B R OY H I L L H I G H Q UA L I T Y D I V I D E N D

INTRODUCTION
Broyhill Asset Management is an independent investment management boutique built upon the long-term investment philosophy refined over a quarter century within the Broyhill Family Office. We believe that capital preservation coupled with consistent, compounded returns is the key to long term wealth generation. We do not target an irrelevant benchmark, but seek to provide consistent returns with a low probability of loss.
PORTFOLIO INFORMATION
Current Number of Positions Annual Management Fee* Minimum Investment Strategy Inception Custodian Liquidity 27 Broyhill High Quality Dividend Portfolio 1.25% MSCI World Index $500,000 August 31, 2012 Fidelity Investments Daily Subscriptions/Redemptions 2012 2013 Jan 6.7% Feb 0.4% Mar 3.2% Apr 0.6% May 0.4% Jun 0.8% Jul 3.3% Aug 0.5% Sep 1.4% 3.2% Oct Nov Dec 2.8% 0.9% Year 2.2% 27.1% 20.3% 20.3% 26.8%

INVESTMENT PHILOSOPHY
The Broyhill High Quality Dividend Portfolio is a concentrated equity strategy invested in a select group of exceptional businesses judged to be competitively entrenched market leaders, trading at reasonable prices. Our research seeks to identify outstanding companies with sustainable competitive advantages, rather than speculate on mediocre businesses with uncertain futures. The result is a portfolio of profitable businesses which offer the potential for full participation in up markets while mitigating the brunt of down markets, delivered to investors in the form of attractive dividends and consistent earnings growth.

PERFORMANCE STATISTICS*
YTD 27.1% 1 Year 27.1% 3 Year Inception 29.9%

-0.8% -1.2% 3.2% 1.1%

TOP POSITIONS
Top 10 Holdings Cash & Equivalents Closed End Funds Apple Inc Microsoft Nestle Laboratory Corp Procter & Gamble Tesco Danone Sanofi Total: % of Assets 31.6% 9.5% 5.6% 5.5% 5.1% 4.9% 4.7% 4.6% 4.4% 4.1% 80.0% Yield 1.0% 5.2% 2.2% 3.0% 2.5% 0.0% 3.0% 3.9% 1.7% 2.3%

PORTFOLIO COMPOSITION
Sector Analysis Consumer Defensive Healthcare Utilities Communication Services Energy Industrials Technology Basic Materials Consumer Cyclical Financial Services Real Estate % of Assets 36.5% 20.9% 0.0% 5.9% 5.1% 0.0% 18.3% 0.0% 5.2% 7.9% 0.2% Geographic Allocation North America Europe United Kingdom Central America % of Assets 62.8% 22.5% 13.7% 1.1%

CONTACT INFO
Chief Investment Officer: Christopher R. Pavese, CFA chris@broyhillasset.com Fax: (828) 758 8919 Tel: (828) 758 6100

* Performance is calculated net of all fees and expenses. Management fees for separate accounts are based on a percentage of assets under management and calculated on a sliding scale starting at 125 basis points and falling to 60 basis points for market values exceeding $2,500,000. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any manner without the written permission of Broyhill Asset Management. We do not represent that this information is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors. Performance numbers are calculated using a time-weighted rate of return. Additional information will be provided upon request.

B R O Y H I L L

A S S E T M A N A G E M E N T | 8 0 0 G O L F V I E W L E N O I R , N O R T H C A R O L I N A 2 8 6 4 5

P A R K

January 31, 2014 Investment Review & Outlook The market climbed a wall of worry last year. Stocks outperformed bonds by the widest span since 1958 only the fourth time since 1926 that the spread exceeded 45% when measured against Barclays Long Term Treasury Index. Despite concerns over central bank policy, budget sequestration, a government shutdown and an emerging market currency crisis, the S&P exhibited its lowest daily volatility since 2006 and only experienced a single correction of five percent, the least since 1995. Coincidentally, 1995 was also the only year with a higher Sharpe ratio in the past five decades. In contrast, bonds posted their worst losses in twenty years, and as a result, bond proxies were among the markets weakest performers. Needless to say, moves of this magnitude are simply not sustainable for an extended period of time. This bull is aging. The current rally has lasted almost five years and produced cumulative returns over 200%. Only five bull markets have lasted longer and only 7% have matched gains of this magnitude over the past century. As the chart below shows, it has been some time since weve seen a correction in stock prices the current stretch is the eighth longest on record. To put it short, we wouldnt be surprised if the turn of the calendar represented an inflection point in both investor psychology and market trend.

Bear markets have historically been kicked off with tightening monetary policy at the Fed in the form of rising short-term interest rates. The two bear markets since the turn of the century are indicative of this cause and effect relationship. Consequently, with short rates pegged at zero for the foreseeable future, the bulls would appear to have the upper hand until central banks change course. Yet, our work suggests otherwise. Central banks are not the only entities that can tighten monetary policy and markets often disagree with the wishes of central bankers. While short rates are unlikely to move higher anytime soon, we fear that a continued increase in long term yields could pressure asset inflation and lead to a sharp decline in stock prices, particularly in the context of todays overhyped, overvalued and overbought market. This is difficult to consider in the face of daily new highs and perpetually bullish commentary, both of which are typical in the later stages of bull markets. But this is precisely when it matters most to take a step back and consider the big picture.

Risk assets have been pushed higher by unprecedented stimulus since the financial crisis. Broadly speaking, markets have been dominated by policy decisions. The world has become dependent upon two policies which remain the only game in town Chinas decision around structural reform and the Feds decision around quantitative easing. The unwinding of stimulus is a delicate affair. Move too slow and risk igniting larger bubbles and greater financial instability down the road - the worst developed world crises in the past century (in 1929, in 1990 Japan and in 2008) were preceded by extreme levels of private sector debt. Move too fast and risk a bigger mess today each period was followed by crisis triggered by large falls in inflated asset values. The magnitude and duration of the stimulus this time around makes this balancing act all the more difficult, particularly as it coincides with new leadership at both ends of the globe. Bernanke has set the tone for the Yellen Fed, which is likely to continue the reduction of quantitative easing throughout the year. At the same time, new leadership in China has demonstrated a clear shift in policy toward growth one that favors quality over quantity.

Through our eyes, it appears as though the momentum has shifted beneath the only game in town. Investors should ask if markets are priced for such a shift in policy. They might also ask what the insiders know that the Average Joe does not (see chart above). History is an accomplished teacher. Running with the Bulls Deeply stressed asset prices provided a large margin of safety for investors at the depths of the financial crisis. As a result, our work pointed to double-digit expected returns on stocks five years ago. Today, the S&P 500 is nearly three times higher than its crisis lows and consequently, stocks are priced to deliver negative real expected returns. In other words, that wide margin of safety has vanished. With expectations and prices significantly greater today, risk assets are more vulnerable to inevitable disappointments and negative surprises, given the smaller buffer to absorb adverse developments. Great businesses are not always great investments and stocks are not always priced to generate average long-term returns. An investors margin of safety is always and only dependent upon the price paid. It can be large at one price. It will be small at some higher price. And it can vanish at some still higher price. With respect to todays margin of safety, one word comes to mind. Poof.

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Experience has taught us that the management of return is impossible outcomes are extremely unpredictable in investing and timing is uncertain at best. Consequently, we focus on what we can control process. We do not attempt to time the markets. Rather, we sell investments as they approach our estimate of intrinsic value and as a result, during periods of overvaluation, our allocation to cash will increase. Patience and discipline in the absence of compelling opportunities, can sometimes be a performance drag in the short-term, but it is the price that must be paid for longer-term outperformance. Last year was one of those times. While our equity portfolios performed exceptionally well on an absolute and risk-adjusted basis, any attempt to reduce risk through diversification, resulted in reduced returns. That being said, we expect our current positioning to dampen the downside when markets ultimately revert to reality.

The chart above illustrates the potential for mean reversion in earnings relative to trend. To more accurately gauge downside risk in the market today, one should also consider the potential for a similar magnitude of mean reversion in valuation multiples. Of course, most investors will chose to ignore both and plan to exit at still higher prices down the road. The challenge, as we have learned, is identifying the exit signal in advance . . . its impossible to know when that is. Todays speculators would be well served to consider the advice offered by John Maynard Keynes in The General Theory of Employment, Interest and Money: There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

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The Flight from Safety Fixed income investors have been spoiled by central bank bond purchases. To date, this policy has been successful and as a result, capital has traveled the globe in search of yield. While increasing flows induce increasing asset prices, a reversal in the flow of money from abroad has historically been followed by distress and often triggered crashes. Central banks remain committed to low interest rates today, but last summers taper tantrum may have only provided a brief glimpse of the dress rehearsal to prepare for the final act to come once stimulus is withdrawn.

The current generation of investors has relied on fixed income for both income generation and capital preservation. The next generation is unlikely to do the same. Traditionally safe fixed income investments may no longer fulfill their historical role as income producers and shock absorbers in a diversified portfolio. There are certainly exceptions within the bond universe, but broadly speaking, it is safe to assume that our allocation to fixed income will gradually decline over time. This raises an important question. Is there any value left in the bond markets? And if not bonds, than what? We address the first point below, before moving onto the second.

As a starting point, lets consider the current expectations embedded in market prices. The chart above illustrates our point the single most obvious market call among strategists today is that stocks will outperform bonds. The rationale is simple and it is an easy story for investors to latch onto. Bonds yields are low and have nowhere to go but up. Compared with bonds, stocks look cheap. Simple enough? Perhaps. But when everyone is in agreement, chances are it is already reflected in the price. So if the chart above doesnt raise your eyebrows, perhaps you should lay off the Botox. Consensus opinion is unanimous on this one and consequently, retail fund flows have followed backward-looking performance. Or as the old adage states, What the wise man does in the beginning, the fool does in the end.
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To be clear, it is mathematically impossible for bonds to generate returns on par with last decades experience. This is simply a function of the starting point the ten year treasury yielded about 3% at year-end. And while a 3% return is certainly nothing to write home about, it is still nearly double the lowest levels seen this cycle. More importantly, domestic bonds are now priced to deliver a 1% real return to investors, or about 300 basis points over cash. Not too shabby, particularly when measured relative to the current opportunity set, which we discuss below.

From a portfolio construction standpoint, bonds now provide investors with a real return above cash. So fixed income appears to be priced about right given todays interest rate environment and current inflation expectations. But relative to the 6.5% average real return on stocks, the 1% real expected return on todays bonds is almost insulting. We get that. However, investors are not buying stocks today that are priced to deliver the average 6.5% real return. Rather, they are buying large cap stocks priced to deliver -1.7% real annual returns or small cap stocks priced to deliver -4.9% real expected returns. Against this backdrop, all of a sudden an asset priced to deliver a 1% real return looks like a bargain relative to domestic equities. Even cheap international equity markets are only priced to deliver the same 1% real return on offer in domestic bonds, but shouldnt equity investors demand a premium for the risk they take? We sure do. Bottom line: investors can still get paid for taking some risk today, but all asset forecasts have been shifted down, compliments of the Fed. In this environment, we think it still makes sense to own some bonds here since we are earning a premium over cash its just the prudent thing to do in a world with no great opportunities and a significant number of risks. Todays Collectors Items Looking ahead, it is still prudent to assume that rates are structurally bottoming and may endure a slow grind higher in both real and nominal terms over time. This has not been a great backdrop for most income-generating asset classes. But one lesson stands out from history keep duration short and pick up as much carry as possible. In a rising rate environment, you want to own those securities that provide the most yield. In a world of zero interest rates, high coupons are collectors items.

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Long dated bonds are more sensitive to interest rates because they lock investors into low rates for a longer period of time. High yield bonds, on the other hand, have shorter maturities and higher coupons which diminish duration risk. They almost never reach maturity since they are callable and management refinances whenever possible. Importantly, these bonds are priced more on company fundamentals than interest rates and over time, have actually exhibited a positive correlation with inflation due to improved pricing power, increasing cash flows and stronger balance sheets. For our part, we continue to believe that default rates will remain below their long-term historical averages, as companies refinance debts before they come due while the economy slowly improves. High yield bonds should perform well in this environment, and a carefully selected portfolio of high conviction ideas has the potential to perform even better. When applied to the high yield markets today, we believe we can construct a portfolio of bonds with above average yields and below average risks. This can be accomplished by 1) balancing performing credits with attractive yields, 2) stressed credits suffering from temporary issues at meaningful discounts to par, and 3) special situations trading at discounts to net asset value. Beyond the opportunity we see in outsized default premiums, we also think the illiquidity premium remains mispriced. In a low rate environment, where asset allocators are increasingly desperate to generate incremental yield, we think alternatives can play a meaningful role. In particular, allocators of capital may need to expand their conventional tool box and become more opportunistic in their approach in order to achieve long-term objectives. In this regard, we remain convinced that asset-based lending and the private credit markets in general, remain in the sweet spot at this point in the cycle. Specifically, we remain constructive on assets that provide both yield and growth while we wait for inflation down the road.

Our allocation to fixed income will change with the opportunity set as will the nature of our investments in the sector. Today, the balance of our fixed income exposure is invested through various closed-end funds given the unique opportunity provided by recent panic in bond markets. In addition to our investment in municipal funds, discussed here, we have discovered similar opportunities in a number of taxable bond funds. We think this is an excellent opportunity to generate equity-like returns as panicked, yield-starved retail investors eventually return to the space and discounts narrow.

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The Current Opportunity Set The vast majority of investment managers are not rational allocators of capital. There are exceptions, but broadly speaking, most are fully invested all of the time, regardless of price and expected returns. Many investors worry that they are not getting their moneys worth if they are holding large amounts of zero-yielding cash. More often than not, these are the same investors likely to sell securities at any price when emotions run wild. Rather than limiting their opportunity set between earning nothing in cash or earning something in stocks or bonds, investors would be better served if they considered how much their cash might earn if it were available to buy assets from forced sellers once theyve become cheap. In his recent book, Antifragile, Nassim Taleb argues that, It is much easier to sell Look what I did for you than, Look what I avoided for you. But when the herd is busiest bidding up prices to ridiculous levels and the noise from the crowd becomes loudest, it is the ability to sit on your hands and do nothing that is the stuff tomorrows returns are made of. Its just a much tougher sell, as Keynes first noted in 1936. The greatest buying opportunities arise when liquidity is in short supply and anxious investors, consumed by fear, are forced to sell securities as prices fall. Leaving the party early will almost always result in short term underperformance during the later stages of bull markets, but it is the only way to ensure that you have the resolve, the discipline, and the dry powder to buy in bear markets when risk is lowest and expected returns are highest.

At Broyhill, we have the flexibility and the patience required to commit as little or as much capital as we determine based upon our independent appraisal of valuations and expected returns, opportunity costs and risks. The amount of cash we hold is inversely proportional to both the number and the attractiveness of securities trading at a discount to what we believe they are worth. Today, cash balances are high, as the current environment has created a scarcity of opportunities that meet our return requirements. Physics suggests that the further the pendulum moves away from the center of gravity, the more forceful it will reverse direction in the future. In other words, todays gains may come at the cost of tomorrows returns. We are quite comfortable holding cash absent compelling investments and spend our time in the interim, building an inventory of ideas that meet our investment requirements. Our primary objective is to achieve consistent returns compounded over time, while minimizing the risk of loss. At the same time, we believe flexibility is critical as value may emerge in various forms. The balance of this letter reviews some of the forms we are monitoring today.
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Sliding Down the Back Side Few affairs in history have had a greater impact on global capital markets than Chinas economic development. The effects of this multi-decade expansion are farther reaching than conventional wisdom believes and, for the most part, the implications or rebalancing remain largely misunderstood. Doubledigit growth in Chinese investment fueled demand for everything from coal to copper and fueled inflation in every corner of the world. For the past decade, investors made great sums of money simply buying what China needs. But the setup then was drastically different than it is today. Then, investors were on the front end of a historical surge in money and credit. Today, we are in the uncomfortable position of sliding down the back side. We believe that the global financial crisis marked the end of a long period of emerging market outperformance that began with Chinas growing economic influence and concluded with new Chinese leadership choreographing a massive shift in its economy from investment to consumption. The crisis uncovered a number of structural imbalances across global capital markets that are likely to weigh on emerging markets for years. These factors include slowing Chinese growth, constrained credit to emerging economies, a strengthening dollar along with eventual tapering, the reversal of global wage arbitrage and the growing risk of capital flight. The handoff will be tricky to say the least, and anything less than a perfect landing will have significant implications for the global economy.

The share of investments in Chinas GDP hovers near 50%, a level never before approached in history, and certainly never by an economy as large as Chinas today. Many signs suggest that this may be the glass ceiling for investments in China, and that an inflection point has already been reached. If true, Chinese rebalancing may represent the single most important factor in financial markets for years to come. As Chinas investment boom deflates, so too will the assets that have benefitted from Chinas investment orgy. If accelerating debt served to boost growth, decelerating debt will reduce it. If building capacity has artificially lifted GDP, shutting it down will lower it. The emerging market boom was a decade-long period where related growth stories stole the spotlight and the developed world massively underperformed. We expect that the structural issues we are seeing in emerging markets today, and the pending reversal of fortunes (along with capital flows) may lead to a sustained period of outperformance for the developed world.
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The Emerging Unwind The bull market in commodities that spanned the last decade conditioned investors for perpetually rising commodity prices. During this period, those companies with assets and revenues closely linked to commodity inflation performed spectacularly, while those which faced commodity cost pressures lagged behind. Market sentiment and corporate valuations reflected the magnitude and duration of this trend as expectations became deeply embedded in investor psyche. The consensus is notoriously slow to recognize inflection points in long-term trends. But this is precisely where the largest opportunities are uncovered. As Chinese growth slows, commodity inflation is likely to follow suit, and a number of industries are poised to benefit from margin expansion and greater returns on capital as a result. Our previous investment in Coca-Cola Hellenic, originally discussed here, was a profitable example of the types of businesses best positioned to benefit from reduced input costs. At the time of our investment, we explained that commodity price increases had resulted in ongoing margin pressure for the company, but that any moderation in cost pressure would drive significant upside in the stock. With the upside now behind us, we have since exited the position as shares approached our estimate of intrinsic value. At the same time, we have been able to leverage our research on the industry to identify a new investment in the space, which we believe is even higher quality, while still providing the same margin tailwinds. This particular company has an unassailable moat and high barriers to entry defensive characteristics which result in strong and consistent free cash flow. Moreover, we see significant long-term growth potential as the company is the dominant provider of low cost products to a young and rising middle class. Currency risk, regulatory threats and the stocks limited float combined to drive shares nearly 50% lower from their recent peak, presenting us with an opportunity to begin building a position. Should capital flight spark a greater currency crisis and increased volatility, we would expect to aggressively accumulate shares. Stay tuned.

We constantly balance our assessment of the macro with current valuations to determine the relative attractiveness of investment opportunities. While emerging markets may appear cheap based on various measures, we believe that the past decade of excesses have greatly distorted the true earnings power of most investments tied to the region. As a result, we currently demand a much greater margin of safety to commit capital to developing economies. Given the magnitude of the last cycle, history would suggest that any reversion to the mean would be accompanied by a large overshoot to the downside. If we are correct in our assessment, we will likely have a great opportunity to find the baby that got thrown out with the emerging market bath water at some point in the future. Until then, we are quite happy with the existing opportunity set discussed below.

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Stuck in the Middle (Class) with You This is an exceptional period to own leading developed world companies despite our expectation that emerging economies will generally grow faster than developed economies (i.e. there is little correlation between GDP growth and stock market returns). These companies have world class management teams, intellectual property and brand recognition, organizational skills and shareholder alignment and are often much better equipped to serve a wealthier, emerging market consumer. Against this backdrop, we think there is a strong structural case for owning high quality, multinational brands at current valuations. We have found that high quality franchises exhibit lower drawdowns with less volatility and similar or greater returns than low quality stocks. While high quality does not always win from an absolute perspective, over the long haul, it has performed better with lower risk. We expect a massive trading up in consumption in the developing world, compounded by an even greater trading up of capital flows into developed markets.

Although we expect some emerging bumps down the road, the structural story remains intact for the emerging middle class over the long term. Hundreds of millions of households are poised to enter the ranks of the middle classes and consumers in emerging economies, whose desire to spend continues to grow, remain buoyant about the future. We think manufacturers and retailers that can provide consumers with an accessible brand that they can identify with are best positioned in the current macroeconomic environment. We believe Coach (COH) is the embodiment of affordable luxury, with shares still trading at the most affordable price in the stocks history, as we discussed in our original report, here. Our thesis remains intact despite near term challenges, which have allowed us to increase our position at even better prices. More recently, we have established a position in TESCO, the UK retailer, at a price which we believe, provides a substantial margin of safety. BRIC & Mortar Investment The grocery market is not particularly exciting against a backdrop of social media and another round of internet public offerings. Nonetheless, we expect our investment in TESCO to provide attractive returns over our investment horizon with limited downside risk given the stocks historically low valuation, healthy dividend yield, and real estate assets valued greater than the current value of the company.
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Managements first profit warning in decades and subsequent reductions to guidance have weighed on shares as investors fear the company has lost focus at home while stretching for growth abroad. The consensus has become extremely negative on the prospects for a turnaround despite recent management changes, which we support, and an increased focus on ROIC, evident as management exits unprofitable markets. These things take time, but given current sentiment on the stock, even stabilization at current depressed levels should be enough to drive double-digit returns on our investment. Our upside would be far greater if Mr. Market again decided to reward high quality dividends with higher multiples. Bottlenecks along the Industrial Revolution For the first time since China joined the WTO, the US is actually seeing manufacturing jobs expand. Falling energy costs, rising productivity, declining transportation costs, relative political stability and competitive labor costs are all contributing to The American Industrial Renaissance. Academics estimate that domestic oil production could exceed Saudi within two years. Natural gas production, in just a single shale formation could exceed all of Qatar in another two years. The long-term implications for American industry are the stuff competitive advantages are made of. But in the intermediate term, the ramp in production has outgrown our nations infrastructure, creating bottlenecks in transportation which will likely persist for years. These bottlenecks have created interesting opportunities with economics largely independent of growth.

Kinder Morgan is the largest pipeline operator in the country and represents a direct investment in the growing infrastructure required to support Americas shale oil and gas revolution. The company owns a world class collection of monopoly-like assets managed by Richard Kinder who personally owns about a quarter of the shares outstanding and earns his $1 annual salary millions times over. The stocks recent decline - driven in part by a negative analyst report and in part due to rotation out of bond-proxies provided us with a compelling entry into a high quality business throwing off high margin, recurring cash flow from assets almost impossible to replicate. At cost, we expect our investment in the GP to generate very attractive returns driven by accelerating cash flow growth, healthy cash dividends and incremental cash distributions from incentive distribution rights.

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Today, oil is plentiful but infrastructure is scarce. This bodes well for the long-term earnings power of companies like Kinder Morgan. In the short-term, however, it has created persistent dislocations in the pricing of crude oil across the country to the benefit of oil refiners. Investors are understandably cautious given the industrys historical cyclicality and as a result, the group is priced as if a downturn is imminent. Our work suggests otherwise. We believe margins are likely to remain elevated as shale oil continues to flood the country and well-positioned refiners should thrive. Of all the refining assets weve analyzed, we believe Northern Tier Energy (NTI) enjoys the most sustainable margins and defensible earnings stream. The companys structural advantage lies in St. Paul Minnesota, where its refinery is located outside the Bakken shale and a short pipeline voyage away from the Canadian Oil sands, providing NTI with a substantial cost advantage relative to the competition. Heavy retail selling amidst a secondary offering, combined with a reduced distribution due to scheduled downtime, created a unique opportunity to purchase units at a price approaching a 25% yield on our estimate of normalized earnings power. Demographics & Policy Tailwinds The Affordable Care Act (ACA) represents perhaps the most significant piece of healthcare reform in history, and stands to benefit 24 million uninsured over the next decade according to the Congressional Budget Office. But similar to the Americas Energy Renaissance the ACA is sure to create bottlenecks in the existing healthcare system along the way.

We expect structural bottlenecks to create headaches for a number of industries in the sector while creating long-term opportunities for others. When viewed in the context of low correlations to the overall market, defensive earnings streams which generate high and rising dividends, and rock-solid balance sheets flush with cash, we dont see any reason the sector shouldnt trade up relative to the consumer staples industry (see chart above). Management focus has clearly shifted from building empires to building shareholder value and Mr. Market has begun to take notice. Some of the best opportunities in the market are found amongst structurally advantaged companies suffering from cyclical weakness that Wall Street is unwilling to look past. The typical phrase used by sell side analysts to describe these investments is dead money patient investors should pay particular attention when they see these buzzwords as they often signal an excellent long-term buying opportunity.
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Our previous investment in Hospira (HSP) exemplifies this dead money phenomenon as the stock has appreciated roughly 50% since we established our position and outlined our thesis here. Fortunately, we are still finding similar opportunities today despite the broader markets extreme valuation. Shares of Laboratory Corporation (LH) fell 20% from their recent peak after management reduced earnings guidance. Consensus sentiment has followed utilization trends lower, resulting in substantially reduced growth expectations for the industry and washed out coverage for LH. Of the 28 lemmings that follow the stock, no more than 5 rate it a buy. So what do these brave analysts see that everyone else is missing? We cant speak for the street (nor would we want to), but we see a very high-quality, defensive business with secular growth tailwinds priced to deliver double-digit annual returns even assuming no improvement in industry fundamentals or relative valuation - both of which we think are likely.

We aim to publish a more thorough report on our investment thesis later this year, but since this letter is already much longer than anyone expected, well just note that Lab Corp is the low-cost and most efficient operator in an effective duopoly, characterized by substantial operating leverage. While the sheep are distracted by yesterdays slowing growth, we are focused on tomorrows volume opportunity driven by tuckin acquisitions, a combination of steady employment growth, insurance coverage expansion, advances in personalized medicine, and an aging population which increases the demand for clinical tests. Underdogs, Misfits and the Art of Battling Giants Three thousand years ago on a battlefield in ancient Palestine, a shepherd boy felled a mighty warrior with nothing more than a stone and a sling, and ever since then the names of David and Goliath have stood for battles between underdogs and giants. David's victory was improbable and miraculous. He shouldn't have won. In his most recent book, David and Goliath, Malcolm Gladwell challenges us to think twice about obstacles and disadvantages. The first chapter tells the story of Vivek Randive, who decided to coach his daughters National Junior Basketball team. He was puzzled by the mindless way Americans played the sport. It was as if there were a kind of conspiracy about the way the game ought to be played which widened the gap between good teams and weak teams. Good teams were tall, fast and able to execute plays with precision at their opponents end. Randive grew up with cricket and soccer in Mumbai, so he wondered why weak teams chose to play in a manner that made it easy for good teams to do what they are good at.

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Most of the time, a team only defended about a quarter of the court, conceding the other three quarters. But Randives girls, in the heart of Silicon Valley, were the daughters of nerds and programmers. They worked on science projects and dreamed about careers in marine biology. If they played the conventional way, they would fail conventionally. Instead, the team would press and steal and do it over and over again. Because they typically got the ball under their opponents basket, they shot layups instead of the low-percentage, long-range shots that require skill and practice. Defense hid their weaknesses. The team attacked the inbounds pass a point in the game where a great team is as vulnerable as a weak one. David refused to engage Goliath in close quarters, where he was sure to lose. He stood back using the valley as his battlefield like Randives girls defended all ninety-four feet of the court. As the playwright, George Bernard Shaw once put it: The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.

Capital markets are undoubtedly a greater conspiracy than junior basketball and consequently, many investors fall into the same trap. They play the conventional game and fail conventionally. As a result, the majority fail to keep up with professionals, who fail to keep up with the market. Institutions have more information, more money, and more time to dedicate to investment decisions. They are the tall and fast good teams able to execute more efficiently than weaker investors. In reality, however, the very thing that gave the giant his size was also the source of his greatest weakness. The powerful and the strong are not always what they seem. Our ability to recognize this weakness and capitalize on it, is precisely our edge. We make our own, more rational, rules. We are patient. They are not. We arent forced to follow the herd. By definition, they are the herd. While most institutional managers spend their days and nights rifling through meetings, sorting through emails and rubbernecking at Bloomberg and CNBC, we sit in a quiet room and read and think. By designing our process to tune out the noise and make better decisions, we have tilted the odds in our favor.

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The advantage of being located in the foothills of the Blue Ridge Mountains (in addition to the weather) is that we are outside of the fray. Its pretty quiet out here and the rumor mill just doesnt churn as loudly. Removed from Wall Streets groupthink, we are able to climb up the mountain and survey the investment landscape with a rational, long-term perspective. We simply operate under a different mandate. Our process does not attempt to catch every market twitch. One of the most underappreciated keys to generating consistent long-term returns is to minimize losses. Losses are almost always caused by taking too much risk, as many investors feel forced to do today. If you avoid large losses, the gains will usually take care of themselves. Our current positioning allows us to generate consistent cash flow in a high risk environment, while keeping our powder dry to seize more attractive investments the next time opportunity knocks. As they say, When youre one step ahead of the crowd, youre a genius. When youre two steps ahead, youre a crackpot. Sometimes, it pays to be a crackpot.

Christopher R. Pavese, CFA

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Broyhill Asset Management, LLC

Broyhill Asset Management is a private investment management boutique. We believe that capital preservation coupled with consistent, compounded returns is the key to long term wealth generation. We are conservative investors for our partners and for ourselves. Our objective is quite simple - superior risk-adjusted performance. Since the sale of Broyhill Furniture in 1980, the Broyhill family wealth has been managed as a single family office. Today, we are privileged to be able to offer the same level of expertise developed and refined over a quarter century within the Broyhill Family Office, to additional families and investors. We have the highest respect for the trust our investment partners have awarded us, and pledge to always treat non-family investments as if they were our own. Our Services The philosophies and strategies we endorse for our investors are only those we have developed and deployed for ourselves. We currently offer investors three different investment strategies, each of which is fundamentally driven by the same objective income generation and capital preservation. Each is consistent with our own goals and leverages our expertise in asset allocation, in equity research and in credit analysis. The Broyhill Portfolio is a diversified, multi-asset class investment strategy. Macroeconomic fundamentals and long term investment themes drive the portfolio construction process which is routed in a strict valuation discipline. Embedded in our approach is a relentless focus on the preservation of capital and the belief that risk management begins with portfolio construction. The objective is simply maximum total return, commensurate with the given risk profile of global capital markets and best suited for investors with a long term time horizon.

The Broyhill High Quality Dividend Portfolio is a concentrated equity strategy invested in a select group of exceptional businesses judged to be competitively entrenched market leaders, trading at reasonable prices. Our research seeks to identify outstanding companies with sustainable competitive advantages, rather than speculate on mediocre businesses with uncertain futures. The result is a portfolio of profitable businesses which offer the potential for full participation in up markets while mitigating the brunt of down markets, delivered to investors in the form of attractive dividends and consistent earnings growth. For more information on our services, please contact: info@broyhillasset.com To subscribe to our research, please click here:

The Broyhill Opportunistic Fixed Income Portfolio is a separately-managed individual bond portfolio focused on short duration, high-yielding fixed income securities. The portfolio aims to combine a high probability of the safe return of principal with a current return superior to a portfolio of US Treasury securities. A rigorous research process drives the selection of only those securities that meet our requirements based upon an independent assessment of each issuers fundamental strength. The result is a cash-generating portfolio focused only on our highest conviction ideas.

Broyhill Asset Management, LLC Post Office Box 500 800 Golfview Park Lenoir, NC 28645 (828) 758-6100 www.broyhillasset.com www.viewfromtheblueridge.com

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