HLTC Large Cap Equity Strategy Overview

Transcription

1 HLTC Large Cap Equity Strategy Overview Separately Managed Accounts September 30, 2018 Firm Overview Established in 1854, Hilliard Lyons is a comprehensive wealth management firm dedicated to putting clients first and maintaining the highest standards of service, professionalism, and stewardship in the communities our Wealth Advisors serve. For over 160 years, core values have shaped the way we do things at Hilliard Lyons. Guiding our clients with honesty and empathy, making their goals our own. Being there for the ups and the downs. As part of this family, it s an approach that comes naturally to us and served as the foundation of who we are. As a sister company, Hilliard Lyons Trust Company, LLC (HLTC) provides asset management as well as trust and estate planning services to high-net-worth clients and institutions. We are the largest state chartered trust company in Kentucky, with over $11 billion in assets J.J.B. Hilliard & Son and W.L. Lyons Company combined to become J.J.B. Hilliard, W.L. Lyons 1984 HLTC offers fiduciary services 2018 $11.2 Billion Assets 1854 J.J.B. Hilliard, W.L. Lyons engaged in general securities business through its predecessors 1972 Hilliard Lyons becomes registered investment advisor 1991 Inception of HLTC Large Cap Equity Portfolio We believe wealth is built over long periods of time rather than overnight. That s why our approach to wealth management is heavily influenced by the timeless principles and wisdom of Warren Buffett, Chairman of Berkshire Hathaway, and Benjamin Graham, the Father of Value Investing. $100,000 invested in HLTC Large-Cap Equity in 1996 $100,000 invested in HLTC Large Cap Equity added over $350,000 in value (over $3,000 net) compared to the same amount invested in the S&P 500. $1,100,000 $1,000,000 $1,014,443 Strategy Overview Our Large Cap Equity strategy invests in companies with sustainable competitive advantages and compelling valuations with the perspective of a long-term business owner. We seek companies that are industry leaders operated by skilled and shareholder-friendly managers to provide consistent revenue and earnings growth. We evaluate each company s growth prospects and appropriate value. Given our long-term perspective, earnings growth has the opportunity to compound and portfolio turnover is low. Client portfolios are constructed with 25 to 30 companies. We seek to stay fully invested to capture the superior returns associated with equity investing. $900,000 $800,000 $700,000 $600,000 Large Cap Equity Gross Large Cap Equity Net S&P 500 $661,924 $500,000 $400,000 $300,000 $200,000 $100,000 $540,074 Price is what you pay. Value is what you get

2 The Investment Process Through the investment team s collective body of knowledge, we identify companies that we consider as industry leaders that have attractive financial characteristics. Company names are added and removed as conditions change. The team then uses traditional fundamental analysis to identify 40 to 60 companies with understandable and sustainable competitive advantages such as pricing power, strong brand, or a unique corporate culture. These companies have the following attributes: A strong management team that has demonstrated their ability to allocate capital effectively and to the benefit of shareholders. Attractive financial characteristics Identifiable revenue and earnings per share growth Macro level issues are considered and contribute to our fundamental analysis. Our investment strategy looks beyond near-term economic data and forecasting of market movements. We consider the long-term macro trends and analyze the effects on different industries and businesses. We seek to invest in companies at compelling valuations. An intrinsic value is calculated for each company that we consider for purchase. We add new companies to the portfolio only when we believe they are trading at discounts to their intrinsic values. Portfolios are constructed with 25 to 30 companies. These relatively concentrated portfolios provide the benefits of diversification yet allow each company to contribute meaningfully to performance. The team invests with a long-term owner s perspective to provide the time required to achieve expected value. Historically, turnover has ranged from about 5% to 20% per year (5% in 2017, 1% in 2016 and 13% in 2015.) Sell Discipline Performance at the portfolio and security level is monitored closely. Company performance is monitored regularly to determine if the investment thesis is in place and the return potential compares favorably to potential risks. During the purchase process, the investment team establishes an investment thesis for each company in our portfolios. Additionally, the team identifies key metrics and potential risks to monitor. The sell discipline is the mirror image of the purchase process. Should new information violate the investment thesis or call into question key metrics or risk assessments, the team will investigate further to determine if a sale or allocation reduction is warranted. The investment team will sell a company if their investment thesis is violated, which means there has been a deterioration in fundamentals and/or the valuation reduces the risk/return profile. Additionally, a company may be sold to make room for a stronger company with a more attractive valuation. We take a disciplined approach to investment research and employ an investment selection process that seeks to reduce risk at both security and portfolio levels. Our equity investing is driven largely by our best ideas rather than overall market movements. Initial Use S&P 500 Initial Quality Company Search Focus on 250 High-Quality Companies Advantage List Our Process Seeks to Continuously Reduce Risk Business Risk 100 Companies with a Sustainable Business Advantage Company Risk It s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Focus List 60 Companies with Strong Management Teams and Catalysts to Drive Valuations Portfolio Companies with a Compelling Valuation Price Risk

3 A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. At Hilliard Lyons Trust Company, we seek to achieve aboveaverage investment performance over extended periods. We have built our investment strategy with long-term investment excellence as our goal. While much of Wall Street today is focused on trading around the next quarterly corporate earnings reports, the next move by the Federal Reserve on interest rates, or the next change in the price of oil, we take a much different approach. We don t think of shares of stock as trading chips to be shuffled around. Rather, we think the stock market gives investors the opportunity to be a long-term owner of a share of a business. Our experience over many years has been that wealth creation and enhancement generally results from owning outstanding businesses over the long-term. Benjamin Graham Based on a hypothetical $100,000 investment in HLTC Large Cap Equity Model Direct portfolio as of September 30, The chart below represents the 10 largest holdings in the portfolio. 7.7% Our favorite holding period is forever. Many investment managers think in terms of the next quarter or the next year when selecting an investment, and their average holding periods tend to be from several months to one or two years. Since we are long term oriented investors, we believe our performance numbers are most meaningful over longer periods of time. In our analysis of a business, we are thinking in terms of five to ten years and our average holding period for a stock is well over 10 years. Key Facts Employs a consistent, disciplined approach that focuses on high-quality companies with competitive advantages that are distinctive and not easily replicated Seeks companies that are industry leaders operated by skilled and shareholder-friendly managers to provide consistent per share earning and cash flow growth. These companies include the following characteristics: A strong management team A sustainable competitive advantage Proven earnings performance over a full market cycle Solid balance sheets 6.5% 6.4% 6.0% 5.6% 4.8% 4.7% 4.5% 4.4% 4.0% Superior cash flow Seeks to continuously reduce risk by only purchasing companies at compelling prices, which may increase both return potential and the margin of safety Constructed with 25 to 30 companies, distilled from the Apple Home Depot Microsoft JP Morgan Chase Progressive O Reilly Automotive Walt Disney Johnson & Johnson Alphabet Berkshire Hathaway universe of 500 companies in the benchmark Portfolio turnover is low, with a 5-year average of 6%, which leads to a tax efficient strategy Portfolio characteristics have shown lower volatility than the equity markets overall

4 HLTC SMA LCE Composite - 10 Year Return 10 Ending LCE SMA Gross LCE SMA Net S&P 500 Dec % 9.0% 8.5% Dec % 7.0% 7.0% Dec % 7.9% 7.3% Dec % 7.2% 7.7% Dec % 6.8% 7.4% Dec % 5.5% 7.1% Dec % 1.9% 2.9% Dec % 1.1% 1.4% Dec % 1.7% -1.0% Dec % -0.8% -1.4% Dec % 5.3% 5.9% Dec % 9.1% 8.4% Dec % 9.2% 9.1% Dec % 12.4% 12.1% Dec % 11.4% 11.1% Average Gross Value Added: 2.3% Average Net Value Added: 0.1% HLTC SMA LCE Composite - Rolling Ending LCE SMA Gross LCE SMA Net S&P 500 Sep % 7.6% 7.4% Jun % 6.6% 6.5% Mar % 6.6% 6.5% Dec % 7.1% 7.2% Sep % 7.2% 7.0% Jun % 7.3% 7.2% Mar % 8.2% 7.9% Dec % 8.0% 7.7% Sep % 8.0% 7.9% Jun % 8.1% 7.9% Mar % 8.3% 8.0% Dec % 8.5% 8.2% Sep % 8.5% 8.1% Jun % 9.1% 8.9% Mar % 9.5% 9.4% Characteristic Summary September 30, 2018 Large Cap Equity S&P500 # of Holdings Trailing P/E 18.2x 19.6x Price/Book 3.3x 3.3x Price/Cash Flow 19.5x 19.8x Dividend Yield % 1.8% 1.9% 5 Yr. EPS Growth % 5.4% 4.8% Return on Equity - 5 Yr Avg % 26.3% 23.7% Market Cap - $ Wtd Median ($bil) $313.2 $247.4 Sector Weights September 30, 2018 Sector Large Cap Equity S&P 500 Communication Services 11.6% 9.5% Consumer Discretionary 16.0% 10.3% Consumer Staples 0.0% 6.7% Energy 0.0% 6.0% Financials 25.1% 13.6% Health Care 15.0% 14.8% Industrials 10.1% 9.9% Information Technology 22.3% 21.5% Materials 0.0% 2.4% Real Estate 0.0% 2.4% Utilities 0.0% 2.8% The chart above illustrates the portfolio s sector exposure in comparison to that of the S&P 500. Average Gross Value Added: 2.3% Average Net Value Added: 0.1% Annualized Returns Qtr 3 YTD 1 Year LCE SMA - Gross 11.4% 13.2% 22.4% 16.9% 14.9% 13.4% 10.5% 9.6% 11.8% LCE SMA - Net 11.0% 12.1% 20.9% 15.3% 13.4% 11.9% 8.9% 7.6% 9.6% S&P 500 Index 7.7% 10.6% 17.9% 17.3% 14.0% 12.0% 9.7% 7.4% 9.8% Past performance is not indicative of future results. Please see performance disclosure on last page.

5 Our Investment Team We love what we do because we re doing what we love: serving our clients wealth management needs over a lifetime. Our experienced investment team has more than 60 years of combined experience and has navigated the financial market challenges of last quarter century. We look forward to helping you achieve your long-term financial goals. Andrew W. Means, CFA Lead Manager Andy is a Senior Vice President and Director of Investments of Hilliard Lyons Trust Company, LLC. He is the lead manager of the Large Cap Equity strategy and also serves as Portfolio Manager for institutional and high-net-worth investors. Andy has 35 years of experience in the investment industry. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Louisville. Andy began his investment career as a financial consultant with Hilliard Lyons for seven years. After that, he was a portfolio manager with PNC Financial Services Group for five years before rejoining Hilliard Lyons. He has a B.A. from Furman University and a M.B.A. from Bellarmine University. Andy joined Hilliard Lyons in John C. Watkins III, CFA Associate Portfolio Manager John is a Vice President, Equity Portfolio Manager and Equity Analyst for Hilliard Lyons Trust Company, LLC (HLTC). He is an Associate Portfolio Manager of the HLTC Large Cap Equity strategy. John has eight years of experience in the investment industry. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Louisville. Additionally, John serves on the Board of Directors for the CFA Society of Louisville. John spent five and a half years at River Road Asset Management, LLC as an Equity Research Analyst. Before that, he was an Equity Research Associate for Fidelity Management & Research, Co. in Boston, MA. John has a B.B.A. in Finance from the University of Notre Dame. He serves on the Board of Directors for the Notre Dame Club of Louisville. John joined Hilliard Lyons in 2016 Ross Demmerle Equity Analyst Ross is a Vice President and Equity Analyst of Hilliard Lyons Trust Company, LLC. He has 24 years of experience in the investment industry, with an emphasis on investment research. Ross was a Research Analyst with J.J.B. Hilliard W.L. Lyons, LLC Research Department for 15 years, where he focused on banks and business development companies, before joining Hilliard Lyons Trust Company in Before joining Hilliard Lyons, he was a Vice President with McDonald & Company Securities, Inc. for seven years following financial institutions in the research department for five years and two years as an analyst in investment banking. Before that, he was a Bank Examiner for Federal Deposit Insurance Corporation. He has a B.A. in Business Administration from Baldwin-Wallace College and an M.B.A. from Indiana University. Ross joined Hilliard Lyons in In the world of business, the people who are the most successful are those who are doing what they love.

6 Hilliard Lyons Trust Company, LLC. Large Cap Equity SMA Composite Annual Disclosure Presentation Year End Total Firm Composite Assets Annual Performance Assets (millions) U.S. Dollars (millions) Number of Accounts Composite Gross** Composite Net S&P Year Annualized Std Dev Composite S&P 500 Composite Dispersion , % 17.11% 21.83% 10.55% 10.07% 0.12% , % 10.20% 11.96% 11.26% 10.74% 0.06% , % 2.67% 1.38% 10.99% 10.62% 0.05% , % 14.01% 13.69% 9.94% 9.10% 0.14% , % 34.91% 32.39% 12.07% 12.11% 0.30% , % 18.72% 16.00% 15.21% 15.30% 0.25% , % 4.37% 2.11% 19.15% 18.97% 0.06% , % 14.40% 15.06% 21.53% 22.16% 0.17% , % 22.22% 26.47% 19.04% 19.91% 0.33% , (32.23%) (33.07%) (37.00%) 13.81% 15.29% 0.28% , ( 1.38%) ( 2.65%) 5.49% 7.81% 7.79% 0.50% N.A. - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. * Results shown for the year 2005 represent partial period performance for the Large Cap Equity Composite from January 1, 2005 through September 30, 2005 and the Large Cap Equity SMA Composite from October 1, 2005 through December 31, **Gross returns beginning October 1, 2005 are pure gross-of-fee returns and do not reflect the deduction of any expenses, including trading costs and are shown as supplemental information. Compliance & Verification The Large Cap Equity SMA Composite was created October 1, A performance certification of this composite has been conducted by Ashland Partners and Company, LLP for the period of October 1, 2005 through June 30, 2016 and by ACA Performance Services, LLC for the period of July 1, 2016 through December 31, The Firm Hilliard Lyons Trust Company, LLC (HLTC) is owned by HL Financial Services LLC ( HLFS ), which is owned by Houchens Industries, Inc., employees, and a limited number of outside investors. HLFS also owns J.J.B. Hilliard, W.L. Lyons, LLC ( Hilliard Lyons ). In 1998 The PNC Financial Services Group, Inc. (PNC) acquired Hilliard Lyons and the original Hilliard Lyons Trust Company. The original Hilliard Lyons Trust Company was merged into PNC Bank, NA, but continued to operate as a separate division doing business as Hilliard Lyons Asset Management. In August 2007, HLCM was formed to provide institutional money management as a registered investment advisor and to house the investment manufacturing capabilities of Hilliard Lyons Asset Management (HLAM); it did not begin operations until March In March 2008, PNC sold Hilliard Lyons, HLCM and a newly formed Hilliard Lyons Trust Company (which continued the trust business of HLAM) to HL Financial Services, LLC. On April 8, 2011, HLCM closed and certain assets were transferred to HLTC. The Composite HLTC s Large Cap Equity strategy focuses on investing in companies with sustainable competitive advantages and compelling valuations with the perspective of a long-term business owner. Identified through fundamental analysis, the companies in our Large Cap Equity portfolio are industry leaders providing consistent revenue and earnings growth that are operated by skilled and shareholder-oriented managers. The Large Cap Equity SMA Composite contains fully discretionary tax-exempt Large Cap Equity separately managed accounts. Prior to January 1, 2015 the composite contained both taxable and tax-exempt clients. For comparison purposes the composite is measured against the S&P 500 Index. In reports shown prior to January 1, 2007 the composite was compared against the Russell 1000 Value Index. The benchmark was changed to more accurately reflect the strategy of the composite. The minimum account

7 Hilliard Lyons Trust Company, LLC. Large Cap Equity SMA Composite Annual Disclosure Presentation (Continued) size for this composite is $100 thousand. Prior to October 1, 2005 performance represents that of the Large Cap Equity Composite which is also measured against the S&P 500 Index. The minimum account size for the Large Cap Equity Composite was $2 million. Prior to September 30, 2007 the composite was known as the Large Cap Value SMA Composite. Prior to July 1, 2004 this composite was known as the Institutional Value Composite. The name was changed to better reflect the composite strategy. Additional information regarding the Large Cap Equity Composite is available upon request. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of fees and include the reinvestment of all income. Beginning October 1, 2005 wrap fee accounts make up 100% of the composite. For this period forward, gross returns are shown as supplemental information and are stated gross of all fees and transaction costs. Net returns are reduced by all fees and transaction costs incurred. Prior to October 1, 2005 net results have been reduced by the highest annual wrap fee of 2.75%. Accounts in the composite pay an all-inclusive wrap fee based on a percentage of assets under management. Other than brokerage commissions, this fee includes investment management, portfolio monitoring, consulting services, and in some cases, custodial services. Prior to October 1, 2005, performance presented represents that of the Large Cap Equity Composite, which did not include wrap fee accounts and gross performance was reduced by transaction costs. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. For periods August 2007 through April 8, 2011 Hilliard Lyons Capital Management, LLC was used as a sub-advisor for implementing the Large Cap Equity strategy. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Composite policy requires the temporary removal of any portfolio incurring a client initiated significant cash inflow or outflow of at least 15% of account value. Prior to January 1, 2010 a significant cash flow was defined as 5% of composite assets. Prior to November 1, 2004, settlement-date and trade-date valuations were used to calculate performance. Wrap fee schedules are provided by independent wrap sponsors and are available upon request from the respective wrap sponsor. Actual investment advisory fees incurred by clients may vary. Prior to October 1, 2005, carve-outs were included in this composite. Performance reflects required total segment plus cash returns using a pro rata cash allocation. As of September 30, 2005, 13% of composite assets were comprised of carve-out segments. HLTC maintains a complete list and description of composites, which is available upon request. Past performance is not indicative of future results.