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

Building A Power ful Portfolio with infrAstructure

We recently introduced the concept of theme-based investing. First, though, why do themes matter? In

many industries in mature areas of the economy, revenue growth is limited by broad economic growth. What one company gains in market share often comes at another company’s expense.

So, in most investors’ portfolios, profiting by investing in many broad sectors, as is typically done, depends on correctly forecasting which companies will be successful and which ones will not. In some sense, it can be a zero sum game, where the total pool of profits might be limited, and there are winners and losers in dividing slices of a fixed pie.

However, when focusing on thematic drivers, many companies can share the spoils of overall demographic, social, economic and technological changes. It’s not so much identifying investment opportunities in one company vs. another; it’s evaluating how long term drivers can identify the next growth industry, where thematic drivers may be in place for years or even decades. In other words, the focus is investing in the big picture; a growing pie, not determining which slice will be bigger than another. These are profitable opportunities, not based on a particular company’s quarterly financial results that can shift on a dime, but trends that can serve us for the long haul.

Let’s take a closer look at one theme, infrastructure. Not surprising to many motorists is the need to replace aging and decaying transportation networks. This was highlighted by the recent collapse of a bridge on Interstate 5 in Washington following it being hit by a truck. The bridge had already been labeled “functionally obsolete” and was scheduled for repairs that were never made. You may also recall the tragic bridge collapse in Minneapolis a few years prior. At some point, we need to fix those vital transportation systems, despite limited government funding.

Of course, the theme of building infrastructure isn’t limited to the U.S., though much of emerging market demand is for new construction, rather than repairs as in the case domestically. Many foreign nations, particularly emerging markets, have a pressing demand for not just roads and bridges, but water and irrigation systems and broadband networks as well. Add in utility development for both power and landline communications, and you have the makings for a powerful global theme. One important consideration is that, even if the U.S. doesn’t lead the world in infrastructure spending, our companies might still be key beneficiaries.

As we see above, infrastructure is a broad field, and can be thought to include several different categories, transportation, water and irrigation, power, and

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communications. All of these are important, but some countries will have a different mix of these different components. Here in the U.S., we might not spend as much as emerging markets might do in order to develop water systems and power grids. However, our roads and bridges are aging badly, and uneven economic growth around the country means that there are growing cities in some parts of the country that will need to build out highways and residential streets alike, while other areas can just focus on maintenence.

On the other hand, in some developing economies, the focus will be more on basics, such as potable water, sewage systems and irrigation for farmland. This means new investments in water projects. For example, China is spending $150 billion on the South-North Water Diversion Project, which will divert water from the Yangtze River to the parched north, and has an estimated completion date of 2050. China’s central government is providing some of the funding for these projects, and has a much greater commitment to making these investments than we do here in the U.S.

Together, these infrastructure themes benefit some industries in common. For example, consider companies that make construction equipment or provide engineering services. They could benefit whether those goods and services are used for building roads and bridges, constructing dams or erecting new power plants and transmission lines. A company making cement or steel can similarly profit from these infrastructure investments, regardless of the exact nature of a specific project.

One commonality between many of these projects, despite their varied end uses, is that they tend to be funded by government spending programs. Many emerging markets, notably China, have a particular need for promoting more domestic growth at the same time they need to accommodate a migration into cities from rural areas. Here in the U.S., we theoretically have more knowhow to engineer such projects, but not as much funds to actually complete them right now.

That makes for a competing theme of budget cutbacks. A question might be is with the tragedy of not just the collapsing bridge in Washington, but also the collapsing freeway bridge in Minneapolis a few years ago, how much will the public outcry be for all levels of government to make transportation safe, not just efficient? Given limited funds, what priority will policymakers assign to making needed repairs and invest in new projects?

At some point, it may require that either funding for other projects must be cut or revenues (i.e. taxes) must be

increased. In the meantime, however, demand is building up as needed projects are left undone. Should funding become more of a priority, perhaps due to demands from the public, the pent-up demand to complete road and bridge repair and construction in the U.S. could be significant. Being early to such a theme could possibly lead to greater profits, by assessing when the political winds here in the U.S. might shift.

Then there are communications projects, as well as power systems. As the world develops a greater consumer society and white collar service industries develop in emerging markets, newly urbanized populations will require more and better access to things we in the U.S. take for granted. That means building out wireless networks along with cable television, landline phone and internet platforms.

They also need more reliable and efficient forms of electric power generation, not to mention smart transmission systems and the land development required to construct rights-of-way for those projects. Power plants require engineering firms and basic materials to construct them, along with the construction companies themselves.

Firms leading the way in this effort could be based anywhere in the world. Exchange traded funds can provide suitable investment vehicles for investing in many of these different themes, as there are sector-based products that allow a targeted approach to these areas and can greatly simplify investing in foreign companies for U.S. investors. In a product traded on a U.S. exchange and denominated in U.S. dollars, an investor can buy an ownership stake in companies based in local markets around the globe.

These sector ETFs focus on companies in particular niches, where again, the goal is not to pick which particular companies will be winners vs. losers, but to profit from investment into a broad basket of companies that fit the same profile. This alleviates the need for outside analysts to correctly forecast the internal – and sometimes opaque – aspects of a particular company. It makes investment easier to focus on the big-picture revenue prospects and allow instant exposure in a single trade.

This theme-based investment approach is a cornerstone of East End Wealth Management’s portfolio management philosophy. We’ll explore additional themes in coming newsletters. The theme of this newsletter focuses on global infrastructure projects. Other separate themes that we’ll explore relate to societal and demographic themes globally.

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

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

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

One is changing diets in the emerging markets to include more animal protein. An obvious beneficiary is agricultural companies. However, a less obvious component to that theme are healthcare companies, such as those which make pharmaceuticals and medical devices, that can treat the maladies that come with Western-style diets, including obesity, hypertension and diabetes.

Another future theme we will explore is growing consumer societies in emerging economies and how this theme will benefit various industries directly and indirectly catering the consumer. This is a wide-ranging theme that includes financial services, consumer product makers and service providers, among many others.

At East End Wealth Management, we invest following a top-down approach designed to profit from thematic, macroeconomic or other big-picture drivers. The companies that can benefit are based across the globe – but many are companies based right here in the U.S. but which have a global presence. Our goal is to think outside the style box.

Companies don’t deliver value to shareholders because they fall into a particular style box. They deliver value to investors because they offer goods or services that their customers want and need. Identifying those top-down sources of wants and needs, and then evaluating how investment opportunities might be presented in response, is how we build an investment portfolio.

BiogrAPhies

STEVEN KACZMAREK

gENE d. bAlAS, CfA

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

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

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

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