“The economy depends about as much on economists as the weather does on weather forecasters.”
Jean Paul Kauffmann

Investment Perspective

The fourth quarter of 2011 saw equity markets significantly rebound from the sharp downturn experienced in the third quarter. The entire year was a troubling and difficult one for investors as volatility from economic, geopolitical, and natural disasters interfered with rational investing. These factors prevented stock prices from reflecting significantly higher earnings achieved by
many companies in the U.S. and around the world. In fact, there was an unusually high correlation between the stock market performance of companies whose businesses performed well and those that didn’t. Thus higher earnings from better performing companies were cast aside from a valuation standpoint as fear and uncertainty spread by the media dominated investors. Specifically the uncertainty of the European debt crisis, the Arab Spring, and the horrific natural disaster in Japan from an earthquake and tsunami plagued investors on almost a daily basis. Couple this with dysfunction in Washington and an unprecedented downgrade of U.S. debt, and we found ourselves in an ugly environment with outflows from equity markets
and inflows to cash and bonds.

One result from the above factors was the proliferation of dire economic forecasts from many notable economists. Predictions of another Lehman-type financial crisis initiated in Europe, a double-dip recession, and an imminent attack on Iran surfaced on a regular basis adding to the uncertainty and fear of investors. Well, thus far the economists have been wrong to a large extent. The U.S. has not gone into recession, although growth remains painfully slow. Employment has steadily improved, although still leaving millions unemployed and underemployed. Europe continues to kick the can down the road with its efforts to bolster the Euro and the besieged economies of Greece, Italy and Spain. Despite political paralysis, our government is still functioning and we as a nation have survived our first credit downgrade (it was no shock that France and other European countries were downgraded in January). So, as a global economy, we are doing somewhat better than that which was suggested by many economists just six months ago. Well, their predictions made for some interesting reading, although it sometimes bordered on fiction. Economists weren’t able to predict much of what the real economy was. And that is why we focus on the fundamentals and don’t listen to weather forecasters as well.

The confluence of these factors led to a tough year for different strategies. Most equity-based hedge funds did quite poorly with negative results as correlations were too high amongst stocks. Longer duration high quality municipal, treasury, and corporate bonds did reasonably well as did our fixed income portfolios. Most traditional equity strategies suffered modest losses, failing to
achieve a flat benchmark return. Our defensive equity strategy, dividend growth, had a great year achieving a 12% net return. Other of our traditional equity strategies suffered modest losses. Foreign equity strategies did poorly as the international benchmarks declined from ten to twenty percent, falling in sympathy with the angst in Europe and fears of a hard landing in China. Thus it was a difficult investment environment in which our strategies did alright on balance, led by Dividend Growth.

While it is true that many economists got it wrong last year, we remain optimistic but cautious ahead of continued uncertainty. We take solace in knowing that American domiciled businesses (especially large ones) have solid balance sheets with significant amounts of cash. This is a good position to be in and gives these companies the flexibility to possibly raise dividends, buy back
shares, and make opportunistic acquisitions. Interest rates remain incredibly low as mandated by monetary actions taken by the Fed recognizing weaker than desired economic growth, a still declining housing market, and a benign inflation outlook. This will save bond investors for the time being who have extended out too far in maturity, but provides weak yields that in many cases are below the inflation rate. Thus those investors remaining in cash and those holding bonds are getting a negative real return after inflation. Those investors who have stretched maturities to grab yield will be punished if rates start to increase sometime in the future (we believe they will increase in the future).

Equity valuations remain attractive in our opinion. Projected S&P 500 earnings of about $100 for 2012 (a modest growth from 2011) makes the general market seem somewhat undervalued. We believe that, over time, this asset class will generate investor inflows for the first time in years. This could lead to multiple expansion and meaningful appreciation. However, investors should
always be choosy in selecting companies to invest in. We see many companies that are reasonably growing and represent real value in our opinion. Others might not fare as well in this more difficult and slow growing economy. Accordingly, we believe that our defensive equity strategies, including Dividend Growth, are key sound strategies for the current uncertain environment. Our dividend growth strategy should benefit from what we believe will be another year where its dividends should grow by 8% or more. This strategy continues to garner investor interest because of its above average yield and steadily growing income stream. Thus we believe these two defensive equity strategies are ideally suited to prosper in the current uncertain economic and geopolitical environment.

Our traditional equity strategies are also seemingly in a good place given both valuation and significant earnings improvement forecasted for 2012. These strategies will particularly benefit if the European debt crisis has some resolution as this has been a major overhang. In any event, the headlines from Europe no longer generate the panic they did last year, and our domestic banks are actually seeing some lending opportunities in Europe. Valuations are reasonably compelling for traditional equities and while earnings growth on average appears modest, less uncertainty than last year should help these strategies appreciate. We also believe that our seasoned managers have identified those companies that can prosper in the growing global economy as well as those capable of making market share gains.

On balance, we remain cautiously optimistic as the forecasted disasters last year didn’t materialize and the global economy continues to slowly improve. However, given continuing policy uncertainty both domestically and internationally, we believe that asset allocations for our clients should be biased on the defensive side. Defensive equity strategies make sense while fixed income offers unreasonably low returns. We would not add to them at this time unless one is willing to accept a negative real return on an after tax basis for most quality bond offerings. Finally, for those who can withstand illiquidity, private equity also seems attractive given the need for capital in the small to middle market companies where credit is still hard to come by. We remain committed to the strategy of reasonable diversification.

As always, we stand ready to assist you with your asset allocation in these difficult times. Our goal remains preservation of capital with appreciation above the rate of inflation while minimizing risk through greater emphasis of defensive equity strategies and overall diversification. And yes, we know this will help you sleep at night as well. Please call upon us.

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive Officer

Ralph F. Palleschi
President and
Chief Operating Officer

RDR/lsb

* The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal and Ralph F. Palleschi through the period ending December 31, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2012 by First Long IslandInvestors, LLC. All rights reserved.

Dear (Client):

We wanted to take this opportunity to thank you for investing in our Dividend Growth strategy. You probably have noticed that we had a very good year in 2011 by appreciating 12.0% net of all fees and expenses. (This compares favorably to the S&P 500 which advanced 2.1%.) We appreciate your confidence in our strategy and we are glad to have provided a really good return in what turned out to be a most difficult year for investors.

Recently, many pundits and strategists have pointed out the benefit of investing in higher yielding large companies as if this were a new phenomenon. We believe that this way of investing has rewarded investors over many decades. We also believe that the key to this being a successful way to invest over the long term is to find companies that can grow their dividends virtually every year. That requires a successful business model as well as managements that have it in their DNA to share growing cash flows with their shareholders. This is why we carefully select our portfolio companies to include only those that combine a higher than average dividend with the ability and history to increase dividends on a yearly basis. We are proud to report to you that each of our portfolio companies (27 in all) raised their dividends last year. In some instances, we have companies that have raised their dividends for more than fifty consecutive years!

Based on our reviews of academic studies and our analysis of companies that pay higher and growing dividends, we firmly believe that dividends play a significant role in total appreciation over long periods of time. We believe that many companies that don’t pay dividends (or don’t raise them on a frequent basis) will suffer from less than desirable valuations unless they have unique growth characteristics. Today, with bond yields so low and in some cases less than the annual inflation rate, we believe that large quality companies that pay higher than average dividends with the potential of growing those dividends continue to make great sense as part of an overall asset allocation for any investor. Getting a three to four percent on average growing cash return settles a lot of nerves during periods of great uncertainty.

Diversified investing is still the key to a successful overall investment strategy. We believe that our Dividend Growth strategy of investing should continue to be a meaningful component of your investment plan. This, along with allocations to our security and traditional equity baskets, will help you navigate the uncertainties that exist in our world today with a goal to both preserve and grow your net worth.

Thanks for your continued support!

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending December 31, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC . Copyright © 2012 by First Long Island Investors, LLC. All rights reserved.

2012: Many Challenges But Opportunity as Well

The new year has come upon us and we must force ourselves to deal with the uncertainty as well as the opportunities that confront us as investors. Our job at FLI is to present the reality that we see coupled with the paramount responsibility of helping you protect your capital. Reality has to take front stage as we live in a world consumed with leaderless developed countries facing huge economic issues. We are living through the agony and frustration of political paralysis in our great nation as well as throughout Europe. Politicians intoxicated by rhetoric and uncompromising inflexibility are thus far failing to address key issues that challenge our social and economic well being.

Meanwhile, many well run businesses have for the most part purged their wasteful ways of the past and become lean economic dynamos. They have accumulated cash and driven operating margins and profits to all time highs. The unintended consequences of this corporate prosperity is a dearth of hiring and a reluctance to constructively use this corporate largesse to more rapidly grow our economy. They have good reason to be reluctant given little visibility on GDP growth, tax policy and new regulations that are paralyzing decision making. While they wait for the political fog to lift, dividends and share buybacks are constructively used by many companies to reward shareholders to keep them in the game (this has really helped our Dividend Growth strategy). Also, a modest amount of strategic and financial acquisitions are taking place. This too represents opportunity for lucky shareholders.

This fog and uncertainty has resulted in a volatile and undervalued stock market in our opinion. At the same time quality bonds offer little return and appear overvalued. Inflation could be a problem if governments print money to bail out huge indebtedness. This is a legitimate worry. At the same time, housing remains depressed resulting from over supply, tight lending, and weak household formations as young unemployed live with their parents. Weak housing means construction workers remain unemployed which in years past represented a meaningful component of overall employment. However, there are small signs of improvement and hope. Couple this with real concerns about our national debt, deficit and impending financial failure of both our Social Security and Medicare systems, and no wonder many Americans are afraid to invest and question the sincerity and effectiveness of our elected officials.

The hope is that while we as a nation struggle to work out these issues, our economy benefits from robust growth in the emerging powerhouse of China and other developing countries. However, can we rely on a country whose human and corporate rights are limited and where its government controls and mandates economic growth? Maybe, but who knows for how long.

So, what do we do as investors? Hiding under our covers is not a good option. Remaining cautious and somewhat optimistic is the preferred way to proceed in our opinion. Don’t give up on America because we are a country of resilient people ultimately motivated by a heritage of freedom and an enviable and irrepressible entrepreneurial spirit. Thus we must have a practical wealth strategy that recognizes our many challenges but embraces our history of success irrespective of political knuckleheads on both sides of the aisle.

You have heard of the top ten ideas from a famous late night program. Here we would propose our top twelve ideas for your 2012 wealth management strategy:

1. Have a reasonable goal to achieve an overall investment return that gives you some breathing room above inflation. (We would suggest a net of five percent after taxes with a prudent asset allocation for these times.)
2. Be diversified in your investment selections with strategies that have reduced correlations so that you capture opportunity irrespective of ugly macro and geopolitical circumstances. And be sure to understand the strategies you invest in and require transparency and reasonable liquidity.
3. Take advantage of very favorable current tax laws for individuals before the laws expire. It is most likely that prospective fiscal policy will require give ups from both sides of the aisle including somewhat higher taxes.
4. Be cautious to a larger extent. You are wealthy and you want to stay that way. The world is uncertain and politicians are playing too much of a role as government has become too large. Economic issues relating to deficits, entitlements and the European debt crises need to be dealt with. Now is no time to try and make up for the lean returns of the past ten years.
5. Initiate defensive equity strategies or add to them as they can provide some upside but should reduce downside in bad markets. Our Dividend Growth strategy has provided our clients with real appreciation and has protected capital in market downturns. Consult with us on your current asset allocation.
6. Don’t reach for yield in bonds by extending maturities unreasonably or cutting quality and investing in third tier companies or banana republics. Inflation and a slow economy as well as political uncertainty could hurt you. Also, despite fiscal improvement in many states, municipal bond integrity is being litigated as to the full faith and credit that in the past generally assured repayment of bonds. Invest in quality bonds.
7. Rely on a diversified asset allocation to protect you from uncertainty while affording you the opportunity to participate when markets unexpectedly improve. None of us have a crystal ball and equity market upturns happen when least expected. Remember that gains achieved in equity markets typically happen in a small number of big market-moving days. You can’t afford to miss them.
8. Review all aspects of your insurance planning. Assess your need for long term care insurance as well as medical evacuation insurance from remote travel locations (American Express offers very little in our opinion). These along with a review of traditional life and property and casualty insurance should be considered periodically. Utilizing the large lifetime gift exclusion as well as low interest cost loans can help fund life insurance policies that could be quite valuable in estate planning. We can help as we are experienced in these areas.
9. Review your annual spending to assess its relationship to your earnings capacity. Personal deficit spending is no better than our country going further into debt without a plan of remediation. Proposed increased taxes and those that are part of Obamacare (higher cap gains taxes) will reduce after tax income and must be considered in how much you can spend without incurring debt or eating into principal. We live longer lives and must have sufficient capital to provide our quality of life as well as keep pace with creeping inflation.
10. Prudent wealth planning and an honest annual assessment of your wealth plan will let you have greater peace of mind leading to sleeping better at night. In addition, you will be better equipped to face whatever challenges we must endure – both those we know about and those we can’t project.
11. There are many stresses in the world we live in. Some we can control and others are beyond our influence. In order to endure these, whether they be financial or personal, one’s health needs to be constantly attended to. Take the time to do this so you can enjoy life with the best possible quality that is available to you. Although we are not doctors or therapists, we are here to listen and try and help. We do have access to some fine doctors and hospitals should that be needed. And stay in good physical shape as it is one key to living a better quality life.
12. I am sure that we forgot something that you or we should consider. We are there for that as well given all of the unexpected that can occur.

The above twelve points are steps and thoughts we believe each of us must consider. We at First Long Island stand ready to personally help you consider each one of them and assist you in taking whatever actions are required in a well thought out plan. This is incredibly important in today’s complex world.

We wish you a most healthy, happy and prosperous New Year and look forward to serving you in your wealth management needs. We appreciate the opportunity to be your wealth managers. Please call upon us.

Best regards,
Robert D. Rosenthal
Chairman and
Chief Executive Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending December 31, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC . Copyright © 2012 by First Long Island Investors, LLC. All rights reserved.

 

Our recent Thought Leadership series featured veteran New York Times business reporter and Pulitzer Prize-winning writer, Gretchen Morgenson. Gretchen’s book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, continues to be at the top of Amazon’s worldwide bestseller list, and recently was named one of the “Best Books of 2011” by Barnes & Noble. FLI clients and friends experienced a highly charged and informative morning with some top line insights such as:

• High powered executives, members of Congress and Washington’s prestigious regulatory community laid the ground work for the financial crisis and meltdown that America is struggling to overcome.
• Washington elites rigged the system for themselves, became rich and powerful and then “slipped quietly from the scene.”
• Early warnings and signs of impending doom were virtually ignored or hidden.

Gretchen Morgenson is a business reporter and writes the “Fair Game” column in the Sunday business section of The New York Times, where she also serves as assistant business and financial editor. She was awarded the Pulitzer Prize in 2002 for her “trenchant and incisive” coverage of Wall Street. Prior to joining the Times in 1998, she worked as a broker at Dean Witter in the 1980s and as a reporter at Forbes, Worth, and Money magazines. She lives with her husband and son in New York City.

“Making money doesn’t oblige people to forfeit their honor or their conscience.”
Baron Guy de Rothschild (renowned banking magnate)

Investment Perspective

The third quarter was very difficult with many factors contributing to both uncertainty and fear. The result was a significant downturn in equity markets (S&P 500 -13.9%), and a flight to safety in both U.S. Treasury bonds and gold. However, thus far in the month of October equity markets have rallied sharply (S&P 500 +13.7% as of 10/28/11) and bonds have retreated. (Our defensive equity strategies and bond investments have done well as of this writing for the third quarter and year-to-date.) In addition, social and political strife, reflecting a loss of hope by some, has made its presence known in the Middle East, Greece, and most recently on Wall Street and other major U.S. cities.

The cause of much of this fear and uncertainty can be attributed to the following factors:

1. European debt crises resulting in concerns about global banking and sovereign defaults
2. Economic pundits predicting another domestic recession reflecting continued deleveraging
3. Political paralysis in Washington relating to our deficit resulting in the downgrade of U.S. debt
4. Concerns about the pace of growth in China
5. Fears about domestic inflation
6. The growing economic plight of our middle-class
7. High domestic unemployment and under employment
8. New domestic regulations that continue to hamper business expansion

There are probably others, but these seem to be the most troublesome. However, there continue to be some very favorable factors as well:

1. U.S. domestic corporate profits continue to grow and have reached record levels!
2. Domestic corporate balance sheets remain flush with cash and lower levels of debt
3. In our opinion, valuations for many domestic companies are cheap (11 to 12 times 2012 earnings) assuming there is no double-dip recession (continues to be our view)
4. Dividends for many quality blue-chip type companies continue to grow
5. Our banking system continues to get stronger despite headwinds
6. Retail sales and industrial production continue to improve despite slow GDP growth

The above positive and negative factors are highlighted daily in the press leading to a schizophrenic equity market. Short term investors, high frequency traders, and hedge funds are exacerbating the market volatility. Seemingly knowledgeable market experts speak of recession and market declines adding to investor fears. Some renowned hedge fund managers are down 30% to 40% thus far this year. The multi-hundred point intraday swings in the stock market have once again led to outflows from equity markets and abnormally high cash on the sidelines earning virtually nothing. However, in our view this continues to represent an opportunity for long term investors, who can wait out the uncertainty, and take advantage of certain company share prices that we believe are on sale. Some of these bargain priced companies have dividend rates twice that of the yield of a ten year treasury bond.

We recognize that at a time when politicians are failing to address serious economic and social issues through meaningful compromise, it can be frightening to investors. Demonstrators and liberal politicians want to make us feel that making money is not only not noble, but greedy and dirty. However, it would be a mistake to forget that one can invest with conscience as well as a goal of making money, as Baron de Rothschild suggested. We believe that much of the monies we invest support growing businesses with innovative ideas, new products and hopefully contribute to improving employment. As investors, we must recognize that despite being criticized for being wealthy as well as facing a potential higher tax burden, we could face another threat, inflation. This threat requires us to withstand market volatility and make sound investments to ultimately make enough money to maintain our standard of life and financial security. It is true that stock market returns have been unkind over the past decade, however there are numerous examples of companies whose stock prices have thrived despite the many uncertainties we have discussed (McDonald’s and Apple as examples). In addition, there are numerous companies whose share prices have languished, but have increased dividends on a yearly basis giving us a growing cash return (e.g. Microsoft). At the same time, despite talk of deflation, core inflation continues to modestly rise. We must stay ahead of that, especially given the money printing that has been used to avoid the recent threat of financial Armageddon.

So, how do we invest in this deleveraging and confusing environment yet still sleep at night? We would be foolish to suggest that the European debt crisis, high unemployment, political paralysis, and consumer and government deleveraging is going to just fade away. We can, however, somewhat insulate ourselves from these legitimate concerns by directing you to defensive equity strategies that we believe will result in reasonably good returns over time as a more meaningful part of your asset allocation. This is particularly appropriate for us as wealth managers whose first priority is to preserve your capital (while outpacing inflation). It also permits us to participate in equity returns when some of the black clouds dissipate and investor flows return to stock markets. We continue to believe that more of your asset allocation should take advantage of our strategy that benefits from growing dividends, from strong mostly global companies that successfully build market share. Many of these businesses are benefiting from evolving countries where there aren’t debt problems and boast a surging middle-class representing new customers for the companies we invest in.

Our relatively new Dividend and Growth strategy (growing dividends), continues to dramatically outperform its respective benchmark by over nine hundred basis points respectively on a net basis as of September 30. As of this writing Dividend and Growth has a net return of slightly more than nine percent. The strategy is in our defensive equity category, providing a lower risk way to invest in equities. This strategy invests in companies with consistently growing dividends and reasonable earnings growth. It relies in part on a cash earnings stream as part of its overall return. If equity markets turn much higher, it won’t do quite as well on a relative basis. However, this type of strategy has demonstrated an ability to preserve capital during severe market downturns. We believe it makes more sense than keeping large sums of money in cash (earning a negative real return) or crowding into an overvalued bond market where any inflation leading to an increase in interest rates will result in a loss of “real” capital. And for those investors who have too much exposure to traditional equities, you should feel more comfortable allocating to a defensive equity strategy.

These are difficult and confusing times for investors. But we believe we can offer you reasonably safe and diverse ways to make an honest, liquid and transparent return while still focusing on preservation of capital. And despite fear, political paralysis, and policy uncertainty, we believe we can still find an honorable way to protect and grow your net worth with a clear conscience. Asset class diversification with a bias towards defensive equity strategies is called for in this troubling economic and geopolitical environment. And, as contrarians, we believe there are still investment opportunities for those conservative investors that are patient, selective, quality-oriented and don’t give in to the herd mentality following the constant noise of media

We look forward to working with you to craft your asset allocation to navigate these troubled investment waters. Our goal remains preservation of capital with appreciation above the rate of inflation while minimizing risk through greater emphasis of defensive equity strategies and overall diversification. And yes, we know this will help you sleep at night as well. Please call upon us.

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive Officer

Ralph F. Palleschi
President and
Chief Operating Officer

Merge documents/Lisa/Website Letters/FLI 3rd Qtr 2011 report on funds part one for website

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal and Ralph F. Palleschi through the period ending September 30, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC . Copyright © 2012 by First Long Island Investors, LLC. All rights reserved.