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B ARROW , H ANLEY , M EWHINNEY & S TRAUSS D ALLAS, TX

S OUTHERN M ETHODIST U NIVERSITY. EQUITY PORTFOLIO MANAGEMENT. J ANE G ILDAY. B ARROW , H ANLEY , M EWHINNEY & S TRAUSS D ALLAS, TX. 1968 Roaring Guns & Butter Economy Rip Roaring Stock Market Raging Vietnam War. Boston Bank of Boston AT&T. New York City Exxon

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B ARROW , H ANLEY , M EWHINNEY & S TRAUSS D ALLAS, TX

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  1. SOUTHERN METHODIST UNIVERSITY EQUITY PORTFOLIO MANAGEMENT JANE GILDAY BARROW, HANLEY, MEWHINNEY & STRAUSS DALLAS, TX

  2. 1968 Roaring Guns & Butter Economy Rip Roaring Stock Market Raging Vietnam War Boston Bank of Boston AT&T New York City Exxon First National City Bank (Citigroup) J.P. Morgan & Co. U.S. Trust Argus Research - Who?? 1969 N.Y.U. Business School Bear Market

  3. 1998 How does a Red Sox gal end up in Ranger territory? • 30 years of experience in all kinds of markets, with a good stock picking record • Sell side became a beauty contest judged by investment bankers. Client portfolios didn’t matter anymore. • Barrow, Hanley growing rapidly. Needed in-house research. • Fabulous career and intellectual opportunity

  4. 2004 • Portfolio Manager in 1999. SMU is a client. • Partner in 2001. • Always a securities analyst.

  5. BHMS OVERVIEW • Twenty-Four Year Old Firm, Founded 1979 in Dallas, Texas Portfolio Managers - 5 Large Cap, 2 Small Cap, 1 Me Analysts - 7 and Me Fixed Income - 8 Traders - 3 • Sole Focus is Value Management for Institutional Investors plus me • Large Manager of Institutional Assets - $37 Billion • Large Cap Value Equity (1979) $ 9.7 Billion 116 Clients • Mid Cap Value Equity (1999) $ 2.0 Billion 8 Clients • Small Cap Value Equity (1995) $ 900 Million 13 Clients • Fixed Income (1983) $ 3.5 Billion 64 Clients • Mutual Funds (1985) $ 19.8 Billion 9 Clients • Vanguard Windsor II (large cap) • Vandguard Select Value (mid cap) • Sector Portfolios (1998) $ 507 Million 2 Clients

  6. 3 = 24% 8 = 48% 12 = 60% WHAT DO I DO ALL DAY LONG? JOB DESCRIPTION • Beat the Index • Analyze the index. 77 S&P stocks. PG, KO, MO, VIA’B, PEP, AOL, CMCSA, BUD, DIS, G, CL, KMB • Buy Low/Sell High • Minimize Downside Risk • Pick Good Stocks • Bunge (BG/NYSE - $49.58) • Fortune Brands (FO/NYSE - $75.86)

  7. WHAT DO I DO ALL DAY LONG? • S&P 500 up 1% since 2/23/2003 • Stay Out of Trouble • Tribune Company (TRB/NYSE - $44.06) Down 12% • Univision (UVN/NYSE - $28.96) Down 19% • Interpublic Group (IPG/NYSE - $12.36) Down 27% • OOPS • Starbucks (SBUX/OTC - $54.44) Up 117% • Hershey Foods (HSY/NYSE - $52.45) Up 26% • Gillette (G/NYSE - $43.45) Up 13%

  8. RESOURCES - How do I do it? • NEWS: Wall Street Journal, Barrons, First Call, Prudent Bear.com, Drudge, CBS Marketwatch.com (for SEC filings), Business Week • EXPENSIVE STUFF: Holt (CSFB), StockVal, Bank Credit Analyst • SPREADSHEETS: P&L through Cash Flow to Balance Sheet • COMPANY VISITS: DEO, WEN, ATN, PX, SRCP

  9. RESOURCES - How do I do it? • CONFERENCES: • SSB/Palm Springs: Barry Diller, Sumner Redstone, Michael Eisner, Brian Roberts, Ed Whitacre • CAGNY/Scottsdale: Dr. Atkins, PG/KMB, innovation • LISTEN TO MY SON: Navarre/Halo II KO/H20 Abercrombie/Lacoste • Use every contact you’ve got/LEGALLY

  10. SPECIFIC EXAMPLES - DIAGEO Initial Purchase Subsequent Additions What did I see? • General Mills registration statement (DEO to sell GIS shares) declared effective • Diageo about to complete transformation to focused, world-leading spirits company • Diageo commitment to return capital to shareholders • Modest 14x P/E, 4.1% dividend yield, excellent balance sheet, strong cash flow

  11. NEWS CORP. Initial Purchase What did I see? Outlook • Began trading on NYSE 11/2 • International index fund selling about over • US portfolio managers can buy • Soon, or very soon, in S&P 500 Index • Great media assets broadly diversified Fox Cable, Fox TV, 20th Century Fox movies, Direct TV, NY Post, TV Guide, SKY Satellite TV, The Australian, The Sun • Cheaper than Viacom, TimeWarner, Comcast, and Disney

  12. A BAD HAIR DAY!!!

  13. JAKKS CORP. Subsequent Additions The Set-Up • My best performing stock in 2004. • Accounted for 5% to 8% in my portfolios. • On 10/19, reports strong sales and earnings, raises forecasts, stock rises to $25.55 (52 wk high) • On 10/19, stock closes at $18.81, down 22% on the day • On 10/20, stock closes at $12.96, down an ADDITIONAL 31% Vince deals a knock out punch Stay-tuned for Stone Cold Jack Friedman JAKK selling at 9.2x earnings, with $5.81 per share in cash

  14. LOOKING BACK: 1982 VS. TODAY’S MARKET Valuation (S&P 500)1982 10/31/04 • P/E 8.3x 17.2x • P/B 1.1x 2.8x • Yield 5.6% 1.9% • Market Capitalization/GDP 40.2% 89.2% Interest Rates1982 10/31/04 • Fed Funds Rate 13.1% 1.75% • 90 Day T-Bill 11.1% 1.9% • 10-Year Treasury Bond 14.0% 4.1% • Unemployment Rate 8.5% 5.4% Market valuations are higher today. Interest rates are at historic lows. Source: BHMS and Ned Davis Research

  15. S&P500RETURNS BY THE DECADE (%/YEAR) Investment Return = + or - + or - Dividends Earnings Growth Valuation Source: Bogle Financial Markets Research Center Next Decade 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s AVG. (“Reasonable Expectations”) Investment Return 9.1 3.9 15.1 -0.8 8.9 20.1 8.1 6.1 17.3 17.8 10.1 5.1 • At the outset of the decade, reasonable expectations for earnings growth and P/E levels suggested an average total return of approximately 5%.

  16. APPLYING THE INVESTMENT DISCIPLINE • Buy Companies For Less Than They Are Worth • Know Your Downside • Have Patience • Don’t Forget to Watch the Ducks • Look Where Nobody Else Is Looking

  17. LOOK FOR IRRATIONAL SELLERS • BUSTED DEALS - CMCSK • NEGLECTED - FUN • COMPLICATED - CD • OBSCURE - BG • SCARY - JAKK • MISUNDERSTOOD - NWS • SPIN-OFFS - FO

  18. All were temporarily out of favor! Texaco Pepsi Sears Chase Manhattan Restaurants Bankruptcy Management Credit Crisis Union Carbide Northeast Utilities Halliburton Bhopal Exxon NRC Issues Collapse of Oil Prices Valdez American Express Management Boston Tea Party Waste Management Pfizer UST Coca Cola Shiley Heart Valve Accounting Irregularities Tobacco Litigation New Coke WHAT DO THESE HAVE IN COMMON?

  19. HOW TO GET RICH IN THE NEXT 25 YEARS EQUITY INVESTMENT PRINCIPLES • Never Trust A Brokers’ Advice You are just below them on the food chain • Be Careful When Buying Stocks Whose CEO’S Are Building Homes, Buying Ranches, Naming Stadiums and Building New Headquarters ENRN TYC WCOM AOL • Spin-offs Almost Always Work KFT / FO • Watch the Covers Time Magazine - Jeff Bezos / Business Week - The Death of Equities

  20. HOW TO GET RICH IN THE NEXT 25 YEARS EQUITY INVESTMENT PRINCIPLES • Look For Insider Buying / Selling Very scary-can’t find any buyers these days. • Proven Winners in Management Are Good Bets – Norm Wesley, Rubin Mark, everyone at WalMart & Sysco • Trust Your Instincts - Don’t Look For Confirmation From Your Friends • My First Manhattan Guru - If you buy 100 shares in a company, would you buy the whole company?

  21. VALUATION DOES MATTER! Pebble Beach Golf Course Sold 1990 $840 Million Sold July 2000 $820 Million

  22. THANK YOU

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