Tag Archives: performance statistics

Recently, our teammate Bill Coleman celebrated his 60th birthday. He and his wife are on a much-deserved vacation and celebration trip to Italy and Croatia. So, this quarter’s letter is a team effort.

Uncertainty reared its head again during the second quarter, especially in May. Most investors hate uncertainty, but as the quote above puts it, investing is an exercise in making decisions under conditions of uncertainty.

After a solid first quarter, stocks continued their advances in April. Perceptions related to the U.S. and China trade war shifted in early May as President Trump issued a deadline to increase the 10% tariffs to 25% on imports. For good measure, he also threatened Mexico with tariffs because of unresolved border and immigration issues. Consequently, May returns were the worst since 2010. The S&P 500, the Nasdaq, Russell 2000 delivered minus 7.93%, 6.64% and 6.69% returns respectively. Meanwhile, bond yields collapsed. Ten-year Treasury bonds now yield only 2.13%, down from 3.25% in the past six months.

We all seem to have short memories these days, so let’s go back nine months to October 2018. Yields were climbing, and the Fed was looking to raise rates due to positive economic data. Consequently, stocks tanked almost 20% in November and December due to worries that HIGHER bond yields would hurt stocks. However, the trade war started affecting the economies abroard and at home. Mario Draghi, President of the European Central Bank, was the first to announce monetary accommodations and the Fed soon followed suit discussing lower rates. Remember, that the price paid for a stock today represents the discounted present value of the future stream of earnings of the stock. A key component in the discount of the future stream of earnings is the interest rate. The lower the interest rate used in the discounting, the higher the present value of the stock. With the announcement of lower rates, the market took off, and yields decreased.

This market volatility was exacerbated by the computer trading that we have written about in previous letters. Programs are created to trade on headline news and market trends versus company fundamentals. For example, when news hit about new tariffs, markets traded down rapidly due to the program algorithms. Although such down days and volatility are scary, we use such events as opportunities to enhance positions or buy new positions. With our experience and battle-tested process, we know when companies are trading at attractive valuations. So, while we do not like that 20 – 30% of the market trading is driven by these computers, we do use their illogical trading to buy good companies at reasonable prices.

The big question is, where do we go from here? The bond and stock markets are priced in the 0.25% rate cut in July. Stocks are at all-time highs. In the early stages of earnings season, corporate profits seemed to be flat to modestly higher. There is no doubt that the record-long expansion is showing its age, but falling interest rates are propping the economy and companies. It seems like we have heard this song before—don’t fight the Fed. We believe that even if we receive good trade and economic news, the market would extend its gains, but not replicate the first two quarters.

So, we are back with market uncertainty for the last half of the year. If you have ever read a book about Naval SEALs, there seem to be two underlying common themes:

We believe these two principles apply to Wealth Management too. Live Oak Private Wealth believes in every client having a financial plan that clearly outlines your goals and objectives. Through appropriate allocation, it shows a path to achieving your life dreams and gives peace of mind. But things change. The market certainly has volatility-trade wars, the 2020 election, etc. We can’t control that uncertainty. However, Live Oak Private Wealth can control its research (our wingspan) and the companies we invest in. We’re focused on companies with competitive moats, solid management, a good balance sheet and positive cash flow. So, when markets change, we know what we own and feel good about the companies in our portfolios.

Thank you for trusting Live Oak Private Wealth with your family’s planning and investing.

Focused Opportunity Commentary and Thoughts

Our Focused Opportunity Portfolio is our signature investment portfolio, which carries our highest conviction opportunities. This portfolio has unlimited flexibility and can appear uncomfortably quirky at times. Bargain investments are usually found when a company has experienced a controversial event, general pessimism or poor performance. This portfolio invests across the capitalization spectrum and is conviction weighted to our most attractive companies.

In the second quarter, Focused Opportunity returned 4.84% (gross) and is up 16.28% to date (total).

Ten Largest Investments

June 30, 2019

Year Acquired		Year Acquired
Berkshire Hathaway	1998	Google C	2008
Microsoft	2006	Carmax	2018
United Healthcare	2012	Charter Communications	2007
Apple	2011	HCA Healthcare	2014
Bank of America	2013	Visa	2013

 

Portfolio Activity: During the 2nd quarter, we increased our positions in Google and United Healthcare.

Performance Attribution

Contributors		Detractors
Carmax	+41%	Bank of New York	-16%
Disney	+22%	Schwab	-14%
Microsoft	+19%	Schlumberger	-12%
Mastercard	+16%	Fed Ex	-10%
Visa	+16%	CVS	-6%

 

Focused Opportunity Featured Company:

Disney (Walt) Co

We are all familiar with Disney. But many fail to recognize the unique, unrepeatable assets Disney has. These assets are a competitive advantage that provides healthy margins and pricing power. Since recently acquiring the assets of 21st Century Fox, Disney’s position is bolstered by its leading position in media content and distribution. Disney owns 60% of HULU and is now rolling out a new over the top (OTT) subscription-based streaming service called Disney+. This platform could further leverage all of Disney’s properties and allow for deep cohesiveness to develop, share and promote (sell) more Disney content. Content is king, and Disney is incredibly well-positioned. The stock at its current price is a little expensive but should be a solid core investment for years to come.

Select Portfolio Commentary and Thoughts

Our Select Portfolio might be best understood using a sports analogy. Select consists of our bench players or our on-deck circle of companies. These are companies we admire and ones who compliment positions in Focused Opportunity. Select would be considered an all-cap core portfolio that is style agnostic. It invests across the capitalization spectrum yet leans towards growth. Select is also conviction weighted to companies we view have the best price to value relationship.

In the second quarter, the Select Portfolio returned 2.65% (gross) and is up 18.81% YTD (gross).

Ten Largest Investments

June 30, 2019

Year Acquired		Year Acquired
Google A	2009	Markel	1998
Citigroup	1998	Anthem	2002
Fox Corp A	2019	Delta Airlines	2017
Lowes Companies	2018	Facebook	2019
Comcast	2004	Mohawk	2018

 

Trading activity for the 2nd quarter: During the quarter, we sold Qualcomm and DowDupont. We increased our positions in Fox, Anthem and Lowes.

Performance Attribution

Contributors		Detractors
American International Corp	+23%	Boeing	-17%
Facebook	+19%	Apache	-15%
Ecolab	+16%	Anthem	-8%
Delta Airlines	+16%	Liberty XM Sirius	-8%
Medtronic PLC	+11%	Google A	-5%

 

Select Portfolio Featured Company:

Fox Corporation (FOXA)

The Fox Corporation is an American television broadcasting company headquartered in New York. It has reformed this year from the acquisition of 21st Century Fox by Disney. Fox Corporation was a spinoff from 21st Century Fox as a stand-alone company in March of this year. Fox offers “must-have networks” that are mainly immune to disruption from cord-cutters and over the top providers. The must-have networks are Fox News, Fox Sports, to name a few. Netflix said this about Fox in their letter to shareholders last year: “New Fox appears to have a great strategy, which is to focus on large simultaneous viewing of sports and news. These content areas are not disrupted by on-demand viewing in the way TV series and movies are, so they are more resilient to the rise of the internet.” Fox owns part of Roku and is underleveraged and converts almost all income to free cash flow. Fox possesses valuable tax deferrals as well.

Equity Income Portfolio Commentary and Thoughts

Our Equity Income Portfolio, like our other three, is a concentrated portfolio. Equity Income consists of high-quality companies with sustainable competitive advantages. They all have average to above-average dividend yields, along with the potential for dividend growth. The portfolio’s objective is to offer the opportunity for attractive total returns with the possibility of slightly higher income.

Equity Income, like Select, Focused Opportunity and International, is a go-anywhere portfolio that is style and capitalization agnostic.

In the second quarter, the Equity Income Portfolio returned 2.48% (gross) and is up 11.97% YTD (gross).

Top Largest Investments

June 30, 2019

Year Acquired		Year Acquired
JP Morgan	2007	Home Depot	2004
Walmart	1998	Intel	1998
Exxon	1998	Bristol Myers	2018
Chevron	2017	Target	2018
Cisco Systems	1998	Lockheed Martin	2018

 

Trading activity for the second quarter: There was no trading activity.

Performance Attribution

Contributors		Detractors
Air Products	+26%	Walgreens	-18%
Target	+19%	3M	-16%
Lockheed Martin	+17%	Bristol Myers	-15%
Pepsi	+13%	Eli Lilly	-14%
Walmart	+13%	Intel	-10%

 

Equity Income Portfolio Featured Company:

Air Products & Chemicals, Inc. (APD)

Many people don’t know about Air Products and their value as a business. They supply industrial gases to thousands of customers, which helps them become more efficient and sustainable. The company makes enormous quantities of hydrogen for energy companies to use to make gasoline, not to mention helium for our birthday balloons. Many also don’t know the everyday daily use of their gases. They provide high-priority gas to chill and freeze everything from shrimp and chicken to Sara Lee pound cakes. We all understand the concept of welding metal for automobiles and thousands of other metal products. It takes Air Products’ gas to make the welding torches work. The industrial gas business, which Air Products is the leader in, is a boring behind-the-scenes American business that is very profitable and sustainable. Our manufacturing economy could not function without them. We remain very comfortable as a long-term investor in Air Products.

International Portfolio Commentary and Thoughts

International Portfolio: Our International Portfolio is also highly concentrated in what we feel are superior, growing businesses. The portfolio’s objective is to expose us as long-term investors to other opportunities worldwide. The mandate allows for unlimited geographical reach and can own any size capitalization business. The majority of the world’s growth is outside the U.S., and therefore, we hope to capitalize on that.

In the second quarter, the International Portfolio returned 1.91% (gross) and is up 19.81% YTD (gross).

Ten Largest Investments

June 30, 2019

Year Acquired		Year Acquired
Nestle	2002	JD.Com	2018
Alibaba	2018	Safran	2018
Fiat Chrysler	2018	Ten Cent	2018
New Oriental Education	2018	Development Bank of Singapore	2018
Ferguson	2019	Naspers	2018

 

Trading activity for the second quarter: We sold Daimler and Fairfax Financial and added Hollysys Automation Technologies Ltd. and Schneider Electric.

Performance Attribution

Contributors		Detractors
Linde	+19%	Baidu	-28%
Allergan	+19%	Alibaba	-8%
New Oriental Education	+17%	Fiat Chrysler	-6%
Schnieder	+15%	DNB Asa	-3%
Nestle	+14%	Lanxess	-1%

 

International Portfolio Featured Company:

Hollysys Automation Technologies Ltd. (HOLI)

Founded in 1993, Hollysys is a provider of automation and control technologies and products. In fact, they’re the leading
provider in China. Hollysys has a nationwide presence in 60 cities. Their proprietary technologies and products are tailored to
industrial, rail, subway and nuclear industries. This product line includes:

We like the long-term prospects of Hollysys as the leader in artificial intelligence and technology automation.

Live Oak Private Wealth Investment Philosophy

Three Pillars

We consider potential losses before gains. We think about multiple scenarios that could affect us. We ask how much might we lose before we ask how much we might make.

We focus on absolute returns, not relative returns. Our goal is to lose less than the market. We don’t manage to a benchmark.

We do not focus on the macroeconomic environment. We focus on great businesses we can invest in at a fair price.

Our Beliefs

We believe your lifetime investment results will be mostly governed by two variables: behavior and asset allocation.
We consider the three quotes below by two very famous investors daily in our thoughts, research and work.

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude
and pays the greatest reward.” – John Templeton

“Be fearful when others are greedy and greedy when others are fearful.”
“Price is what you pay; value is what you get.” -Warren Buffett

Guiding Principals

• A share of stock represents a share in the ownership of a business.
• A stock exchange is nothing more than an auction place that provides a convenient means for exchanging your
  ownership in business for cash and vice-versa.
• Our investment approach would be akin to applying a private equity mindset to investing in public markets.
• We limit our search for qualifying investments to good businesses. They have identifiable, sustainable competitive
  advantages.
• Risks to us are permanently losing capital over a five-year time horizon. Market volatility is not a risk to us.
• Our primary return goal is to compound money at real rates of return (4-5%) above inflation over our five-year time
  horizon.
• Compounding capital at 7% doubles your assets in 10 years.

Disclosures

1) Past performance is no guarantee of future results and future performance may be higher or lower than the performance shown.

2) This performance composite represents results from all actively managed, fully invested accounts at the firm. The composite results include all accounts managed for capital appreciation and income.

3) There can be no assurance that our portfolio management or any account managed by our investment managers will achieve a targeted rate of return or volatility or any other specified parameters. There is no guarantee against loss resulting from an investment.

4) Performance is presented net of fees. Calculated using Orion standards. Periods greater than one year are annualized. This information has been obtained from sources that were deemed reliable, but cannot be guaranteed nor verified.

5) The method for calculating the composite returns includes a monthly weighted (weighting of monthly beginning values, adjusting for time-weighted average returns to derive quarterly and annual returns.

6) Investment objectives, returns, and volatility are used for measurements and/or comparison purposes only and are only a guideline for prospective investors to evaluate our investment strategy and the accompanying risk/reward ratios.

7) Comparison to any index is for illustrative purposes only. Certain information, including index and benchmark information, has been provided by third-party sources, and although believed to be reliable, has not been independently verified and its accuracy cannot be guaranteed.

8) The information contained here is not complete, may change, and is subject to, and is qualified in its entirety by, the more complete disclosures, risk factors, and other important information contained in Part 2A or 2B of Form ADV. This presentation is for informational purposes only and does not constitute an offer to sell or as a solicitation.

9) Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor.

10) Opinion and thoughts expressed are those of Bill Coleman and not Live Oak Bank.

Wow. What a rebound. The last five months have proven that market timing is a futile exercise. Equity markets reversed course and marched steadily higher in the first quarter. The fears that drove the market down in November and December were alleviated this quarter as prospects for a trade deal with China, and a complete 180 by the Fed regarding rate hikes provided the fuel for a strong rally. The first quarter produced very strong returns for global stock markets. The S&P 500 was up 13.6% on a total return basis. This was almost a mirror image of the fourth quarter of 2018 when the S&P 500 was down 13.5%. This quarter’s gains were still not quite enough to make up for last quarter’s losses, as it takes almost a 15% gain to offset a 13.5% loss.

One of the highlights of the quarter was our annual trip to the Columbia Business School Investment Conference in New York. We try and attend as many of these types of conferences, filled with thought leaders, as our budget allows us to learn and hopefully hear about an investment opportunity. In our experience, a great investment is the serendipitous result of a prepared mind encountering and acting upon the right opportunity. We didn’t leave New York with a lot of specific ideas, but we derived tremendous value from the time spent with many smart investors.

An amusing anecdote to the trip (that relates to our portfolios) goes something like this: The journey began with an alarm beeping on a smartphone made by Apple, (which has 62% of market share in the U.S.) followed by our uneventful flight to New York on Delta Airlines (17% market share in the U.S.). We paid for our taxi trip into the city with a piece of plastic issued by Mastercard (we own Visa, too), which controls 70% of the credit card market. We checked Google hundreds of times for information (60% of the internet browser market). Our Apple smartphones, transmitted over Verizon’s network (one of three that controls 78% of the telecom market) and our laptops by Microsoft running on AZURE in the cloud, provided us with information as if we were sitting in our offices.

The firms above involved in the journey made profits last year of over $150 billion and had a median return on capital of 26%. An equally weighted basket of their shares has outperformed global stock markets by a large percentage over the past ten years.

The point of the anecdote is that we approach investing from a commonsense, business person’s point of view. The businesses above are commonplace in our lives today and possess many of the attractive attributes we look for in an investment. We don’t just “put money in the stock market” we thoughtfully invest as co-owners in attractive businesses we think we can understand and are engaged with daily such as Apple, Delta, Mastercard, Visa, Google, Verizon and Microsoft.

Attractive businesses such as these are durable franchises that have high barriers to entry, expensive switching costs, enjoy healthy stable margins and most importantly, generate lots of free cash flow. We want to invest alongside management owners who allocate this free cash flow in a manner that maximizes our wealth in the long run.

There are only a few options for management to allocate free cash flow:

• Expand current business operations
• Pursue business opportunities in adjacent or unrelated areas
• Make acquisitions
• Accumulate cash
• Return cash to shareholders

When considering the first four options a company has from the list above, capital allocation of free cash flow must generate an attractive incremental rate of return on that reinvested capital. If this is not possible, it should be returned to us as shareholders. Dividends and share repurchases are the most common form of returning the cash to the shareholders.

Dividends are the most straightforward way for the return of excess capital, but it is the least flexible and most impacted by tax consequences. The cash generated by the business has already been taxed once and then our dividends get taxed again when we receive them.

If executed with price discipline, a share repurchase program can be a very efficient means of returning capital to shareholders. The only taxes that may be imposed would be on those who sold their shares. Share repurchases have been a political football these days in the financial media. Politicians on the left seem to think that if companies repurchase their shares, they are not reinvesting in their business and benefiting the economy. This is a misguided view in our opinion as it presumes that the “reinvested cash” is somehow lost to the economy rather than reinvested elsewhere or consumed which might have positive feedback effects.

Politics and investing are getting more blurred by the year, especially now with the rise of populism and the threat to capitalism.

Ray Dalio at Bridgewater and Howard Marks at Oaktree have been commenting a lot recently about significant social and economic trends that have contributed to increases in economic inequality, and thus the rise of populism. Ray Dalio put out a fascinating post on January 28 titled Populism + Weakening Economy + Limited Central Bank Power to Ease + Elections = Risky Markets and Risky Economies. Howard Marks commented in his recent letter to investors that he is drawn to the following passage in Dalio’s post:

“Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right.”

Marks adds: “As a rule, populists of the right (who are usually capitalists) don’t know how to divide the pie well, while populists of the left (who are usually socialists) don’t know how to grow the pie.”

The role of capitalism and its wealth creation has been a boon to America. Our investment team is keenly aware of social changes underfoot in the U.S. and the upcoming elections. The increasing conflicts and risky markets that Dalio speaks to are front and foremost in our minds as we weigh the risks and reward opportunities of the current investment climate.

The quarter to quarter extreme bullishness and bearishness we just witnessed is based on emotional mood swings by investors as they handicap the probabilities of slowing economic growth around the world. Continual worries about the fate of a trade pact between the U.S. and China as well as the central banks’ decisions to deploy additional stimulus, combined to exacerbate investor fears. There was fear at the beginning of the quarter that major economies around the world were decelerating faster than expected. By the time the quarter closed out, many of these fears were abated somewhat by the expectation of further Fed easing policy.

All of this is being played out in the markets as the current bull market is turning ten years old. March 9th marked the 3,653rd day since the market bottomed at the end of the financial crisis. The 305% rise since March 2009 ranks as the 3rd largest bull market run. This run could be tested as we enter the second quarter and most stocks face the potential for a pullback in corporate profit growth. Several companies we own or follow have already warned that their profits will be less than expectations. Valuations have crept up during the quarter and are now back to the upper end of the historical range. Much of the concern about slowing profit growth is due to the high mark set during last year’s tax cut fueled earnings boom, making year over year growth comparisons hard to meet without further economic stimulus. We will be watching closely to see if increased wage gains that have been reported are starting to affect corporate margins.

Portfolio(s) Discussion and Commentary

Now settled in at Live Oak Private Wealth with our feet firmly planted on the ground, it’s time to enhance the format of these quarterly letters, especially since we have new strategies and new clients. Our investment team manages four portfolios with different approaches. We’re going to be breaking out separate commentary for each that will be listed at this end of this broader commentary.

• Focused Opportunity Portfolio
• Select Portfolio
• Equity Income Portfolio
• International Portfolio

So the pendulum continues to swing – moving way beyond at times what fundamentals justify in both directions as we have witnessed in the last 180 days. Our primary objective remains to reduce risk and to protect your capital. We will also continue to limit our investments to companies with stable values and to compound your money at rates above inflation and create real wealth for your family. Please revisit our Live Oak Private Wealth Investment Philosophy, beliefs and guiding principles in the appendix to this letter.

A lot is going on in the world today. Many challenges are apparent such as the threats to capitalism and real issues around income inequality and populism. Many people on our team have been entrusted with client capital for a long time. The future is always uncertain, but thoughtful and active value investing is more of a certainty. With artificial intelligence, robotic investment models and the masses convinced passive investing is the holy grail, those of us who remain fundamental practicing investors in businesses will endure with solid returns.

Our focus remains a long-term orientation which affords us the privilege to look further on the horizon to capture investment returns that are just not available to the masses who are focused on the next data points. We all continue to study broadly to prepare our minds for potential investments that may appear. We feel like this focus on study, along with a long-term perspective coupled with experience and discipline, is our competitive advantage at Live Oak Private Wealth.

In closing, it remains a privilege for our team to report to you on our progress. We are grateful and appreciative for the opportunity to help grow your family’s wealth. It was a busy, productive quarter and we regained almost all of the fourth quarter declines.

We are blessed with great technology at Live Oak, and we are trying our best to utilize it. We have an excellent, secure, client portal that you can access through our Live Oak Private Wealth website, www.liveoakprivatewealth.com. We encourage you to utilize this client portal as we will be delivering more and more important and pertinent information and documents to you through the secure portal. These would include quarterly progress reviews, performance reports, cash flow plans as well as these investment commentaries. Please let any of us know if you need help in getting into our secure client portal.

Our entire team is humbled and blessed by your willingness to compensate us for doing something that we love to do and is so meaningful and rewarding to us all. We look forward to our continued shared success in this partnership.

Focused Opportunity Commentary and Thoughts

Our Focused Opportunity Portfolio is our signature investment portfolio which carries our highest conviction opportunities. This portfolio has unlimited flexibility to shift among styles and can appear uncomfortably idiosyncratic at times. Bargain investments can usually be found around controversial events on a company, general pessimism or those that have been performing poorly of late. Focused Opportunity invests across the capitalization spectrum and is conviction weighted to our most attractive companies.

In the first quarter, Focused Opportunity returned 10.71% (gross).

Position Weightings – March 31, 2019

Berkshire Hathaway	8%	Fed Ex	4%
Charles Schwab	6%	Charter Communications	4%
CVS Healthcare	5%	Disney	3%
United Technologies	5%	Abbot Labs	3%
Bank of New York	5%	United Healthcare	3%
Carmax	5%	Dollar Tree	3%
Apple	5%	Visa	3%
Microsoft	4%	HCA Healthcare	3%
Bank of America	4%	Axalta Coatings	3%
Brookfield Asset Mgt	4%	Verizon	2%
Mastercard	4%	Schlumberger	2%
General Motors	4%	AON	2%
Google C	4%	Verisign	2%

Top 5 positions 26%

Top 10 positions 49%

Top 15 positions 69%

Portfolio Activity: During the quarter, we received shares of Disney and (new) Fox for our existing 21st Century Fox shares.

No other portfolio activity.

Contributors		Detractors
Berkshire Hathaway	8%	Fed Ex	4%
Mastercard	+25%	CVS Health	-18%
Verisign	+22%	Fox A (new)	-3%
Charter Communications	+22%	Berkshire Hathaway	-2%
Brookfield Asset Management	+22%	United Healthcare	-1%
United Technologies	+21%

Focused Opportunity Featured Company:

United Technologies (UTX)

UTX is a high-quality industrial conglomerate which owns market-leading businesses such as Pratt & Whitney, Rockwell Collins, Otis Elevator and Carrier HVAC. The conglomerate company is undertaking a value-creating three-way separation of its main businesses to realize the full potential of its franchise assets. As standalone businesses, each of them should benefit in the long run from a more focused corporate strategy, more flexibility in allocating capital, better alignment of management incentives and generate strategic optionality. Estimates of 20% of UTX’s market cap or $20 billion could potentially be unlocked due to higher multiples assigned to the individual businesses versus the conglomerate. During 2018, UTX’s organic revenue grew 8% and earnings 14%, yet its stock declined. We think the upcoming spinoffs will likely serve as a catalyst for future significant share price appreciation.

Select Portfolio Commentary and Thoughts

Our Select Portfolio might be best understood using a sports analogy. Select consists of our “bench players” or our “on deck circle” of companies. These are companies we admire and ones who compliment positions in Focused Opportunity. Select would be considered an all-cap core portfolio that is style agnostic. It invests across the capitalization spectrum yet leans towards growth. Select is also conviction weighted to companies we view have the best price to value relationship.

In the first quarter, the Select Portfolio returned 15.77% (gross).

Position Weightings March 31, 2019

Citigroup	6%	Delta Airlines	4%
American International Corp.	5%	Oracle	4%
Comcast	5%	Lowes Companies	4%
Mohawk	5%	Apache	4%
Liberty SiriusXM C	5%	Facebook	4%
DowDupont	5%	Analog Devices	3%
Goldman Sachs	5%	Danaher Corp	3%
Lennar	5%	Anthem	3%
Honeywell	4%	Ecolab 3%
Medtronic PLC	4%	Cheniere Energy	3%
Moodys	4%	Restaurant Brands Int’l	2%
Google A	4%	Boeing	2%
Markel	4%

Top 5 positions 26%

Top 10 positions 49%

Top 15 positions 69%

Trading activity for the first quarter: During the quarter, we sold non-core positions Celgene and Norwegian Cruise Lines. Celgene’s price recovered dramatically on a proposed buyout by Bristol Myers.

Contributors		Detractors
Celgene	+47%	Markel	-4%
Apache	+32%
Moody’s	+29%
Facebook	+27%
Lennar	+25%

Select Portfolio Featured Company:

Mohawk (MHK)

Mohawk is the world leader in flooring. Mohawk ranks #1 globally in ceramic tile, yet with just 3% global market share. The majority of Mohawk’s sales of flooring are for remodels as new construction comprises less than 20% of revenue. Mohawk is establishing a leadership position in luxury vinyl tile (LVT) which is growing at double-digit rates. Mohawk trades at a discounted valuation of fewer than 13 times earnings and a multiple of ten (10) times enterprise value to EBIDTA. There has been insider buying of Mohawk stock by board members at higher prices. Recent growth capital expenditures are likely to decline in the coming quarters, improving free cash flow.

Historically, Mohawk’s stock has outperformed the S&P 500 over the past 5, 10, 20 and 25 years. Equity Income Portfolio Commentary and Thoughts.

Our Equity Income Portfolio, like our other three, is a concentrated portfolio. Equity Income consists of high-quality companies with sustainable competitive advantages with average to above average dividend yields, along with the potential for dividend growth. The portfolio’s objective is to offer the opportunity for attractive total returns with the possibility of slightly higher income.

Equity Income, like Select, Focused Opportunity and International, is a go anywhere portfolio that is style and capitalization agnostic.

In the first quarter, the Equity Income Portfolio returned 9.28% (gross).

Position Weightings – March 31, 2019

Bristol Myers	7%	Target	4%
Newell Brands	6%	Travelers	4%
UPS	5%	3M	4%
Home Depot	5%	Air Products	4%
JP Morgan	5%	Walmart	4%
Cummins	5%	Lockheed Martin	4%
Invesco	5%	Chevron	3%
Abbvie	5%	Exxon	3%
Intel	5%	VF Corp	3%
US Bank	4%	Eli Lilly	3%
Cisco Systems	4%	Pepsi	2%
Walgreens	4%	ADP	2%

Top 5 positions 28%

Top 10 positions 52%

Top 15 positions 72%

Trading activity for the first quarter: There was no trading activity.

Contributors		Detractors
Cisco Systems	+25%	Abbvie	-13%
Target	+21%	Bristol Myers	-8%
Cummins	+18%	Walgreens	-7%
UPS	+15%
CVX	+13%

Equity Income Portfolio Featured Company:

J.P. Morgan (JPM)

J.P. Morgan is arguably the most dominant bank in the United States. JPM leads in investment banking, commercial banking, credit cards, retail banking and asset wealth management franchises. J.P. Morgan benefits from a nearly unrivaled combination of scale and scope within the U.S. JPM has about $1.5 trillion in deposits. J.P. Morgan recently earned $9.2 billion in the quarter while generating a 19% return on equity. Management led by Jamie Dimon is best in class and has performed better than virtually all of its global peers. Trading at 11 times earnings and paying a 3% dividend, we remain quite comfortable with JPM.

International Portfolio Commentary and Thoughts

Most major U.S., global and international developed markets enjoyed double-digit increases in the first quarter as concerns around continued monetary tightening, increasing odds of a hard Brexit, trade war fears, and a slowing growth outlook lessened. Investor sentiment towards international stocks, especially China, improved. The move up in the first quarter positively impacted virtually all equity sectors, industry groups and individual securities. The ongoing volatility in global equity markets over the last several quarters continues to produce improved opportunity sets for investors such as us. These opportunities are particularly true for specific companies outside of the U.S.

In the first quarter, the International Portfolio returned 17.57% (gross).

Position Weightings – March 31, 2019

Fiat Chrysler	8%	Ten Cent	4%
Alibaba	7%	Daimler	4%
New Oriental Education	6%	Linde	4%
Development Bank of Singapore	6%	Teva Pharmaceuticals	3%
Safran	6%	Nestle	3%
Ferguson	5%	Sanofi	3%
JD.Com	5%	Baidu	3%
DNB Asa	5%	Fairfax Financial	3%
Siemens	4%	Lanxess	3%
Encana	4%	Novartis	2%
Naspers	4%	Allergan	2%
Air Bus Industries	4%	Unilever	2%

Top 5 positions 33%

Top 10 positions 56%

Top 15 positions 75%

Trading activity for the first quarter: There was no trading activity.

Contributors		Detractors
New Oriental Education	+64%	None
JD Com	+44%
Airbus	+39%
Alibaba	+33%
Encana	+25%

International Portfolio Featured Company:

Safran S.A.

Safran S.A. is a French multinational aircraft engine and aerospace component and defense company. The global industry landscape for aviation is very solid with many positives. Air traffic globally is expected to double in the next 20 years. There is currently pressure in capacity with peaking load factors and substantial profits for airlines–this bodes well for engine replacements as well as aircraft replacements with new efficient engines. Safran has both the know-how and operational excellence and is well-positioned for success. They also have a clear growth line of sight for the next 15 years. Safran’s stock performance over the last 20 years has been nothing short of extraordinary. There is a total shareholders’ return (2008-2018) of 23% per year.

Live Oak Private Wealth Investment Philosophy

Three Pillars

We consider potential losses before gains. We think about multiple scenarios that could affect us. We ask how much might we lose before we ask how much we might make.

We focus on absolute returns, not relative returns. Our goal is to lose less than the market. We don’t manage to a benchmark.

We do not focus on the macroeconomic environment. We focus on great businesses we can invest in at a fair price.

Our Beliefs

We believe your lifetime investment results will be mostly governed by two variables: behavior and asset allocation.
We consider the three quotes below by two very famous investors daily in our thoughts, research and work.

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude
and pays the greatest reward.” – John Templeton

“Be fearful when others are greedy and greedy when others are fearful.”
“Price is what you pay; value is what you get.” -Warren Buffett

Guiding Principals

• A share of stock represents a share in the ownership of a business.
• A stock exchange is nothing more than an auction place that provides a convenient means for exchanging your
  ownership in business for cash and vice-versa.
• Our investment approach would be akin to applying a private equity mindset to investing in public markets.
• We limit our search for qualifying investments to good businesses. They have identifiable, sustainable competitive
  advantages.
• Risks to us are permanently losing capital over a five-year time horizon. Market volatility is not a risk to us.
• Our primary return goal is to compound money at real rates of return (4-5%) above inflation over our five-year time
  horizon.
• Compounding capital at 7% doubles your assets in 10 years.

Disclosures

1) Past performance is no guarantee of future results and future performance may be higher or lower than the performance shown.

2) This performance composite represents results from all actively managed, fully invested accounts at the firm. The composite results include all accounts managed for capital appreciation and income.

3) There can be no assurance that our portfolio management or any account managed by our investment managers will achieve a targeted rate of return or volatility or any other specified parameters. There is no guarantee against loss resulting from an investment.

4) Performance is presented net of fees. Calculated using Orion standards. Periods greater than one year are annualized. This information has been obtained from sources that were deemed reliable, but cannot be guaranteed nor verified.

5) The method for calculating the composite returns includes a monthly weighted (weighting of monthly beginning values, adjusting for time-weighted average returns to derive quarterly and annual returns.

6) Investment objectives, returns, and volatility are used for measurements and/or comparison purposes only and are only a guideline for prospective investors to evaluate our investment strategy and the accompanying risk/reward ratios.

7) Comparison to any index is for illustrative purposes only. Certain information, including index and benchmark information, has been provided by third-party sources, and although believed to be reliable, has not been independently verified and its accuracy cannot be guaranteed.

8) The information contained here is not complete, may change, and is subject to, and is qualified in its entirety by, the more complete disclosures, risk factors, and other important information contained in Part 2A or 2B of Form ADV. This presentation is for informational purposes only and does not constitute an offer to sell or as a solicitation.

9) Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor.

10) Opinion and thoughts expressed are those of Bill Coleman and not Live Oak Bank.

I have had to restart quarterly performance statistics as of September 30, 2018, at Live Oak Private Wealth. We have created two performance composites just like I have had in the past. Also as in the past, each client’s actual performance results may differ from that of the composites due to several factors. So starting in a big hole, our Equity Composite returned -10.51% net for the quarter versus the market’s return of -13.5% for the S&P 500 and -11.70% for the Russell 1000 value. Our Balanced Composite returned -8.9% net for the quarter versus the market’s return of -7.58% for the 60 S&P 500/40 BGCI.

As for the year, 2018 started where 2017 left off. The 5.7% gains in January were the best since 1997. The market would then sell off hard in February and March and claw and climb to an increase of 5% by the time it peaked in September. The move down in the fourth quarter was staggering, especially December. $3.7 trillion in market cap was erased which is equal to the entire GDP of India. The sentiment or bearishness led to the first 20% correction since 2009. December ’18 was the worst December since 1931. The big year we had in 2017 did a classic job of discounting the record “good news” about the economy to come this year. 3.7% unemployment, record consumer confidence, 3% + GDP growth, huge tax cuts, 25% earnings growth was I guess sniffed out in advance during 2017’s +22% year.

My last letter (June 30, 2018) referenced the rising risks in the market. The length of the economic recovery since 2009 was getting long in the tooth. The corresponding nine-year bull market might need to pause. I wrote about the effects of rising interest rates and shrinking liquidity, not to mention the concentration in large-cap tech stocks (FAANG). I underestimated the potential for a policy error around our trade policy. Comments from the Federal Reserve chairman during the first part of October related to interest rates was the trigger that started the volatile selloff. As I have written on multiple occasions, “our markets are unfortunately dominated by computer-driven systematic algorithmic trading of index baskets of stocks.” This exacerbated the selloff as it fed on itself during the quarter.

Trend-following speculative strategies, like these based on algorithms, have become a significant force in the markets. They went from bullish to bearish in the fourth quarter to a degree not seen in a decade. Recent volatility has pitted humans against these machines as the machines reinforce instability since they react to significant price swings by piling on the same trade and exacerbating the moves.

The charts below, courtesy of Alpha Simplex and the Wall Street Journal, reinforce this phenomenon in the markets today. The “chaos bet” as it was referred to:

So, we know what the market did during the end of the year, but how about the performance of the businesses we own? A massive disconnect in my humble opinion. The businesses we are invested in performed quite well, but their stocks did not. In the short run divergences like these occur. By the time the year was over, the decline in stock prices coupled with higher corporate earnings had reduced the multiple on 2019 consensus S&P estimates to less than 14 times. This multiple is about 15% below its historical average. The 10-year Treasury yield is less than 3% and therefore, doesn’t warrant this low of a P/E. Looking at the last 40 years, the 10-year Treasury has averaged over 6%, and stocks averaged a higher P/E. From this starting point, I would expect stocks of good businesses to outperform bonds by a long shot.

We established a new position in FedEx during December at the cost of $187. We also doubled up on our Schlumberger position for tax reasons on November 30th and sold the other half of the position bought previously. The original Schlumberger purchase, in hindsight, was a mistake, but by lowing our cost basis in this sound company, we should start to benefit from rising needs in energy engineering and services. FedEx is unmatched in its global network. FedEx links more than 99% of the world’s GDP by serving 220 countries and territories with 675 aircraft and nearly 180,000 motorized vehicles. FedEx sold off hard during December on disappointing earnings related to the China trade issues and poor results from their European division. FedEx dropped from a high earlier in the year of $274. At our entry price, we were paying the equivalent of 11.5 times earnings for one of the world’s most significant businesses.

Performance Characteristics From Calendar Year 2018 Focused Opportunity Model

Comments On Portfolio Positions

General Motors

GM is the 8th largest holding in our Focused Opportunity Model. We have owned GM since March of 2014 at the cost of $33.40. We owned GM long before the company acquired Cruise Automation, its autonomous vehicle unit. In May of 2018, Softbank announced a $2.25 billion investment in Cruise for a 20% stake. GM only paid $1.0 billion for Cruise. Then in October, Honda made an investment in Cruise that implied a valuation of $14.6 billion. That value is 20% of GM’s total market cap and isn’t even profitable yet. GM still trades in the mid-30s having gone into the mid-40s twice. Since GM went public in 2010 at $33, the company has cumulatively earned more than $33 per share and paid out over $7 per share in dividends. Some bullish GM analysts think just the truck and SUV division is worth the current stock price even before considering what Cruise might be worth. GM sells at a very modest six times 2019 earnings and offers a well-supported dividend yield. GM remains a particularly compelling investment opportunity in my view.

Brookfield Asset Management

We have owned Brookfield for as long as I can remember. Brookfield is the world’s largest global hard asset manager in the world. By hard assets, I mean real estate, utilities, and infrastructure. In today’s world, many advisors promote “alternatives.” I would put Brookfield’s management and performance up against any alternative strategies. Brookfield has delivered 16.8% compounded total returns for the last 14 years compared to 8.5% for the S&P 500 and no telling how much less for the “alternative” funds. According to a recent OECD report, by 2040, the world is going to need to invest nearly $100 trillion in additional infrastructure to support a fast-growing and rapidly urbanizing population. Brookfield’s excellent track record of high returns and trusted brand means it stands to benefit significantly from these trends. Brookfield trades at a very favorable 8.6 times its funds from operations.

Charles Schwab

Schwab continues to rapidly expand its banking subsidiary which has helped to blunt some weakness in its core asset management business. Schwab has done an excellent job of executing lo w-risk strategies with its balance sheet, which has yielded outsized returns and should serve to offset revenue volatility associated with quarters like we just witnessed. Hopefully, higher net interest margins will accompany higher interest rates in 2019, and along with prudent expense management and excess capital to deploy for buybacks, I expect Schwab to have a good year.

Apple

Apple was a lightning rod stock recently. On the fundamental front, in their most recent earnings report, Apple reported +20% sales growth, driven by a 30% increase in iPhone revenue and a 20% increase in software and services revenue. Management recently guided down expectations for future revenue due to a sudden slowdown in demand for the iPhone in China. Despite this near-term bearishness, I think Apple has a solid strategy for growth over the next several years. Also, I think the next few years of faster growth in higher margin software services will lead to stickier gross margins at the company. Apple trades around 12 times 2019 earnings estimates of $12.00 per share. That is a substantial discount to the market and one that Apple’s management will take advantage of through large share buybacks.

There have been several comments lately about a recession. Much of it is in reaction to the market’s selloff. I don’t know about you, but it sure feels like we are quite a w ays away from a recession. Yes, there is some slowing in economic conditions, especially globally. Yes, the effects of growth are currently hampered by the ongoing trade skirmish. There are typically a few items always present at the onset of a recession and corresponding prolonged bear market in stocks.

1) Problematic inflation: if wage inflation is around 3.5% or higher, it’s a problem (it’s currently well below that). Core consumer prices more than 3%, which we do not see either.

2) A hostile Federal Reserve: raising rates well above neutral (in this case 2.5-3%). The Fed is gradually lifting rates and is data dependent not to be hostile.

3) Valuation: current multiples are not extended related to history and certainly not related to current interest rates.

I would expect that global policy issues related to trade, gradually rising interest rates and reduced liquidity, will most probably cause short-term earnings pressures on our portfolio companies. I feel that we are sufficiently compensated for that risk given where current stock prices are. As many of you know, I am an optimist and I remain patient and believe that owning these businesses at these prices will allow us to endure the fears of today.

I believe successful investing requires the knowledge to be able to accurately value businesses for investment as well as an understanding of market psychology. As mentioned many times in letters before, the stock market’s cyclical nature produces periods of overvaluation, fair valuation and then undervaluation, before reversing and repeating itself. Investor emotions drive this classic market cycle during each period. The understanding of these market cycles is critical to your success as an investor so that you do not make the mistake of following the herd mentality and suffering as a result. It is hard to determine precisely when we enter each of these periods, and we can’t predict with accuracy when the next significant market buying opportunity will occur. All we can do is remain patient and aware of opportunities. To be a successful investor, you need to not only buy when it is emotionally the hardest, and sell when it is emotionally the hardest, but also sit patiently and do nothing for long periods while good businesses compound.

For the benefit of new readers of these quarterly letters, I have been writing them four times a year for 19 years. Investors do all kinds of exercises to make sense of the world – modeling scenarios in spreadsheets, conducting diligence on managers, or reading pitch decks. But few activities help clarify your thoughts better than writing. Writing is the ultimate test of whether your ideas make sense or are merely gut feelings. Putting your thoughts on paper forces them into an unforgiving reality where you have to look at the words and interpret them as another reader will see them. If you are reading this letter for the first time, it may be helpful for you to understand our beliefs, investment philosophy and guiding principals. These core beliefs typically drive a lot of our thoughts that we are writing about. Therefore, our Live Oak Private Wealth investment philosophy, beliefs and guiding principals are found in the appendix to this letter.

In closing, it is a privilege to write to you and report on our progress as a new investment firm. There is no doubt in my mind that Live Oak Private Wealth is the best team in the wealth management business. I’m personally blessed to be a part of an extraordinary team. Your trust in our team is a responsibility we do not take lightly. We are all thankful and appreciative for the opportunity to continue working with you at Live Oak.

We feel privileged and humbled by your willingness to compensate us for doing something that we love to do and is so meaningful and rewarding to us all.

On behalf of the team, we look forward to our continued shared success in this relationship.

Warmest Personal Regards,

J. William Coleman, III
Managing Director
Chief Investment Officer

Live Oak Private Wealth Investment Philosophy

Three Pillars

We consider potential losses before gains. We think about multiple scenarios that could affect us. We ask how much might we lose before we ask how much we might make.

We focus on absolute returns, not relative returns. Our goal is to lose less than the market. We don’t manage to a benchmark.

We do not focus on the macroeconomic environment. We focus on great businesses we can invest in at a fair price.

Our Beliefs

We believe your lifetime investment results will be mostly governed by two variables: behavior and asset allocation.
We consider the three quotes below by two very famous investors daily in our thoughts, research and work.

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude
and pays the greatest reward.” – John Templeton

“Be fearful when others are greedy and greedy when others are fearful.”
“Price is what you pay; value is what you get.” -Warren Buffett

Guiding Principals

• A share of stock represents a share in the ownership of a business.
• A stock exchange is nothing more than an auction place that provides a convenient means for exchanging your
  ownership in business for cash and vice-versa.
• Our investment approach would be akin to applying a private equity mindset to investing in public markets.
• We limit our search for qualifying investments to good businesses. They have identifiable, sustainable competitive
  advantages.
• Risks to us are permanently losing capital over a five-year time horizon. Market volatility is not a risk to us.
• Our primary return goal is to compound money at real rates of return (4-5%) above inflation over our five-year time
  horizon.
• Compounding capital at 7% doubles your assets in 10 years.

Disclosures

1) Past performance is no guarantee of future results and future performance may be higher or lower than the performance shown.

2) This performance composite represents results from all actively managed, fully invested accounts at the firm. The composite results include all accounts managed for capital appreciation and income.

3) There can be no assurance that our portfolio management or any account managed by our investment managers will achieve a targeted rate of return or volatility or any other specified parameters. There is no guarantee against loss resulting from an investment.

4) Performance is presented net of fees. Calculated using Orion standards. Periods greater than one year are annualized. This information has been obtained from sources that were deemed reliable, but cannot be guaranteed nor verified.

5) The method for calculating the composite returns includes a monthly weighted (weighting of monthly beginning values, adjusting for time-weighted average returns to derive quarterly and annual returns.

6) Investment objectives, returns, and volatility are used for measurements and/or comparison purposes only and are only a guideline for prospective investors to evaluate our investment strategy and the accompanying risk/reward ratios.

7) Comparison to any index is for illustrative purposes only. Certain information, including index and benchmark information, has been provided by third-party sources, and although believed to be reliable, has not been independently verified and its accuracy cannot be guaranteed.

8) The information contained here is not complete, may change, and is subject to, and is qualified in its entirety by, the more complete disclosures, risk factors, and other important information contained in Part 2A or 2B of Form ADV. This presentation is for informational purposes only and does not constitute an offer to sell or as a solicitation.

9) Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor.

10) Opinion and thoughts expressed are those of Bill Coleman and not Live Oak Bank.