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Insight & Outlook is published quarterly by Patton Albertson & Miller.

The statements expressed in this newsletter are the opinions of

Patton Albertson & Miller and do not represent specific investment

recommendations or results.

Financial Life Management

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INSIGHT & OUTLOOKA QUARTERLY MARKET COMMENTARY & NEWSLETTER

2ND QUARTER 2016

On May 31st Great Britain celebrated the

100th anniversary of the Battle of Jutland, the

great naval battle in the North Sea between

Admiral John Jellicoe’s British Grand Fleet and Vice Admiral Reinhard Scheer’s German High Seas Fleet. This World War I sea battle

engaged over 100,000 officers and sailors

aboard more than 250 ships, including 28

British battleships and 24 German ones.

The running engagement lasted into the early

hours of June 1, 1916, and when it was over

the British counted 14 ships sunk and 6607

casualties of which 6097 were fatalities.

Britain lost its three best battle cruisers,

the Indefatigable, the Queen Mary, and the

Invincible plus three other armored cruisers

and eight destroyers. The Germans lost 11

ships (1 obsolete battleship, 5 cruisers, and

5 destroyers) and suffered 3058 casualties

of which 2551 were fatalities. The Germans

claimed the tactical victory but Great Britain

won the strategic victory because 1) the

British Grand Fleet remained intact and potent

insuring that 2) the British blockade would

continue against Imperial Germany.

After the epic battle critics complained that

Admiral Jellicoe had been too cautious thereby

missing the opportunity for a modern day

Nelsonian “Battle of Trafalgar”. Winston Churchill,

however, astutely observed that Jellicoe was

“…the only man on either side who could

lose the war in an afternoon.” A major

British defeat would have broken the British

blockade which was slowly strangling

Germany’s war effort and would have allowed

German surface raiders to combine with

German submarines. Great Britain would have

found itself blockaded with dire implications

for its capacity to carry on the war.

Churchill’s judgement was correct.

Jellicoe and Scheer faced what are called

“asymmetrical payoffs”. Scheer had little to

lose if he were aggressive. If the High Seas

Fleet had been severely defeated, strategically

not much would have changed. In fact, the

German Navy had a Plan B—unrestricted

submarine warfare. So it had options although

not very good ones. For Jellicoe, as noted

earlier, a great defeat might have forced Great

Britain out of the war and handed Imperial

Germany mastery of Europe.

Investors, much like Jellicoe and Scheer, need

to carefully assess their true strategic position

when they decide how much risk to assume in

their portfolios. Are they in Admiral Jellicoe’s

position where major losses could cripple their

ability to meet their long term objectives?

Many retirees face Jellicoe’s predicament.

If they invest too aggressively in stocks and

a bear market like 2001-2003 or 2008-2009

hits, they might lack the time and fortitude

to recover. The psychological downside to

a more conservative asset allocation is not

participating as fully in bullish markets.

They’ll still make good “risk adjusted” returns,

but those might prove dissatisfying when they

see others reaping higher returns from their

higher risk asset allocations.

JELLICOE OR SCHEER?

On the other hand, many younger investors

are in Vice Admiral Scheer’s situation.

They can be fairly aggressive in their asset

allocation by holding a higher proportion of

stocks, knowing that time is on their side.

They can recover from big losses provided

they stay the course. They have options.

Behavioral finance, however, warns us that

investors, younger and older, often do NOT

stay the course in the face of large losses

aka “drawdowns”. Even a 25-year-old can

be shaken by markets like 2008 when well

diversified, high quality, stock portfolios

collapsed 35-45% in just a matter of months.

The all too human tendency is to relieve the

immediate financial and psychological pain by

selling securities, often near the bottom.

A Morningstar analysis of the 2008-2009 bear

market indicated the greatest selling of equity

mutual funds occurred in the first quarter of

2009, within weeks of the bear market low.

In other words, many investors sold out

after most of the damage had been done

and accordingly missed the huge rally which

started in March 2009.

“MANY INVESTORS SOLD OUT

AFTER MOST OF THE DAMAGE

HAD BEEN DONE”

“JELLICOE AND SCHEER

FACED WHAT ARE CALLED

‘ASYMETRICAL PAYOFFS’.”

with this great team of people who share a

common set of values. You can’t really call

this work because we love what we do and

like the people we work with!

Q: What has the transition from a lifetime

Georgian to a Chattanoogan been like?

A: Three years ago, we moved our family to

Chattanooga, TN after we opened our office

here and we have loved being part of this

beautiful city. Chattanooga has welcomed us

from both a personal and professional perspective.

The Chattanooga Women’s Leadership Institute

(CWLI) has been an awesome introduction to

so many aspects of Chattanooga.

Q: Share a little with us about your family.

A: I am married to Eddie and we have four

children, plus our golden retriever Buddy.

We have one son left at home so we are

quickly approaching the “empty nest”

milestone. Still trying to figure out if I am

looking forward to the freedom or will

miss the hectic activity. I like to read, grow

a garden (flowers and vegetables), cook,

and I also enjoy amateur photography.

The definition of a hobby is something you

love to do for pleasure or relaxation. I have

enjoyed joining The Canyons at Falling Water

Book Club as well as the Sweet and Savory

Cooking Club.

Q: Tell us more about your photography.

A: Photography has really become a passion

of mine in the last several years. There is

something about the combination of sky,

mountains and the Tennessee river that

compels me to snap photos of the

Scenic City. I have a friend who is really

good at portrait paintings and photographs,

while I lean toward landscapes. My son,

Jared, just completed a photography class

at Chattanooga Christian School where he

learned about things like aperture, white

balance, and film speed. He knows a lot

about the process and technique of taking

photographs; I am more interested in the search

for that beautiful moment I want to capture.

Q: Any particularly memorable pictures

you have taken?

A: On the morning of February 26th, after 7

inches of snow, I was fortunate to get some

pretty good shots of the sun rising on all

that ice and snow resulting in what looked

like fire and ice! (See photograph below)

We enlarged it to a poster size, left it

un-enhanced and hung it in our small

conference room. All the glory goes to the

maker not the taker!

Q: Anything else you would like to share?

A: I am always amazed by the pursuits of

others and enjoy hearing what brings joy to

each person. In my compliance role, I

regularly spend time in each of our locations

and look forward to meeting you and

hearing about your hobbies.

Bill Miller, CFAPatton Albertson & Miller

We are not advocating Wall Street’s advice

to “buy and hold” because “the stock

market always comes back.” The S&P 500

took more than six long years to recover

the losses from the 2007 high (it took

23 years, until 1952, to recover from the

granddaddy of bear markets in 1929). The

compounded return of stocks from 2007

to 2013 was about zero. Not very many

investors could have been happy with that.

Many undoubtedly wished they had cut their

equity exposure in 2007-08.

We have shown the following data before,

but it bears revisiting:

The data show the critical importance

of avoiding large drawdowns. We very

successfully used our “Portfolio Protection

Strategy” in 2007-2009 to sidestep a

significant percentage of the S&P 500’s

peak to trough decline of 57%. The cost of

such a strategy, however, is that sometimes

defensive action, in hindsight,

proves premature. For example, in 2010

during the first Greek crisis, in 2011 during

the Euro crisis, and more recently in the

fall of 2015 our rules-based model signaled

precaution so we partially hedged our clients’

equity exposure. We never know for certain

whether a 5 or 10% decline will turn into

something much more dangerous so we have

to respect the historical odds. In the last

three instances the stock market eventually

turned around and headed higher, so the

“hedge” trimmed a couple of percentage

points off clients’ equity returns. Especially in

today’s low return environment giving up any

returns is frustrating for us and our clients.

Yet we doubt bear markets are extinct and

because of their severe impact on clients’

long term, full market cycle (trough to

trough) returns, we still think it is prudent

to hedge our “Jellicoe” clients. But if you

consider yourself a “Scheer” client, please

let us know. At the end of the day it is your

individual risk tolerance that counts.

Bill Miller, CFA

Swiss 30 Year Bonds

The spread of negative interest rates

has astonished the frugal Swiss people.

On June 16th Switzerland’s 30 year bond

traded below 0% for the first time ever,

reaching -.05%. That means all Swiss

federal government debt now requires the

lenders to pay the borrowers. The 10 year

maturity has carried a negative yield since

January 2015. There was a time when

the Swiss National Bank represented a

beacon of monetary sanity, but apparently

no longer. The SNB has joined the central

bankers’ club whose motto is “We’re all

Keynesians now”.

Hedge Funds Struggle, Again

Dan Loeb, the famous hedge fund

manager, wrote his investors “We are in the

first innings of a washout in hedge funds.”

Hedge funds as a group have seen over

$15 billion withdrawn from the industry

through the first quarter of 2016. Many

large institutional investors such as the

California Public Employees’ Retirement

System (Calpers) and the pension fund

for New York City employees are cutting

their hedge fund investments due to

disappointing returns over the past

several years. Due to their enormous

investment appetite, they can only invest

in strategies capable of handling huge

fund flows—currencies, macro, long/short

equities, government bonds—and those

sort of strategies have not done well

of late. Large institutions cannot tap into

niche strategies, although smaller investors

can. As always, the top 10-20% hedge funds

account for most of the returns in the industry.

French RiotsFrance has been in political turmoil since

this spring when President Francois

Hollande proposed reforms to France’s

rigid labor laws. Unions and students

have protested against the changes in

Paris, Marseille, Toulouse and elsewhere.

The reforms would allow businesses more

flexibility in hiring and firing employees.

In recent weeks some of the protests have

turned violent, yet US news media have

largely ignored the unrest.

Facts:

• Born in Warner Robins, Georgia

• Lives in Chattanooga, Tennessee

• Married to Eddie

• Four children (Brooke, Ashley, Kyle, and Jared)

• Joined Patton Albertson & Miller in 2011

• Elected Partner of the firm in 2013

• Chief Compliance Officer and Director of

Human Resources

• Holds the IACCP (Investment Adviser

Certified Compliance Professional) and

SPHR/SHRM-SCP professional designations.

Recently, Jimmy Patton sat down with Lisa

and asked her a few questions:

Q: Lisa, what is your role at Patton Albertson

& Miller?

A: My title is Chief Compliance Officer and

Director of Human Resources. Although

that sounds like a behind the scenes staff

position, I really work for our clients by

promoting safety and soundness. My role

is to be an advocate for our clients, making

sure we have the very best in cyber-security,

best execution of trades, and, of course,

compliance with all the SEC rules and

regulations which are designed to protect

our clients. Instead of being called the Chief

Compliance Officer, a better description

would be Chief Client Advocate.

Q: Tell us a little about yourself.

A: I was blessed to have been born and

raised in Middle Georgia by two great

parents, William and Elizabeth Murphy.

Before joining Patton Albertson & Miller I

worked for two Fortune 500 companies for

20+ years. I worked with several members of

the Patton Albertson & Miller team while at

SunTrust Bank and I’m so fortunate to work

MEET LISA BRYANT

UNDER THE RADAR

10%

DRAWDOWN RECOVERY NEEDEDTO BREAK EVEN

11%

20% 25%

30% 43%

40% 67%

50% 100%

“... WE LOVE WHAT WE DO

AND LIKE THE PEOPLE

WE WORK WITH!”

“..IT IS YOUR OWN INDIVIDUAL RISK TOLERANCE THAT COUNTS.”