STEVEN KACZMAREKGENE D. BALAS, CFA631 574 2474Info@EastEndWealthManagement.comwww.EastEndWealthManagement.com

IntroductIon to theme-Based InvestIng

When investors create a portfolio, many of them often think of the well-popularized “style boxes,”

such as large cap growth, small cap value, etc. Perhaps they look at earnings trends over the next few quarters and valuations. Maybe they pick an allocation just because it looks like “the market” or because it seems well diversified and balanced. That may be the case even if they don’t know why they have a given amount in bonds or stocks, let alone what each investment’s overriding goal is for inclusion in the portfolio. Many investors might not even know the reason and purpose for each of their holdings.

Surely, that can’t be the right approach, can it? And indeed, the reason why something is in a portfolio is just important as what is in a portfolio. When it comes to investing, especially for the longer term, one has to think of what will ultimately drive the demand for a company’s goods or services. Some of these do relate to broad economic conditions, but many fundamental prospects are industry-specific and are driven by powerful macro themes and trends. It is examining how these trends will play out that sets East End Wealth Management’s Global Macro Strategies (GMS) apart from other portfolios.

Let’s take a look at one such theme, the growing prosperity of emerging economies. The developed world is languishing, whether one refers to Japan, Europe or even

the U.S. These are powerful economies. However, they are not seeing the same dynamics of a growing middle class in the emerging world. As these societies develop a growing consumer society, they can support global investment with improved living standards. In doing so, they need some basic things. Think of hospitals, roads, bridges, broadband networks, water systems, etc., not to mention consumer products of all types ranging from pharmaceuticals to automobile to financial services.

Now think of what goes into building a new road, irrigation project or communication system. There is quite a bit of investment required, and a host of companies doing many different things, all the way up the supply chain. A dam needs engineers; it needs concrete and steel. It needs earthmoving equipment. It supplies water to new agricultural, residential and commercial lands previously undeveloped.

Those lands will eventually be populated with crops, houses, offices and factories. Those, in turn, need fertilizer and seeds, lumber and copper, furniture and telecommunications. The trends towards growing urbanization and factory farming in Asia, Latin America and even Africa are spawning much more demand for the goods and services provided by the world’s leading companies, or even those in their own backyard.

May 2013

2East End Wealth Management

These long term themes and trends present investors with numerous opportunities to invest in a virtually limitless theme, not an artificially-constrained style box. And these themes are global, even if an investment is made in a U.S., European or Japanese company. Thinking globally, one might invest locally.

It is important, though, to think of the world as an interconnected space, with many companies, even smaller ones, having a global supply or distribution chain. The nature of a globally linked economy allows investors to have a broad exposure to a big global theme by investing in companies in developed and emerging markets, large and small, value and growth. One can get ample diversification without consulting rigid style box definitions; we would argue instead that diversity of thought is a much better way of diversifying a portfolio.

That is how we at East End Wealth Management approach investing. We look to what the world needs and focus on investing in those companies which supply those demands. However, we don’t look at individual companies. We think of asset categories, often narrowly defined, that represent an industry sector where some companies may benefit more than others. By focusing on the asset class, not the company, we can maintain our focus on the forest instead of the trees.

Going forward, we will introduce many different big-picture themes and explain what the themes mean to investors and what we are doing about them. There are many different forces at play, and it is important to consider how some of them interact with others. Here are some examples of the themes we will consider, among others:

GROWING EMERGING MARKETS 

PROSPERITY

Infrastructure

Healthcare

Water

Farm Equiptment

Fertilizer/Pesticides/Seeds

Consumer Goods

Financial Services

Basic Materials

Engineering

Construction

Consumer Demand

Changing Diets

Example of Investment Impact of One Theme

Growing Emerging Market Prosperity

» Changing diets and more agriculturally-intensive protein consumption

» Increased consumer discretionary spending

» Establishing household investment portfolios as savings increase

Infrastructure

» Building water and irrigation systems

» Repairng aging roads and bridges

» New residential developments in emerging markets

Aging Developed World Population

» Rising savings rate and lower consumption

» Increased utilization of healthcare services

» Slower growth due to reduced labor force growth

Developed World Debt

» Higher taxes and lower spending reducing growth

» Ability to finance future debt levels

» Decreased bond issuance or continued increase in debt?

East End Wealth Management

This information is intended to describe a general investment strategy and is not a recommendation to buy or sell any specific securities. The strategy discussed does not and should not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. Any investment carries risk, including the loss of principal. Any investment strategy discussed here or available through East End Wealth Management is not an obligation of a bank and is not guaranteed by the FDIC and may lose money. Some investments are not suitable for all investors. Past performance is not indicative of future results. We cannot guarantee that this information is accurate or complete. As with any investment strategy, you should thoroughly discuss your particular investment situation and with your financial representative and understand any investment recommendation that might be made before investing any money.

East End Wealth Management is registered as an investment advisor with the States of New York, Florida and California. East End Wealth Management only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

3

For more information on East End Wealth Management, including our performance results, please visit our website: www.eastendwealthmanagement.com

For example of a theme in action, consider some of the themes noted discussed above. Growing emerging market prosperity would generally argue for more consumer products, but then consider the sluggish economies of the developed world. In Europe, the U.S. and Japan, wages are barely growing. Wages are growing sluggishly due to a mismatch with what employers can pay workers in the developing world versus the high-wage developed world, combined with a lack of productivity gains that limits profit growth at the same time as wage growth. But with slow wage growth, companies have increased or maintained profit margins.

Can consumers in emerging markets offset weak growth in the developed world? Possibly, but we need to carefully consider the effects of two contradictory themes such as these. There are many examples when different themes will take us to different types of investments.

We do believe that a theme-based approach to investing is indeed appropriate for the long term investor, but not all themes can yield economic benefits right away. It may turn out that some investments might not be the absolute best way to capitalize on a theme, if any investments even exist to do so for a particular trend.

In upcoming newsletters, we’ll explore what’s in our portfolio and why, giving you the story behind each investment idea. We’ll cover the economics, demographics and other big picture forces that lead to investment decisions. While some of the themes might not always be topics people consider to be necessarily positive developments, avoiding discussion of them won’t cause them to go away, while investing in them could still be profitable.

Whether the theme is good news or bad, we’ll keep you informed by bringing you a periodic look at what’s on our mind, not just for the near term, but looking ahead many years. After all, that is a time horizon that corresponds to the duration of many investors’ portfolios.

BIographIes

STEVEN KACZMAREK

gENE d. bAlAS, CfA

Steve is the President of East End Wealth Management. He has over 30 years of experience in trading and risk management in a wide range of markets. Most recently, Steve held the position of Managing Director at Legend Merchant Group. His background also includes the positions of Partner at Schonfeld Securities; a proprietary trading firm, NYMEX floor trader and Lieutenant, United States Army Reserve. Steve graduated New York University with a degree in Economics.

As an active member of the investing, planning and trading community, Steve is a member of NAIFA and the Financial Planning Association. Locally, he is the Chairman of the Southampton Youth Board, focused on youth issues on the East End of Long Island.

Balas has over twenty years’ experience in investment management. He currently writes economic commentary for TheStreet.com’s RealMoney site. Previously, he was Director of Investments at Genworth Financial Asset Management. In this role, he performed forecasts on macroeconomic conditions and determined the influences of thematic drivers to develop investment strategy, He also headed the firm’s manager due diligence efforts. Prior to GFAM, Gene was Director, Investment Management & Guidance at Merrill Lynch & Co. In that role, he advised pension funds, endowments and foundations as to appropriate asset allocation strategy. In previous roles, he advised both institutional and individual investors on asset allocation and manager selection decisions, beginning his career in 1989. He has an MBA from Columbia Business School and a BBA in Finance from the University of Houston, where he attended on a full National Merit scholarship. He is a Chartered Financial Analyst.

East End Wealth Management 4