2015 INVESTMENT OUTLOOK

2015 has seen a tidal change for investors as markets have shifted focus to Domestic (Mid & Small Cap) Growth Stocks, European and Japanese Equities, and Emerging Markets from the large U.S. Mega Caps which drove the S&P 500 Index to record levels in 2014. In fact, the SLG High Growth Portfolio advanced over 10% in February alone.

Look no further than the age-old fundamentals of stock valuation to understand why this is happening and in our opinion, will continue to occur.

First, 2014 will go down as the year of the Index Investor, during which spending time to research companies based on their balance sheets, R&D, product advantages, marketing capabilities, management teams, etc., seemed like a waste of time. Investing was simple, just buy the biggest, most well-known and liquid names and earn a double digit return. Well, all good things that are too easy eventually come to an end, as fundamentals come back to roost.

In our view, the most important fundamentals are operating earnings, the price that an investor pays for the stream of future cash flows, and the ability of a company to grow. To this end, as the mega cap global brand companies began reporting earlier this year we began to see notable and significant earnings misses. Included in this group were Caterpillar, Microsoft, Wal-Mart, McDonalds and recently Hewlett Packard, all of which were followed by steep relative sell-offs.

Through these earnings misses there were common themes cited for the weakness, including the strength of the U.S. dollar hurting competiveness against foreign counterparts, slowdowns due to weakness in Europe and China, and margin pressure from increased hiring.

Additionally, many of these companies and their peers were trading at 17-19 times earnings, while lesser-known and faster growing small-cap companies were trading at 12-14 multiples. As earnings come in, investors are now beginning to realize that they are in many cases paying 30% more for a company that is growing half as fast.

Additionally, Europe has engaged in a U.S. Fed style stimulus program, providing liquidity to the EU markets and pushing down the value of the Euro. These actions are providing competitive advantages to the Large European Mega Cap Companies, most of which trade at a lower P/E than their U.S. counterparts. Earnings reports and management commentary from European companies continues to support the idea of increased profitability and growth.

Emerging markets, particularly the energy starved economies of China and India, are receiving stimulus in the form of lower oil prices. The stimulating effect is now beginning to show up as these emerging consumers have more disposable income which can be used to purchase cellular telephones, automobiles, televisions, furniture, and other desired consumer goods.

In closing, 2008 was so traumatic for equity investors and psyches were so damaged that investors refused to believe that the economic recovery was in process and felt that the only safe way to re-enter the market was to buy the biggest and most well-known U.S. companies, pushing their values to unsustainable levels.

We believe that selecting well-run companies that are not overvalued, with great products, unique niches, and strategic advantages will not only play catch-up for underperforming the last two years, but will also reward investors well into the future.