TAP QuarterlyLetter 201603

Registered Investment Advisor

Seaport Investment Management www.seaportIM.com 844.249.9463 1

Total Asset Partners First Quarter Review

March 2016

The roller coaster ride experienced by the financial markets in 2015 carried into the first quarter of 2016. From

an 11% negative return through mid-February global equities rallied over 13% to end the quarter barely positive.

After posting an 11% loss, U.S stocks rallied and also ended the quarter in positive territory. Emerging market

equities rebounded from down 10% to finish up 6%.

At the start of the year a widely-held view was that interest rates and the US dollar would rise, while bond prices,

oil, and gold could only drop. What happened? Global indices of government bond prices returned almost 7%,

plunging by some counts almost 40% of the world’s government bonds to negative real interest rates. At the

same time, the dollar fell 4%, oil rebounded almost 60% from its lows, and gold soared 16%.

These reversals in the market have taken place against a backdrop of a slowing economic growth. Over the past

12 months, GDP growth in the U.S. has fallen from an annualized rate of 3.9% in the second quarter to 1.4% in the

fourth quarter.

As weakness in manufacturing and energy threatened to spread to services, we’ve seen several significant

negative revisions to economic forecasts. The Atlanta Fed revised its GDPNow model for first quarter GDP growth

from 1.4% to 0.6% during the quarter and current readings have drifted lower to 0.3%. The IMF lowered its

forecast for global growth for the fourth time in a year to 3.2% for 2016 and 3.5% for 2017, citing a broader impact

from China’s economic slowdown, the effect of lower commodity prices on emerging economies, and persistent

weakness in Japan, Europe, and the United States. The IMF report also raised a cautionary flag that existing

monetary policy tools and resources may prove insufficient in fighting a global recession or financial crisis. The

trajectory of this underlying trend can be seen in the chart below, which plots change in U.S. per capita GDP versus

change in corporate profits. Neither trend appears favorable to a near-term recovery in global growth.

Source: St. Louis Federal Reserve

http://www.seaportim.com/



Monetary authorities across the globe have responded with a dramatic expansion of quantitative easing programs

in Europe and Japan, while the Fed, which in December appeared committed to raising rates at least twice in 2016,

surprised the markets with what appeared to be a capitulation on that commitment. In a speech in late March,

Janet Yellen indicated that the Fed was willing to accept a higher risk of of inflation in order to keep economic

growth on sound footing.

Events of the first quarter have not changed our perspective or our investment strategy significantly. We continue

to have the same concerns we had at the beginning of the year over a deterioration in economic growth, market

liquidity, and security valuations, the fundamental underpinnings of market returns. Our base case remains that

consumption, which accounts for roughly 70% of GDP, will gain support from improved consumer balance sheets,

lower energy costs, a positive rate of job and wage growth, and a healthy housing market. At the same time, the

headwinds of a strong dollar should recede for manufacturing and the energy sectors while government spending

continues its inexorable growth. In aggregate these factors support our view that economic activity should

accelerate through the second half of the year and generate positive growth in the range of 2% to 2.5%.

As a key driver of the business cycle, credit conditions are not improving. Since the Fed began to scale back

purchases of government debt in 2014, the rate of growth in the monetary base and commercial loans has fallen

to low single digits. Profit margins at the banks remain under pressure in an environment of low interest rates, a

flattening yield curve, exposure to defaults in the energy sector, and an increasing burden of regulatory oversight.

The result has been slower growth in their credit portfolios and tighter credit requirements for small businesses,

perhaps the most significant driver of job growth. In public markets for credit, high yield has come under stress

as outflows continue from mutual funds and ETFs, while liquidity provided by Wall Street has dried up due to

capital requirements imposed by Dodd Frank legislation. New issuance has slowed dramatically.

We believe that valuations remain at historically high levels in both fixed income and equity markets. Valuation

may be a poor tool for timing market entry or exit, but we find it invaluable as a tool to assess risk. Recent figures

show that over 20% of the world financial markets as measured by GDP are experiencing negative interest rates.

Investors in Japanese and German bonds are guaranteed to lose principal when they hold to maturity the bonds

they buy today. Here in the U.S. real interest rates are negative out to 5-year maturities and the 10- year Treasury

offers a real return well under 1% if inflation remains at today’s level indefinitely.

At current valuations equity markets likewise carry significant downside risk. The analysis on the next page, which

was graciously provided by the Lethold Group, compares valuations of the S&P 500 at peaks and troughs in both

bull and bear markets from 1990 through 2007. If we assume a retracement in the context of a bull market, then

the valuation of the S&P 500 at the end of March represents a potential loss of almost 8% if the index reverts to

the bull market average. If we assume a retracement in the context of a bear market, the outcome, of course,

appears much worse with a potential loss approaching 34%.




Source: Lethold Group

Portfolio Strategy and Structure

Our Partnership returned 2.2% before fees and expenses for the first quarter. As we seek opportunities to plant

the seeds of attractive long term growth, the defensive portfolio structure that we implemented in 2015 has

served to buffer downside volatility while providing a stable and growing income stream. From July through

September last year when the S&P 500 declined by 8.5%, a 50/50 blend of US stocks and bonds fell 4%. Over the

same period the loss for Seaport Total Asset Partners was 2.4%.

1. Unaudited gross returns before fees and expenses. Numbers may not add due to rounding.

Current Valuations March 31, 2016 21.6 x 23.9 x 12.8 x 3.08 x

Bull Market Highs June 30, 1990 15.0 18.3 8.8 1.80

(Month-End) March 31, 1998 23.1 31.5 14.0 3.43

February 29, 2000 18.6 22.2 11.0 2.65

September 28, 2007 18.6 26.0 12.8 3.02

Average 18.8 24.5 11.7 2.73

Upside/Downside to Avg. High -12.8 % 2.5 % -9.0 % -11.5 % -7.7 %

Bear Market Lows October 31, 1990 12.2 14.7 6.6 1.45

(Month-End) August 31, 1998 18.2 23.3 11.6 2.62

September 30, 2002 19.5 19.4 8.3 2.03

February 27, 2009 9.7 11.8 5.6 1.33

Average 14.9 17.3 8.0 1.86

Downside to Avg. Low -31.0 % -27.6 % -37.3 % -39.7 % -33.9 %

S&P 500 Median Stock:

Reward/Risk Analysis Versus Recent Cyclical Highs & Lows

© 2016 T he Leutho ld Gro up

Downside

Price-to- Upside/

MedianMedian

Price/

Cash Flow BookP/E

Trailing

Median Median

Normalized

P/E

Seaport Total Asset Partners

as of 31-Mar-16

Exposure and Contribution to Gross Portfolio Returns1 by Asset Class

returns

asset class exposure beta duration yield rating ytd ytd contrib

Equity 26.8% 0.89 - 2.9% 3.39% 0.95%

MLP 2.3% 0.89 - 6.9% 11.17% 0.24%

REIT 4.5% 0.73 - 4.2% 7.29% 0.33%

Options 0.2% (0.21) - - 0.75% 0.01%

Credit 26.6% 0.13 1.24 4.2% BBB3 0.68% 0.19%

Mortgage 12.7% 0.02 2.56 3.9% B1 0.64% 0.09%

Muni 5.1% 0.22 6.04 5.4% BBB1 4.98% 0.25%

Commodity 1.1% 0.16 - - 10.59% 0.15%

Cash 20.6% - - - AAA - -

Grand Total 100.0% 0.34 0.96 3.0% BBB1 2.21% 2.21%




Equities (34%)

Our equity portfolio remains defensively positioned with a beta (a measure of sensitivity to market moves) of

about 80% of the S&P 500. We continue to emphasize high quality companies with moderate debt levels. While

our equity portfolio yields more than the market (3.3% versus 2.17% for the S&P 500), our objective is to find the

best combination of yield and growth rather than simply maximize current yield. We expect our equity positions

in aggregate to increase dividend distributions at a pace sufficient to support income growth in the portfolio of 3-

5% and exceed inflation. Below we provide a list of representative holdings with their current dividend yields and

one-year trailing dividend growth:

The market weakness early in the quarter provided opportunities to add marginally to a number of our holdings

including Ventas, Welltower, Exxon Mobil, Time Warner, and AmerisourceBergen. We also added several new

names to the portfolio including San Jose Water, Teva Pharmaceuticals, and Sun Trust Banks.

San Jose Water San Jose Water (SJW) operates in the Silicon Valley and has an uninterupted 30-year track

record of paying and increasing its dividend. We expect growth of the company’s rate base to

accelerate over the next 10 years as the company invests in the infrastructure necessary to

support anticipated population growth in the region. In addition, SJW has substantial real

estate holdings, which are not regulated and, in our opinion, not reflected in the current share

price. These include large undeveloped tracts of land and the parking lot at Levis Stadium, the

home field for the San Francisco 49ers.

Seaport Total Asset Partners

as of 31-Mar-16

Representative Equity Holdings & Dividend Yields

company Industry price % portfolio yield

12mo

dividend

growth

Welltower Healthcare Real Estate 55.82 0.96% 5.0% 3.4%

CVS Health Drugstores 47.78 0.95% 1.6% 25.5%

Xylem Water & Wastewater Equipment 26.91 0.91% 1.5% 10.0%

Macquarie Infrastructure Industrial Infrastructure 62.55 0.90% 6.8% 14.7%

Spectra Energy Natural Gas Pipelines 21.65 0.89% 5.3% 7.5%

Johnson & Johnson Pharmaceuticals 65.58 0.88% 2.8% 7.1%

Cisco Telecommunication Equipment 26.27 0.84% 3.7% 14.1%

Everest Re Insurance 181.15 0.84% 2.3% 23.5%

ExxonMobil Integrated Oil & Refining 72.20 0.79% 3.5% 5.8%

Time Warner Broadcasting & Cable 80.03 0.75% 2.2% 11.5%

Weyerhauser Forest Products 28.43 0.75% 4.0% 11.9%

Raytheon Aerospace/Defense 103.23 0.71% 2.4% 10.3%

AmerisourceBergen Heathcare Products Distribution 61.75 0.70% 1.6% 20.0%

Enterprise Product Partners Natural Gas Pipelines 16.35 0.70% 6.3% 5.5%

Schweitzer-Maudit Specialty Paper 39.82 0.63% 5.1% 5.4%




Teva Teva Pharmaceuticals (TEVA) is a leading manufacturer of generic drugs, which has traded

Pharmaceuticals down 26% from its 52-week highs. Teva is a leader in generic pharmaceuticals with strong

positions across a broad portfolio of drugs. Critically, generics save money in health care. At

the current valuation of 10x free cash flow and a yield of 2%, the shares offer attractive long

term returns.

SunTrust Banks SunTrust Banks (STI) is a super-regional bank holding company that operating across the South-

eastern United States. Despite a difficult environment for banks, SunTrust continues to

demonstrate growth that is superior to that of major money center banks across most lines of

its business. After the shares traded down 31% from their the 52-week highs, the valuation

became compelling at 1.0x tangible book value, 11.4x consensus estimates for 2016 earnings,

and a 2.5% yield. SunTrust has increased its dividend 20% over the past 12 months and creates

a position in the portfolio that will benefit when interest rates rise.

In addition to these new positions, we have been able to implement conservative option strategies at particularly

attractive valuations due to higher volatility in equity markets. Our strategy has been to sell options that are 5%-

10% out-of-the-money and if exercised, would put us into the underlying equity at prices that are 80% or lower

than our estimate of fair value. If the options expire worthless, we earn roughly 8% anualized on the capital we

set aside to cover any exercise of the position. Our contingent long exposure averaged approximately 3% through

the quarter.

Fixed Income & Commodities (44%)

Bonds There were few changes to the overall portfolio structure or allocations. We were able to add

several short maturity credit positions during the quarter, but these largely replaced positions

that matured or were called. We have found less opportunity in mortgage-back securities, so

we have not reinvested in that sector the paydowns we have received from mortgages in the

underlying collateral packages. Our exposure in mortgages over the quarter fell roughly a point

from 14% to just under 13%. Our fixed income portfolio remains insulated from increases in

interest rates due to its short duration and relatively high quality. Most of our exposure to

interest rates falls in municipal debt securities, where the yield curve remains steep and we are

compensated for the risk.

Commodities After nearly four years of a painful bear market, gold was a strong performer during the first

quarter, returning over 10% in the portfolio. Despite the decline over the past four years, we

continue to believe that gold plays an important role in a diversified portfolio as a hedge and as

a tool for preserving value.

We believe an allocation of between 1% and 5% is appropriate for a number of reasons. Not

the least of these include the fact that over $7 trillion of European debt carries negative interest

rates, which means a guaranteed loss of 6% over 10 years for owning a 10-year German Bund.

We are increasingly concerned with increasing calls from academics and policy makers for what

former Fed Chairman Ben Bernanke called helicopter money—just another term for massive

quantitative monetary easing—and the specter it raises of long-term imbedded structural




inflation. Finally, there is a good case to be made that the US dollar has peaked and that the

recent US dollar rally is losing steam.

We are appreciative of our Seaport clients who share our view of long-term, fundamental, value-driven investing,

independent of short-term market moves. Thank you for your continued trust and support.

Sincerely,

Ben Trosky

April 18, 2016

Legal Disclaimer

Although the information contained herein has been obtained from sources Seaport Wealth Management, LLC, doing business as Seaport

Investment Management (hereinafter “Seaport Investment Management” or “Seaport”) believes to be reliable, its accuracy and

completeness cannot be guaranteed. This correspondence is for informational purposes only and under no circumstances should be construed

as an offer to sell, or a solicitation to buy, any security. At various times Seaport may have positions in and effect transactions in securities

referred to herein. Any recommendation contained in this correspondence may not be appropriate for all investors. The recipient must

independently evaluate any investment including the tax, legal, accounting and credit aspects of any transaction. Instruments and trading

strategies of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile and may

be adversely affected by the absence of a market to provide liquidity. Additional information is available upon request.

This communication includes data about capital markets generally for discussion purposes only. It should not be assumed that market

conditions will be the same in the future. This communication also contains “forward-looking statements” based on certain assumptions

(e.g., availability and terms of investments and market conditions) that may not be available to, experienced or realized by the Fund. In

addition, information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-

looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or

“believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual

events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking

statements. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission

of Seaport Investment Management. ©2015, Seaport Investment Management.


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TAP QuarterlyLetter 201603