All Cap Equity Portfolio John Spicciatie Brian Mark Portfolio Manager Assistant Portfolio Manager (800) 966-9343 EXT. 204 (800) 966-9343 EXT. 205 [email protected] [email protected] MARGIN OF SAFETY ST. JAMES INVESTMENT ADVISORS “Confronted with the challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” — Benjamin Graham, The Intelligent Investor Page 2 St. James All Cap Equity Portfolio ST. JAMES INVESTMENT ADVISORS The St. James Equity Portfolio seeks long-term capital appreciation through an actively managed portfolio of companies with sustainable competitive advantages and consistent strong business performance. The portfolio will consist of approximately 30 to 35 holdings and is balanced amongst market capitalizations, sectors, and industries. We emphasize “All-Weather Businesses.” St. James employs a disciplined investment strategy by identifying high quality companies at what it believes to be attractive prices. We focus on essential companies in today’s economy but notably on companies we believe will be just as relevant in five to seven years. Exceptional business performance combined with endurance! Page 3 Objective and Why Consider ST. JAMES INVESTMENT ADVISORS ◆ We invest in quality companies with strong cash flow above operating needs. Maintain competitive advantages over the long-term by reinvesting back into their business to maintain and improve their competitive advantages! ◆ Exceptional Return on Shareholder Equity Measures how many dollars of profit generated for each dollar of shareholder equity. How well is a company utilizing its equity to generate profits? We target companies that have an ROE of greater than 15% and we believe will maintain or grow during the next five to seven years ◆ Under normal circumstances, at least 95% of the portfolio assets will be invested in equity securities selected through a thoughtful value-oriented approach. Operating Cash Flow = Net Income + Non-Cash Expenses – Increase in Working Capital Page 4 Return on Equity = Net Income / Shareholders’ Equity Investment Philosophy ST. JAMES INVESTMENT ADVISORS ◆ We believe our philosophy is a rational and intelligent approach to investing: we buy pieces of companies which we have a good understanding of at prices below our fair value assessment. ◆ We approach investing in publicly-traded companies on a long-term basis as if we were buying the company outright and retaining current management. ◆ Our goal is to provide superior long-term returns for investors while attempting to minimize risk. ◆ We seek absolute returns while attempting to outperform the S&P 500 index over the long-term. Page 5 1 Stock Selection Criteria – Buy a Business, not a Stock ST. JAMES INVESTMENT ADVISORS We approach investing in publicly traded companies as if we were buying the company and current management. ◆Think about investing as the purchase of a business. Watch the business, not the stock! ◆Utilize a sufficiently long-term time frame. If you had to hold a purchased business for five to seven years, what would it look like? ◆Acknowledge volatility does not equal risk. Price is what one pays, but value is what one gets. ◆ We buy partial ownership of companies in which we understand at prices below their intrinsic value. Is the company’s stock attractively priced? Is there a margin of safety? Page 6 Investment Process Summary ST. JAMES INVESTMENT ADVISORS Stage 1 Stage 2 Stage 3 Stage 4 Fundamental Analysis Qualification and Determining Patience Sell Discipline Fair Value Page 7 1 2 3 4 Investment Process ST. JAMES INVESTMENT ADVISORS Stage One: Qualification Identify Opportunities Market Cap > 5B Screen for companies with one or more of the following characteristics: good business, shareholder-oriented management or low purchase price Followed Opportunity Page 8 1 2 3 4 Investment Process ST. JAMES INVESTMENT ADVISORS Stage Two: Fundamental Analysis and Determining Fair Value Attractive Business Substitutes? Quality Business Existing Competitors? Competitive Advantages? New Competitors? Are They Sustainable? Pricing Power? Weather All Economic Climates? Power of Suppliers? Strong Management Capable Operators? Strong Cash Flow Return on Shareholder Equity Shareholder Oriented? Proper Incentives? Graham’s “Margin of Safety” “Sum of Parts” Analysis Discounted Cash Flow Analysis Definition Page 9 1 2 3 4 Investment Process ST. JAMES INVESTMENT ADVISORS Stage Three: Patience Assess and Monitor Fair Value – We seek to initiate positions at a discount to our fair value determination. Risk Control - We define “risk” as the probability of the permanent loss of capital, not price volatility. We believe in concentrating our portfolio on our most attractive investment ideas, which can cause short-term price volatility. A portfolio of approximately 30 to 35 companies permits ample diversification while allowing our best ideas to have the most significant positive impact on performance. It is important to note that no one company accounts for more than 7% of the portfolio assets on the cost side, and no one industry group accounts for more than 30% of the portfolio's value on the cost side. Page 10 1 2 3 4 Investment Process ST. JAMES INVESTMENT ADVISORS Stage Four: Sell Discipline ◆ Price Appreciation - The price reaches our appraisal, and no margin of safety remains. ◆ Superior Risk/Reward Elsewhere- We can improve our risk/return profile substantially. For example, we can replace a business selling at 90% of its worth with an equally attractive company trading at 50% of its value. ◆ Eroding Fundamentals - The company’s future earnings power becomes severely impaired by competitive threats, balance sheet deterioration, or poor capital allocation. ◆ Loss of Confidence in Management - We no longer believe management can build shareholder value, and efforts to find new corporate leadership would be unsuccessful or too costly. Page 11 Company Holdings Profile Page 12 ST. JAMES INVESTMENT ADVISORS ◆ Microsoft Corporation (MSFT) is a technology company and the world’s largest independent software developer ◆ Microsoft’s business segments include Productivity and Business Processes, Intelligent Cloud and More Personal Computing ◆ Microsoft's products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games, and training and certification of computer system integrators and developers ◆ It also designs, manufactures, and sells devices, including personal computers (PCs), tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories, that integrate with its cloud-based offerings ◆ It offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and it provides solution support and consulting services. About 47% of revenue is generated outside the U.S. ◆ MSFT generated annual sales of $125.8 billion in 2019 and has a market capitalization of $1.17 trillion Page 13 ST. JAMES INVESTMENT ADVISORS ◆ Alphabet Inc. is a holding company. The Company's businesses include Google Inc. (Google) and its Internet products, such as Access, Calico, CapitalG, GV, Nest, Verily, Waymo and X. The Company's segments include Google and Other Bets. – The Google segment includes its Internet products, such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome and Google Play, as well as its hardware initiatives. The Google segment is engaged in advertising, sales of digital content, applications and cloud offerings, and sales of hardware products. – The Other Bets segment is engaged in the sales of Internet and television services through Google Fiber, sales of Nest products and services, and licensing and research and development (R&D) services through Verily. It offers Google Assistant, which allows users to type or talk with Google; Google Maps, which helps users navigate to a store, and Google Photos, which helps users store and organize all of their photos. ◆ GOOGL generated annual sales of $161.8 billion in 2019 and has a market capitalization of $1.19 trillion Page 14 ST. JAMES INVESTMENT ADVISORS ◆ Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in various business activities. Its segments include: – Insurance, such as GEICO, Berkshire Hathaway Primary Group, General Re Corporation and Berkshire Hathaway Reinsurance Group – Burlington Northern Santa Fe, LLC, which is engaged in the operation of the railroad system – Berkshire Hathaway Energy, which includes regulated electric and gas utility – Manufacturing, which includes manufacturers of various products, including industrial, consumer and building products – McLane Company, which is engaged in the wholesale distribution of groceries and non-food items – Service and retailing, which includes providers of various services, including fractional aircraft ownership programs, aviation pilot training and various retailing businesses, and Finance and financial products, which includes manufactured housing and related consumer financing, transportation equipment, manufacturing and leasing, and furniture leasing. ◆ Berkshire Hathaway generated annual revenue of $327.2 billion in 2019 and has a market capitalization of $536.1 billion Page 15 ST. JAMES INVESTMENT ADVISORS ◆ Becton, Dickinson and Company (BDX) is a global medical technology company engaged in the development, manufacture and sale