Summary of Our Recent Investment Strategy Meeting

We held our second quarter investment strategy meeting on March 28, 2013. Despite the market achieving record levels recently, we remain constructive on the outlook for equities for a number of reasons. We expect the economy to continue to grow with the potential for some acceleration later this year and in 2014. Continued economic growth should support further growth in corporate profits and cash flows, which are key drivers for stocks. We expect inflation to remain relatively low, particularly near term, and with a continued accommodative Federal Reserve policy, we also expect interest rates to remain relatively low. Valuations, while increased, are not yet at levels that would cause us to be overly concerned. We also believe investor sentiment, reflected in continued apathy and disbelief, remains constructive.

We now view the stock market as reasonably valued but not overvalued. We believe the enormous amounts of cash sitting in corporate coffers provides considerable “fuel” to ramp up M&A activity, which would be positive for stock valuations. We see similarities in the current market with that of the late 1970s and early 1980s period. During that period towards the end of that secular bear market, corporate cash flows became grossly undervalued. This eventually resulted in a wave of mergers and LBOs that preceded the secular bull market of 1982-2000. We think many of the same conditions exist now: lot’s of corporate cash, many businesses still undervalued relative to sustainable cash flow.

With regard to fixed income, we are keeping an eye on the possibility that interest rates could begin to rise more sharply. Interest rates, as reflected in the 10-year Treasury, actually bottomed in late July and have risen modestly since then, perhaps presaging an improving economy or an end to Fed easing. Given the rather modest growth of the economy, as of now, we suspect any increase in rates will continue to be moderate and not of a jarring or rapid increase that could upset the stock market. We are watching the trends in interest rates carefully as a rapid rise in rates would have potentially negative ramifications for both stocks and bonds.

In terms of changes to our allocation model following the meeting, we increased our allocation to equities slightly, while reducing exposure to fixed income. The increases in our equity allocations were primarily in large cap equities, mid-cap growth stocks, and natural resources. Within large cap equities, we added a new investment in the health care sector. We believe this sector offers strong secular growth prospects and believe it deserves some added emphasis in client portfolios. Our reduction in fixed income exposure was primarily centered in intermediate-term holdings, primarily intermediate-term TIPS.