“intellectual honesty for the global investor”principles of firm performance history for abe...
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CapitalManagement
“Intellectual Honesty for the Global Investor”
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 1
ABE Capital ManageMent was established in June of 2010.
The following materials and charts include investment principles and
related performance figures designed to illustrate the ABE Capital
Management Strategy. This Strategy was privately managed by Mr. Nelson
prior to the establishment of ABE Capital Management and is now
available to new prospective investors.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 2
ABE Capital ManageMent is founded on the premise that
intellectually honest investment research practices and
portfolio management practices can, over time, meaningfully
shift the probabilistic odds in the investor’s favor.
Executive Summary
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 3
• Itispreferabletomissanopportunitythantoloseclientmoney:
ABE will only invest when its proprietary research indicates that the
probabilistic reward-to-risk ratio is substantially in the client’s favor.
If no such opportunities exist, ABE will not invest.
• Investingisapartnership: Transparency, liquidity, and reasonable
costs are integral to this partnership.
• Educationthroughcommunication: By sharing its proprietary
investment research with the client, ABE intends to impart comfort
through knowledge.
• ABEowestheclientafiduciaryduty: ABE will approach every
decision with this principle in mind.
ABE’sFourMoralPillars
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 4
ABECapitalManagementStrategy
SignificantlyOutperformedS&P500TotalReturnIndex
ABE Capital Management Strategy performance figures are based on Schedule of Gross Investment Performance of Account XYZ as verified in the Accountants’ Review Report prepared by Marcum, LLC and covers April 1, 2000 through August 31, 2010. Performance for the period September 1, 2010 through December 31, 2012 is based on management’s estimates. The performance results for ABE Capital Management Strategy are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section of ABE Pitchbook for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
S&P 500 Total Return IndexABE Strategy
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500,000
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1,250,000
1,500,000
1,750,000
2,000,000
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$2,500,000
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 5
Monthly Rolling Returns
Quarterly Rolling Returns
Annual Rolling Returns
3-Year Rolling Returns
5-Year Rolling Returns
Total Periods 153 151 142 118 94
% of Periods with Positive Returns 62.7% 72.8% 76.1% 100.0% 100.0%
% of Periods with Negative Returns 37.3 27.2 23.9 0.0 0.0
Average Return for Period 0.5 1.6 6.5 24.1 46.5
Average S&P 500 TR Return for Period 0.2 0.8 3.7 13.2 16.7
Average Outperformance of S&P 500 TR 0.3 0.8 2.8 10.9 29.7
Best Return for Period 7.1 11.6 21.6 44.6 70.7
Worst Return for Period -6.1 -7.0 -5.1 0.8 18.2
ABECapitalManagementStrategy
PerformanceonaRollingPeriodBasisOverVariousTimeHorizons
PercentageofPeriodsABECapitalManagementStrategyOutperformed S&P500TotalReturnIndexonaRollingPeriodBasis
Rolling 5-Year ReturnsRolling 3-Year ReturnsRolling Annual ReturnsRolling Quarterly ReturnsRolling Monthly Returns0
102030405060708090
100%
ABE Capital Management Strategy performance figures are based on Schedule of Gross Investment Performance of Account XYZ as verified in the Accountants’ Review Report prepared by Marcum, LLC and covers April 1, 2000 through August 31, 2010. Performance for the period September 1, 2010 through December 31, 2012 is based on management’s estimates. The performance results for ABE Capital Management Strategy are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section of ABE Pitchbook for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 6
ABECapitalManagementStrategy
AbsoluteReturns:DistributionPatternofRollingReturns
DistributionPatternof5-YrRollingReturns
DistributionPatternof3-YrRollingReturns
0
10
20
30
40
50
40% < x < 50%30% < x < 40%20% < x < 30%10% < x < 20%0% < x < 10%x < 0%
Num
ber o
f Per
iods
Percent Return
0
5
10
15
20
25
x > 70%60% < x < 70%50% < x < 60%40% < x < 50%30% < x < 40%20% < x < 30%10% < x < 20%x< 10%
Num
ber o
f Per
iods
Percent Return
ABE Capital Management Strategy performance figures are based on Schedule of Gross Investment Performance of Account XYZ as verified in the Accountants’ Review Report prepared by Marcum, LLC and covers April 1, 2000 through August 31, 2010. Performance for the period September 1, 2010 through December 31, 2012 is based on management’s estimates. The performance results for ABE Capital Management Strategy are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section of ABE Pitchbook for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 7
ABEStrategySignificantlyOutperformedBenchmarkIndices
StockPortfolio
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500,000
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1500,000
2,000,000
2,500,000
3,000,000
3,500,000
$4,000,000
S&P 500 Total Return IndexMSCI All-Country World Total Return Index ABE Strategy Stock Portfolio
ABE Strategy Stock Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through December 31, 2012. The results from April 1, 2000 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across asset classes are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 8
Monthly Rolling Returns
Quarterly Rolling Returns
Annual Rolling Returns
3-Year Rolling Returns
5-Year Rolling Returns
Total Periods 153 151 142 118 94
% of Periods with Positive Returns 58.2% 67.5% 72.5% 94.1% 100.0%
% of Periods with Negative Returns 41.8 32.5 27.5 5.9 0.0
Average Return for Period 1.0 3.0 12.5 51.9 107.7
Average S&P 500 TR Return for Period 0.2 0.8 3.7 13.2 16.7
Average Outperformance of S&P 500 TR 0.7 2.2 8.8 38.7 91.0
Best Return for Period 15.1 24.4 50.9 102.4 202.9
Worst Return for Period -15.9 -18.3 -19.0 -22.5 23.8
PerformanceonaRollingPeriodBasisOverVariousTimeHorizons
StockPortfolio
PercentageofPeriodsABEStrategyStockPortfolioOutperformed S&P500TotalReturnIndexonaRollingPeriodBasis
Rolling 5-Year ReturnsRolling 3-Year ReturnsRolling Annual ReturnsRolling Quarterly ReturnsRolling Monthly Returns0
102030405060708090
100%
ABE Strategy Stock Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through December 31, 2012. The results from April 1, 2000 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across asset classes are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 9
AbsoluteReturns:DistributionPatternofRollingReturns
StockPortfolio
DistributionPatternof5-YrRollingReturns
DistributionPatternof3-YrRollingReturns
0
5
10
15
20
25
30
x > 200%175% < x < 200%150% < x < 175%125% < x < 150%100% < x < 125%75% < x < 100%50% < x < 75%25% < x < 50%0% < x < 25%
Num
ber o
f Per
iods
Percent Return
0
5
10
15
20
25
30
35
40
45
x > 100% 80% < x < 100% 60% < x < 80% 40% < x < 60% 20% < x < 40% 0% < x < 20% -20% < x < 0% x < -20%
Num
ber o
f Per
iods
Percent Return
ABE Strategy Stock Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through December 31, 2012. The results from April 1, 2000 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across asset classes are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place. Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 10
Jun-
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Jun-
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Dec-0
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-11
800,000
1,000,000
1,200,000
1,400,000
1,600,000
$1,800,000
Jun-12
Barclay's Municipal Bond Index (1-10 Year blend)ABE Strategy Bond Portfolio
ABEStrategyProvidedSteady,Tax-PreferredReturns
BondPortfolio
ABE Strategy Bond Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through May 31, 2011. The results from April 1, 2000 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across asset classes are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place.Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 11
Monthly Rolling Returns
Quarterly Rolling Returns
Annual Rolling Returns
3-Year Rolling Returns
5-Year Rolling Returns
Total Periods 134 132 123 99 75
% of Periods with Positive Returns 66.4% 76.5% 94.3% 100.0% 100.0%
% of Periods with Negative Returns 33.6 23.5 5.7 0.0 0.0
Average Return for Period 0.4 1.2 4.8 13.6 23.5
Average Return for Barclay's Muni (1-10yr) 0.4 1.2 4.9 14.3 23.1
Average Outperformance of S&P 500 TR 0.0 0.0 -0.1 -0.7 0.4
Best Return for Period 5.3 6.0 12.3 21.8 31.0
Worst Return for Period -3.3 -6.0 -4.7 4.5 11.8
PerformanceonaRollingPeriodBasisOverVariousTimeHorizons
BondPortfolio
PercentageofPeriodsABEStrategyBondPortfolioOutperformed Barclay’sMuniIndexonaRollingPeriodBasis
0
10
20
30
40
50
60
70%
Rolling 5-Year ReturnsRolling 3-Year ReturnsRolling Annual ReturnsRolling Quarterly ReturnsRolling Monthly Returns
ABE Strategy Bond Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through May 31, 2011. The results from April 1, 2000 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across asset classes are net of all trading costs/commissions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place.Past performance is no guarantee of future results.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 12
500,000
750,000
1,000,000
1,250,000
1,500,000
$1,750,000
S&P 500 Total Return Index
MSCI All-Country World Total Return Index
ABE Strategy Stock Portfolio
ABE Strategy
Aug-
10
Jul-1
0
Jun-
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May
-10
Apr
-10
Mar
-10
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Dec
-09
Nov
-09
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-09
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9
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-09
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-09
Mar
-09
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-08
Nov
-08
Oct
-08
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8
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-08
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-08
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-08
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-07
Nov
-07
Oct
-07
Sep-
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Aug-
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Returns Between Periods Since Inception of Financial Crisis
ABE Strategy Stock Portfolio
ABE Capital Management Strategy
MSCI All-Country World TR Index
S&P 500 TR Index
September 1, 2007 to March 31, 2009 15.49% 7.34% -46.12% -43.78%April 1, 2009 to August 31, 2010 42.00 19.72 43.71 35.54September 1, 2007 to August 31, 2010 63.99 28.51 -22.56 -23.80
ABECapitalManagementStrategy
GeneratedPositiveReturnsduringtheFinancialCrisis
ABE Capital Management Strategy performance figures are based on Schedule of Gross Investment Performance of Account XYZ as verified in the Accountants’ Review Report prepared by Marcum, LLC and covers September 1, 2007 through August 31, 2010. ABE Strategy Stock Portfolio performance figures are based on management calculations using historic brokerage statements from Account XYZ. The figures cover the period from September 1, 2007 through August 31, 2010. The Stock Portfolio results from September 1, 2007 through August 31, 2010 were reconciled with the Accountants’Review Report prepared by Marcum, LLC. There were no material differences. The performance results across the ABE Capital Management Strategy and ABE Strategy Stock Portfolio are net of all trading costs/commis-sions and gross of all management fees. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place.Past performance is no guarantee of future results.
ABE Capital Management’s research process enabled it to anticipate and prepare for risks not broadly recognized by the market. ABE’s flexible investment model provided the ability to opportunistically short at-risk sectors, to hedge across asset classes, and to reduce security-specific risk through sales of securities and through other hedging strategies.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 13
• Conduct value-oriented research in order to purchase securities at a
significant discount to intrinsic value and sell securities that are priced
at a premium to intrinsic value
• Allocate capital across asset classes on a global basis
• Create a diversified basket of long-term investment opportunities with
flexibility to hedge portfolio-specific or broader macroeconomic risks
• Seek special situation investment opportunities where counterparties
to the transactions are likely to be driven by mechanical selling for
non-economic reasons or short-term excessive sentiment
ABE Capital Management’s Investment Methodology
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 14
ABE Capital Management has a disciplined investment research process.
This process is supported by three valuable and complementary investment
methodologies. Investment decisions will be initiated on the client’s
behalf after “Top-Down,” “Bottom-Up,” and “Behavioral” research
methodologies facilitate a probabilistic estimate of value. If the security’s
intrinsic value relative to its price is highly advantageous, ABE Capital
Management may purchase the security for the client’s portfolio.
After purchasing the security, ABE Capital Management monitors
the position in the client’s portfolio and has a sell discipline. ABE will
not encourage the client to take off (buy a security) without a flight path
and thoroughly considered landing instructions. ABE will also observe
prospective turbulence on an ongoing basis in an effort to effectuate a safe
flight and a secure landing (sale of a security).
ABE Capital Management Exercises Diligence in Research
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 15
• Pricesaremorevolatilethanunderlyingintrinsicvalue,
which can create opportunity. Prices may be too high or
too low. As Warren Buffett notably stated, “Price is what
you pay; value is what you get.”*
• Securitiesshouldalwaysbepurchasedwithamarginof
safety (at a significant discount to intrinsic value) in order
to protect the client in the event that estimates of intrinsic value
prove overly optimistic. As Warren Buffett also stated,
“You build a bridge that 30,000-pound trucks can go across
and then drive only 10,000-pound trucks across it.”**
ABE Capital Management’s Value Orientation
*Berkshire Hathaway 2008 Letter to Shareholders**Financial World, June 13, 1984.
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 16
Valuation Methodologies • Net Asset Value • Earnings Power Value • Discounted Free Cash Flow Value • Private Market Value • Sum-of-Parts Value
“Top-Down” Research: Broad Social, Economic, and Political factors
• Social: Demographic trends, cultural shifts in purchasing habits
• Economic: Balance of trade, monetary, and fiscal policy
• Political: Regulatory environment, currency implications
• Self-Reinforcing Interaction: Social,economic, and political developments
“Bottom-Up” Research: Evaluation of Security-Specific Criteria
• Industry Analysis: Market potential, competitive environment
• Industry Interviews: Management, competitors, suppliers, customers
• Financials: Financial statement analysis, ROIC, unit economics
• Fixed Income: Debt service, capital structure, liquidation value
“Behavioral” Research: Understand Investment Psychology
• Confirmation Bias: Seek evidence contrary to investment thesis
• Recency Effect: Do not extrapolate present; study market history
• Sentiment Indicators: Understand sentiment’s impact on security pricing
• Technical Indicators: Context for actions of market participants
ABE CapitalManagementApplies“Top-Down,”“Bottom-Up,” and“Behavioral”ResearchinEstimatingIntrinsicValue
Principles of Firm
Performance History for ABE Strategy
Performance History by Asset Class
Performance During Financial Crisis
Investment Research
Risk Management
Portfolio Management
Long-Term Methodology
Special Situations Investing
Transparency
Fiduciary Relationship
Management
Contact Information
Disclosures
CapitalManagement
Phone: 973.713.1236 E-mail: [email protected] • Page 17
ABE Capital Management Conducts ResearchBasedonProbability
Estimated value of a security is a function of: WhatMightHappenxTheLikelihoodThatItWillHappen
Hypothetical example: Assume Company Y has an estimated value of $20 per share based on ABE’s proprietary research. There are two independent variables that might meaningfully impact the underlying value of the business:
Event 1: Will Company Y acquire or lose a major customer? Event 2: How successful will Company Y ’s newest business venture be?
Change in Customer Base(Event #1)
Probability#1
Impact on Share Value
of Event #1
Degree of Successof New Business Venture (Event #2)
Probability#2
Impact on Share Value
of Event #2
Overall Probability of Event #1 AND Event #2
(Probability #1 multiplied by Probabilty #2)
Original Value +
Impact of Events
Contribution to Overall Valuation
Acquire Major Customer
30% $5 Exceptional 20% $3 6% x $28 = $1.68 Moderate 40% $1 12% x $26 = $3.12
Original Estimated Value of Company Y
$20
Failure 40% ($2) 12% x $23 = $2.76
No Change in Customers
50% $0 Exceptional 20% $3 10% x $23 = $2.30 Moderate 40% $1 20% x $21 = $4.20 Failure 40% ($2) 20% x $18 = $3.60
Lose Major Customer
20% ($6)Exceptional 20% $3 4% x $17 = $0.68
Moderate 40% $1 8% x $15 = $1.20 Failure 40% ($2) 8% x $12 = $0.96
Value Estimate = $20.50
Probabilistic-based research allows ABE to garner a better understanding of the range of outcomes and provides consideration to even less likely outcomes. ABE seeks to purchase securities at a significant discount to the Probabilistic Value Estimate because the ability to climb higher is easiest when you start at a low point. Similarly, you get back up much quicker if you are only falling off of a pancake.
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• The valuation is no longer compelling
• The thesis for purchasing the security is no longer viable
• Better opportunities exist in the market
• Behavioral and/or technical considerations justify selling the security
“When the facts change, I change my mind.”
John Maynard Keynes
ABE CapitalManagementWillSellSecuritiesWhen:
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Misperception#1:VolatilityisRisk
ABE’sView: Volatility represents opportunity for long-term, intellectually honest
investors. Price changes more than underlying value.
Misperception#2:RewardisProportionaltoRiskAssumed
ABE’sView: Reward is not directly proportional to risk assumed. If risky
investments always produce high returns, they would not be risky.
ABE will only assume risk for the client when its research indicates
a compelling reward-to-risk ratio.
Common Misperceptions Regarding Risk
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Risk at the Security Level
• Payingtoomuchwhenthereward-to-risksetupisnotcompelling
• Makingpoorassumptionsaboutthefuturewhenvaluingasecurity
ABEattemptstomitigatesecurityspecificriskbydoingthefollowing:
• Investingonlywhenresearchindicatesahighreward-to-riskratiobyunderstanding
the client’s investment through a disciplined research process.
• Recognizingthat“top-down,”“bottom-up,”and“behavioral”research
methodologies can have “blind-spots.” The risks associated with these “blind-spots”
can be mitigated by research associated with the other two methodologies.
ABE Capital Management’s Perception of Risk
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ABE Capital Management’s Perception of Risk
Risk at the Portfolio Level
• Institutionalframeworks:Manyinvestmentfirmshaveself-imposedpoliciesand
procedures. These policies and procedures often set arbitrary rules which prevent
flexible asset allocation, thoughtful diversification, and prudent hedging.
• Behavioraldiscipline:Businessandcareerriskcaninduceshort-term,benchmark-focused
research processes. Such practices hinder patience and a willingness to
deviate from the consensus when it is appropriate.
ABEattemptstomitigateportfolioriskthroughaflexibleinvestmentmandate:
Flexibility:
• Permitspatiencewhenpatienceiswarranted
• Allowsdivergencefromconsensuswhendivergenceisjustified
• Supportsdiversificationwherediversificationisbeneficial
• Encourageshedgingwhenportfolioexposurecallsforit
• Multipliesareastotargethighreward-to-riskopportunities
ABE Capital Management is neither concerned with short-term performance
nor is it designed to mimic any index. ABE’s objective is to add value to the client’s
portfoliooverthree-yeartofive-yearperiodsoftimeinanabsolute,asopposed
torelative,sense.
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ABECapitalManagement’sCashAllocation ReflectsPatience,Discipline,andanInvestmentDecision
ABE’sHistoricAllocationbyAssetClass
Average Annual AllocationStocks Bonds Cash
2000 38.92% 36.56% 24.52%
2001 34.82 32.21 32.98
2002 28.56 32.61 38.83
2003 27.12 29.60 43.29
2004 33.80 31.05 35.15
2005 40.58 29.31 30.11
2006 53.06 27.06 19.88
2007 49.38 22.76 27.86
2008 54.45 17.84 27.71
2009 45.84 17.77 36.39
Average Annual AllocationStocks Bonds Cash
2010 42.84% 15.61% 43.81%
2011 31.02 0.17 68.81
2012 40.40 0.00 59.60
3-Year Average 38.09 5.12 56.80
5-Year Average 42.91 10.19 46.90
Historical Averages 40.08 22.19 37.72
Historical Median 39.63 26.49 35.24
Maximum (Monthly) 63.36 37.90 74.71
Minimum (Monthly) 22.09 0.00 14.54
• ABE’scashallocationenhancesflexibilitytoreactquicklytoattractiveinvestmentopportunities,buffers
returns during market declines, and increases portfolio purchasing power as market valuations compress.
• ABE’sfuturecashallocationmaybehigherorlowerthanhistoricalaveragesdependingoneconomic
conditions, existing security valuations, and other investments in the client’s portfolio.
ABE Strategy Stock Portfolio, ABE Strategy Bond Portfolio, and ABE Strategy Cash allocations are based on end of month figures calculated by management using historic brokerage statements from Account XYZ. The figures cover the period from April 1, 2000 through December 31, 2012. ABE Capital Management was established in June of 2010. Any asset allocation figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures section for complete performance disclosure. Advisory services are only offered to clients or prospective clients where ABE Capital Management, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by ABE Capital Management, LLC unless a client service agreement is in place.Past performance is no guarantee of future results.
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Be Contrarian When It Is Least Comfortable
“Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism
when optimism is excessive. But it also calls for optimism when pessimism is
excessive.” – howard MarKs, “the liMits to negativisM,” oCtober 15, 2008
Extreme consensus views (whether bullish or bearish) shift valuations and create an imbalance of prospective buyers relative to prospective sellers. Similar to a seesaw where all parties have shifted to one side, it is unreasonable to credibly believe that the seesaw can move further in the same direction. At some point, the process will reverse and the parties will start to shift back to a more normalized state, perhaps en masse. Thevariantperception,ifprobabilisticallyvalid,canoftenpresentcompellingreward-to-riskratiosforthepatient,independently-minded,andunleveragedinvestor.
In 2007, Citigroup CEO Chuck Prince famously quipped to the Financial Times, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” History has shown that Citigroup remained on the dance floor too long, meaning that although the risks were readily apparent, their business needs justified investment. ABE Capital Management will not dance just because the music is playing. ABE Capital Management will only dance when the music is exceptional because it would rather miss an opportunity for the client than lose the client’s capital. Opportunities are made up easier than losses.
ABECapitalManagementwillnotbuythehotcompany,industry,orsecurityofthemomentifitsresearch does not justify such a position. It will look to such ‘hot money’ securities as prospective shorting opportunities.
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ABE Capital Management Diversifies with Reason and Not for the Sake of Diversification
Owning more things with the same or very similar risk profiles does not reduce risk; It merely distracts from research focus and provides a false sense of security.
ABE will focus its research in order to understand the securities in which it is investing and thespecificrisksforeachsecurityona“top-down”,“bottom-up”,and“behavioral”basis.
Research practices will likely result in a basket of opportunities with compelling reward-to-risk characteristics and diversified risk exposures. When meaningful risks are identified and overrepresented in the client portfolio, ABE Capital Management will look to hedge these risks. Furthermore, where macroeconomic risks are considered underappreciated in market pricing, ABE’s flexible investment model will seek out opportunities not only to mitigate these risks, but also to capitalize on this mispricing.
ABE Capital Management is structured to allow for reasonable diversification to the extent it benefits the client’s portfolio. ABE Capital Management can invest:
• AcrosstheGlobe
• AcrossAssetClasses(Stocks,Bonds,Commodities,Currencies,etc.)
• WithinAssetClasses(LargeCap,MidCap,SmallCap,MicroCapStocks)
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ABE Capital Management Is Able to Hedge Identified Market or Portfolio Risks
Hedging an investment portfolio should be approached like
purchasing insurance in other areas of life.
Hedging portfolio risks is most advantageous when the risks are present
but remain underappreciated. If you live on a fault line, it is preferable
to purchase insurance after 10 years of inactivity because low fear should
imply lower cost. If you wait for the earthquake, insurance costs will be
higher and the damage would have already been done.
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0
5
10
15
20
25
30
35
40
x > 5yr4 yr < x < 5 yr3 yr < x < 4 yr2 yr < x < 3 yr1 yr < x < 2 yr6 mo < x < 1yr< 6 months
Num
ber o
f Occ
uren
ces
Length of Holding Period
ABE Strategy Bond Portfolio
ABE Strategy Stock Portfolio
ABECapitalManagementBenefitsfrom WallStreet’s“Short-Term”Mentality
AverageHoldingPeriodsABE’sStockPortfolio:29Months/ABE’sBondPortfolio:46Months
Holding period figure estimates are determined by management using historic brokerage statements from Account XYZ and covers January 1, 2002 through December 31, 2010. ABE Capital Management was established in June of 2010. Any performance figures before June of 2010 reflect Mr. Nelson’s private management of Account XYZ. The Strategy for Account XYZ has remained the same under Mr. Nelson’s private management and under ABE Capital Management. See Disclosures for more information on holding period calculations.
Investment market participants have become increasingly short-term oriented.
This frequently drives security prices to levels that do not reflect underlying
value. ABE Capital Management’s investment approach seeks to capitalize on
this short-term mentality through “time-horizon arbitrage.” ABE will invest
and patiently wait for prices to catch up with underlying values.
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SpecialSituationInvesting: ABETakesAdvantageofMarketInefficiencies
Before investing on behalf of the client, it is imperative to remember that every transaction has one buyer and one seller. To put the probabilistic odds in the client’s favor, ABE Capital Management seeks opportunities where counterparties to the transaction are likely to be driven by mechanical selling for non-economic reasons or short-term excessive sentiment.
Example#1:Spin-offsoccur when a company separates a part of its business from the parent company. For example, assume a large pharmaceutical company ‘spins-off’ its small consumer products division. The recipients of the consumer product shares may sell because they:
• Donothaveaconsumerproductsanalyst• Onlyinvestinlargecapcompaniesbutthespin-offisasmallcapstock• Purchasegrowthstocksandthespin-offdoesnothaveahighrateofgrowth• Restricttheirinvestmentstohealthcarecompanies• Trackanindextowhichtheparent,butnotthespin-off,wasamember
Consequently, shortly after the spin-off, a significant percentage of shareholders may sell shares for non-economic considerations. This vast supply can overwhelm prospective buyers for a newly independent company with minimal analytical coverage. Asaresult,stockpricesmightplummetwhileunderlying value has not changed. A compelling reward-to-risk opportunity may be present.
Example#2:Closed-EndFundsmay, at times, be purchased for market prices that materially differ from known Net Asset Value. These opportunities allow patient investors to capture returns through a quantifiable and observable arbitrage process as market prices converge with known, underlying Net Asset Value. Whileinvestorspatientlybenefitfromthearbitrageopportunity,theycanearnanenhanced dividend yield without assuming additional risk.
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TranparencyofRelationshipwiththeClient
• ABECapitalManagementisstructuredtoprovideoptimaltransparencyfor
the client. To provide this transparency, ABE Capital Management selected a
large online brokerage firm to custody client assets. Clients will be able to see
their investments by logging onto their own online account and will receive
monthly statements directly from this online brokerage firm. The client
will provide ABE Capital Management the discretion to purchase and sell
securities within the account.
• Toprovideanadditionalleveloftransparencyandcomfort,ABECapital
Management will share its proprietary research pertaining to any security
purchased or sold in the client’s account. Clients will see the research that
is performed on their behalf and better understand how their savings are
being invested.
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ABEhasaFiduciaryObligationtotheClient
As a Registered Investment Advisor, ABE Capital Management provides
independent financial advice and receives a fee for this advice. ABE Capital
Management is governed by The Investment Advisers Act of 1940 and is legally
obligated to act in the interests of the client (act as a fiduciary).
Assets Under Management Annual Advisory Fee
$100,000-$250,000 1.30%
$250,001-$500,000 1.20%
$500,001-$1,000,000 1.10%
$1,000,001-$5,000,000 1.00%
$5,000,001-$10,000,000 .90%
$10,000,001 + .80%
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ManagementBiographyEricA.Nelson,Esq. has been responsible for actively
managing investment portfolios for high-net-worth
individuals, retirement accounts, trusts, and a
charitable entity since 2000. The portfolio management
responsibilities were conducted simultaneously with
other professional and academic responsibilities.
Mr. Nelson has years of experience performing
investment research for several financial firms including
OppenheimerCapitalandTheMDEGroup.He
graduated with honors from Columbia Business School
where he earned an MBA and was in the prestigious
and highly-competitive Value Investing Program. Mr.
Nelson is a graduate of Villanova University School
ofLawwherehefocusedhisstudiesonmattersof
international law and is a licensed attorney in the
States of New York and New Jersey. At Washington
UniversityinSt.Louis,Mr.Nelsonconductedresearch
on speculative financial
markets and behavioral finance while earning a BSBA
at the John M. Olin School of Business. Mr. Nelson is
an avid international traveler
and is intrigued by matters
of international economic
development. In this regard,
he has served on the Advisory
Council of The Center for New
Institutional Social Sciences (CNISS) and on the Board for
Eliminate Poverty Now. CNISS is a Washington University
based research institute focused on fostering political
stability and economic growth in developing and transition
economies through an interdisciplinary model. Eliminate
Poverty Now is a charitable organization dedicated
to eliminating extreme poverty through economic
opportunities with a focus on African development. Mr.
Nelson also manages the investment portfolio and serves
on the Board of the Teddie Nelson Wieland Scholarship
Fund, a college scholarship afforded to graduates of
Mount Vernon High School in Mount Vernon, New
York. He lives in New Jersey with his wonderful wife and
precious daughter.
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New Jersey Addresses51 JFK ParkwayFirst Floor, WestShort Hills, NJ 07078
24 Camlet CourtRoseland, NJ 07068
New York Address44 Wall Street10th FloorNew York, NY 10005
TelephonePhone: 973.713.1236Fax: 973.404.8808
Websitewww.abecm.com
ContactInformation
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Disclosures
Benchmark Information: The S&P 500 Total Return Index sets
forth the performance of a well-known, broad-based stock
market index which includes and adjusts for the reinvestment
of dividends. The MSCI ACWI (All Country World Index) is a
free float-adjusted market capitalization weighted index that
is designed to measure the equity market performance of
developed and emerging markets. As of May 27, 2010 the MSCI
ACWI consisted of 45 country indices comprising 24 developed
and 21 emerging market country indices. The MSCI ACWI returns
are calculated to include reinvested dividends. The Barclays
Capital Municipal Bond 1-10 Year Blend (1-12) Index consists of
a broad selection of investment-grade general obligation bonds,
revenue bonds, insured bonds (including all insured bonds with
a Aaa/AAA rating), and prerefunded bonds with maturities of
at least 1 year and less than 12 years. It is an unmanaged index
representative of the tax-exempt bond market. The index is
made up of all investment grade municipal bonds issued after
12/31/90 having a remaining maturity of at least one year.
ABE Capital Management is not restricted to the securities and
instruments comprising any one index.
Calculation of Returns: ABE Capital Management was
established in June of 2010. Any performance figures before
June of 2010 reflect Mr. Nelson’s private management of
Account XYZ. The Strategy for Account XYZ has remained the
same under Mr. Nelson’s private management and under
ABE Capital Management. The rates of return as provided in
Marcum’s Accountants’ Review Report were computed using
the modified Dietz method. This method computes the rate
of return by time weighting each cash flow by the amount of
time it is held in the portfolio. Cash flows consist of proceeds
from contributions and payments for withdrawals. The
cumulative gross rate of return is derived by geometrically
linking annual gross rates of return, which are derived by
geometrically linking monthly gross rates of return. The
investment performance for each period was computed on a
gross basis without regard to an advisory fee or income taxes.
Accrued interest in account XYZ was not included in computing
performance.Transaction costs for purchases and sales of
securities listed on exchanges were approximately $55 each
before October 2009, approximately $130 each from October
2009 through August 2010, and $10 since August 2010. The
average period gross returns have been computed by dividing
the aggregate annual gross returns by the respective number
of periods. The asset class returns for “Stocks,” “Bonds,” and
“Cash” were computed using a total return methodology.
Stocks include any exchange-traded securities, mutual
funds, and annuities. Bonds include fixed income securities
including municipal and corporate bonds. Cash includes
U.S. denominated currency and money market funds. The
asset class returns for the period of April 1, 200 through
August 31, 2010, were reconciled with the returns verified in
Marcum’s Accountants’ Review Report. There were no material
differences. All figures for the period September 1, 2010
through December 31, 2012 are based on management
estimates. A copy of Marcum’s Accountants’ Review
Report can be found at www.abecm.com.
Holding Period: The holding period for Stocks and Bonds were
calculated from the time of purchase or acquisition in Account
XYZ until the time of final sale. If the securities were in Account
XYZ at the time Mr. Nelson assumed management of Account
XYZ, the acquisition date was assumed to be April 1, 2000.
Since Mr. Nelson was responsible for rebalancing the portfolio
upon assuming management responsibilities, the holding
period data only reflects securities sold after December 31,
2001. Securities remaining in the portfolio are included in the
holding period figures and have a holding period based on the
date of initial purchase until December 31, 2010.
Important: This information is for illustration and discussion
purposes only and is not intended to be, nor should it be
construed or used as, investment, tax or legal advice, any
recommendation, or an offer to sell, or a solicitation of
any offer to buy, an interest in any security or any strategy
managed by ABE Capital Management. All material facts
(if any) have been properly disclosed. It is hereby disclosed
that any references to potential for profits also include the
potential for loss. All claims or results of the portfolio
portrayed reflect the reinvestment of dividends and
other earnings. All material facts (if any) have been properly
disclosed. It is hereby disclosed that any references to potential
for profits also include the potential for loss. Sample Research
of Stocks and Securities is available to clients upon request.
This research is for illustration and discussion purposes only. It
does not guarantee and promise a positive return or strategies
to use with specific clients. Any offer or solicitation of an
investment with ABE Capital Management may be made only
by delivery of the ABE Capital Management’s Form ADV Part II
and Investment Advisory Client Agreement. Advisory services
are only offered to clients or prospective clients where ABE
Capital Management, LLC and its representatives are properly
licensed or exempt from licensure. Investing involves risk and
possible loss of principal capital.