Ken Broad, CFA Vice President and Portfolio Manager

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Ken Broad, CFAVice President and Portfolio
Manager
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Agenda

• Macro View Review 2002 look ahead to 2003
• Transamerica Growth Opportunities investment
  strategy review and performance
• Looking ahead to 2003

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Macro View

• Review Expectations for 2002
• Short shallow recession ended
• Significant monetary fiscal stimulus to
  provide foundation for solid recovery
• Strong corporate bond performance

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Macro View

• Reality
• 1) Significant geopolitical turmoil
• - Anthrax fears still lingering at start of
  2002
• - US engaged in war in Afghanistan
• - Israel in heated battles with Arafat/PLO
• - Tension heating up between Pakistan India
• - Threat of war with Iraq
• - Asian destabilization due to North Korea

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Macro View

• Reality continued
• 2) Constant bombardment of financial scandals
• - Enron, Adelphia, Tyco, Qwest Worldcom
• - Arthur Andersen dissolved
• - Investment banks under investigation
• 3) Proliferation of Hedge Funds
• - Increased market volatility
• - Increasing negative rumors

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Macro View

• Results
• Equity markets experience most severe bear
  market since the 1930s
• Corporate bonds also turn in worst relative
  performance in the history of the bond
  market accompanied by the record volatility
• Both markets bottom October 9, 2002

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Macro View
Source ISI Group
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• Ken Broad, CFA
• Vice President and Portfolio Manager
• Transamerica Growth Opportunities

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Investment Philosophy

• Bottom-up fundamental analysis
• Seek opportunity in change
• Identify wealth-creating machines
• Free cash flow is what drives wealth creation
• Cash flow statement is a leading indicator
• Buy businesses, not securities
• Take concentrated positions
• Valuation matters
• Play to win, not to avoid losing!

Closet Indexing
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Risk Management
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Concentrated Portfolios Risk

• We believe that a policy of portfolio
  concentration may well decrease risk if it
  raises, as it should, both the intensity with
  which an investor thinks about a business and the
  comfort level he must feel with its economic
  characteristics before buying into it
• Warren Buffett

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Equity Selection Risk Management

• PORTFOLIO LEVEL
• Concentrated Positions Own fewer businesses
  but know them better
• Diversified Holdings Maintain sector diversity
• COMPANY LEVEL
• Operating-Focus on buffered business models,
  with variable cost structures, recurring revs,
  organic growth
• Financial-Focus on high ROIC and free cash flow
• Management Honest with aligned incentive pay
• Bottom-Line Seek favorable risk-reward tradeoff
  

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Low Turnover

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Quality vs. Quantity

• Make fewer, hopefully better decisions
• Growth Ops. Mid-Cap Growth Avg.
• of Stocks 27 ?
• x
• Turnover 23 ?
• New Ideas/Year 6 ?

The mid-cap growth fund average data comes from
Morningstar. The data for the Premier Growth
Opportunities Fund is as of 9/30/02
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Quality vs. Quantity

• Make fewer, hopefully better decisions
• Growth Ops. Mid-Cap Growth Avg.
• of Stocks 27 108
• x
• Turnover 23 ?
• New Ideas/Year 6 ?

The mid-cap growth fund average data comes from
Morningstar. The data for the Premier Growth
Opportunities Fund is as of 9/30/02
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Quality vs. Quantity

• Make fewer, hopefully better decisions
• Growth Ops. Mid-Cap Growth Avg.
• of Stocks 27 108
• x
• Turnover 23 157
• New Ideas/Year 6 ?

The mid-cap growth fund average data comes from
Morningstar. The data for the Premier Growth
Opportunities Fund is as of 9/30/02
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Quality vs. Quantity

• Make fewer, hopefully better decisions
• Growth Ops. Mid-Cap Growth Avg.
• of Stocks 27 108
• x
• Turnover 23 157
• New Ideas/Year 6 170

The mid-cap growth fund average data comes from
Morningstar. The data for the Premier Growth
Opportunities Fund is as of 9/30/02
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Pop Quiz

• Which Stock would you rather own?
• 2000A 2001E 2002E
• COMPANY A lt35gt EPS 1.20 1.84 2.21
• Growth Est. 19 P/E 29.2 x 19.0 x 15.8 x
• Op. Margin 12.0 P/E-to-Growth 1.0 x 0.8 x
• COMPANY B lt57gt EPS 1.52 1.85 2.20
• Growth Est. 21 P/E 37.5 x 30.8 x 25.9 x
• Op. Margin 7.5 P/E-to-Growth 1.5 x 1.2 x
• Which Business is a better Investment?

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Answer Insufficient Data

• You cant evaluate the attractiveness of a
  business without looking at cash flow statements
  and balance sheets!
• (Actual 2000 Results-Millions) COMPANY A
  COMPANY B
• Reported Net Income 43.8 83.0
• Cash Flow From Operations (1.0) 154.5
• Capital Expenditures (21.9) (28.7)
• Free Cash Flow (22.9) 125.8
• Net Cash (Debt) (76.5) 166.2
• Company B has vastly superior economics

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Pop Quiz Update
Company A -76 vs. Company B 6
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Expeditors International (a.k.a. Company B)

• Massive Market Opportunity Huge Growth
  Potential
• Expeditors has less than 5 market share of the
  100 billion global logistics market
• Low Financial Risk No Debt Self-financing
• Excellent cash economics have allowed 29
  organic CAGR in operating income since 1984. No
  need for Wall Street.
• Low Operating Risk Variable Cost Model
• Focus on internal growth and highly variable
  cost business model result in low risk profile
• Low Governance Risk Outstanding Management
• High proportion of incentive comp

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Sell Discipline

• We find a better idea our favorite reason
• Valuations defy logic
• Unexpected fundamental change
• Management change in strategy
• Portfolio Diversification

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Transamerica Growth Opportunities

• 10/1/1998 12/31/2002
• TA Growth Opportunities 14.79
• Russell 2500 Growth Index 0.79

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Transamerica Growth Opportunities

• Top Ten Holdings
• As of 12/31/02
• 1. Expeditors International 6. ServiceMaster
  Company
• 2. CH Robinson 7. EOG Resources Inc.
• 3. DeVry Inc. 8. Financial Federal Corp
• 4. Global Payments Inc. 9. Blackrock Inc.
• 5. Barra Inc. 10. Packaging Corp.
  of Amer.

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Investment Strategy Looking Ahead
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Fundamentals to Emphasize in Recessions

• Strong balance sheets
• Free cash flow generation
• Improving competitive position
• Internal growth instead of acquisition
• Why buy what you can kill? Expeditors CEO
• Attractive absolute valuation
• Trustworthy motivated management

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Bear Markets Recovery

• The Bear Years The Recovery Years
• Bear Market Years Left CAGR
  Next 5 Years Ending CAGR
• 1929-32 4 0.36
  -22.5 1933-37 0.70
  14.2
• 1939-41 3 0.79
  -7.5 1942-46 1.80
  17.9
• 1973-74 2 0.63
  -20.6 1975-79 1.25
  14.7
• 2000-02 3 0.56
  -17.6 2003-07 ?
  ?
• Source ISI Group

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What has changed?

• Dot.coms offered no return on investment
• Companies are not afraid of being Amazoned
• Valuations are more reasonable, but still high
• Significant excess capacity remains
• Geopolitical situation remains unsettled
• Post-bubble structural reform initiatives
• Options accounting, governance, dividend
  tax

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Market Fundamentals in 2000s

• Single-Digit earnings growth
• Single-Digit market returns
• Low inflation
• Rationalization of excess capacity
• Repairing leveraged balance sheets
• Multiples remain high due to low interest rates
• Less margin for error and inefficiency

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Bottom Line

• Put the Power of the Pyramid to Work for You!
• PERFORMANCE
• CONSISTENCY
• QUALITY
• FLEXIBILITY

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