listeningin participate and protect inside stralem’s …...teristics of active money managers,...

Let me be straight aboutit. Adam Abelson, theCIO of private institu-tional and wealth man-ager Stralem & Co., aWall Street fixture forover 50 years, had a legup in getting my atten-tion, simply by virtue ofhis last name. But Adam,who graciously sat forthis week’s WOWS invest-ment interview, was alsoquite up front. He is notsome long-lost relative ofmy famous mentor, AlanAbelson. Indeed, eventhough his father,Stralem’s chairman isone of Alan’s contempo-raries in the relativelysmall world of WallStreet, they evidentlynever even met.

So I got to make the dis-covery of Stralem’s par-ticipation with protectionapproach to growthinvesting, and its long-term record of compound-ing market gains whileavoiding the worst draw-downs of bear markets,through reliance on an investment strategy the firmtraces back to before the really great financial crisis— the one that started in 1929.

With the current market environment giving off vibes

that feel increasingly end-of-cycle, Adam’s pragmat-ic investment approach seems particularly germane. Listen in.KMW

Welcome, Adam. I imagine you’re as

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Adam Abelson

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transfixed as most everybody is lately, bythe sudden return of volatility to the mar-kets, threats of trade wars and such. ADAM ABELSON: I’m actually enjoying it, partlyjust because it comes on the tail end of so manyyears of sameness and a lack of originality. So it’sinteresting to see complacency get shaken up again.If you think back to late-1999 or mid-2007, it wasthe same type of complacency. I just feel like we’rethere.

That’s ominous. Yetwhen I’ve broughtup complacencylately, I’ve gotten alot of push back. Well, bull cases aremore appealing, right?

By definition, sure.Yes. Today, I suspectit’s less about the sheerappeal of the bull argu-ment about how goodtimes are than it is thefact that the institutionalmemory of what I’dcharacterize as just thenormal ebb and flow ofvolatility seems to havebeen lost — until quiterecently. Investorsseemed to have forgottenabout what “reversion tothe mean” entails. Whatpercentage of the timedo markets go up, whatpercentage of the time do they go down?

What, it’s not a one-way up ramp? I’m soold I have to keep reminding myself thatfew investors remember the bear marketsof the 1970s — or even 1987. Oh, absolutely. It’s very hard to compare periods— particularly this period to the late-1970s’ infla-tion but —

There were a bunch of bears in thatdecade. But we’ve had the mirror image“runaway inflation” more recently.I was just writing my quarterly letter to clients andmentioning that it’s probably one of the two topquestions I get — “where for art thou inflation?”But it’s everywhere other than in the things thatthey measure, of course.

So be careful what you wish for.Exactly. That opens a whole other can of wormsthat I don’t think anyone would really like to haveto manage through right now.

No, they wouldn’t. My friend LouiseYamada has been writing about “inflationin all the wrong places” for quite a while.But the official numbers have stayedincredibly low. I think that has bred some of the complacency and

confusion. You are con-vinced that what you’rebeing told by the Fedabout inflation in gener-al isn’t matching up withthe actual hard data thatyou’re experiencing. Ithink also that’s whereerosion of confidencebegins to a certaindegree. Either that, oryou’re just absolutelycomfortable with thatmismatch between dec-larations about economicstrength and not seeingthe actual data reflectingthat.

The times we’re liv-ing in seem to getmore interesting bythe day — for goodor ill. But that actu-ally plays to yourstrength at Stralem,

doesn’t it?Yes, in that our strategy feeds off of that normalebb and flow in the markets that complacentinvestors seemed to have forgotten about untilrecently.

Cycles? That sounds almost quaint. This has certainly been an interesting period oftime in the markets, if you think about the charac-teristics of active money managers, right? Youneed stock picking —

But it’s passé. Well, the massive flow into passive has certainlybeen a game changer for active management in thelast almost decade now — and the only question isdoes that abate? Does stock picking come back? Doyou get rewarded for all the hard work that your top-down and bottom-up processes involve? Will the out-

“We have been askingthis question for overa year now but of lateit’s certainly gotten —just say it now has a little bit more

resonance. It’s a verysimple question: Doyou think, in terms ofinvesting, that the

next five years will belike the last five?”

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put of all that work — are you goingto get rewarded for it in the market?In the last bunch of years, the answerhas been no — in the relative sense.

Implying, however, that itremains rewarding in theabsolute?Yes. The irony of our business isthat we are measured against bench-mark constructs. So suddenly doing15%, 16%, 17% — whatever yourcompounded return is over the lastcouple years — gets lost — thatextraordinary return gets lostbecause in comparison with thatbenchmark it might be trailing by150 or 200 basis points — and that’san interesting conundrum.

True, though you can’t actual-ly invest in an index — despitethe plethora of productspitched as tracking them. Slippage isinevitable.There is that. Then too, just look what happened inFebruary, when an esoteric — relatively small, atthe margin — volatility product had that outsizeddeleterious effect on the indexes. I mean, nine-and-a-half out of 10 people have no access to that prod-uct to begin with, right? It’s a real institutionalpicking up pennies in front of the steam roller typeof product. But there’s your modern day financialmarkets in a nutshell.

That tail definitely wagged the dog. Andgee, leverage was involved.Oh gee, I’m not surprised. Why pick up one pennywhen you can pick up two? It’s just a starkreminder of all the linkages, across trading instru-ments and across markets, that exist. They’ve beenforgotten again, though they were so obvious in2007, ’08, ’09.

Which is fairly astounding given how hor-rible the financial crisis was — Yes, it’s astounding but it’s not without historicalprecedents.

We never learn —True enough. If you think about human behavior,and think about market cycles — the beginning ofa bull market, what is that? It’s what comes after abear market. And in a bear market, people’s confi-dence is lost, capital is obviously lost and multiplesare pushed down. So in the first couple of years

after that experience, history tells us that mostinvestors are going to be looking in the rearviewmirror, right? It takes a couple of years for theirconfidence to be repaired. Then, once that hap-pens, multiples expand and more people start toparticipate. Then investors’ attention is suddenlyfocused on looking out over the dashboard, insteadof on the rearview mirror. And I think that cyclehas a long history.

True, it does. And it fits, understandablyenough, with human nature, when you’retalking about “ordinary” cycles — run ofthe mill bull and bear markets. I had justthought a crisis like 2007-2008, literallytottering on the edge of the abyss, mighthave exhibited more lasting impact. Except that the Fed conjured the ghost of JohnMaynard Keynes and stepped into the breach andsuddenly the velocity of money took off again. Andit all happened so quickly you almost didn’t havetime to ponder it.

If you took any time, the bull left youbehind. But don’t you think some of thescars from that experience — and even thepopping of the internet bubble — haveadded fuel to the passive investing “fire”? It probably has, to a certain degree, but I thinkmore of it has had to do with the old cost issue —it’s just so cheap to participate passively. Andagain, there has been no volatility, and the Fed hashad investors’ backs. The Bernanke put — theGreenspan put — the Yellen put —

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It was handed down. But is it the Powellput now? The was the assumption, but —He didn’t seem to get a clean hand off of the baton.

Nothing is going very smoothly thesedays in Washington, to state the obvious. It’s tough. We have been asking this question forover a year now but of late it’s certainly gotten —just say it now has a little bit more resonance. It’sa very simple question: Do you think, in terms ofinvesting, that the next five years will be like thelast five years?

Do you have to ask?It’s not a fair question because the answer is rela-tively obvious, if you think about policy or geopoli-tics — the big broad brushstroke issues. Just thinkabout macroeconomic risks, political risks, policyrisks, market risks — the ones you’d list today didnot even exist five years ago. We would never havebeen happy with the intellectual property demandsthat China makes. But if any multinational, Chinais where the marginal growth is in the world — andwhere it has been for the last 15 years. If you lookat the really unbelievable numbers of people mov-ing in to the middle class, just in China alone, andat the purchasing power they bring and at their dis-posable income, it’s hard to get your head aroundthe dimensions of that incremental growth. Thatpopulation is larger than that of the U.S. andEurope combined.

Makes my baby boom generation look likenothing in terms of its pig in the pythoneconomic effects. I do think it’s going to be disruptive and that is justthe first step in a larger problem, in terms of theirChina 2025 industrial policy. That’s certainlygoing to be a challenge for a lot of U.S. andEuropean companies. You’ve got to be out there,participating and learning the nuances of managingyour businesses successfully so far from home. Totry to block China’s growth, through tariffs or any-thing else, is I think, pretty much like shootingyourself in the foot.

Sort of the trade equivalent of trying todefend the Alamo? That’s a good analogy. I travel to China regularlyand am so impressed by the managements that I’vemet there.

We’ll go there. But first, let’s back up andget some background on Stralem — you —to put some of this in context.

Let me start at the beginning with Donald Stralemand Hirschel Abelson. Full disclosure: I’m theyoungest of Hirschel’s sons. Stralem & Co., aclient-focused private boutique investment advisor,was founded in 1966 by Donald, who was verywell-known on Wall Street, because he believed ayoung independent firm with more capital couldbetter serve modern clients’ needs. Donald hadbeen a partner at a prestigious, old-line firm,Hallgarten & Co., where he’d worked since the1930s. Soon after founding Stralem, Donald wasintroduced to Hirschel, who had come to WallStreet in 1955 and was a partner at LadenburgThalmann & Co. — he actually had worked inresearch there with Marty Whitman and LionelPincus — two others who became well-knownnames on the Street. Hirschel brought into Stralemwith him, Philippe Baumann, who had been at A.L.Stamm & Co. and Coleman & Co. In the earlyyears, Donald and Philippe would introduce pri-vate clients to the firm and Hirschel handled theportfolio management duties. Donald passed awayin the early 1970s, but Philippe and Hirschel man-aged the business for over 40 years — untilPhilippe’s passing just a couple of years ago.Hirschel is still here, as chairman. We celebratedStralem & Co.’s 50th anniversary last year — wethink because we’ve done one thing, and done itquite well for all those years.

Kept the business in the families?Well, yes, but that wasn’t my point. What we’vedone very well is consistently apply a singular,time-tested wealth-building strategy we call “par-ticipation with protection,” which Hirschel learnedfrom his mentor. The strategy is based on a solidset of wealth-building principles whose origins goback to before the Great Depression and weredevised by Hirschel’s mentor, Harry B. Lake —who got his start on Wall Street in 1911. Hirschelhad become Mr. Lake’s associate in 1960 andlearned the ins and outs of his strategy. His “par-ticipation with protection” is still the basis ofinvestment management at Stralem today — thefoundation of our Large Cap Equity Strategy™(LCES), which has a long history of outperformingthe S&P gross of fees.

So I’m guessing it has nothing to do withArtificial Intelligence —Right, this process goes way back. I mean, 1911.That’s pre-Great Depression, pre-the S&P, pre-theVIX.

Before passive portfolios, modern portfo-lio theory — even Graham and Dodd.




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Yes, it predates all of that. Our investment philoso-phy is elegant and it’s simple. It’s based on theidea that — especially wealthy private clients andinstitutions like endowments, universities — peo-ple who have money — aren’t looking to doubledown. People with assets are typically looking toprotect those assets. They’d obviously like them togrow, too — especially if they have grandchildren’strusts or whatever else that they want to be able tofund. So ultimately you’re looking for a littlegrowth. But you’re first and foremost looking toprotect their capital, and you’re also looking forincome to live off of. That’s where this philosophy— participation with protection — comes from.And that is what we still follow for clients — now,through separately managed accounts, a U.S. mutu-al fund (the Stralem Equity Fund, STEFX), aLuxemburg-based UCITS for European clients, andalso some accounts customized for socially respon-sible investing. But the strategy really hasn’tchanged that much. It’s all about balancing growthwith preservation of capital. And it has paid offdramatically across, historically, very differentmarket conditions for our clients — who under-stand that participating in market advances butprotecting capital when markets decline is one ofthe most effective ways to build long-term wealth.

Because it should harness the magic ofcompounding?Exactly. So LCES has a long history of outperform-ing the S&P 500, gross of fees, through its combi-nation of strong participation in rising markets andprotecting capital when they go south. Statistically,from the beginning of 1992 through the end lastyear, Stralem’s LCES had 91% upside capture and62% downside capture, generating alpha of 3.3%,a 2.1% premium over the S&P 500. What’s more,its standard deviation, at 12.43, was lower than theindex’s 13.95.

Can you delve a bit more into how it works?Put simply, participation with protection is basedon the understanding that the impact of preservingcapital in falling markets far outstrips the impor-tance of outperforming the market in rising ones, ifthe goal is building wealth over time. Our approachlets investors participate when the market goes upwithout taking undue risk and outperform over time.

Because of the protection part?Yes, by going down less when the market declines,a portfolio grows from a higher base when the mar-ket starts to advance again — providing a signifi-cant opportunity to outperform over the full cycle.and begin outperforming the market sooner. Some

charts from our website [this page and next] helppaint the picture. The bottom line is, an investordoes not need to continuously seek to outperformthe market to build wealth as long as the portfoliois adequately protected during declines. Whiletempting, a singular focus on outperforming themarket can lead to taking on unnecessary risk thatmay prove costly in the long run.

And you are managing how much in yourvarious portfolios?We had $707 million in AUM at the end of 2017.

I would have guessed more, consideringyour long-term record.Remember, we stress long-term wealth building.


How Participation + Protection WorksMost investors recognize that to make up for a 50% loss, a portfolio has to reboundby 100%...

But few realize how powerful minimizing the initial loss can be in rebuilding or exceeding theiroriginal investment.For example, if you were able to reduce your loss by just 5 percentagepoints – making your decline 45% instead of 50% – your portfolio would need to go up only82% instead of 100% to get back to where it started. In other words, protecting your capital sothat you were able to cut your loss to just 90% of the market decline would put you back towhere you started after your portfolio advanced 82% instead of 100%. If the portfolio advancedby 100% – to where the market regained its starting value – it would have surpassed where itstarted and grown your wealth by 10%!

Source: Stralem & Co.

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In other words, you manage the antithesisof hot money?Well, interestingly enough, but maybe not surprisingto students of human nature, the level of interest wesee in the “protection” side of our strategy verymuch ebbs and flows. It really only comes to the forein the aftermath of the market taking a hit. Think ofthe period after the tech bubble burst, or right afterthe financial crisis. Or maybe, increasingly, a bittoday. It’s only after people take losses that theyrealize the power of going down less than the market,combined with the power of compounding. After all,if the market plunges but your portfolio drops less,and then the market turns around, you’re going tostart growing again from a higher base. It’s such asimple philosophy but, again, it gets lost becauseof the cycles in this business.

Are you saying that while LCES might lag instrong bull phases, you more than makethat up during the down parts of the cycle?Yes and no. The second part of that, absolutely.But it’s not that we can’t fully participate in upmarkets — we outperformed the benchmark in1997, 1998, 1999, 2000, et cetera, even withoutholding any dot.coms. LCES is less about justabsolute stock picking and portfolio construction(though they are important) than, it is again, aboutfeeding off the characteristics that make an activemanager successful. And those three legs underthe stool are volatility, correlation and dispersion— for lack of better terms.

You need to have volatility so that stock picking —in terms of both the offensive and defensive sidesof the portfolio — is working. And you need tohave that lower correlation so that, again, the stockpicking actually stands out from the overall bench.And dispersion doesn’t hurt either.

Those three market characteristics havebeen AWOL until quite recently —The insidious nature of quantitative easing put allthree of those out to pasture. Historically, youcould go through periods where one or two of thosecharacteristics wasn’t prevalent, but never beforedid we see all three characteristics fade like theydid from the start, basically, of QE2 — I’d sayfrom the end of 2011, when they announced QE2at the Jackson Hole Summit, all the way throughuntil now. There have been lots of moving partsobviously going on underneath that but for the mostpart — until this period arose in which you’restarting to have policy question marks — and par-ticularly macroeconomic and geopolitical waves —you hadn’t seen those three characteristics. Butyes, you’re starting to see that now.

Implying there’s more to come?It doesn’t all come back at once. The market char-acteristics/fundamentals really haven’t changedthat much over the years. They don’t just go awayovernight; it takes a little while for these things togain traction. So if you want to play both sides ofthe market, you have to realize that the cycle is notgoing to change all at once. So you have to try toparticipate on both sides.

You’re saying you overweight growthstocks in bull markets and defensives onthe downside? Absolutely — but we’re not a market-timing portfo-lio. We don’t know when the market’s going to turn.We might have our own qualitative and quantita-

WELLLINGONWALLST. April 13, 2018 PAGE 6



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Now, imagine if you were able to reduce your loss to 30% instead of 50%. The portfolio wouldneed to go up by only 43% instead of 82% to get back to where it started. In other words, pro-tecting your capital so that you were able to cut your loss to 60% of the market decline wouldput you back to where you started after your portfolio advanced 43% instead of 100%.

Any advance beyond 43% would mean that you were growing your wealth. And if your portfoliohad advanced until the market regained its starting value, you would have grown your capitalby 40%. Protecting your portfolio against decline is among the most effective ways of buildinglong-term wealth because it takes less of a market advance to get you back to your startingvalue and you begin growing your wealth beyond that starting value much quicker.

PROTECT- 30%

down 60% of market decline

PARTICIPATE+ 43%

to get back tostarting value

OUTPERFORM+ 40%

as mkt regainsits starting value


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tive metrics that would suggest when it might, butagain, we don’t know. We didn’t foresee Mexicodefaulting in the late-’90s, we didn’t know aboutLong-Term Capital’s woes or Russia’s, or the Asiancurrency crisis in advance. The list is fairly long,just covering the last 20 years here. You don’t seethose volatility events coming until they happen.

But investors should have seen the tech bubblebuilding, should have seen the financial crisis —that stuff was all there for everybody to see. It wasjust a question of whether you wanted to acknowl-edge it or not.

But the things that add more natural volatility to themarkets are the things that you can’t plan for. Soyou need to have really good upside capture —90% or more — which means you really need tohold good growth stories so that the other positionsyou’re carrying — those down market stocks —what we call comfort food — that protection side ofthe portfolio — isn’t too much of a drag. You natu-rally want to talk about the sexy stuff at a cocktailparty, and not the comfort food. But the comfort foodis the secret sauce in a lot of ways.

Still, there’s a price to pay for protection. Yes, and you can go through periods where thosecomfort stocks are not needed. They might go upbut they’re going to go up less than the bench, soyou’re not going to pick up 100% of an up market.

Which can tend to frustrate clients — Only if they’re not focused on the full cycle. Again,you can go through these longer extended periodswhere holding the comfort food in the portfolio canreally be a drag on relative performance. But thenyou have this moment in February where, wow,what a great thing it is to have. We’d been told allalong, “No, you’ve got to own these bull markettype cyclical stocks versus the boring stuff youown.” And they’d been right — until they weren’tright. You had those several days in Februarywhere boy, did it pay to have some downside pro-tection — and certainly in the last couple of weekshere it has also paid. Not that you shouldn’t haveseen a trade spat coming — Trump ran on it, get-ting tough on trade, especially with China, was abig part of his campaign. The fact that he hadn’tgotten around to addressing trade policy in his firstyear was just because of the pecking order of thingsthat were important to him. The fact is it was hardlysomething that came out of the blue.

But the market sure acted like it came outof the blue —And in that instance, again, it really pays to hold

onto that protective side of the portfolio. I mean,clearly, defensive stocks have not done well in thelast couple of years — there’s been no volatility. Infact, February was the first month in 16 monthsthat the market was down on a monthly basis.

And even though the market hardly qualified as abear market in the first quarter, it was down a per-centage point or two, depending your bench. Thesurprise at year-end had been that there was onlyone down quarter in five years. If you think aboutthat, it amounted to what? Spending 5% of the lastfive years in a down market. So now it’s 10% of thelast 5 years in down markets —

You’re implying the placid and pleasantmarkets of these past few years havebeen a real outlier in terms of history?Right. If you speak about what is the mean — themean is two-thirds/one-third. In other words, 66%of the time, market indexes climb up, 33% of thetime, they are falling down. But recently the splithas been like 95/5, or now say 90/10. That, to me,is a more pressing topic for conversation than arestocks cheap or are they expensive? That’s almostirrelevant in way.

What way?The fact is that there has been less participation, inthe up moves, in terms of the number of stocks thatare going up. Of course, with the cap weighting ofthe indexes as it is, just a couple of names canreally take the indexes a lot higher.

I think the FANG stocks last year accounted for,what was it, 20% of the returns in the index?

They had a huge impact. No question. That, to me, is why if you’re aninvestor you’ve got to think ahead of these things.You can’t wait for the decline to come; can’t waitfor something that we don’t foresee occurring tohappen before you make a move to try to protectyourself. Because then that’s just too late.

But how do you balance aggressive growthwith caution?The way we think about portfolio management andthink about the clients that we have is that for mostprivate clients — and for most small institutions —we’re part of multi-manager platforms. So we’re justone cog in their overall asset allocation. But wedefinitely try to be the manager that doesn’t keepthem up at night.

Okay, but tell me how — A little bit more background on Stralem should



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help. Our decision-making is centralized in ourinvestment committee, so that all of our clientsreceive our best thinking. And one of the charac-teristics of the firm that we are proud of is that allof our employees are invested in the fund, so weeat our own cooking, if you will. It’s putting mykids through college and probably putting all of ourkids through college and probably some throughgraduate school. We’re an all-weather manager thatat the end of the day provides a concentrated,high-conviction, high active share, low-turnover,tax-efficient portfolio. We have 33 names in theportfolio today — and 3-to-5 year holding periods,on average. Again, we obviously try to participatein the market’s rise. But we also know that goingdown less, over time, is the secret sauce to long-term wealth growth in wealth management — eventhough that, from time to time, goes out of favor.After all, when there is no downside, why pay forthe downside protection side of the portfolio?

To which your answer is, stuff happens?That’s why you buy insurance, right? So ours is alower-risk strategy. But LCES necessitates not justbuying your best ideas but also buying stocks in acollective sort of framework — again, becauseyou’re trying to play both sides of the equation, interms of stocks for both an up and a down market.

In a collective framework? You’re implyingthat portfolio construction is a key towhat you do? Exactly. Because our strategy predates the S&P500, we use unique groupings to structure the port-folio incorporating the up-market participation anddown-market protection we’ve been discussing.

Go on —If you think about the last couple of years, forexample, there has been very, very high correlation— and not just in the overall market — we look athow the stocks in our portfolio are correlated. Andeven there, it’s been very difficult to break free ofthat very high correlation. We’ve made some adjust-ments over time and they’ve certainly paid off. Butthinking about the portfolio in total, you definitelywant to have a separation between what’s drivingstocks up and what’s preserving capital when stocksaren’t going up. In that way, the construction of theportfolio is probably as important as the stockswithin it — in terms of how you allocate to them,how you think about them, what their role is.

But how do you pick stocks?Our stock selection, driven by our participationand protection philosophy, is fundamental, bottom-

up research driven, long-term focused and basedon our belief that earnings growth ultimately driveslong-term stock performance. Stock ideas originatemostly from fundamental analysis that we do inhouse, sometimes driven by top-down themes we’veidentified, or from valuation metrics. What we lookfor are companies with competitive advantages todeliver growth for the participation part of the port-folio and cash-rich companies to protect capitaland reduce volatility. The research team advancesthe attractive ideas that meet our investment crite-ria to our investment committee —

I’d guess that’s not a cast of thousands.Hardly. Our investment committee consists of ourportfolio managers, headed by Hirschel, andincluding me, Andrea Baumann Lustig, EdwardCooper, Philippe Labaune, and Michael Alpert.What we do is use a multi-layered risk manage-ment model and debate the ideas for their fit withour portfolio structure, stock valuation criteria andour buy/sell discipline. And the decisions we cometo about buying and selling have to be unanimous.

As I’m sure you can tell, these are not traditionalways of deciding, “Oh, I want to buy XYZ stock.”It’s always about the why for us. What is it, besidesthe fact that it might be a good story? How does itfit in with the overall construct that you’re trying tohave? I think that distinguishes us in terms of mostmanagers that we know. Their portfolios tend toreflect either growth or value. Rarely do you havethis sort of blend that we have — it’s almost like along-only hedge fund without the fees.

Can you be more specific about yourstock selection criteria?For upside participation, we select growth compa-nies with a focus on their long-term outlook, givenour long holding periods. We want companieswhose relative growth opportunities exceed themarket’s. These generally fall into three categories:new industries, new products, and dominant com-panies. In the first category, we look at marketinnovators, leaders in the current cycle, technologi-cal shifts, and companies exhibiting strongergrowth. In the second category, new products, we’lllook at more mature growth companies, ones withan intense focus on R&D, ones with more pre-dictable growth, or horizontal growth. The domi-nant companies in our third category tend to bethematic investments, companies with increasingmarket share, leading global brands, or boastingworld-class managements.

And when you’re looking for protection?


WOWS 2018Issue DatesJanuary 19February 16March 9March 23April 13April 27May 11May 25June 8June 22July 20August 10September 7September 28October 26November 9November 30 December 14



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Which, you understand, is all the time — to somedegree — we want to combine those growth stocksin the portfolio with stocks that should providedownside protection and capital preservation whenmarkets fall. In other words, cash-rich companieswhich tend to provide smoother return profiles.Those tend to fall into two groups: One with high,sustainable dividend yields and the other with lowprices, relative to cash flow. In the first case, that’scompanies with dividend yields higher than themarket average, ones raising their dividends fasterthan inflation, or ones with secure dividend pay-ments evidenced by low payout ratios. The cashflow group consists of companies with high, sus-tainable levels of cash flow, companies whose cashflow is fundamentally and financially secure, andalso cash flow-rich companies that we can oppor-tunistically purchase at a discount to the market.

That’s the portfolio combination, we believe, thattends to outperform over full market cycles, thoughit may lag during strong bull phases, because itprotects during declines. And that’s what, ofcourse, allows wealth compounding to begin from ahigher base when growth resumes. This combina-tion strategy for all markets also dampens portfoliovolatility, helping us — and clients — sleep atnight.

Can you point to a time when that hasworked, in practice?The most persuasive case we been able to make inrecent years has been by pointing to how our U.S.Large Cap Equity Strategy (LCES) portfolio mini-mized the impact of downside volatility — and out-performed — during the financial crisis that beganin 2007. LCES was down 38.5% peak to trough —

Ouch. It wasn’t fun. Except on a relative basis, becausethe market skidded 50.2% in that stretch. So wecaptured only 77% of the decline. Again, not fun.But the point is that it took LCES only 23 monthsand a 65% market rise to recover to its pre-crisislevel — compared to 37 months and 104.5% forthe S&P 500. By the time the S&P retraced all theground it had lost, our strategy was up 91.8% fromthe trough, generating a total return of 118% —and outperforming the S&P’s paltry 1.9% return by16.1 percentage points.

But your focus is more on riding long-term secular market waves than oncatching every little blip?We’re much more into the secular camp. From atop-down perspective, most of the trends we see

have good secular wings to them. That’s where wecan see, for our longer-tern holding period, a niceup ramp — that’s certainly what drives our thoughtprocess.

So you don’t spend a lot of time fussingover the next quarter’s earnings?No, exactly. But on occasion — especially wherethe M&A world intersects when you are trying tobuy growth — disappointing earnings might short-en your relationship with a company.

Because?Suppose, okay, they’ve made their cost savings tar-get, but then there are still just all these hangingthreads around the merger that they haven’t beenable to wrap up, so it doesn’t make a compellingstory any longer. Getting the initial cost savings isalways the easiest part of a merger. But actuallymerging two companies’ cultures or software, theirdistribution, or whatever it might be — typically,that’s a much harder thing to achieve.

We see that — unfortunately — more than we’dlike. A deal looks great on paper and the bankerhas got to get paid, right? So all these deals getdone but they’re not always as well-executed asthey are imagined.

I’d venture that’s the case more oftenthan not. And we’ve definitely entered the late stage now ofthis market and economic cycle, where disappoint-ments are typical. So we try to think independentlyabout what we want to achieve.

Is looking for prospective M&A candidatesanother part of your process?Not typically, no. We’re sometimes cognizant that acompany might ultimately be a target. But that’s notwhat drives our research, because frequently youget disappointed. Look at — what is the worst per-former in the market this year? It’s probably Kraft.

Or GE. Right, but why is Kraft (KHC) doing badly?Because they did all these deals, they got every-body excited and then they just left the investorshanging for the last three years, while marginsdeclined and revenue declined. They clearly are inneed of an injection of growth. So if you boughtKraft expecting — or if you bought Mondelēz(MDLZ) expecting them to re-merge, you’ve beenthoroughly disappointed. That’s a tough one. Or atleast, M&A is not our strength.



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Both have been subjected to all manner offinancial engineering alchemy for years—making bankers and others rich — butboth still are essentially mature business-es, great cash machines, that just aren’tgoing to grow faster than demographics.Unless they improbably manage to hookthe Chinese on Oreos and ketchup. Their international packaging is good. I tend to wan-der through grocery stores when I’m in Shanghai, forexample. It’s interesting to see familiar brands beingsold with a slightly different look to them.

Chinese characters on the box.The characters, the photos — they usually trickthem out with a green tea flavor which probablydoesn’t sell big in Pittsburgh.

But may intrigue someone in Chengdu.And there’s some room for that in the market. Butit’s still definitely a foreign food, not somethingthat’s part of the culture. So while it may look goodon paper, I think a lot of the consumer companies,at least, are realizing that to succeed in China theyneed to be on the ground, producing for localtastes, instead of trying to convert the world to U.S.tastes. That’s not enough.

When it comes to the growth side of the equation,if you want to have long-term holdings, you need tofind good secular trends. Something like the growthof social media —

Even that’s been rather painful lately.Yes, but at the end of day, while poor oldFacebook (FB) and Google, or Alphabet, now,(GOOGL) have certainly been under the micro-scope in terms of privacy issues and enabling mali-cious activities — or anything else the Europeanregulators can think up — they still hover upthree-quarters of all the advertising that’s online.And who knows how much more, in traditionalmedia. Those are big stories. They are growingtheir top lines over 20% and their bottom lines at40%-plus. That growth has been pretty steady andthey have a lot of things they haven’t even mone-tized yet.

Those stories don’t go away, in terms of growth. Butwhat we prefer to do is ask questions like, “Howdoes all that advertising get onto the web? Whatare the mechanisms and what are the software pro-grams that enable all of this content to be creat-ed?” In other words, we look at the same growthstories as everyone else, but try to find that extrahook. A different angle of approach.

For instance?It could be a stock like Adobe (ADBE), for exam-ple. It has a big growth story because its businesshas a very high barrier to entry. They are, de facto,the tool used today to create online content andadvertising. That’s the kind of good up-market-typegrowth story that you certainly want exposure to.

It’s something on the order of a moderntwist on Levi Strauss selling jeans or pickaxes to the Forty-Niners? Basically. Software as a service, or SaaS, for exam-ple, is a very big deal. The cloud is everything.The numbers that the big tech guys are racking upin cloud services growth are gaudy. You can’t par-ticipate in the up-market if you don’t have that.

But the caveat is that you need to manage youractive exposure to the cloud, knowing that if marketsturn down, those kinds of stocks are going to be thefirst to drop, just because they’ve gone up the most.That’s just how that works. So if you’re going to havea big tech exposure, you also definitely have to thinkabout what is the other side of that position? That’s,again, how we construct the portfolio.

So what is on the other side? Traditionaldefensive stocks like utilities? Utilities historically have always been the comfortfood. A regulated utility has — you can think of itas pricing power — but what they really have israte-based growth. If they are investing in theirinfrastructure, they’re able to pass that growththrough to the end users and today that could beupwards of 6.5% per annum, which is very, verystrong for a business where actual electricity con-sumption has been flat for a decade. They have topass through their rate growth to either feed moreinvestment or, more importantly, to increase divi-dends annually at a rate higher than inflationgrowth. Which means you’re maintaining the pur-chasing power of the dividends you’re being paid.

It’s not something, again, you’re going to talk aboutat a cocktail party but it has tremendous valuewhen you least expect it, in terms of a market drop.

Do you have some examples?Well, we’re at the end of a long cycle here so it’snot just utilities. Some of the mega-pharmaceuticalcompanies with decent pipelines but just enormouscash flow — AbbVie (ABBV) and Pfizer (PFE)come to mind — are good down-market stocks.They still have pipelines and there’s still certainexpectations of those pipelines, so there’s going to




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be a little bit more volatility in them.But these are very mature companiesthat have huge runways for cash flowand dividend growth.

Telecom is another area that’s tradition-ally been a solid place for dividendgrowth. Then you’re also going to see afew consumer names in the comfortgroup — tobacco specifically has beena really good down market participantover the years.

Those are the kinds of things that fillthe other side of the portfolio coin, tobalance the IT or biotech or whateveryou’re using for up-market capture.

Is the proportion of defensivenames in your portfolio a con-stant or does it grow in timeslike this or in anticipation oftimes like this?We vary the weightings through thecycle, as this chart [nearby] helpsexplain. We will sell into multipleexpansion. We will reduce our up-mar-ket exposure in times of rapid multipleexpansion. Then, as people are rushingfor the exits in a multiple contraction, we’ll reverseit. So we’re sort of counter-cyclical. Again, we’realways thinking about what’s next. We’re alwaysthinking, “This is our portfolio but what do we dounder these circumstances? How do we react?”

We always have a road map because in times ofstress it’s very difficult to start that process. So welike to constantly re-evaluate where we think weare and what would we do. What price points wouldwe want to see, how would we step down? With ourlow turnover portfolio our strategic allocation with-in the up-market and the down-market basketsmoves fairly slowly — you’re talking maybe in 5%increments and then you adjust tactically the actu-al weights of the stocks in the two buckets — theup-market and the down-market — because,what’s the old adage? The markets take the stairsup and the elevator down?

I’ve heard that a few times. That’s why you plan ahead. When 2008 happenedwe’d already been planning for that for 18 months.

Yet you still took an unpleasant hit —What I meant was that anyone who wanted to seethat crisis coming could see how that one was set-ting up. So what we did was put ridiculous price

targets on things we’d like to own under the rightcircumstances — in other words, would like to buyin a broad market decline. Then we sat back andwaited. When it happens, it happens. I mean,nobody foresaw GE plunging from the mid-20sdown to $6 or $7, but that’s how it happens.

It might be heading there again!Another example, then. Schlumberger was tradingsomewhere in the 90s in 2008, then three monthslater it was in the 40s. Those kinds of opportunitiesare few and far between, but if you think aboutthem in advance — because that’s what we getpaid to do — when they do occur, you’re able toexecute your plan. And that’s how our up-market/down-market strategy ebbs and flows.

Historically we’ll never be below a 50/50 — equallyweighting growth and preservation of capital. At themost extreme, it would be 90% up-market/10%down. I haven’t seen that during my time at Stralem.We went into the tech bubble already positioned70% up-market and 30% down — which wasstepped down from even greater exposure to growth.

Why was that? Already in 1999, our research identified the factthat the tech buying for Y2K compliance had




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Stralem Approach Varies As Markets, Economy Cycle


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already occurred. So we were sort of quantitativelyforced sellers of techs at the beginning of 1999.While Wall Street analysts were still selling youthen on the notion there’d be a “new normal” oftech shipments, it just wasn’t reflected in the actualshipments going out. Clients weren’t happy aboutus selling for the first six or nine months, but theycertainly were happy about it afterwards.

Funny how that works. What’s your par-ticipation/protection distribution today?We’re around 65% up and 35% down — becausewe counter-cyclically were buying when everyonewas rushing for the exits in 2008 and ’09. And wewould have continued to buy, but when they threwsand in the gears of the clearing process in March’09, we just stayed with this distribution, instead ofchasing that multiple expansion.

In this business, really you just need a good ideaevery half-decade or so, to really power you for thenext couple of years. So if you have the ability tocome up with one, and to draw up some contin-gency plans — that’s how we think about it and tryto execute our strategy.

Okay, what’s your big secular idea here?This one isn’t even new anymore. It emerged a cou-ple of years ago. But if you think about it, demo-graphics are driving just about everything on aglobal scale. First and foremost is in healthcare.Not only is disease identification made quicker, it’savailable to more people. As the wealth affect ofemerging middle classes starts to take off, some ofthe first dollar spends, after an entertainmentsplurge to Disney World or whatever, typically is inhealthcare. That’s why we’re seeing growth in U.S.— and European, to a lesser extent — pharmacompanies in Asia.

It’s lost here in the U.S., as we argue over theAffordable Care Act and the cost of insurance andhealthcare in general. But that is the biggest, with-out question, macro trend out there. Just peelingback that onion one level, you’re investing in thelife sciences, because the discovery process canonly go as far as the tools in the lab can take us. SoI see life sciences as the most interesting place tobe on a secular scale for the next bunch of years.

Even a growth investor has to be chal-lenged to buy them at today’s nosebleedlevels, though. If you just look at the multiples, yes. That’s prob-lematic. But we have a proprietary tool that we lookat valuations through. It basically tries to look atthe ramp up — where earnings have come from

versus where they’re expected to go.

You don’t just take a pair of binocularsand look through the wrong end? Ha! That’s a good description. Typically — here weare in 2018, so the way we calculate things — welook at GAAP earnings for 2016, ’17, plus themean estimates for this year — a three-year earn-ings stream. Then we take a simple average ofthose years and divide it by the Street’s mean esti-mate for next year, which frequently needs adjust-ment, because all too frequently the analysts alldrink from the same batch of Kool-Aid —

No? Really?What that exercise produces is a growth rate. Thenyou look at the P/E on that three-year growth rateand use that in what we call our relative growthvaluation model. The result is that we can actuallybuy something that’s selling at 35 times currentearnings — if the projections for the forward esti-mates over the next year or two are supportive orare growing that much more rapidly than the trail-ing three-year average. We also use the model’soutput for controlling risk in our portfolio construc-tion process. [table, next page]

No wonder you’re so interested in investorpsychology. That sort of valuation dependsheavily on shifting human perceptions. Absolutely right. And we stress tested the esti-mates. We’re not calculating our own estimates —there are more than enough people doing that inthe U.S. large cap space, on our behalf. But we cer-tainly stress test the estimates we use to see ifthey’re just straight out wrong. They can be.

No kidding. You mentioned life sciences.How about pharma or the biotechs?They’re the other side of that coin. Those compa-nies spend billions of dollars either investing intheir own molecules or doing a joint venture orbuying someone else’s molecules. But if you getthat wrong — whew — and that’s happening today.We’re seeing more misses in the pipelines than wedid previously. That’s probably just a reflection ofthe scale and scope of modern pharmaceuticalcompanies. But that means you have to lower yourestimates and your expectations, which impactstheir growth valuations, even if the multiples drop.

You’re saying it’s a mine field?Well, here’s the danger. You might think, “Okay,it’s a cheap stock. It’s been re-priced.” But it’sprobably only been repriced relative to where itsprior earning stream was. It might not have beenre-priced enough, relative to getting the overall cal-




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culation to work for you.

Again, we look through a slightly different prism. Idon’t know if stocks are expensive or not today.

Seriously?I have a sense they are. You are paying $18, $20,$22, $24 — whatever the trailing estimate is — fora dollar of earnings. That doesn’t seem reasonablein overall market structure. But at an individualstock level, we try to separate that out from theoverall benchmark. Because otherwise, you’re justgoing to sit in cash and not make anyone anymoney. You do want to participate so you just needto find your comfort zone —

Yet I see you do hold cash on occasion. We have frictional cash, on average, of about 4% ofthe portfolio. That’s partly for tax efficiency. Youdon’t want to be forced to recognize a capital gainevery time you want to add something. If you do geta resetting of prices, you can maybe buy downwithout actually having to create a capital gain. Butwe don’t hold cash for tactical purposes.

Your strategy invests just in U.S.-listedcompanies, but you’ve mentioned travel-ing the globe frequently — even to China?We invest only in S&P 500 listed companies sowe’re certainly America-centric in terms of thepond that we fish in. But with that said —

A lot of S&P companies are internationalin their reach? Yes, about 65% of revenues of portfolio companiescomes from outside the U.S. That has been bydesign. And keep in mind that we have oil compa-nies, so sometimes that metric isn’t as straightfor-ward as it sounds. But we really like the way com-panies we’re invested in are taking it to the emerg-ing markets.

Not as much, obviously, in reporting periodsimpacted by a strong dollar. But lately the dollarhas been weak, which helps our companies. Theyare doing business in local currencies, they’re rein-vesting in the local businesses in those local cur-rencies. So we try not to worry too much about thequarterly distractions of dollar accounting.

Do you have favorite EM here?We love Asia, we like Europe. We have companiesin the portfolio that have been growing double-dig-its over the last couple of years — when EuropeanGDP was effectively flat. We have companies doingdouble-digits in Brazil, while that nation’s economy

is contracting. That’s what we’re looking for. It’s notjust that we have this top-down thematic exposure.We do the bottom-up research to find the compa-nies able to execute, regardless of what’s going onin the region.

And that’s the purpose of your travel? Yes, very much so. We go out to meet not just withthe managers on the ground in the companies weinvest in, but other companies, economists, acade-mics — just about anyone who’s willing to sit downand help us to a much better understanding of thebackdrop. That is always changing and you can’t justsit here and read about. Then you’re consuminginformation that’s already stale. You have to be there.

I’ve been so impressed over the years with themanagement teams we meet overseas. I happenedto be in China during the 2016 presidential elec-tion. Partly by design — I find China particularlyto be a wonderful vantage point for watchingdemocracy at work. They didn’t block CNN in theWestern hotels, so I could watch what turned out tobe just a crazy moment in time.

I then met with a couple multinationals whoseregional headquarters are in Shanghai, and askedwhat Trump’s platform of protectionism and tradewars was going to mean to them. “How am I sup-pose to think about this? How are you thinkingabout this?” What amazed me was that they alreadyhad a game plan. They’d already gone through theirlogistics and their global footprint and figured outhow to operate, in a hostile trade environment.

“We’re getting something from a plant in Texas, sowe’re going to now resource it from Thailand orfrom Saudi Arabia,” or whatever. They’d alreadyfigured out how to minimize any disruptions of




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their supply chains. Because they’re doing businessin China for China, or for the greater region. Theyare not making things to re-import to the U.S., con-trary to claims. I was just terrifically impressedthat they’d already anticipated all that, which to meis a hallmark of a great local management team.

So all the verbal fire and fury over tariffsisn’t overly worrying in terms of your port-folio companies’ international exposures?No, we’ve gone out and looked and assessed therisks. It remains to be seen how they execute, ofcourse, but our companies have actually beenpreparing for years. We’re comfortable becausethey’re ahead of the curve. Not just reacting to yes-terday’s headlines. Clearly, it ultimately dependson where it ends. Historically, trade wars, sort ofhave one round. But with our current president, youjust don’t know. It might all just be bluster. I mean,NAFTA is still NAFTA, right?

Bluster is his favorite negotiating tactic,it seems. The thing is, what’s often overlooked is that blusterdoesn’t translate well. These are proud cultureshe’s targeting, and that’s problematic. His gametheory is single round, but this is multi-round andit’s much harder to foresee where it ends. Mexico’sis also a proud culture. There’s only so much bully-ing they’ll take before digging in their heels.

The big question for Trump is how far he and hisadministration are willing to take it. China is prag-matic, they know where to hit him — they’re goingto hit him in his face — hitting America’s strength,unfortunately, which is primarily agriculture. AndTrump’s base. Meanwhile, the Chinese are used tosuffering, while we haven’t suffered, as a nation, fora long time.

China will find ways to replace U.S. soybeans.They’ll grow more, source more from Brazil.Whatever. But we get 100% of our Christmaslights, 100% of our American flags and who knowshow many other things — socks, brassieres —from China. We don’t have that capacity here.

Well, depending on what day it is, the mar-ket seems a mite concerned.It creates an interesting backdrop for investing,regardless of the outcome. You try to avoid it asbest you can, but the overall market inevitablyreflects this anxiety — which is probably healthy.Again, relative to how we’ve gotten to where we arein the market, and the impact of the central bankin inflating assets. Now the real world seems to be

intruding to a degree. Which is something that wefind interesting and attractive both in terms of whatwe do and how we do it.

Participating and protecting, again. So I’mguessing you’re not loading up on lever-aged derivatives? Not at all. This current administration is going tokeep everyone on their toes. They’re moving aroundquite frantically from one thing to the next. And Isuspect this is just the beginning. Like I started outsaying, after so many years of a becalmed market,we’re kind of enjoying watching the market reactwith more volatility. With a portfolio structured forboth up and down markets, we’re just hopeful thatthis creates opportunities for us to gain exposure toour short list investments we’d love to own, at theright prices.

How about sharing some of the ideas onyour wish list? Well, we have all the noise of politics and geopoli-tics and just an acrimonious environment. Let mejust observe that the way cyclicals ran up hardbased on some policy decisions — especially thetax cuts — we found somewhat amusing. Becausewhat was ramped up — particularly the industrials— were too expensive to begin with.

Industrials are a funny sector. If you look at theadministration’s policy on infrastructure, it’s onething to do tax cuts, bring back foreign assets —the obvious things. You want to own a lot of the bigtech companies to get the big repatriated cash, orthe big pharmaceutical companies. That makessense. Deregulation is going to work well for ener-gy, maybe utilities — certainly financials.

But the investment case for industrials generallyisn’t so straightforward. There are five borderstates, each with its own municipalities and region-al issues. There is no one overarching winner there.And with global growth slowing a little bit, theindustrials are the tip of the sphere, and that slow-ing is starting to be visible.

Which leaves you, where?It brings us back to demographics, which has hadthe biggest impact overall, in recent years. Again,we like the life sciences, where Thermo-FisherScientific (TMO) has been our big horse for the lastfive years or so. They’re doing 20%-plus growth inChina every quarter, like clockwork. And theyshould continue to do well — of course, we don’tknow what impact a trade war would have, butthey produce domestically in China, so it might not


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be as much as would be presumed.

TMO sells the big ticket analytical gear, like massspectrometers and DNA sequencers — all thatsuper fancy stuff that drives discoveries. They’re inall the right places at the right time. The secondlargest spender in life sciences, after the U.S., isChina. With their demographics growing the way itis — and just their sheer numbers — you have tobe there. Plus, the Chinese are doing the largestDNA sequencing projects in the world right now.So TMO is a very attractive, very high-growth com-pany that we certainly want exposure to.

What’s another?Danaher Corp. (DHR) is another attractive life sci-ences companies. It is just so steady year in andyear out. They don’t make noise, they execute, aphenomenal management team. For us, if you’reonly going to have two companies in life sciences— which is a fact of our life, running a concentrat-ed portfolio — it’s certainly a way we want to getexposure to life sciences.

So those aren’t positions you’ve beentrimming as the market advanced? We’re not slowly reducing it. Again, the way wemanage, we have a slightly lower weighting inDanaher than in Thermo-Fisher Scientific, becauseit’s growing much faster than Danaher; has a muchmore reasonable multiple. We’re looking out overthe valley a little bit and seeing TMO as having agreater growth opportunity set than Danaher.

You mentioned Adobe. Do you like othersoftware purveyors?They really don’t have any equal in the software asa service space, in terms of creating online content.Adobe is pretty much a perfect Stralem stock. Notonly are you getting tech growth characteristics —42% profit growth, 20%-plus top-line growth,extremely attractive margins, I think 86% — butwhat makes them a Stralem stock is that Adobe’stransition to a software as a service model has ledto 85% of their revenue is recurring. That’s us.That’s great stuff.

We like that visibility, that clarity in their growth,in terms of recurring sources. It’s just very stableand should enable a continuously higher valuation.We like that a lot. We own a couple of companieslike that.

For instance?One is the Intercontinental Exchange, (ICE). They own a couple of the stock exchanges, they’re amajor clearing house for global derivatives growth,

especially in interest rates and commodities. Butsince they own the exchanges they’re able to sell“the exhaust” — as they call it — real time data— to hedge funds. So 50% of their revenue isrecurring, from selling that “exhaust” from theexchanges. You could also own the CME Group(CME), which is the other company in that space,but they don’t have that recurring revenue streamthat we find quite comforting. Selling trading data is big business, cer-tainly. I just wonder if it’s vulnerable toquestions about who really owns the data. Well, unlike Facebook, the data they’re selling isnot personal.

Not in the same way, certainly. My trad-ing data is laughable. Jim Simons’, howev-er — Anyway, what else?Healthcare is our biggest footprint, no question.We like the devices that Abbott Labs (ABT) sells.Abbott’s former partner, AbbVie — I mentioned.Its Humira patent is just a phenomenal source ofgrowth, cash flow. Then we have more esoteric, take-your-shots, positions. Celgene (CELG), we’veowned for years. It’s recently run up against somedrug trial headwinds, but it’s still a great growthstory; has been an extremely good investment for anumber of years.

Do you have a favorite in your protectionbasket?Dominion Energy (D) is a utility serving veryattractive end users. They’re in northern Virginiawhere you have the government corridor along thePotomac River and the Baltimore/Washington tech-nology corridor — 70% of global internet trafficgoes through Dominion’s territory every single day.This is where you find the cloud computing net-works of Amazon and Apple and others. But itslarge regulated customer base is also highly diver-sified. Its balance sheet is strong. Its dividend isover 4%, and growing at 8% per annum, with a70% payout ratio. It’s just very attractive in termsof the security and transparency of dividends —and that’s what matters.

That’s how we think. For much the same reasonswe like Philip Morris (MO) on the protection side ofour portfolio. They’re obviously dominant in tobac-co and they’re moving the e-cigarettes —

Vaping and all that.Which is growing like hotcakes right now.

Another addictive product. is great untilsomeone gets around to regulating it too.True. We run some SRI/ESG portfolios for clients




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and find alternatives for ones who have ethical objections to owning things liketobacco or fossil fuels — without diluting what we do. That’s another part ofhow Stralem does business.

The clients come first — always a good policy. Thanks, Adam forsharing some of your ideas — and atypical approach to what areincreasingly atypical markets!

Welling on Wall Street Interviewee disclosures: Adam S. Abelson is Chief Investment Officer at Stralem & Co., chairs firm’s InvestmentCommittee and leads Stralem’s research effort, overseeing the implementation of the U.S. Large Cap Equity Strategy. He co-authors the firm'squarterly "West of the Hudson" letter, which is the product of the team's research trips around the world. He serves as a director of Stralem’sUCITS fund. Adam joined Stralem in 1998 after managing business units within the emerging technologies, consumer products and hotel/gamingindustries. He’s a graduate of Pitzer College, Claremont Colleges. Manhattan-based Stralem & Company is an independent, SEC registeredinvestment adviser established in 1966 by Donald Stralem, who had been a long-time partner in Hallgarten & Co. He was soon joined by HirschelAbelson, a former partner at Ladenburg Thalmann & Co. and Philippe E. Baumann of A.L. Stamm & Co. and Coleman & Co. Hirschel, a disciple ofWall Street pioneer Harry B. Lake, applied Lake’s Great Depression-tested wealth building principles for the new firm’s private clients and boththe firm and the clients prospered. The Large Cap Equity Strategy ™ Composite (LCES) consists of fully discretionary large capitalization equityaccounts. The investment objective of the LCES is to deliver above market returns with less risk during both up and down markets. The invest-ment philosophy of the Large Cap Equity Strategy is predicated on the belief that there are four types of market environments, two types ofbull markets and two types of bear markets each characterized by momentum and valuation factors. Market environments affect portfoliostructure so it is critical to identify and prepare for changing market environments. The Large Cap Equity Strategy adds value by purchasing aset of fundamentally solid growth companies along with a set of companies that deliver strong cash flow and adjusting the balance betweenthese two groups depending on where we are in the market cycle. Stralem defines the LCES as a conservative growth strategy that also focuseson preserving capital during down markets. For comparison purposes, the composite is measured against the S&P 500 index. The S&P 500 indexis widely recognized as a leading indicator of the U.S. equity markets. Prior to 7/1/2014, the Russell 1000 growth index was presented in additionto the S&P 500 as an additional benchmark for the LCES composite. Stralem claims compliance with the Global Investment PerformanceStandards (GIPS®) and prepares its report in compliance with the GIPS standards. Stralem has been independently verified for the periodsJanuary 1, 1992 through September 30, 2017. The firm maintains a complete list and description of composites, which is available upon request.To receive a complete list and description of Stralem's composites contact Stralem at 212-888-8123. Results are based on fully discretionaryaccounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. Policies forvaluing portfolios, calculating performance, and preparing compliant presentations are available upon request.Legal Disclaimer. For furtherinformation, see www.stralem.com. This Interview does not constitute advice nor a recommendation to buy, sell or hold, nor an offer to sell ora solicitation to buy interests or shares in the Stralem Fund or other offerings, or in securities in the companies mentioned in it (“relevantsecurities”). It has not been prepared in accordance with legal requirements designed to promote the independence of investment research.Stralem, its affiliates, directors and employees are not subject to restrictions on dealing in relevant securities ahead of the dissemination ofthis interview. This interview was initiated by Welling on Wall St. and contains the current opinions of the interviewee but not necessarily those of Stralem. Suchopinions are subject to change without notice. This interview and all information and opinions discussed herein is being distributed for informa-tional purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or invest-ment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. In addition, forecasts,estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, asgospel or as infallible. Nor should they, in any way shape or form, be considered an offer or solicitation for the purchase or sale of any financialinstrument. The price and value of investments may rise or fall. There are no guarantees in investment or in research, as in life. No part of this copyrighted interview may be reproduced in any form, without express written permission of Welling on Wall St. and Kathryn M.Welling. © 2018 Welling on Wall St. LLC

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