Page 7 - Equity Investing Through Business Cycles

Common Questions

What does that mean for Pacific Capital Investors?

The bottom line is that we maintain a long-term approach to investing. All active management
decisions are made through the framework provided here. While our core positions maintain,
our active management is guided by this top-down approach while maintaining the Investment
Strategy Guide we previously arranged with the client. In simple terms, we will never sell
everything and go into cash, for example. We will always stay invested and adjust part of the
portfolio based on this framework.

How do we determine what part of the business cycle we are in?

We use a variety of variables and weight them according to historical importance. For example,
an inverted yield curve has historically been a strong indicator of an impending recession. The
yield curve has a higher weighting in our determination than other financial metrics.

What if you are wrong?

Even more critical than a thorough framework for investment decision making is understanding
your limitations. While these metrics are time tested, past performance does not ensure future
performance. We are often right, but we are certainly not always right. By maintaining the
allocations based on the Investment Strategy Guide and diversifying appropriately based on
strict criteria, we attempt to benefit from strategic asset allocation while not deviating too
much from the market if we are wrong. This strategy allows us to attempt to capture alpha
without taking outsized risks.

Why shouldn't I just wait to invest until we are in the recession period and sell everything
when we are at the peak?

Lots of research has shown us that nobody, no matter how convincing they are or how loud
they shout on TV, can time the market perfectly. A study by Merrill Lynch found that model
portfolios over a 30-year period could underperform by nearly half their value by attempting
market timing. Charles Schwab tells us that their “research shows that the cost of waiting for
the perfect moment to invest exceeds the benefit of even perfect timing." A survey by Putnam
Investments found that market timers who miss just 10 days in the market could lose up to half
the value of their portfolio. Their model found that getting it wrong by no more than a month
was the difference between $6,873 in returns and $30,711.

How can I use this framework to find the best stocks to buy?

With the exception of client request or extreme circumstances, we will never recommend
individual stocks to our clients. We only invest in ETFs that capture a broad basket of stocks.
Research has proven this investment strategy superior in the long term. This framework is
considered a "top-down" investment approach. This means we focus on the macro factors of
the economy, such as GDP, employment, taxation, interest rates, etc. However, we stop our
analysis at sectors.

How often do you monitor these different data points?

Our job is to look at these 24/7. We constantly update our analysis based on new data releases.
We have an Investment Committee that reviews every 2-3 months and historically we have had
5-10 portfolio changes per year.

7