3rd Quarter 2015

October 15, 2015

Dear Client:

October marks Noesis Capital Management’s 20th anniversary of business. For the past two decades we have had the privilege to serve over 500 families and have been fortunate to make many lifelong friends along the way. Our staff has grown, our assets under management have grown and we continue to expand our educational pursuits. The family has grown as well, as we welcomed children and grandchildren of staff this year. Through volatile markets we have always held fast to our investment principles, and we have always been there for our clients.

This past quarter we saw more volatility than we have in a while. It is interesting to reflect back on similar times – from our July 2000 newsletter after the burst of the dot-com bubble we remarked:

During the second quarter, investors experienced one of the most volatile markets in history…$2 trillion of market value disappeared in one week alone…We believe that there are attractive long-term buying opportunities in today’s market. Accordingly, we will take advantage of the short term volatility resulting from investors’ emotions by buying high-quality stocks in beaten-down sectors that offer promising growth potential.

In the midst of the Great Recession from October 2008 to April 2009 we wrote:

While investment strategies must include defensive considerations, it is important to also focus on longer range opportunities…We should bear in mind that in previous business cycles equity markets normally began to recover before the economy hit bottom and we are hopeful that this pattern will be repeated in the current cycle…When the environment is as bad as we have been experiencing, it is natural to be pessimistic. We should not invest emotionally when the market is so volatile.

In our October 2011 newsletter at the height of the European debt crisis we noted:

Stock markets worldwide have been selling off and extremely volatile since late July…However, the multinational companies that we follow remain well equipped financially with solid balance sheets and strong cash flow generations…We favor holding good businesses with predictable earnings by paying a reasonable discount to the true values of the businesses.

As you can see, our message has stayed the same throughout the past two decades.

During August, fresh concerns of global disinflation and recession arose from faltering emerging-market currencies and a slowing Chinese economy. This scenario was very similar to October of last year, when oil prices and stock prices fell rapidly. Daily volatility spiked, and on August 24, the Dow Jones Industrial Average moved in a 1,089 point range falling 6.6% from the high to the low of the day. The headline on the evening news was of the largest point drop ever in a single day. The Dow Jones managed to rally off the low of the day, and also the low point of the year, to finish off 568 points or 3.4% lower on August 24. Similarly the S&P 500 Index fell 98 points at its worst level of the day, but it is far more difficult for the news media to create sensationalism around a 98 point intra-day drop.

For perspective it is important to bear in mind that in the crash of 1987, the Dow Jones dropped 508 points which represented a 22.6% decline in one day. The Dow Jones closed at 2,247 on the prior day, October 18, 1987. With the Dow Jones trading near 17,000 today, it would have to drop more than 3,800 points in a single day to match the 1987 decline in percentage terms.

Volatility has been unusually low for most of the past 6 years and now we are experiencing historically “normal” levels on volatility. For the quarter-ended September, the S&P declined 6.4%, the FTSE 100 Index fell 6.1%, while the Nikkei, the Hang Seng and the Emerging Market Indices all dropped in excess of 13%, respectively. This made for an $11 trillion loss in global equities during the 3-month period. In historical terms, this price variation is not an anomaly.

In each of 36 calendar years since 1980, the S&P 500 Index has had a negative return at some point throughout the year. Refer to the chart on the next page which illustrates that in spite of average peak-to-trough drops of 14.2% during the year, the market has posted a positive return in 27 out of 35 years. The annualized price appreciation since January 1980 is 8.2%, with a total return including dividends of 11.4% annually, as of September 30, 2015.

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Our process at Noesis is to focus on individual stock selection instead of guessing at the near-term direction of the market. That said, we note that in August, 23% of the stocks in the S&P Index were down more than 20% on the year and it appears much of the selling pressure may have already passed. As long-term investors, we endeavor to utilize market weakness as an opportunity to purchase new positions or add to existing holdings. Likewise, we look to rebalance and reduce larger positions during periods of market strength.

Alphabet Inc.

Google Inc. has officially changed its name to Alphabet Inc. on October, 2015. Stock symbols remain the same as prior to the name change. They are GOOGL for class A shares with voting rights and GOOG for class C non-voting shares.

Celebrating 20 Years

In 1995 when the firm was founded, our objective was simple:

“We seek superior long term financial results consistent with our clients’ investment goals, with capital preservation a priority at all times.”

So much has changed in the last two decades. We share our twenty year anniversary with the birth of the DVD; it was twenty years ago the world watched the OJ Simpson trial; since then, the smartphone was introduced, the internet took off and e-commerce became mainstream. 9/11 forever changed so many lives… and so much more. We saw the dot-com bubble, the Great Recession, the housing crisis, Dodd-Frank Wall Street reform and countless other financial-related events.

And yet, 20 years later, our objective remains true:

“Our value is providing a trusted service with a superior client per professional ratio, independent in-house research with individual equity and income securities selection capability, and international expertise, with capital preservation a priority at all times. “

“We seek to be the most trusted advisor providing financial peace of mind.”

We have come a long way since 1995 and we couldn’t have done it without our terrific clients, our wonderful partners such as Charles Schwab, and our staff. Thank you to everyone and we look forward to the next twenty years and beyond.

We look forward to hearing your views and addressing any questions that you may have.

Sincerely,

Noesis Research Team