Muhlenkamp Fund

For the period ended 06/30/13

Investment Adviser
Muhlenkamp & Company, Inc. 5000 Stonewood Drive, Suite 300 Wexford, PA 15090-8395 (877)935-5520 www.muhlenkamp.com

Objective
Seeks to maximize total return to its shareholders through capital appreciation, and income from dividends and interest, consistent with reasonable risk.

Strategy
Invest in the common stock of highly profitable companies, as measured by Return on Equity (ROE), that sell at value prices, as measured by Price-to-Earnings Ratios (P/E).

General Information
Style All-Cap Inception Date 11/1988 Ticker Symbol MUHLX CUSIP 962096103 Minimum Initial Investment $1,500.00 Sales Charge None Expense Ratio 1.26%
Or

Portfolio Manager
Ronald H. Muhlenkamp, CFA, has been active in professional investment management since 1968. He is a graduate of both M.I.T. and the Harvard Business School.

Vested Interest
The majority of Mr. Muhlenkamps long-term investment assets are invested in the Muhlenkamp Fund.

Top Ten Holdings

% of Net Industry % Company Industry Assets of Portfolio

$200 if the Automatic Investment Plan (AIP) is chosen. Automatic Investment Plans do not assure a profit and do not protect against a loss in declining markets. Although the Fund is no-load, investment management fees and other expenses still apply. Please refer to the prospectus for further details.

Alliance Data Systems Corporation JPMorgan Chase & Co. Philip Morris International, Inc. Microsoft Corporation Sonic Automotive, Inc. - Class A State Street Corporation Westport Innovations, Inc. Halliburton Company Oracle Corporation Celgene Corporation

IT Services Diversified Financial Services Tobacco Software Specialty Retail Capital Markets Machinery Energy Equipment & Services Software Biotechnology

6.35 4.71 4.57 4.47 4.29 4.15 4.04 3.72 3.37 3.20

6.4 7.9 4.6 7.8 6.1 4.2 4.0 4.1 7.8 7.7

Fund Facts
Number of Equity Holdings 42 Total Net Assets $456,072,187.57 Average ROE 15.89% Long-Term Earnings Growth 16.20% Average P/E 16.19 Portfolio Turnover (2012) 38.09% Source: Bloomberg as of 06/30/13 Note: Average ROE and P/E have been adjusted to provide a more meaningful valuation. Audited Return on Equity (ROE) is a companys net income (earnings), divided by the owners equity in the business (book value). Price-to-Earnings Ratio (P/E) is the current stock price divided by the earnings per share. Long-Term Earnings Growth is not a forecast of the Funds future performance.

Fund holdings are subject to change and are not recommendations to buy or sell any security.

AVERAGE ANNUAL RETURNS as of JUNE 30, 2013

Year to One Past 3 Past 5 Past 10 Past 15 Date Year Years Years Years Years Return Before Taxes 16.97% 24.34% 12.53% 4.31% 4.87% 5.11% Return After Taxes (1) 16.97% 22.60% 12.00% 3.99% 4.40% 4.70% Return After Taxes (2) 9.60% 16.42% 9.92% 3.41% 4.10% 4.29% S&P 500*
(1) Return (2) Return

13.82% 20.60% 18.45% 7.01%

7.30% 4.24%

after taxes on distributions** after taxes on distributions and sale of Fund shares**

Performance data quoted, before and after taxes, represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data shown is current to the most recent quarter end. * The S&P 500 is a widely recognized, unmanaged index of common stock prices. The figures for the S&P 500 reflect all dividends reinvested but do not reflect any deductions for fees, expenses, or taxes. One cannot invest directly in an index.

** After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your situation and may differ from those shown. Furthermore, the after-tax returns shown are not relevant to those who hold their shares through taxdeferred arrangements such as 401(k) plans or IRAs. Quasar Distributors, LLC., Distributor 07/13

Amended Transcript
Muhlenkamp & Company, Inc.
July 11, 2013 / 4:15 p.m. ET SPEAKERS Tony Muhlenkamp, Executive Vice President Ron Muhlenkamp, Founder, President, and Portfolio Manager PRESENTATION Tony Muhlenkamp Good afternoon, everybody. Ill be hosting the call with my father, Ron, the President and Portfolio Manager of our firm. I suspect most of you have been on one or two of these conference calls before, so youre familiar with the people and the format. What were going to do is spend a little time with Ron, getting his big picture, an overview pick up on some of the themes that are continuing, and review what has changed since the last time we spoke. Then Im going to ask him to take a look at the companies we own within our top ten holdingsgive us the rationale, what hes seeing with those companies, and how they reflect those themes. Then, well have some time for questions and answers. A lot of what well be talking about with you, youll be able to review online. To prepare for this call, I always review our quarterly newsletter, as well as any transcripts of our seminar and past conference calls. Once again, a lot of what well talk about today, youll be able to go back and flesh out if you go to our website and browse around. If you still have questions, by all means, give us a call. So, Dad, with that all being said, what are the most interesting or significant things you see going on today and how has that changed from three or four months ago? Ron Muhlenkamp Ill start with the things that havent changed too much: 1. Europe is in recession. We really dont have a lot of interest in betting on Europe just yet. If your stomach is real good and you have a long-term perspective, you may start with the bottom fish. Our stomach is not quite that good. We do think we have long-term perspective, but, the long and short of it is, were not interested in Europe at the present time. 2. We were expressing some interest in China, but China is turning slower than we had thought, than a lot of people had thought. China is also trying to shift from an

infrastructure economy to a consumer economy. But, thats taken longer than anticipated, so we really dont have a lot of interest in China at the present time. 3. We do have interest in the United States. The United States economy continues to grow, but at a tepid rate. The first quarter was first estimated at a 2.4% growth in GDP (Gross Domestic Product); its since been revised to a 1.8 percent. The second quarter is looking on the order of a little less than 2 percent. So, the U.S. economy is growing, but its slow growth. In the U.S., we are seeing some pick-up in housing. We are seeing some pick-up in autos. But thats offset by very modest growth rates in a number of other areas. In the past, we talked about taxing the rich. If you substitute employers for the rich, you will understand why employment has not picked up and why capital spending has not really picked up. Most employers, when they see tax rates going up, healthcare costs going up, regulations going up, its not inducing them to hire more people or to expand their plant equivalent. Plus, of course, with the 2% GDP growth rate, we can usually get that out of de-bottleneckingwe really dont have to build a lot of new plants or hire a lot of new people. And employers arent. So, the economy remains slow. Its going to be interesting to see how second quarter earnings come through in a 2% growth-rate economy. We do think that any company that has revenue growth or earnings growth much over 5% will stand out. Were trying to identify those firms. Whats changed Whats happened in the last couple of months thats been most interestingand now were into the part thats changing (as to the part thats not changing) interest rates in the last two months have moved up about a percent: that is the ten-year Treasury has gone from about 1.6% to 2.6 percent. Mortgage rates have also gone up about a percent. Frankly, we think this is healthy. Those rates are not yet quite as high as they normally should be in an economy roughly at 2% inflation or at a 2% growth rate. Nevertheless, the fact that theyve moved up helps retirees, it helps pension plans, and we think it is fairly healthy. We saw that when rates moved up 1% in two months (particularly off a base of about 1.6% on a ten-year Treasury) its a huge move in the bond marketand we expected it to be disruptive in the stock market. It was, but the stocks, by and large, have recovered most of that. So, in our terms, we came halfway to normal in interest rates over a short period. The stock market seems to have absorbed that fairly well. We think interest rates, from an economic point of view, should move a bit higher. So, we still dont own any bonds. Were still not interested in owning bonds, but we do think the increase (in interest rates) has been helpful to retirees and to pension plans and, frankly, overall, its a pretty good thing.

We had said, the last couple of years, that we wanted to own companies with rock-solid balance sheets. So far this year, up until a month or so ago, high-yielding stocks did pretty good. For example, we had owned telephone (AT&T); we dont any longer. For the first time probably in my career, about two months ago, we said that the high-dividend yields had been done and we were more interested in owning companies with good cash flows, good earnings, and low dividend payouts. Today, Id rather own a company with a 3% or 4% dividend and a low payout than one with a 5% or 6% dividend and a high payout. The 5% or 6% dividends with high payouts, by and large, are utilities. They got hit when bonds got hit, as they were bought as bond substitutes. So, where people want yield or the security of having cash flows coming in, were still finding good, big companies with 3% or 4% dividend yields, but with a payout in the 30%-50% range, and that we think is still attractive. The markets are up 14%-15% as of the end of June year-to-date, which is quite good considering all of the macro concerns I addressed earlier. Were a bit ahead of that, running about 3% ahead of the S&P 500 Index. We dont expect to repeat that during the second half of the year (i.e. an additional 18% return), as we think its become a pick-and-choose market. On average, stocks are roughly fair [in price], given the economic growth and inflation. As I said, we think bonds are a bit overpriced. Interest rates are still a little bit below where they should be, but weve come halfway to normalizing that without the stock market getting hit drastically. Everybody knew it would take some hit. It looks like its absorbed that pretty well. So, thats pretty much where we are. We continue to shop for good companies. We still insist on good balance sheets, since we dont think the U.S. economy is completely out of the woods by any means. That remains true for the rest of the world economy. You all know the whole list of things that can hitand probably will over time. If several of them hit together, we can get a pretty good downdraft. If we work out of this on a gradual basis, the markets have a great capacity for absorbing things, provided they come in a sequential basis as opposed to all at once. But were relying on the companies we own, not on the markets per se. The Fed (Federal Reserve) has said it can reverse itself in 15 minutes when the data provides for it. But weve just seen that when the Fed said it might taper, the markets took a 5% hit. The rhetoric can change pretty quickly. So, the Fed has the capability of changing when things dowhether it has the political will to do so is a whole other question. Frankly, history would indicate the will is lacking. Tony Muhlenkamp You had said in the past that theres some evidence of the stock market getting ahead of the economythat with the Fed doing quantitative easing and keeping interest rates so low, a lot of the money was artificial. Im not sure you used the word artificial, but that prices were high, largely because there was a supply of money.

Am I hearing you say that were working through that, or is that still a concern? Ron Muhlenkamp Thats still a concern. Its a little less so as, so far, inflation hasnt kicked up, probably because were running below 80% of [industrial] capacity and because unemployment is fairly high. And, frankly, earnings have held up better than we somewhat expected. Companies are still being cautious. Theyve been threatened with higher taxes, higher regulations, higher energy bills Well, energy has its chance. If you want to get me bullish, lets talk about energy and talk about biotech. Tony Muhlenkamp Companies are still seeing a lot of regulations. They could see higher energy bills because the regulators arent getting out of the way Ron Muhlenkamp The intermediate questions are still there. As you know, most of what happens in economics is a tradeoff of the short term versus the long termand that remains. Tony Muhlenkamp Have the odds of a recession in the U.S. economy diminished? In November 2012, those odds were 50-50. At 2% growth, youre not concerned? Ron Muhlenkamp We (U.S. economy) are growing at a modest rate. My best guess is that we continue to do that. There are enough variables that, if two or three hit at the same time, it could change things. But, so far, my bet is were going to continue to grow at a modest rate. Tony Muhlenkamp So, youre focusing on companies that Ron Muhlenkamp My focus today is on individual company stock picking, as opposed to making overall bets. As a result: Weve written calls against some of the stocks that we own. Weve got two stocks that are selling at above 20 times earnings. They both got there exactly the right way. Their earnings ran up, but their stocks went up faster. We moved out of Intel just because it did what we wanted it to do. Our (Intel) cost is less than $15 per share, and we got $23 and change (per share) for it. PC sales are slow Frankly, I wouldnt mind if Intels stock price came down, and I got a chance to do it again. Im not a raging bull. Im a bit of a bear on the bond market. The move that weve had in interest rates and the markets response to it, both, I view as rather healthy.

Tony Muhlenkamp Is there any part of the bond market that you think has opportunity? Someone had asked about high-yield corporate bonds Is there anything? Ron Muhlenkamp No. Tony Muhlenkamp Its all subject to the interest rate? Ron Muhlenkamp Anything called high yield is also called junk. Those spreads dont cover. If you really want to do your homework, theres probably money to be made in municipal bonds, but one town is different than another, one authority is different from a general obligation You must do your homework. Tony Muhlenkamp Bond pick the way youre stock picking? Ron Muhlenkamp Yes. Youve got to spend as much time these days choosing the right municipals [bonds] as you would spend choosing the right stocks. Tony Muhlenkamp The phrase Ive used with some people is Which municipality would you be willing to lend money to today? And there may be some, but you need to think of it in those terms. Ron Muhlenkamp I wouldnt expect to find too many in Illinois or California. Harrisburg, PA is bankrupt. Choosing municipals is a minefield in the way that stocks have always been, but people are used to thinking of munis as safe. Dont rely on the ratings. Ratings are always behind the clock. Tony Muhlenkamp So, what would you recommend for income, if anything? Ron Muhlenkamp Im back to owning good companies with big cash flows, nice earnings, and low payouts. We still own GE (General Electric)we still own Philip Morris we still own Microsoft. As I said, we just sold Intel. Intel is not going out of businessthe stock may fluctuate, but the dividend is there.

Tony Muhlenkamp Ive suggested that people redefine their termspeople get hung up on the word income as opposed to cash flow or spending money. Ron Muhlenkamp We always think in terms of assets and spending money. If your assets are good, you can always get spending money. Tony Muhlenkamp So, youre not interested in bondsnot interested in Europe per se not interested in China Japanis there anything worth talking about with Japan right now? Ron Muhlenkamp If youre nimble and understand what happens with currencies Japans also had a pretty good run. Tony Muhlenkamp So, youre going to have to be a currency speculator to fundamentally invest? Ron Muhlenkamp People continue to confuse short-term political gains with long-term economic gains. Japan jumped on the same bandwagon as our Fed and the European Central Bank jumped on. We can put money into the system and it could carry us for a whilebut unless you change the underlying basic parameters and rules for the economyit wont help you for long. So, no, Im not interested in investing in Japan. If youre nimble and understand currencies, some people, Im sure, will make decent money trading securities in Japan. Tony Muhlenkamp Do you have any thoughts on what to look for in Japan or Europe that would suggest they are getting their acts together? Ron Muhlenkamp Less government spending. See, the other thing that happens is... Tony Muhlenkamp You mentioned government spending, too, at our last seminar. Ron Muhlenkamp When government spending crowds out private spending, even though government spending is included in GDP, it actually becomes a negative for the long-term goals of GDP. Its easy to boost GDP in the short term by government spending. But if it is

structured in a way that crowds out private spending and investment, it strangles you longer term. Tony Muhlenkamp Didnt GaveKal publish some charts and data demonstrating the negative correlations between government spending and GDP growth? Weve got that information on our website... GaveKal did a pretty decent job of documenting extents to which government spending over a certain level will erode GDP growth. Is that fair? Ron Muhlenkamp Yes, and its not much different from a familys perspective. If a family spends money on vacation, that short-term spending is good. If they take the same money and spend it on college education, it tends to do better things for the long-term prosperity. Tony Muhlenkamp Which is one of the reasons you continue to be disappointed that our federal government has not gotten a handle on its spending. Ron Muhlenkamp And, frankly, that tax receipts this year were above estimates because a fair number of people, including me, took capital gains last year on purpose. That gave tax receipts a boost this year, but it makes our current deficit look less than expected, which takes some of the pressure off of the politicians to fix the spending problems. Its an excuse to kick the can further down the road rather than solving the problem. That is the negative. The positive in all this is its still a relatively free economyand its very, very hard to shut down this relatively free economy. What every business owner, what every wage earner, is trying to do is produce goods and services to increase its own income, and that still is the underlying core of this. Its tough to shut that down. We came close to shutting it down in the 1970s with the inflation. Were trying to do it today through taxes and regulation. Thats a battle thats ongoing: how much of our economy remains free, how much of it gets strangled. So far, were getting 2% growth when we should have 4% growth, but that battle is not yet over. I dont know how this comes out. Tony Muhlenkamp Do you think unemployment in this country is a cause of or a result of this slow GDP? Ron Muhlenkamp As a result of it. At our seminars, I tell people that if you think unemployment is too high, go hire someone. The rules look a whole lot different to the employers than they look to the academicians.

Tony Muhlenkamp The question has to be: what are the incentives to hire right now, what are the benefits of hiring? Ron Muhlenkamp Normally, unless you can play sports very well or entertain very well, its very hard to make a lot of money in this country unless you hire people to help you do it. The reason I hire people is theyre going to make me money. If you tax away the money that Im making, I have no incentive to hire people. I hire people to save me time and make me money, which, after all, is the same thing. If that becomes too much of a hassle due to regulations, or if you tax away the profit due to the taxes, then theres no incentive to do it. Thats what every employer in the country is facing and thats why theyre not hiring. For four years, weve said that if you tax the employer, you will get less employment. And were doing itand were threatening to do more of it! And weve said for four years, we expect employment to be slow. To the extent that the economy is growing at all, it requires companies to spend their money on capital goods. Today, the cost of employment has gone up, and the cost of capital goods has gone down. Tony Muhlenkamp So, if someone asks, Whats the impact of unemployment on the economy?its the other way around; you have to reverse the question. Ron Muhlenkamp And what we [U.S. officials] were trying to do, despite our fiscal problem, was to put money into the economy on the premise that lower interest rates would encourage people to spend. Lower interest rates do not encourage retirees to spendand it puts a tremendous squeeze on pension plans. Tony Muhlenkamp And it doesnt really encourage businesses to go out and spend money on people [hiring]. It may help them spend money on their capital goods. Ron Muhlenkamp The argument is consumers will buy houses and cars. I know people who put off buying houses and cars, but not because the interest rates were too high. Its because they didnt know what the rules were. Tony Muhlenkamp They were uncertain of keeping their job or what have you. Ron Muhlenkamp Its exactly what happens in a recession. In a recession people fear that they might lose their job, so they work a little harder and spend a little less. After they do that for six months or a year and dont lose their jobs, they realize that their savings has built up. 8

Some lose their fear of losing their job and start spending a little more. They continue to work a little harder, and start to spend a little more. So, recessions tend to be selfcorrecting. Now, each time we have a recession, I ask what is different? What was different this time is we changed the rules for employers. We called it taxing the rich, but, by and large, its taxing employers and so theyve been slow to employ. That is not a surprise. Bernie Marcus of Home Depot has said he couldnt have co-founded Home Depot under todays rules. Ive said several times I could not have founded Muhlenkamp and Company under todays rules. Tony Muhlenkamp So, the federal government ought to be spending less. What should the Federal Reserve be doing? Ron Muhlenkamp The Fed should allow the interest rates to gravitate toward market rates. The Fed now calls this tapering. In my opinion, over time, the ten-year Treasury, which just went to 2.5%, might gravitate to 3.25% or 3.5 percent. Thirty-year bonds would be a little higher than that, and mortgages would be a little higher than 30-year bonds. Retirees have started thinking they could earn 3% or 4%, but what everybody is looking for is the safe investment that can earn 4% or 5% percent. They havent found it, which keeps them nervous, which means they dont spend money. Tony Muhlenkamp I met with a long-time shareholder this morning, who moved money to a broker in January. The broker had put her in corporate bonds that had 4% or 5% yields, which she thought were risk-free. And, in the last couple of months, shes lost money. Ron Muhlenkamp Because interest rates moved up a little bit. Tony Muhlenkamp A bit of a primer on how fixed income and bonds work. Thats the squeeze on retirees. She knows she cant put her money in a savings account at the bank, and wants something that wont lose her moneyand it is not to be found. Ron Muhlenkamp Our seminar in May we titled, The Big Squeeze: How Taxes Are Squeezing Your Income, How Interest Rates Are Squeezing Your Assets. In my opinion, in the last two months, interest rates have come about halfway to economic rates, as opposed to political rates, and the fact that the stock market absorbed that as well as it did is a great boon. 9

Tony Muhlenkamp It came as somewhat of a surprise to me. I dont know about you, but I thought wed see more slop over than we did. Ron Muhlenkamp When the Fed announced on May 22 that it might curtail its stimulus program, the markets went down because any investor, any money manager, assesses this change and asks, Where can it hurt me? And they respond, Ive got to get rid of investment where it could hurt me. Afterwards, you come back and ask, How can I take advantage of it? But the first thing you do is cover where you can get squeezed. So, when any change occurs in the rules, the initial response is a negative. The trouble is what the Fed seems to take away from this process is the immediate (negative) response. Rather than having even a two-week horizon where most of this behavior neutralizes itself, the great tendency by all the pundits is to respond to the immediate reaction. And if the Fed announcement occurs at 2:30 in the afternoon, as opposed to 5:00 on Friday afternoon (when you have the weekend to think about it), the initial response will always be negative. Tony Muhlenkamp Okay, lets turn to specific companies. What companies do you want to own? If we look at the top ten Ron Muhlenkamp Not much has changed, has it? There are a couple of themes that run through the top holdings: 1. We still want to own U.S.-based, worldwide financial firms like J.P. Morgan or Citigroup, but Citi doesnt happen to be in our top 10. And we still own State Street, which is a custodian bank as opposed to a commercial bank. 2. We still want to own big companies with rock-solid balance sheets. For example, we own GE, but its not in the top 10. We always want to own companies with good return on equity (ROE)and growth if we can find it at a decent price. 3. We still own Alliance Data Systems (ADS), which processes credit cards and mines the data. ADS has a multiple over 20 (P/E ratio). 4. We still own Philip Morris, which is a big heavy, if you will. 5. We still own Sonic Automotive, which is an auto retailer. We think that auto sales in the U.S. will continue to work their way back toward a 16- or 17-million car per year level. We like the auto retailers better than we like the producers, but we also own GM (not in the Funds top 10) as an auto producer, as the parts companies have run pretty good. 6. Weve made good money on biotech. Celgene has over a 20 multiple (P/E ratio), but its keeps announcing good news on a very frequent basis. Thats where we are... 10

Tony Muhlenkamp You mentioned that we own two companies in the top 10 with multiples (P/E ratios) over 20, Alliance and Celgene. And youre saying they got there the right way? Ron Muhlenkamp Every time these companies announce news, its good newsso Im willing to ride them. We scaled back a little bit, but Im willing to ride them as long as theyre doing that. Tony Muhlenkamp Lets talk a little bit about that (sales discipline) from a portfolio management standpoint Ron Muhlenkamp We like to buy good companies when theyre selling cheap. If the company does what we think, over time, the price should move up. When the price gets to something that we consider fair, well scale it back. By this time, however, its probably become an oversized position. Tony Muhlenkamp 5% or 6 percent? Ron Muhlenkamp Wed scale it back to probably no more than 5%and then we may still own it on the momentum. If the company keeps doing well, even if the P/E doesnt move up, it means the stock can move up. But when it gets to what we think is a fair price, well scale it back. If the momentum is no longer moving up, and either the price or, particularly, the earnings are flat, well sell. Tony Muhlenkamp Right now, Alliance Data Systems (ADS) is at 6% of assets in the Fund. Ron Muhlenkamp Yes. Tony Muhlenkamp If ADS were to appreciate to an 8% or 9% position in the next couple of months, youd scale it back to 3% or 4 percent? Ron Muhlenkamp ADS is getting close to what we consider fair value. That said, we have pretty good visibility that the next year or two will be strong for it. In contrast, Intels price got up to what we considered fair value, but we expected the next quarter or two to be weak, so we sold it.

11

Tony Muhlenkamp And if you get a chance to buy it [Intel]? Ron Muhlenkamp At $20 or less [per share], it will look good to us again. Tony Muhlenkamp Now, someone might accuse you of churning Ron Muhlenkamp We owned Intel for a couple of years; our portfolio turnover this year is running about 38 percent. Tony Muhlenkamp Okay, so were in decent shape there. Ron Muhlenkamp We call this a traders market. If you can get a long-term trend and own something for 10 or 20 years, thats ideal, but we can never see that far. What we try to do is buy good companies that are cheap today. Historically, thats worked out over a 3-5 year period, but Im not a slave to the calendar. Tony Muhlenkamp What Ive suggested to people is were trying to buy companies we think will be worth more three years from now than theyre worth today. In some instances, however, the company may be worth more three years from now than its worth today, even though the price may be the same. Ron Muhlenkamp That happens. Tony Muhlenkamp But if I can buy it for less than its worth today, Ive got a cushion and a real competitive edge. Is that still fair? Ron Muhlenkamp Thats what were trying to do and what weve always tried to do. Tony Muhlenkamp And the reason weve talked so much about the big picture is to make sure that theres nothing going on that would invalidate that approach. Ron Muhlenkamp Going way back to the 1960s, studies proved that 17 was the normal P/E (price-toearnings ratio) because thats where it had been for the prior 20 years. And then along

12

came 1973-74, and P/Es went to 7 in two years. We think that was totally justified by the fact that inflation ran up. In fact, we think the market lagged the realization of inflation. Every once in a while, this is just what happens. And, in fact, this recently happened: people thought that bonds were safe just because they were named bonds. Well, bonds that were safe when yields are 6% arent safe when yields are 4% because the Fed is pushing rates below economic levels. When that happenswhen circumstances changethe values change, and youve got to reflect that in what youre doing. Tony Muhlenkamp You said earlier, if you wanted to get you bullish on something, talk about energy. I see in our top 10 holdings, Halliburton and Westport Innovations. Ron Muhlenkamp Westport Innovations has a joint venture with Cummins. Westport makes the kits to convert diesel engines to run on compressed natural gas or liquefied natural gas. Waste management companies run garbage trucks using a nine-liter engine. Last year, something like 85% of waste management trucksand over 65% of all trucks for garbage haulers used compressed natural gas engines. Cummins and Westport just got approved a 12-liter engine to run on natural gas. (The over-the-road truckers use 12- and 15-liter engines. Until now, they have not had new engines of that size available to them.) In the meantime, T. Boone Pickens (Founder at BP Capital Management) helped start a company called Clean Energy, of which we owned a little. By the end of this year, Clean Energy will have filling stations at Flying J truck stops coast-to-coast on four different interstate highways every 250 miles. You couldnt last year, but, this year, you can buy a pickup truck that runs on compressed natural gas from GM, Ford, and Dodge. So, by the end of this year, whether youre driving pickups, or garbage trucks, or over-the-road trucks, you will have the filling stations available to you and you will have the trucks available to you. And it costs about half as much to fuel a truck with compressed natural gas as it does diesel. Depending on how many miles you drive, your payback may be in the range of 18 to 36 months. We think thats a pretty good dealand were trying to play that capability every way we can find it. Tony Muhlenkamp You talked about the spread between the prices of crude oil and natural gas and the energy content. Historically, theyve tracked very closely up until a year or two ago. Ron Muhlenkamp Until about 2009, about four years ago Now, natural gas is selling for about a third of the price of the equivalent. Tony Muhlenkamp So, that spread remains pretty...

13

Ron Muhlenkamp Very wide. Tony Muhlenkamp What are the other ways youre finding of playing this? Ron Muhlenkamp We own a couple of companies that drill for gas, we own some that frack for gas, and some focused on green energy. Tony Muhlenkamp How does Halliburton figure into all of this? Ron Muhlenkamp Halliburton is a drilling service company and the #1 company that fracks wells. Incidentally, weve got some white papers we wrote on natural gas from a consumer standpoint. The savings we figure on the average home in Pennsylvania is probably $500 a year. (Most homes use natural gas for heating.) Weve also published papers on the impact to the environment and the landowner. If youre interested in our white papers on natural gas, theyre available on our website, or give us a call. Tony Muhlenkamp What else can get you excited? Ron Muhlenkamp Biotechand whats happening with companies like Celgene and Covidian. Tony Muhlenkamp What does Celgene do? Ron Muhlenkamp Celgene provides therapies for the treatment of cancer and immune inflammatory diseases. Tony Muhlenkamp Weve got about ten minutes left. [Terry, why dont you go ahead and open up the lines for questions.] Ron, while hes doing that, how would you wrap it all up? Ron Muhlenkamp In the U.S., were on a collision course between what the economics are doing and what the politics are doing. We have time in this country to fix it. Were not France or Italy were not yet Greece, or Portugal, or Japan. Those countries are rapidly running out of time. Were slowly running out of time. So, those are the background In the meantime, the next three weeks will be dominated by revenue reports and earnings reports.

14

Tony Muhlenkamp There dont seem to be any questions from the call participants, but we did receive some questions in advance of this call. What about REITs? Ron Muhlenkamp REITs ran pretty good when people were buying yield. REITs have since corrected pretty good along with bonds. Anything that looks like a direct bond substitute got hurt when interest rates moved up. Residential real estate, frankly, still looks pretty good to us. Prices in Pennsylvania never really got hit. We said a year ago that if you were going to buy, that was the time. Today, prices are up and interest rates are up. Theres still probably room to make money on residential real estatebut look at it as a place to live, not a place to make money. Tony Muhlenkamp Sounds like its getting back to what I would call normal. Ron Muhlenkamp Weve come halfway back to normal in interest rates. That is a good thing. Tony Muhlenkamp Terry, do we have any questions? Coordinator Tony, we have no questions waiting. Ron Muhlenkamp Well, we either did a good job or we confused them. Tony Muhlenkamp If you think of a question later, send us an e-mail. I suspect most of you are acquainted with the folks in our Client Service Department. Reach out to them. Let them know what you thought, questions that we raised, questions that we didnt answer. Well be happy to go over anything that we can. Ron Muhlenkamp Thank you for your attention.

15