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Home My WebLink About1991-09-26 - Agendas - Final• • • FIRE PENSION AGENDA ITEMS FOR 9-26-91 • City of Fayetteville %Firemen's Relief and Pension Fund GENERAL 6-30-941 Active Retired Lopfi Participants 4 23 59 30 Checks Received 106,263.31 43,121.14 82 112 149,384.45 / 112 = 1,333.79 (16 82 x 1333.79 109,370.75 - reirvv `f"f %30x1333.79 40,013.70 - /,C ? F • • • Lor Coupes Insurance Commissions 1s, ARKANSAS INSURANCE DEPARTMENT September 20, 1991 TO: City Treasurer FROM: Lee Douglass RE: Firemen's Relief and Pension Fund 400 uY111M7 Tome EuNq a ua. now. Manias a 72204 ►11 507371402S Enclosed are tvo state varrants to be credited to your Firemen's Relief and Pension Fund. The warrants are issued under authority of Appropriation Act 897 of 1991. Act 595 of 1981 levied the insurance premium tax on domestic insurers as well as foreign or alien insurers. The larger varrant is based on foreign or alien insurance premiums and the smaller varrant is based on domestic insurance premiums. Contact Pam Davis regarding any questions on the turnback at 686-2960. Please take the time to examine your mailing label and notify us of any changes that may be necessary. • ELI 9 FWD MD DAY YR. 17 91 01001 425 0361 04 tla ACCOUR NUMBER et -1111W 1IW& ua Qpltlir 01 ranula To THE STATE. TREASURER, LITTLE ROCK, ARK. PAY TO THE ORDER OF': FAYETTEVILLE DO NOT BEND, FOLD OR MUTIUITE 1912130 !:08 20096781: !UD MO. DAY Y0. $LM 9 t7 91. 01002 42500161 04 ACCOUNT NUMBER Sawn CENTS **106263 31 THIS WARRANT VOID AFTER JUNE 30, 1993 fr ubitor of Aute of &rkans�ss To THE STATE TREASURER, LITTLE OCK, ARK. PAY TO THE ORQER OF: FAYETTEVILLE ( DO NOT BEND, FOLD OR MUTtATE L91213. 40820076781: 92E-0260426 MUMS CEMS ••+43121 14 • • 2 20268 4 gtt. AtR)iIOROP P14 i7 t.1 � " r' • • 1 NTA4CIVI INVESTMENT PORTFOLIO MANAGERS NM CAPITAL MANAGEMENT, INC. City of Fayetteville Fire Dept. Ms. Sherry Thomas 113 W. Mountain St. Fayetteville, AR 72701 Dear Ms. Thomas, MEMBER INVESTMENT COUNSEL ASSOC. OF AMERICA September 23, 1991 Security markets, like many things in life, are subject to periodic trends or fads. Certain Investment strategies or styles will come into favor for a time resulting in a period of substantial over -performance. Eventually, that trend will fall out of vogue resulting in an often lengthy period of relative underperformance. Ultimately, and over long periods of time, a sound, conservative "value" approach to stock -picking has proved to be the most durable investment strategy as exemplified by the amazing long-term success of such well-known investors as Warren Buffett and John Templeton. The 'value" approach is perhaps best described in the classic investment text The Intelligent Investor written by Benjamin Graham. The enclosed articles from the September 17 and September 23, 1991 editions of "The Wall Street Journal" illustrate the extent that a prudent value -oriented investment style has underperformed the major averages and other more aggressive styles in recent years. They also point out the likelihood that the markets are once again in a transitional phase which will lead to a return to a more fundamentally durable investment climate favoring value managers NM Capital Management has always used a fundamental value approach to stock selection. This has resulted in a strategy favoring companies with clean balance sheets (i.e., low debt), good dividend records, strong, clearly focused management, and low price to earnings ratios (i.e., companies that are "cheap" relative to earnings potential and compared with historical averages for the company, the industry and the market as a whole.). This investment style has resulted in excellent performance over time (344.2% for the last ten years, and 79.0% for the last five years). Furthermore, there have been no negative returns for the 14 years since NMCM was founded in 1977. The historical, statistical record of the stock market clearly points out the futility of attempting to predict what will happen next week much Tess next year. What does become apparent however, after a study of the markets in this century, is that a fundamentally sound value approach to investing that is diligently applied and rigidly adhered to will result in positive returns over the long term. At NMCM, we will continue to apply the time -tested principles that have been the hallmark of our success over the years and look forward to helping all of our investors to achieve their investment goals in a conservative, low-risk format. If you have any questions about value investing, please feel free to contact me. Since ly, • harles W. Dumler Assistant Vice President CWD/km 7510 MONTGOMERY NE, SUITE #201 • ALBUQUERQUE. NM 87109 1500 • (505] BBB -5500 FAX 15051 888-0874 s 1 P ►-+ a 1 • re September 24, 1991 FROM: Darrell E. Judy Retired Firefighter - May 13, 1968 - May 15, 1988 202 West Maple Fayetteville, Ar. 72701 501-521-4194 TO WHOM IT MAY CONCERN: SUBJECT: 0 Pension Board Chief, Marion Members, Assistant Doss, City of Fayetteville Request for change in retirement status. I am requesting a reconsideration of my case for an increase to 65% disability retirement. Attatched you will find a copy of my original request and back up letters from the doctor. If you require more information please let me know. Respectfully, Darrell E. Judy • • • • • • November 17, 1989 FROM: Darrell E. Judy Retired Firefigher May 13, 1968- May 15, 1988 202 W. Maple Fayetteville, Ar. 72701 501-521-4194 TO WHOM IT MAY CONCERN: Pension Board Members, Chief Mickey Jackson, City of Fayetteville SUBJECT:Request: for change in retirement: status When I became disabled in Janurary of 1985 and ask about retiring disability I was told the advantage was that I could retire at that time and draw my 50% retirement. However, if the board decided at any time I was no longer disabled I could be brought back to work at the Fire Dept. to complete my twenty years. I'decided, at that time to try to complete my 20 year responsibility before retiring. I now realize effective Janurary 1, 1987 the regulations changed and I could have retired after that with 65% if I retired disability. Until recently when I read the regulations in the Handbook for Arkansas Municipal Officials Section 33-1.18 and checked with an attorney I had no idea I might be elgiable for the extra benefits. Although I have managed to continue to do other work until now my back is detriting each day to the point the doctors are considering more surgery. Therefore, I am requesting consideration for an increase to 65% I am elgiable for -retroactive for 6 mo. as the regulations state -Sec. 33-1.18-4. Attatched you will find some letters and medical reports to help with dates and basic information,please let me know what other medical information you will require. Respectfully, LI/IdfZihk Darrell E. Juy • • NORTHWEST ARKANSAS NEUROSURGERY CLINIC VINCENT R. RUNNELS, M. D., FACS, FASC, FANA DIPLOMAT' AMERICAN BOARD Of NEUROLOGICAL SURGERY D. LUKE KNOB, M. D. • • Fayetteville Fire Department Attn: Chief Mickey Jackson 303 West Center Fayetteville, AR 72701 RE: Darrell E. Judy DOB: 8/17/46 Dear Mr. Jackson: BUTTERFIELD TRAIL MEDICAL CENTER 1706 JOYCE, SUITE TWO FAYETTEVILLE, ARKANSAS 72703 January 10, 1990 TELEPHONE (501) 521-0900 PIGGY A. BAILEY OFFICE ADMINISTRATOR Mr. Judy has never been released to return to his regular duties subsequent to his on the job injury. If I can be of further assistance, please do not hesitate to contact my office. VBR/dk Sincerely, Vincent B. Runnels, M.D. • • RODDY LEE ODOM DON R. ELLIOTT, JR. MARK L. MARTIN LAURA J. MI,RINNON AMBER L. GARTER February 9, 1988 Ohm, &4a ? and dmt mt ATTORNEYS AT LAK P. 0. DRAWER IRos, 1 EAST MOUNTAIN FAYETTEVILLE. ARKANSAS 79708 Jerry G. James, Director Public Employee ,Claims Division Suite 820, University Tower Little Rock, AR 72204 Re: Darrell Judy v. City of Fayetteville WCC No: D502241 TELE P,IUNE (111111 4.111-7575 AN/TA K. SGISM 1KrN:1: MIN INIMTNATIIN Dear Jerry: I have now had an opportunity to meet with my client, Darrell Judy, regarding a possible settlement of his worker's compensation claim. As you recall, Darrell sustained an injury to his lower back while working as a firefighter for the City of Fayetteville on October 17, 1983. He sustained a herniated disc at the L5-S1 level. Chemonucleolysis was performed by Dr. Vincent Runnels at the Washington Regional Medical Center on December 5, 1984. That procedure failed and Dr. Runnels later performed a laminectomy on Darrell at the Washington Regional Medical Center on January 9, 1985. Since his operation, Darrell has been approximately twice a year and continues and Darvocet for pain as prescribed by taking Limbitrol for sleeping.. I am enclosing a statement from Collier Drug Store verifying his charges there in 1987. According to these charges and records from Dr. Runnels, I believe it would be fair to say that a conservative estimate of his yearly medical charges is approximately $1,000.00. Darrell understands that this medication will be needed on an indefinite basis. Also there is a. possibility of future spinal injections with Dr. Runnels as the pain intensifies. Darrell is presently 41 /conservative estimate would exceed the sum of followed by Dr. Runnels to take Naprosyn, Zantac Dr. Runnels. He is also years of age (DOB: 8/17/46). I believe of his medical expenses through age 65 $20,000.00. Also, Darrell has continued 1 • • to work as a firefighter for the City of Fayetteville but they have done everything within their power to accommodate him. Darrell has been assigned to Station *5 which is the least active fire station in the City of Fayetteville. Also, he has been restricted to driving only and has been instructed by his employer not to fight fires as they are afraid this will cause him further complications. Also, Darrell has been instructed by the fire chief not to report to any off duty fires and this has affected his earnings and is also evidence of injury to his wage earning capacity. This information can be verified by contacting Chief Mickey Jackson with the Fayetteville Fire Department at 442-6131. Darrell has been denied promotions because of his physical limitations and that can also be verified with the fire chief, (e.g., Chief Jackson told Darrell not to apply for a lieutenant position that was vacant and informed him he was unable to handle the duties of that job physically). Dr. Runnels has, of course, assessed a 15% functional impairment rating which has now been paid out. According to my calculations Darrell has already received the 15% impairment benefits totaling $10,395.00. Thank you for your call and I look forward to hearing from you. Sincerely, Mark L. Martin MLM:djb opeiu 105, afl-cio enc - statement from Collier Drug Store cc: Darrell Judy (w/enc) • • • • • NORTHWEST ARKANSAS NEUROSURGERY CLINIC VINCENT a. RUNNELS, M.D., PACS. INPLCOAATE AMERICANAMERICANEOARD OF NEURO NEUROIOGICAI SURGERY • FELLOWSHIP NAERKJ , STOOKS LUSMCR.MERICAN HEART ASSOCIATO4.M/EbCAN OalEGE OF SURGEONS SmE MARKETFAYETTEVILL SE. A O RKANSAS PM ^ l2 O TELEPHONE 101/S2VOIC0 tlei'1g85 Sheryl Lipscomb Public Employee Claims Suite 820, University Tower Little Rock, AR 72204 October 31, 1985 RE: Darrell 3udy vs. City of Fayetteville; D/A: 11/15/84 Dear Ms. Lipscomb: OFFICE MANAGER FEGGY GARET The patient was seen on 10-21-85 doing well, working as a dispatcher. He is not having to do any lifting. His leg pain is much better, although he still has considerable midline deep low back pain. He had one spell of his left arm becoming numb and tingly and some pain in the forearm, although it is better today. He still has trouble resting at night. I gave him another injection of Depomedrol and am continuing him on his Limbitrol, Darvocet, Naprosyn. • I would estimate his permanent disability to the body as a whole at 152. • • VBR/dw cc Sincerely, Vincent B. Runnels, M.D. Joe P. Rouse, M.D., 767 W. North, Fayetteville, AR 72701 Mark Martin, P.O. Drawer 1868, Fayetteville, AR 72702 City of Fayetteville,P.O. Drawer F, Fayetteville, AR 72702 • • • • NORTHWEST ARKANSAS NEUROSURGERY CLINIC BUTTERFIELD /RAIL MEDICAL CENTER 1706 IOYCE, SUITE TWO FAYETTEVILLE, ARKANSAS 72703 fiNCENT R. RUNNELS, M. D. FACS, FASC, SADA VLOMAlt AMIRKAN BOARD Oi NEUROLOGICAL SURGERY D.tUKEKNOK,M.D. December 27, 1989 • • Fayetteville Fire Department Attn: Chief Mickey Jackson Pension Board 303 West Center • Fayetteville, AR 72701 RE: Darrell E. Judy DOB: 8/17/46 Dear Mr. Jackson: A 1ttEP11ONE (501) 511-0900 P!GGY A. BAIttY O1[KT ADMINISIRAIOR This patient, as you may recall, underwent surgery as a result of an on the job injury as a firefighter. He underwent chemonucleolysis which failed to relieve Itis obvious symptoms and ultimately led to open surgery. He continues to complain fo chronic low back pain. He has been to the VAMC twice complaining of his low back pain. He has had some recent x-rays, which I will arrange to have sent to my office. I still feel he is disabled from his previous work and is unable to do his previous job as a direct result of his on the job injury and subsequent surgeries He could ultimately come to a fusion. His surgery was done on 1/9/85. He is reminded to continue to follow the back exercise program, take the anti-inflammatory medication, soak in hot water, follow good posture tech- niques and avoid heavy lifting on a permanent basis. Sincerely, Vincent B. Runnels, H.D. VBR/dk cc: Mark L. Martin, Attorney at Law, P.O. Drawer 3597, Fayetteville, AR 72702 t p•.7 1 FAYETTEVILLE •CITY OF FAYEt1EVILLE, ARKANSAS SHERRY THOMAS, QTY CLERK December 29, 1989 • Mr. Darrell Judy 202 W. Maple Fayetteville, AR 12701 Dear Mr. Judy: During the Fire Pension Board meeting on December 28, the Board requested that i write to you regarding your retirement request. There are several questions that the Board needs answers to in order to consider your request. Please provide answers to the following questions at your earliest convenience: 1. What was the date of your back injury? 2. How did your back injury occur? 3. Were you cleared by your doctor to return to full duty work after your injury? Your cooperation in providing answers to these questions will certainly be appreciated. Sincerely, Sherry L. Thomas City Clerk cc: Fire Pension Board 113 WEST MOUNTAIN 72701 501 3754321 • 1 • 917 4 1 • • twenty (20) years. In no instance shall he receive more than lilty dollars ($60.00) per month in addition to his regular benefits. (2) The increase in benefit levels provided in this subsection for service beyond twenty (20) years shall apply only to those fire fighters who retire on or after January 1, 1987. (e) A volunteer or part -paid firefighter who becomes a full -paid member of his fire delfartment shall be eligible to retire as a full -paid member only if he shall have been employed as a full -paid member for a period of at least five (6) years immediately prior to his retirement. (A.C.A. 24-11-818) 33-1.18. Benefits ---Disability retirement.—(a) (1) Any firefighter who becomes totally and permanently physically or mentally incapacitated for any suitable duty as an employee as a result of personal in,tury or disease may be retired by the board, upon written application filed by or on behalf of the member, if, after medical examination of the member made by or under the direction of a physician designated by the board, the physician reports in writing that the member is physically or mentally totally incapacitated for the further performance of any suitable duty, that the incapacity will probably be permanent, and that the firefighter should be retired. (2) The benefit amount shall be: (A) If the. disabling injury or disease occurred while not actu- ally performing work in gainful employment for the fire department, the monthly her .11 shall be equal to the benefit paid to normal ser- vice retiranta; or (B) For a full -paid firefighter who is injured in the line of duty, the monthly disability benefit shall either be equal to sixty-five per- cent 6 f the salary attached to the rank held by the member in the fire department or shall be equal to the benefit paid to normal service retiranta. whichever is greater. For purposes of this section, "infured in the line of duty" means a disabling injury or disease which occurs while conducting official fire department operations or while in training to become a fire fighter. The board shall determine whether the disability occurred in the line of duty, and may require any medical evidence, official reports, expert testimony, or other information to be supplied by the applicant, in addition to the required ' physician's examination and report. The additional benefits provided herein shall be effective for all qualifying applications first received by the board on or after January 11987. (3) For purposes of computing nil benefits, "salary" means recurring pays which are received for a regularly scheduled work week and shall not include payments for unused accrued sick leave or annual leave, or the cash value of any nonrecurring or unusual remunerations. (4) Any disability benefit approved under this section shall be effec- tive the first day of the calendar month next following the latter of either the fire fighter's termination of active membership or six (6) months before the date the written application was filed with the board. (5) In the event that a firefighter's disability ceases, his benefit shall also cease, and he shall be returned to active service at not less than the same salary he received at the time of his retirement. (8) Any firefighter retired for reasons of disability who has more than twenty (20) years of service shall also be entitled to receive any supplementary benefit for which he would otherwise be qualified under A.C.A. 24-11-818. • • 1 • • • February 22, 1990 documentation that was necessary to validate his request for a line of duty disability retirement, he would have his support. Jackson stated he did not feel the documentation has been submitted to a satisfactory degree, however, he is really hung up on the question of his stress related anxiety and whether or not it is related to his job. Given the discussion he has had with Roy and where the situation stands as of today, he will be abstaining from the vote. Reagan stated it was his belief that the state statute governing the 65% line of duty disability was put in there for the purpose of supplementing a disability income for a firefighter who was seriously injured on the job, for example, falling off a building, crushed back, broken legs, etc. He does not believe that this request falls under that line of injury, and because of these reasons, he will be voting to deny Roy's request. Upon roll call, the motion to deny the disability request passed by a vote of 5 - 0 - 1, with Jackson abstaining. Bonaduce made a motion to grant Roy Skelton a 50% disability retirement, effective February 15, 1990. There was some discussion whether or not Skelton should be granted a regular retirement or a disability retirement. Reagan stated the difference in the two was that the disability retirement is set up for someone who does not have in 20 years but becomes disabled while still employed. Dill stated he thought that a disability retirement might enable Roy to receive his social security quicker or help him in that regard. However, he does not want to grant a disability retirement unless Roy has requested it. Bonaduce stated he would amend his motion to read that Roy be granted his normal retirement. Reagan seconded this motion. Upon roll cell, the motion passed by a vote of 6 to 0. DARRELL JUDY RETIREMENT REQUEST Jackson stated Judy has made a request to the Board that his retirement be changed from a regular 1/2 salary to a line of duty disability at 65% of salary. Jackson gave the Board members a copy of correspondence from Jerry Rose, the City Attorney, which states that •Mr. Judy retired from the Department on May 16, 1988, after 20 years on the job. He performed his duties until his retirement. Mr. Judy now asserts that he could have qualified for line of duty disability retirement and wishes to now apply for that status retroactively. ACA 24-11- 819 Al states in a pertinent part that a firefighter must show that he is physically or mentally totally incapacitated for the further performance of any suitable duty. Although there may be a number of other reasons why Mr. Judy may not change his status after his retirement, the fact of his performing his duties up to the date of his retirement in 1988 is conclusive proof of his not being totally incapacitated. The fact that after his retirement he may have become unable to perform duties is simply irrelevant to the issue of his ability to perform while he was employed by the Department.' • • • • • • • February 22, 1990 Reagan stated that Judy's doctor never released him to return to work performing his normal duties, and he was assigned to Station 5 on restricted duty. He stated it was a documented fact that Darrell did hurt his back on the job, but when he retired he did not request disability or line of duty disability. For that , he made a motion to deny Judy's request. Dill stated he would have been more in favor of it if Darrell has applied for it at the time he had retired. Re seconded Reagan's notion. Upon roll call, the notion to deny a retroactive line of duty disability retirement for Darrell Judy passed by a vote of 6 to 0. PENSION LIST Thomas pointed out that there were several changes by retirees making changes in their income tax withholding. This list is for March, but it will include the retirement pay for Skelton from February 15 to 28 as well as his March benefit. Skelton's retirement benefit is 1/2 salary plus $60 for longevity pay. Jackson stated Skelton's monthly salary is $1,975.71 Sonaduce, seconded by Dill, made a lotion to approve the pension list. The motion passed unanimously. ADJOURNMENT The meeting adjourned at 2:48 p.m. 1 1 1 1 1 1 1 r 1 1 1 1 1 1. 1 1 1 • September 30, 1991 QUARTERLY REPORT CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND 1 1 1 1 1 1 •' 1 1 1 1 1 1 .1 1 1 1 1 1 1 1 1 1 1 1 N • NM Capital Management, Inc. Quarterly Investment Comment 3rd Quarter 1991 1 1 1 1 1 1 '• 1 1 QUARTER IN REVIEW IWKS- Despite uncertainties caused by the major changes in the USSR, the stock and bond markets performed well during the third quarter. The sharp decline in interest rates since mid July resulted in bonds slightly out- performing the popular stock indices (S&P 500 and Dow Jones Industrial Average) over the three months Government/corporate bond indices returned approximately 5.8% compared to the S&P 500 5.3% (including dividends) and Dow 4.6%. Nine month stock returns (S&P 500 +20.4%) were primarily influenced by the market surge (+ 14.5%) during the first quarter, triggered by the successful Gulf War. Bond index returns of about 10% for the first three quarters of 1991 reflected the decline in interest rates in the recessionary environment and gradual easing by the Fed to promote economic recovery. ECONOMY AND INVESTMENT OUTLOOK Economic data released over the past few months leaves little doubt that recovery is now underway. However, the data also implies that the initial expansion phase is moderate relative to prior postwar recoveries. The lack of employment growth, particularly in the service sector, and lack of increased inventories have been distinguishing factors in this recovery. Slow income growth from weak employment has partially offset the positive effects of lower interest rates on consumer spending In the months ahead, we expect signs of increasing employment and inventories. A slow initial recovery, however, has benefits. Inflation has registered dramatic improvement in the last two quarters. Core inflation pressures are expected to continue to subside in the year ahead and should fall to the 3.0%- 4.0% .0%4.0% level in 1992. Reduced inflation expectations and continued stirnuhcs by the Fed argue for further easing in interest rates. The decline in interest rates during the third quarter was dramatic. The yield of the benchmark 30 year Treasury bond dropped from about 8.5% in mid July to 7.8% at the end of September. Five year Treasury yields dropped from 8.0% to 6.9% over the two and one half months. This broad decline in interest rates had a positive impact on stocks in the wake of growing concerns about a near -tern recovery in corporate earnings. As mentioned in our last Quarterly Comment, an outlook of slow economic recovery and accompanying earnings improvement, moderate inflation and relatively stable to lower interest rates is a favorable environment for stocks and bonds. The stock market appears to be reasonably valued (October 8 Dow 2964) and already reflects improved corporate earnings prospects for 1992. A severe market correction does not appear imminent, however, except in the unlikely event interest rates soar or the 1992 expected corporate earmngs recovery fails to matenahze We are, therefore, maintaining a relatively fully invested position in portfolios. FIXED INCOME STRATEGY The sharp decline in interest rates since mid- July resulted in strong bond performance for the quarter. The slow recovery, slow money growth, moderating inflation and rising concern about the viability of many banks induced the Fed to lower short term interest rates. Although long term rates have also 1 0 1 1 1 1 1 1 1 N 1 1 1 1 1 1 el1 1 1 1 1 1 1 1S 1 1 1 1 1 1 1. 1 1 • come down, the yield curve remains quite steep. We continue to believe the recovery in the months ahead will be slow. Consequently, we do not anticipate a sharp upturn in rates. With further good news on the inflation front plus continued easing by the Fein stable to somewhat lower rates appear likely. However, any good news regarding a quickening in economic recovery could signal the trough in rates for this cycle. Therefore, at the current level of interest rates, we are not aggressive buyers of bonds and new commitments will continue to be US Treasury bonds with intermediate maturities. EQUITY STRATEGY Our value onented common stock selection is fundamentally driven and disciplined. Because we do not believe we can reliably predict the future, we do not emphasize elaborate economic models or forecasts. Instead, we concentrate on what we know, with a high degree of certainty, about the real business prospects of individual companies. In selecting a stock for investment, we focus on the operating and balance sheet fundamentals. A recent example is Whirlpool. Our analysis considered the company's internal restructuring, improving profit margins, increasing market share, sound financial strength and strategic expansion in Europe. We concluded that Whirlpool has a very good chance of returning to levels of profitability more normally associated with leading brand names, large market shares, and efficient operations We also noted that Whirlpool was selling at the low end of its five year range of price/sales, price/cash flow, and price/book value ratios. Based on our analysis, we determined that Whirlpool should be conservatively priced at $48 per share within three years, which would result in a compound return (including dividends) of 16%. This return is considerably higher than our expectations for the market as a whole. If there is an unexpected surge in appliance demand as the economy recovers, earnings growth and stock price appreciation will be better than anticipated. The stock selection process includes an evaluation of the downside risk as well as the upside potential For every stock holding or new purchase, we ask ourselves, "What if we're wrong?". For the most part, our selections are selling at the low end of the historical valuation ranges and consensus earrings expectations are low compared to potential earnings power. Thus, the downside risk is Judged to be small relative to the upside potential. In addition to good fundamental analysis and discipline, value oriented investing requires patience Our normal time horizon or expected holding period for a stock is roughly three years. We do not know when other investors will recognize the value we see and bid up the stock pnce. We will hold a stock for a much longer period, even if it is up substantially in price, if the fundamentals continue to look attractive and the stock still appears undervalued. We will sell an issue after a brief holding period if the stock moves up to our target price and becomes "fairly valued". If our analysis concludes that the fundamentals of a company are deteriorating or new information changes our assessment of its earnings power — thus reducing the upside potential or increasing the downside risk -- the stock is sold. RELATIVE MARKET VALUATIONS Currently, our analysis indicates that many consumer growth stocks we excessively valued compared to other sectors. The diagram on the following page suggests that investors are paying a high price for stocks that have more predictable earnings such as Consumer Growth Staples (i.e., drugs, medical products, hospital management, publishing and restaurant stocks), and better values exist in other sectors of the market such as Capital Goods (i.e., machinery, electrical equipment and other industrial type stocks). 1 • 1 1 1 1 1 1 *11 1 1 1 1 1 1 1 1 1 1 N 1 1 1 1 1 1 1. 1 1 GROWTH SECTORS ARE QUITE EXPENSIVE, AND NOW MAY NOT EVEN OFFER SUCH SUPERIOR GROWTH P/B Ratio THE PRICE OF GROWTH s s 3 2 1 (P/8 vs. 92/91 EPS Growth) tit llltles 1[ Gen Growth Stpl.s tawlwr Steptes X Quito. Goods 14 FMyy ii1C Industries K ■ Financial T.CNrolopy X CongI,. stn X l credit Cyc lc.w 10 20 30 40 1992/1991 EPS Growth Pate Source: wrrllI lyecn G..ntItatlr. Analysis SO 60 Nob: The Transportation Sector is not shawl because of a lack of data The Consumer Cyclical sector is not shown because 199211991 growth rata are beyond the scale of the dart. On the diagram above, the vertical axis represents price/book ratios. The higher the ratio, the higher the market is valuing the stocks in the sectors. The horizontal axis shows the increase in earnings projected for the stocks in the nanous sectors for 1992 compared with 1991. The valuation disparity is striking between the price -to -book ratios for consumer stocks (growth and staples), with forecasted 1992 earnings growth of 18% and 17% respectively, and the much lower price -to -book ratios at equal or higher projected earnings growth for Financial, Basic Industry, Capital Goods and Technology sectors. Part of this valuation difference is the flight to the visible earnings growth of consumer stocks during a recession as opposed to trying to determine when the earnings in the cyclical stocks will rebound. However, if we are close to the earnings low for this recession, book values for the sectors m the lower half of the diagram appear to well discount the earnings uncertainty even if the 1992 earnings growth rates are overly optimistic. The conclusion from the diagram is that the perceived superior growth of many consumer stocks may now be fully reflected in expanded multiples and price, while their 1992 earnings growth may not be� so superior relative to the lower vaIs;e''1, more cyclical sectors. Our individual company analysis tends to verify the conclusions above. Consequently, our stock portfolios emphasize issues identified with the undervalued economic sectors where earnings growth can be purchased at a bargain price. • • :1 .1 1 1 1 1 1 1 1 N 1 1 1 1 1 1 1 1 0 O 0 0 0 0 ✓ N ' 0 A 0 0 1 O C W d 0 1 r O O . V• O. < 1 1. 1 1 FAYETTEVILLE FIRE P 6 R A/C 107-FAYEPR CHANGES 0 STATEMENT PORTFOLIO COMPOSITION 2,267,307 MARKET VALUE AT 07/01/91 CURRENT O J W IL J 0 < ✓ K O ✓ • A A • O N N 0 • Ca INC N J ▪ Z 0 O O S r r 2 \ 0 W O W O W C O Z - C r < < < - W O W < < < < E O r CL W z Z < < z - v -10,707) (REALIZED G/L K COVON A P 0 - N n N FIXED INCOME COMMON STOCK 2,402,773 N MARKET VALUE AT 09/30/91 K A P K O O O 2,402,773 N W E 0 0 > z 0 0 W W D J 0 • C < 00 I- < < 0 0 v < INCEPTION W O Z 0 0 r S W Z O < J 1 - au W cr - J 3 MONTHS J K• K K K < 0 • - N N < 3 • Z N N A- N Z Z 11 - < 1 K • 0 N TOTAL FUND K K K P - - < N - 0 - N P P P N• 0 N - - A P• 0 N N 0 0 A N O O N• 0 N N N - N K K K K ID N A - 0 0 P A 0 0 0 0 0 - 0 N 0 N P - N 0 - - N K K K 0 O N K K K K P 0 • 0 l0 0 P N P o 0 0 O o Ch f • 0 N - - 0 • • P • 0 n n c 0 0 0 J O W - oa0° 0 W 0 I- < Z W C- 0 r • N. L > C • O O 0 N. 0 G1 • Z N. 3 Z W • Z Y 0 0 I- - r 0 1 0 2 O 0 3 0 1 J S L < X 0 - • J I C1 LL W L 0 0 0 0 US CONSUMER PRICE INDEX M LYNCH CAPITAL MARKET • 1 1 1 1 1 1 N 1 1 1 1 1 1 •11 1 1 y1 1 1 1 1 1 0▪ 1 0 CI 01 0. W C 1 1 1 1 1 1 GSECW ONFBE 1 • 0 CC J• W O } O W W } L O 0 O O Z O 2 W I- O rc 0 K W D J CURRENT INVESTMENT SUMMARY In n n e ID ID CASH EQUIVALENTS CO O m - n CO Cf CON CO 01 N N C/ n V Ci n ID P O N - 01 n W W L 0 H N - O Z Z - 7 O N O n O O W Z O WOX I- n W E - O O K J • W W Z Z £ F 0 O 0 W O I- 0 O Z W Z O X - ID n- N N n W n n n I O - N N N N P N n N N CO Y ID n 01 N CO O Cl n CO CO CI W P V P P O P ID N N N 01 n N O 0 O n N N n n V ID N N n Y o N 01 C1 R n n CO n Y N N- N N P P P C) 0 n n OD ID CO n n N CO ID N N {•/ 01 o N N n N 01 P C! N n N O- n ID Y N 01 0 0 n N N O N- n CO Cl n N 0 0 N - - N - - - CO 01 N N 01 001 01 n 01 01 N J n C J 2 0 2 CC Id W W D n H 2 J 0 0 W CONSUMER DURABLES CO o N ID n P O CO N n 0) 01 N O CO N O N•••• 1- n CO C) N CO n N- n O n N n n mco - - INTERMEDIATES • CO CO W J W - t Z - •-•n - O O CC •-•- O '- O H f J W O • D I- O K C D J J 2 O - < < } - D. O •-• I- - 0: U Z < J 0. W n G Z n O W 1C M W 0_ 2,373,788 01 C! n 01 N TOTAL INVESTMENTS P N 01 in N ACCRUED INTEREST W (D etc 0. L Z 1 0 1 1 1 1 1 1 1 •I 1 1 1 1 1