1. Registered Investment Advisor
Seaport Investment Management www.seaportIM.com 844.249.9463 1
Total Asset Partners First Quarter Review
March 2016
The roller coaster ride experienced by the financial markets in 2015 carried into the first quarter of 2016. From
an 11% negative return through mid-February global equities rallied over 13% to end the quarter barely positive.
After posting an 11% loss, U.S stocks rallied and also ended the quarter in positive territory. Emerging market
equities rebounded from down 10% to finish up 6%.
At the start of the year a widely-held view was that interest rates and the US dollar would rise, while bond prices,
oil, and gold could only drop. What happened? Global indices of government bond prices returned almost 7%,
plunging by some counts almost 40% of the world’s government bonds to negative real interest rates. At the
same time, the dollar fell 4%, oil rebounded almost 60% from its lows, and gold soared 16%.
These reversals in the market have taken place against a backdrop of a slowing economic growth. Over the past
12 months, GDP growth in the U.S. has fallen from an annualized rate of 3.9% in the second quarter to 1.4% in the
fourth quarter.
As weakness in manufacturing and energy threatened to spread to services, we’ve seen several significant
negative revisions to economic forecasts. The Atlanta Fed revised its GDPNow model for first quarter GDP growth
from 1.4% to 0.6% during the quarter and current readings have drifted lower to 0.3%. The IMF lowered its
forecast for global growth for the fourth time in a year to 3.2% for 2016 and 3.5% for 2017, citing a broader impact
from China’s economic slowdown, the effect of lower commodity prices on emerging economies, and persistent
weakness in Japan, Europe, and the United States. The IMF report also raised a cautionary flag that existing
monetary policy tools and resources may prove insufficient in fighting a global recession or financial crisis. The
trajectory of this underlying trend can be seen in the chart below, which plots change in U.S. per capita GDP versus
change in corporate profits. Neither trend appears favorable to a near-term recovery in global growth.
Source: St. Louis Federal Reserve
2. Registered Investment Advisor
Seaport Investment Management www.seaportIM.com 844.249.9463 2
Monetary authorities across the globe have responded with a dramatic expansion of quantitative easing programs
in Europe and Japan, while the Fed, which in December appeared committed to raising rates at least twice in 2016,
surprised the markets with what appeared to be a capitulation on that commitment. In a speech in late March,
Janet Yellen indicated that the Fed was willing to accept a higher risk of of inflation in order to keep economic
growth on sound footing.
Events of the first quarter have not changed our perspective or our investment strategy significantly. We continue
to have the same concerns we had at the beginning of the year over a deterioration in economic growth, market
liquidity, and security valuations, the fundamental underpinnings of market returns. Our base case remains that
consumption, which accounts for roughly 70% of GDP, will gain support from improved consumer balance sheets,
lower energy costs, a positive rate of job and wage growth, and a healthy housing market. At the same time, the
headwinds of a strong dollar should recede for manufacturing and the energy sectors while government spending
continues its inexorable growth. In aggregate these factors support our view that economic activity should
accelerate through the second half of the year and generate positive growth in the range of 2% to 2.5%.
As a key driver of the business cycle, credit conditions are not improving. Since the Fed began to scale back
purchases of government debt in 2014, the rate of growth in the monetary base and commercial loans has fallen
to low single digits. Profit margins at the banks remain under pressure in an environment of low interest rates, a
flattening yield curve, exposure to defaults in the energy sector, and an increasing burden of regulatory oversight.
The result has been slower growth in their credit portfolios and tighter credit requirements for small businesses,
perhaps the most significant driver of job growth. In public markets for credit, high yield has come under stress
as outflows continue from mutual funds and ETFs, while liquidity provided by Wall Street has dried up due to
capital requirements imposed by Dodd Frank legislation. New issuance has slowed dramatically.
We believe that valuations remain at historically high levels in both fixed income and equity markets. Valuation
may be a poor tool for timing market entry or exit, but we find it invaluable as a tool to assess risk. Recent figures
show that over 20% of the world financial markets as measured by GDP are experiencing negative interest rates.
Investors in Japanese and German bonds are guaranteed to lose principal when they hold to maturity the bonds
they buy today. Here in the U.S. real interest rates are negative out to 5-year maturities and the 10- year Treasury
offers a real return well under 1% if inflation remains at today’s level indefinitely.
At current valuations equity markets likewise carry significant downside risk. The analysis on the next page, which
was graciously provided by the Lethold Group, compares valuations of the S&P 500 at peaks and troughs in both
bull and bear markets from 1990 through 2007. If we assume a retracement in the context of a bull market, then
the valuation of the S&P 500 at the end of March represents a potential loss of almost 8% if the index reverts to
the bull market average. If we assume a retracement in the context of a bear market, the outcome, of course,
appears much worse with a potential loss approaching 34%.
4. Registered Investment Advisor
Seaport Investment Management www.seaportIM.com 844.249.9463 4
Equities (34%)
Our equity portfolio remains defensively positioned with a beta (a measure of sensitivity to market moves) of
about 80% of the S&P 500. We continue to emphasize high quality companies with moderate debt levels. While
our equity portfolio yields more than the market (3.3% versus 2.17% for the S&P 500), our objective is to find the
best combination of yield and growth rather than simply maximize current yield. We expect our equity positions
in aggregate to increase dividend distributions at a pace sufficient to support income growth in the portfolio of 3-
5% and exceed inflation. Below we provide a list of representative holdings with their current dividend yields and
one-year trailing dividend growth:
The market weakness early in the quarter provided opportunities to add marginally to a number of our holdings
including Ventas, Welltower, Exxon Mobil, Time Warner, and AmerisourceBergen. We also added several new
names to the portfolio including San Jose Water, Teva Pharmaceuticals, and Sun Trust Banks.
San Jose Water San Jose Water (SJW) operates in the Silicon Valley and has an uninterupted 30-year track
record of paying and increasing its dividend. We expect growth of the company’s rate base to
accelerate over the next 10 years as the company invests in the infrastructure necessary to
support anticipated population growth in the region. In addition, SJW has substantial real
estate holdings, which are not regulated and, in our opinion, not reflected in the current share
price. These include large undeveloped tracts of land and the parking lot at Levis Stadium, the
home field for the San Francisco 49ers.
Seaport Total Asset Partners
as of 31-Mar-16
Representative Equity Holdings & Dividend Yields
company Industry price % portfolio yield
12mo
dividend
growth
Welltower Healthcare Real Estate 55.82 0.96% 5.0% 3.4%
CVS Health Drugstores 47.78 0.95% 1.6% 25.5%
Xylem Water & Wastewater Equipment 26.91 0.91% 1.5% 10.0%
Macquarie Infrastructure Industrial Infrastructure 62.55 0.90% 6.8% 14.7%
Spectra Energy Natural Gas Pipelines 21.65 0.89% 5.3% 7.5%
Johnson & Johnson Pharmaceuticals 65.58 0.88% 2.8% 7.1%
Cisco Telecommunication Equipment 26.27 0.84% 3.7% 14.1%
Everest Re Insurance 181.15 0.84% 2.3% 23.5%
ExxonMobil Integrated Oil & Refining 72.20 0.79% 3.5% 5.8%
Time Warner Broadcasting & Cable 80.03 0.75% 2.2% 11.5%
Weyerhauser Forest Products 28.43 0.75% 4.0% 11.9%
Raytheon Aerospace/Defense 103.23 0.71% 2.4% 10.3%
AmerisourceBergen Heathcare Products Distribution 61.75 0.70% 1.6% 20.0%
Enterprise Product Partners Natural Gas Pipelines 16.35 0.70% 6.3% 5.5%
Schweitzer-Maudit Specialty Paper 39.82 0.63% 5.1% 5.4%
5. Registered Investment Advisor
Seaport Investment Management www.seaportIM.com 844.249.9463 5
Teva Teva Pharmaceuticals (TEVA) is a leading manufacturer of generic drugs, which has traded
Pharmaceuticals down 26% from its 52-week highs. Teva is a leader in generic pharmaceuticals with strong
positions across a broad portfolio of drugs. Critically, generics save money in health care. At
the current valuation of 10x free cash flow and a yield of 2%, the shares offer attractive long
term returns.
SunTrust Banks SunTrust Banks (STI) is a super-regional bank holding company that operating across the South-
eastern United States. Despite a difficult environment for banks, SunTrust continues to
demonstrate growth that is superior to that of major money center banks across most lines of
its business. After the shares traded down 31% from their the 52-week highs, the valuation
became compelling at 1.0x tangible book value, 11.4x consensus estimates for 2016 earnings,
and a 2.5% yield. SunTrust has increased its dividend 20% over the past 12 months and creates
a position in the portfolio that will benefit when interest rates rise.
In addition to these new positions, we have been able to implement conservative option strategies at particularly
attractive valuations due to higher volatility in equity markets. Our strategy has been to sell options that are 5%-
10% out-of-the-money and if exercised, would put us into the underlying equity at prices that are 80% or lower
than our estimate of fair value. If the options expire worthless, we earn roughly 8% anualized on the capital we
set aside to cover any exercise of the position. Our contingent long exposure averaged approximately 3% through
the quarter.
Fixed Income & Commodities (44%)
Bonds There were few changes to the overall portfolio structure or allocations. We were able to add
several short maturity credit positions during the quarter, but these largely replaced positions
that matured or were called. We have found less opportunity in mortgage-back securities, so
we have not reinvested in that sector the paydowns we have received from mortgages in the
underlying collateral packages. Our exposure in mortgages over the quarter fell roughly a point
from 14% to just under 13%. Our fixed income portfolio remains insulated from increases in
interest rates due to its short duration and relatively high quality. Most of our exposure to
interest rates falls in municipal debt securities, where the yield curve remains steep and we are
compensated for the risk.
Commodities After nearly four years of a painful bear market, gold was a strong performer during the first
quarter, returning over 10% in the portfolio. Despite the decline over the past four years, we
continue to believe that gold plays an important role in a diversified portfolio as a hedge and as
a tool for preserving value.
We believe an allocation of between 1% and 5% is appropriate for a number of reasons. Not
the least of these include the fact that over $7 trillion of European debt carries negative interest
rates, which means a guaranteed loss of 6% over 10 years for owning a 10-year German Bund.
We are increasingly concerned with increasing calls from academics and policy makers for what
former Fed Chairman Ben Bernanke called helicopter money—just another term for massive
quantitative monetary easing—and the specter it raises of long-term imbedded structural
