Decision High quality business w/ strong growth prospects Stock trades below intrinsic value Buy This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 18

19 Owens-Illinois (OI) - Add Thesis Largest manufacturer of glass bottle packaging High barrier to entry and switching costs Monopoly position in several key markets Valuation doesn t reflect business quality and earnings power OI Stock Price $26 $24 $22 $20 $18 Add Recent Developments Research Activity Q4 results Revenue growth of 4% Earnings growth of 10% Continued to execute on margin improvement initiatives Launched a $400 million share buyback program Reviewed earnings and filings Participated in two industry conferences CFO private meeting in SF Interviewed and note exchange with largest investor in OI Decision Thesis remains intact and stock very cheap Added to stock This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 19

20 Chipotle (CMG) Exit Thesis CMG Stock Price Pioneering restaurant model w/ attractive unit economics Sales rebound driven by traffic (new menu items, marketing, mobile app) and price increases Unit growth potential in US and franchising overseas Valuation reasonable based on recovery trajectory and cheap relative to historical earnings power $500 $450 $400 $350 $300 Buy Add Exit $250 Recent Developments Research Activity Q4 results Traffic continued to decline, indicating price increases could hurt traffic New menu items not performing well Little detail around new growth initiatives Increased investment in areas unlikely to boost traffic or revenue No update on CEO transition Reviewed earnings and filings Visited restaurants Stress-tested valuation model Decision CMG undervalued assuming partial recovery, but not relative to current trajectory Management actions not having expected results Lowered FV estimate and confidence in estimate Considered possibility of excellent CEO hire and bad hire Thesis broken, so exited position This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 20

21 Mondelez (MDLZ) - Exit Thesis MDLZ Stock Price Iconic snack food brands (Oreo cookies, Ritz crackers, Trident gum) with #1 or #2 global market share 38% of sales from fast growing emerging markets Post spin-off restructuring plan to drive margins and earnings growth Activist investors Trian and Pershing Square applying pressure on management Undervalued relative to earnings potential $47 $44 $41 $38 $35 Buy Add Add Trim Exit Recent Developments Research Activity Q4 results Revenue growth not meeting expectations Margin improvement, but below estimates Activist Trian has reduced investment Recent CEO departure creates uncertainty around company s strategic direction This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 21 Reviewed earnings and filings Reviewed management presentations at industry conferences Stress-tested valuation model Decision Margins improving but at a lackluster rate, resulting in a reduction to fair value. New CEO creates uncertainty around strategy. Fair Value reduced so exited.

22 Deere (DE) - Trim Thesis Largest provider of ag equipment End markets were in a cyclical downturn Significant competitive advantages Valuation didn t reflect mid-cycle earnings power DE Stock Price $165 Buy $145 $125 $105 $85 $65 Trim Recent Developments Research Activity Continued demand recovery in end markets Q1 results Revenue growth of 23% Operating income growth of 52% Reviewed earnings and filings Reviewed competitor earnings and filings Decision Thesis is playing out as expected The stock not as cheap Reduce the position to control risk This presentation is for the intended recipient and not to be distributed Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary. 22

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24 Healthy Earnings Yield and Strong EPS Growth Jun 2014 Jan 2016 Note: EPS growth for 2018 is based on Bloomberg-provided consensus estimates. 24

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26 End of a 35 year bull market in bonds, rising rates to follow? Dec 2016 Falling dollar improves competitiveness and helps foreign earnings translations Source: Strategas Research Partners 26

27 Year-to-date yields have shifted across the curve Dec 2016 Falling dollar improves competitiveness and helps foreign earnings translations Source: Bloomberg, US Treasury Actives Curve 2/20/18 27

28 Whatever the reason for rate rise, caution is in order. Shifts in rates have clear and direct impact on bond prices Inverse relationship between interest rate changes and price changes Price Reaction to Yield Shifts (2.75% Treasury Note due 2/15/28; Current YTM 2.85%) Investors accept lower yields Current Price Investors demand higher yields Yield curve shift -1.50% -1.00% -0.50% +0.50% +1.00% +1.50% Resulting Price Price change 13.3% 8.7% 4.2% -4.0% -7.9% -11.6% Falling dollar improves competitiveness and helps foreign earnings translations Source: Bloomberg, GT10 Govt TRA 28

29 Our strategy: Quality, underleveraged issuers; laddered maturities weighted toward short end Golub Group Balanced Composite Bond Maturity Schedule Weighted Average Maturity ~2021 Falling dollar improves competitiveness and helps foreign earnings translations Source: Golub Group, AdvisorView as of 2/27/18 for accounts included in Balanced Composite as of 12/31/

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32 For more information, please contact your Advisor or visit Golub Group LLC. All rights reserved.