HCM NewsletterApril 2017

Market CommentaryBy Tim Hai, CFA®, CAIA

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Market Commentary

Market Review

Portfolio Activity

HCM News 9

What's Inside

Tim Hai, CFA®, CAIA Portfolio Manager

Still, investors remained relatively bullish across most markets. Growth stocks outperformed Value stocks. Technology and Healthcare stocks outperformed. The U.S. dollar fell relative to most major currencies during the quarter, allowing international equity returns to outperform (in U.S. dollars). Emerging markets outperformed (in both local currency and U.S. dollars) and especially stood out for its optimism and increased asset flow, despite rising U.S. interest rates (+25 bps in March) which usually signals a period of retreat from such markets. The equity-like high-yield bond sector also outperformed other major bond sectors. However, there were some conflicting signals. U.S. small caps bucked the risk-on trend permeating the quarter - perhaps a reflection of perceived overvaluation and profit taking. The energy sector/oil markets retreated as investors began to doubt OPEC’s resolve in maintaining its supply quotas. Also, long-term interest rates fell during the quarter, flattening the overall structure of the yield curve - another sign of market dismay at the Trump administration’s early failure on healthcare reform.

Exhibit 1: Dow Jones Industrial Average Reaches 20k and 21k for the First Time Ever

The first quarter (and March in particular) began with a roar but ended in quite lamb-ish fashion. After posting all-time highs to both the S&P 500 and DJIA (the “Dow” momentarily eclipsed both 20k and 21k levels with just 24 trading days separating them; See Exhibit 1 below), equity markets simmered a bit to reflect reality. Hopes of quick changes to policy in the U.S. were seemingly dashed as the new Republican administration failed to broker a deal on healthcare reform. The S&P 500 had reached an inter-quarter high of +7.41% before settling on +6.07% for the quarter. Not a huge drop, but this belies the level of anxiety with which some investors were left. Market participants interpreted a rocky future for other Trump administration priorities such as tax reform, financial market deregulation, improved trade policies, infrastructure spending, and a new budget (accompanied by a set of its own priorities); all of which were the underpinning reasons for the equity market “Trump bump” experienced since last November.

Last quarter we discussed briefly the difficulties of timing the market after an adverse event occurs. This quarter, we are hearing chatter regarding a potential end to the current bull market (running eight straight years and counting), and especially after lodging +11.83% (total return) in S&P 500 gains since the November 2016 U.S. Presidential election (see Exhibit 2 below). Although markets appear stable and subdued today, many investors appear apprehensive regarding the “Trump bump’s” sustainability. In this case, some investors may be considering anticipatory changes to their investments based on what “feels” to them like a market “top”. The act of selling out of stocks in anticipation of a future market correction is speculation. We would caution against this course of action. We believe market timing has the distinct potential to hinder and completely unravel the long-term financial plans we have helped our clients to develop. This notion alone should give everyone pause.

Exhibit 2: S&P 500 Price Chart Since the 2016 U.S. Presidential Election

There seems to be some anxiety that the market is a little ahead of itself without any fundamental improvement and that the “Trump bump” may not last. While we concede that this may be true, we would point out that it is exceedingly difficult to “time” the stock market. Market timing does not work consistently and would not have worked during the major upheavals of last year: the U.S. Presidential election, the outcome of the U.K.’s “Brexit” vote, and the China/oil driven market correction earlier in the year. At HCM, we observe and are cognizant of macro-economic issues and what occurs in the market generally. However, as we have stated many times in the past, we are not governed by them. We view our client portfolios in a microcosm. Under the lens of a microscope, we see a portfolio of high quality stocks that collectively sell at a significant discount to their intrinsic values – unlike the broader market. In this way, we are perhaps agnostic as to the direction of the broader market.

Macro issues (for lack of a better term) like the past U.S. Presidential election are the sources of opportunity of which we often speak. The volatility created by these events are short-term in nature and will inevitably be the source of the value-add required by our clients to meet their long-term investment/retirement goals. We urge our clients to remain focused on the greater prize: achieving their long-term investment/retirement goals as outlined by the financial plans we’ve helped create for them. Our strategy seeks to remove emotions from the investment equation. In this way, portfolios are allowed to follow their natural course along the way to market efficiency and intrinsic value/market price equilibrium over the long-term. Please continue to contact us if you have any further questions. Enjoy the Spring!

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As always, please call your HCM financial advisor if you have any questions.

Your HCM Team can also provide you with up-to-date information about your holdings and discuss any changes in your personal financial situation.

Unless otherwise noted, performances stated above reflect data provided by Standard and Poor’s, Russell Investments, MSCI, and Barclay’s Capital.

1 The S&P 500 is the most commonly used proxy for U.S. large-cap stocks.2 The Barclays Capital U.S. Aggregate Bond index is the most commonly used proxy for the U.S. bond market.3 The Russell 2000 is the most commonly used proxy for U.S. small-cap stocks.4 The S&P 1500 is a commonly used broad market proxy for U.S. stocks.5 The MSCI EAFE index is the most commonly used proxy for large capitalization, non-U.S. developed market stocks. 6 The MSCI Emerging Markets index is the most commonly used proxy for emerging market stocks.

Past performance is no guarantee of future results. Indexes are not available for direct investment.

• Equity markets generally outperformed fixed-income markets with the S&P 5001

climbing 6.07% (including dividends) and the Barclay’s Capital U.S. Aggregate Bondindex2 increasing 0.82%.

• Small caps underperformed large cap stocks (S&P 500) as the Russell 20003 returned+2.47%.

• Growth outperformed value during the quarter (as determined by the S&P 15004).• Non-U.S. developed markets underperformed U.S. equity markets (as determined by

the MSCI EAFE5) in local currency terms (+4.85%), but outperformed in US dollarterms (+7.39%).

• Emerging markets outperformed both non-U.S. developed markets and U.S. equitymarkets as the MSCI Emerging Markets index6 rose 7.80% and +11.49% in localcurrency and U.S. dollar terms, respectively.

• India (+17.12%), China (+12.93%), Australia (+11.01%), and Brazil (+10.43%), werenotable based on their strong performance during the quarter. (All quoted in U.S.dollar terms).

• Most U.S. market sectors were positive during the quarter. The InformationTechnology (+12.57%), Consumer Discretionary (+8.45%), and Health Care (+8.37%)sectors were most distinguishable given their strength. Energy andTelecommunications Services sectors were noticeably weak (-6.68% and -3.97%,respectively).

• The high yield and corporate bond sectors rose 3.18% and +1.00%, respectively. 10-Year U.S. Treasury yields fell from 2.43% at the beginning of the quarter to 2.40%currently.

• The U.S. dollar fell versus the British Pound (-1.20%) and the Euro (-1.40%) duringthe quarter. The Yen rose versus the U.S. dollar during the quarter (+4.46%).

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Market Review By Tim Hai, CFA®, CAIA

NEW PURCHASES

a high-quality pharmaceutical company with a concentrated focus on branded drugs. This company has a wide economic moat that stems from a strong product portfolio (nine blockbuster drugs) and R&D pipeline, economies of scale, and a powerful salesforce. We entered this position during the quarter because we believed that shares were selling at a discount to their intrinsic value. Our conviction was that the market over-penalized the company for its blockbuster drug Opdivo’s failed trial. Not only does this drug still have immense earnings potential beyond the non-small cell lung cancer market (the market application in which it failed), but the company is not overly reliant on one drug’s success in one particular market. We like the company in this current economic environment because it is diversified in its broad drug portfolio and pipeline. Furthermore, the company operates with zero net debt, is operated by a disciplined management team, and generates strong free cash flow.

John G. Heinlein Chief Executive Officer and Chief Investment Officer

Portfolio ActivityBy John G. Heinlein

Bristol-Myers Squibb Company (BMY)

Bristol-Myers Squibb, the industry leader in immuno-oncology, is

prescription drug component of healthcare plans) with nearly 75 million plan members, and the second-leading drugstore chain with more than 9,600 retail and specialty drugstores. Shares of the company have underperformed of late because of concerns regarding potential government-related cost pressures. While these concerns are legitimate, we do not believe that they justify a material devaluation to the levels at which we purchased shares. This company is a necessary staple in the healthcare industry, as it facilitates pricing concessions from suppliers and provides a tremendous benefit to the consumer. The company processes over $1.3 billion in claims, giving it top-tier supplier negotiating power and exceptional economies of scale. Overall, we are pleased that we were able to purchase shares at a discount to their intrinsic value, which we believe will compensate us for any inherent risks.

CVS Health Corporation (CVS)CVS is the leading pharmacy benefit manager (administers

The following discussion mentions stocks that are widely — but not universally — held by clients of Horan Capital Management. Client portfolios are customized, so this commentary may or may not be directly applicable to any given client or account. Our intention is to provide general insight into portfolio holdings and into our overall approach and to highlight situations of interest, both positive and negative. The mention of any stock is neither advice nor a solicitation to buy or sell any particular investment and our opinions regarding securities are subject to change without notice. Investing involves risk of loss. See the legal disclosures at the end of this publication and on our website for more information.

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ADDITIONS(Unless otherwise noted, all positions listed in this section were added to selected accounts due to our belief that they had attractive valuations during the quarter.)

Allergan, PLC. (AGN) Allergan is a specialty pharmaceutical company that develops, manufactures, markets, and

distributes medical aesthetics, biosimilar, and over-the-counter pharmaceutical products worldwide. Allergan has a wide economic moat, which is a result of its strong product pipeline and brands (i.e. Botox). We believe that the company is ultimately undervalued due to industry headwinds and a failed Pfizer merger. That being said, we view Allergan as an opportunity to gain exposure to a high quality company that is priced at a level that more than compensates us for its risks. Shares were added to selected accounts this quarter.

Alphabet, Inc. (GOOG)

Alphabet (formerly known as “Google”) continues to dominate and grow through its wide economic moat. Alphabet is highly profitable, has minimal debt, and holds a stockpile of cash on its balance sheet. These attributes, coupled with an underappreciation of the company’s network effect, an opportunity to monetize YouTube, and an over-penalization of Google Ventures’ negative profitability, have prompted us to add to our long-term position.

management team and continues to allocate capital in areas that enhance its powerful competitive position. Amazon is disrupting the retail industry, as low cost operations allow the company to price products below brick and mortar retailers. Therefore, we continue to add to our core position when the share price reflects an opportunity.

Amazon.com, Inc. (AMZN) The company has a shareholder-oriented

Berkshire Hathaway, Inc. (BRK.B) This Warren Buffett-run holding company remains a core position in HCM portfolios. We added shares this quarter in selected new accounts and will continue to do so when the market undervalues its compounding ability.

Cerner Corporation (CERN)This company’s strong in-house development team has created an elite portfolio of healthcare IT

offerings to mitigate error and improve operations in the healthcare industry. The company provides services to approximately 30% of all U.S. hospitals, and it has established a strong reputation in the process. We purchased shares early in the quarter for selected accounts.

Citigroup, Inc. (C) Citigroup is a global financial services holding

company, with over $1.8 trillion in assets. We purchased shares for HCM portfolios throughout the quarter, as we believe that the company will benefit from its improved business operations and its extensive presence in more than 100 international and emerging markets.

Gilead Sciences, Inc. (GILD)

Gilead Sciences is a biopharmaceutical (bio-tech) company that discovers, develops, and commercializes medicines in areas of unmet medical need worldwide. The company’s main products offer treatment for HIV and Hepatitis-C. Shares have been underpriced of late because the market is concerned with the Hepatitis-C franchise’s ability to generate long-term cash flow (since the drug cures the disease, rather than simply treating it). This company has a strong history of drug development and acquisitions, and we continue to purchase its discounted shares with conviction that this success will continue.

Polaris Industries, Inc. (PII)

Polaris engineers, manufactures, and markets off-road vehicles, snowmobiles, motorcycles, and small vehicles. Shares were volatile during the quarter, as the company dealt with a series of product recalls. We believe that these recalls have produced short-term pessimism in the market, and we are confident in the company’s ability to generate future cash flows by leveraging its scale and powerful brand.

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Qualcomm, Inc. (QCOM) Qualcomm engages in the development, designing, manufacturing, and marketing of

digital telecommunication products and services. We like the company’s business model, as its royalty structure limits overhead and drives high profit margins. Share prices depreciated significantly in January due to a $1 billion lawsuit filed against the company by Apple. We do not believe that this lawsuit has permanently impaired or deteriorated the company’s economic moat; hence, we added shares after the sharp price depreciation.

Visa (V)Visa is the largest retail electronic payments

network in the world. Shares of Visa were added in selected new accounts, as the position remains one of our “best idea” core holdings.

Wal-Mart Stores, Inc. (WMT)

Shares of Wal-Mart were added in selected new accounts after a brief price depreciation during the quarter. Walmart has unmatched economies of scale that allows it to sell products at prices below those of its competitors. Furthermore, the Walmart brand is ingrained in consumers’ minds as being synonymous with value. We continue to add to the position when presented with the opportunity.

POSITIONS ELIMINATED(Unless otherwise noted, all positions listed in this section were sold in selected non-taxable accounts as we believe they reached full valuation during the quarter and proceeds were used to fund other portfolio purchases.)

services worldwide. In February, we sold all shares of ADP in non-taxable accounts. Share prices became fully valued, and we determined that this was the best time to exit the position.

Automatic Data Processing (ADP) Automatic Data Processing provides business payroll process outsourcing

Bioverativ, Inc. (BIVV)Bioverativ, a biotechnology company, focuses on the research, discovery, development, and commercialization of therapies for the treatment of hemophilia and other blood disorders in the United States and Japan. Shares of Bioverativ were spun-off from former parent firm Biogen in early 2017, and were sold based on its de minimis position size.

C.H. Robinson Worldwide (CHRW)C.H. Robinson Worldwide, a third party logistics

development, and distribution of oil, gas, and petroleum products. We sold shares of Exxon Mobil because of their recently strong price performance. Furthermore, we redistributed proceeds from the sale to other opportunities.

Exxon Mobil Corp. (XOM) Exxon Mobil engages in the exploration,

distribution of industrial and construction supplies primarily under the Fastenal name. We believe that the company was fully valued at the time of sale this quarter. Furthermore, we decided to divest in order to focus our attention on the opportunities listed above in the “New Purchases” section.

Fastenal (FAST)Fastenal engages in the wholesale

International Business Machines Corp. (IBM)

After a rebound in share price, we decided to exit the position. This decision hinged on our concerns with the structural change in the cloud industry and the company’s inability to generate sales.

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company, provides freight transportation services and logistics solutions to companies in various industries worldwide. Shares of C.H. Robinson Worldwide were sold in non-taxable accounts based on price performance and an over-weighted position. Proceeds from the sale were redistributed to other portfolio holdings.

McDonald’s Corp. (MCD) Shares appreciated to fair value this quarter, leading us to exit the position while

minimizing excessive taxable gains. Proceeds from the sale were redistributed to other portfolio holdings.

Paychex, Inc. (PAYX) Paychex provides payroll, human resource,

insurance, and benefits outsourcing solutions for small to medium-sized businesses in the United States and Germany. Shares of Paychex were sold based on price performance and were deemed fully valued. Proceeds from the sale were redistributed to other portfolio holdings.

REDUCTIONS OF EXISTING POSITIONS(Unless otherwise noted, all positions listed in this section were trimmed in selected accounts based on price performance and an over-weighted position during the quarter.)

Bank of America (BAC)Bank of America provides banking and financial products and services and services for

Berkshire Hathaway, Inc. (BRK.B) While shares were added to some selected accounts during the quarter, shares were also trimmed in selected accounts as the price fluctuated. We carefully monitor all of our investments to maintain healthy weightings and to maximize portfolio values. Sometimes this requires trimming and adding during times of volatility and unique circumstances. Nevertheless, Berkshire Hathaway remains a core holding in HCM portfolios.

Cummins, Inc. (CMI)Cummins designs, manufactures, distributes,

and services diesel and natural gas engines, and engine-related component products worldwide. Shares of Cummins were trimmed in selected accounts based on price performance and an over-weighted position. Proceeds from the sale were redistributed to other portfolio holdings.

General Electric Co. (GE) General Electric operates as an infrastructure and

technology company worldwide. Shares of General Electric were trimmed in selected accounts based on price performance and an over-weighted position. Proceeds from the sale were redistributed to other portfolio holdings. Shares of General Electric continue to look attractive as a core long-term holding in HCM portfolios, as the company enjoys high switching costs and pricing power.

Microsoft Corp. (MSFT)

Microsoft develops, licenses, and supports software products, services, and devices worldwide. Shares of Microsoft were trimmed in selected accounts based on price performance and an over-weighted position. Despite this trim, shares of Microsoft continue to look attractive as a core long-term holding in HCM portfolios. The company remains the world’s largest developer of desktop and server software, and the company’s operating systems are in approximately 87% of computers worldwide.

While P&G remains a core HCM holding, we trimmed shares in selected accounts due to strong price performance during the quarter.

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individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Shares of Bank of America were trimmed due to an over-weighted position. Proceeds from the sale were redistributed to other portfolio holdings.

Proctor & Gamble Co. (PG)

U.S. Bancorp (USB)U.S. Bancorp provides banking services in the United States. Shares of U.S. Bancorp were trimmed in selected accounts based on price performance and an over-weighted position. Proceeds from the sale were redistributed to other portfolio holdings.

Walgreens Boots Alliance, Inc. (WBA) Walgreens Boots Alliance engages in retail pharmacy services. Shares of Walgreen Boots Alliance were also trimmed in selected accounts

based on price performance and an over-weighted position. We allocated proceeds to other investment opportunities during the quarter.

Yum China Holdings, Inc. (YUMC) Yum China operates as the largest franchisee for YUM! Brands in China. Shares of Yum

Yum China operates as the largest franchise for YUM! Brands in China after its recent spin-off from YUM! Brands. Shares of Yum China were trimmed in selected accounts to fund better opportunities.

We Want More Great Clients Like You !!!Do you know anyone who can benefit from our financial planning and asset management services? Horan is currently ac-cepting new clients and we want more great clients just like you. Please contact your advisor today if you have a friend or family member who would be a good fit for our firm. We’ll be happy to talk to them about their current situation and provide a complimentary financial consultation.

One of the greatest compliments you can give us is the referral of a friend or family member.

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Tiffany & Co. (TIF)

We trimmed the position in selected accounts due to price performance. Proceeds from the sale were redistributed to other portfolio holdings.

Past performance is not a guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.

HCM Newsletter is a publication for the clients of Horan Capital management, LLC. While every effort is made to ensure accuracy of the articles published herein, we are not liable for any inaccuracies. Horan Capital Management, LLC, is a registered investment advisor (RIA) with the SEC. The information contained within is neither a solicitation nor an advertisement for any investment. The articles and information provided are for the benefit of our clients and are not an offer to purchase or solicit any mentioned investment. Opinions expressed about any security mentioned in this newsletter may change at any time and Horan Capital Management, LLC maintains no duty or obligation to update information as changes occur. Copyright © 2016 Horan Capital Management, LLC. All rights reserved.

New Faces at Horan Capital Management

Claire Mateer is the Marketing Specialist and Operations Manager for Horan Capital Management.

She has almost 10 years of experience in the financial industry. She manages all marketing activities at the firm and works with the executive team to recommend and establish long-term marketing strategies and business development goals.

Prior to joining HCM, Claire held multiple roles at PNC Bank. In all of her roles,

Louis Foxwell is a Research Analyst for Horan Capital Management.

He plays a key role in both researching companies to identify potential investment holdings along with ensuring each client account is traded and allocated correctly. Prior to joining HCM, Louis worked in the Baltimore Orioles front office for two years, where he refined his research and analytical skills.

He earned a B.A. in Entrepreneurship & Management & Writing Seminars from Johns Hopkins University and is a CFA Level 1 candidate. He is also a member of the Phi Beta Kappa honor society.

Claire’s focus was on building and deepening relationships with internal and external clients. Most recently she was on the business development side for PNC Institutional Asset Management and was also an associate with PNC Capital Advisors, the Registered Investment Advisor subsidiary for PNC Bank.

Claire is a native Pennsylvanian and received her B.A. in Political Science and Business from the University of Pittsburgh. She also holds the Accredited Portfolio Management Advisor designation.

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HAPPY SPRING! Welcome to the HCM family!

Horan Capital Management continues to thrive and grow. We are excited to announce the recent acquisition of Kasanow & Associates (Honolulu, HI) in February 2017. Harry Kasanow, CFP®, brings over 30 years of experience in the financial services industry to HCM along with many long-standing, deep client relationships. Aloha to Harry and the Kasanow and Associates Ohana. We look forward to many more years of abundance and prosperity.