Student Managed Fund

1

• Student Managed Fund

Investment Process Presentation December 12, 2006
2

• Arnone-Lerer Social Responsibility Fund
• Undergraduate Students

3
Overview

• Business Cycle Analysis
• Social Responsibility
• Industry and Sector Analysis
• Security Analysis
• PMSP Portfolio Analysis
• Technical Analysis and Exit Strategy
• Performance Reporting

4

• Business Cycle

Richard Greiner Kate Washburn
5
Business Cycle Analysis

• We use a Top -Down investment approach that
  begins with business cycle analysis
• Define stages of the Business Cycle
• Identify current stage
• Identify industries/sectors that historically
  perform well
• Security Analysis
• Monitor economy for change in stage

6
Define Stages of Business Cycle

• 5-Stage Business Cycle
• Lacy Hunt
• QInsight
• Stages last an average of 6-18 months
• Determine stage based upon economic indicators
• Data signals cycle transition and investment
  direction
• Not Market Timing

7
Five Stages of Business Cycle

• Ease-Off
• Slowing growth
• Plunge
• Negative growth
• Revival
• Recovery begins
• Acceleration
• Strong growth
• Maturation
• Growing too fast

8
Identify Current Stage

• Identify the trends of individual indicators
  compare to trends of other indicators
• Q-Insight conference calls
• Government statistics
• Ease-Off Period where Fed is tightening to
  control inflationary pressures and slow economic
  growth
• Trends to observe
• GDP growth rate
• Inflationary Expectations
• Labor Market

9
Economic Summary

• Red Flag GDP has been experiencing decline in
  growth quarter to quarter
• Low forecasts for non-farm payrolls continues
• Crude-oil prices decline
• The Fed holds rates steady
• Housing market continues to cool off
• Credit quality falls, defaults on the rise

10
Monitor Economy

• Continue to track trends and changes in economic
  indicators in order to anticipate change in
  business cycle
• Monitor and Evaluate
• Peak in Federal Funds Rate
• Increase in monetary base
• Observe any bias of Fed from tightening to
  stimulating
• Attend weekly Q-Insight conference calls
• Possible soft landing

11

• Social Responsibility

Erin Garrett Gina Domenick
12
Socially Responsible Investing

• What?
• Integrates social and environmental issues within
  the context of rigorous financial analysis
• As a University, continue the rich tradition of
  Catholic social teaching and values
• Why?
• Avoid companies detrimental to society
• Reward companies
• Comparable return

13
Steps to SRI

• 1.) Read the Arnone-Lerer Investment Policy
  Statement (IPS) and Catholic Bishops Statement
• 2.) Reviewed screens from past years
• 3.) Ranked criteria
• 4.) IWFinancial for Social Responsibility
  Rankings

14
USCCB Investment Importance Criteria
15
Summary of Rankings
16
Example American Express (AXP)
17

• Industry and Sector Analysis

David Grimner
18
Ease-Off Top Performers

• Biotechnology
• Tobacco
• Health Care Equip/ Supp
• Pharmaceuticals
• Airlines
• Food Staples Retailing
• Software
• Commercial Banks

• Health Care Providers
• IT Services
• Electric Utilities
• Computer Peripherals
• Aerospace Defense
• Construction/Engineer
• Gas Utilities

19
Analysis of Top Performers

• Eliminate industries that conflict with social
  responsibility profile
• Tobacco
• Research the top performing industries
• Valuation characteristics
• Ratios, recent performance, growth aspects,
  over/undervalued, out of favor, recent news and
  developments
• Find the best industries

20
Arnone-Lerers Current Industries

• Healthcare Facilities
• Healthcare Equipment
• Utilities Gas
• Biotechnology
• Environmental Services
• Pharmaceuticals

• Banks
• Retail
• Consumer Finance
• Aerospace
• Media
• Insurance
• Healthcare Services

21
Cross-Stage Diversification
22

• Fundamental Analysis

Mark Wyand
23
Fundamental Analysis

• Stocks assigned based on sector
• Modified templates from last year
• Significantly increased efficiency
• Balance sheets, income statements, cash flow
  statements from Market Insight
• Once inputted into template, company data yielded
  various performance and health indicators

24
Output Summary
25
Fundamental Analysis

• Securities were eliminated for various reasons
• P/E ratios
• Low bond ratings
• DuPont ratios that demonstrated weakness
• Unhealthy Altman Z-scores
• Example Manufacturing below 1.81
• Z-scores not applicable for all stocks

26
The Final Decision

• Fundamentally sound stocks then discussed
• Qualitative analysis
• Current events, news
• Analyst reports
• Pipeline products/services
• New market penetration
• Once approved, PMSP

27

• PMSP Portfolio Analysis

Graham Holding
28
PMSP Software

• Portfolio optimizer and portfolio heuristics
• Uses a Lower Partial Moment Heuristic to
  determine portfolio allocations
• Used industry returns as a basis for analysis
• Began with 65 companies
• Used the Nawrocki LPM Heuristic to find a set of
  recommended portfolios

29
Optimal Portfolio
30
Optimal Portfolio (cont.)
31
Rebalancing for Residual Cash
32
Investment by Sector
Investment at inception 126,805
33

• Technical Analysis and Exit Strategy

Adam Dekel Ryan Gilligan
34
Group Structure

• Tech Group advises class on technical strategies
  and execution
• Responsibilities include
• Monitor analysis and progress
• Address and questions or issues
• Update class on new concepts

35
Objectives

• The Language of the Fundamentals
• Discover profitable entry and exit points
• Find significant technical changes to current
  holdings
• Document and analyze past recommendations for
  accuracy to determine value of technical analysis

36
Methodology

• Support and resistance discovery
• Trend analysis
• Risk/Reward ratio
• Adapt to price changes

37
Entry and Exit
Sell (ROST)
Buy (PCP)
38
Exit Strategy

• Utilization of stop losses monitor profit
  targets
• Triple check
• Scenario analysis
• Ensure adherence to policy statement

39

• Fund Performance

Jacklyn Schutz
40
Performance Reporting Process

• Weekly performance compared to benchmarks
• Criteria of stocks in portfolio
• Minimum market capitalization of over 1 billion
• Stock price above 10/share
• Weight of 7 or less of overall portfolio value
• Stay within social responsibility screen

41
Performance Report 12/8/06
42
Arnone-Lerer 2005 vs Arnone-Lerer 2006

• Overlapped
• Invitrogen Corp (IVGN)- bought 14 additional
  shares
• AGL Resources (ATG)- sold 8 shares
• Genentech (DNA)- sold 12 shares

43
Student Managed Fund

• George Coleman Fund

44

• International ETFs

Chris Shields Katie Martin
45
Investment Vehicle iShares

• Exchange Traded Funds
• Investment Policy Statement
• Liquidity
• Flexibility
• No-load
• Diversification
• iShares
• Greatest Flexibility
• Large Selection
• Historical Data

46
Investment Selection Process

• First Screen
• Macro View of Country
• Political Unrest
• Currency Valuation
• SRI Screen
• Second Screen
• Macro Economic
• Economic Strength
• Industry Concentration
• Economic Forecast
• Mean Variance Analysis

47
International iShares

• Forty-five Possible Funds
• Exclude Global Regional Funds
• Drop South Africa Mexico
• Thirty-two Remaining Funds
• Hong Kong Real Estate 34.4
• France Correlation to Germany
• Eight Remaining Funds
• Forecast Growth

48
Current Holdings

• Australia
• Austria
• Canada
• Germany

• South Korea
• Spain
• Sweden
• Switzerland

49
Individual Performance
50

• Domestic ETFs

Jon Greenwald Ipek Kazan Raegen Richard
51
Global Insight

• Provides comprehensive economic, financial, and
  political analysis
• Over 200 countries and 170 industries
• Using expertise, models, data, and software
• Recognized as the most consistently accurate
  forecasting company in the world
• DataInsight
• Provides historical statistics
• Economic Indicators
• Financial Markets

52
Economic Analysis

• Exhaustive list of iShares
• Narrowed down to industries that did well during
  the plunge phase
• Historical performance of each
• Historical performance of top five holdings
• Examined industry performance in previous
  ease-off and plunge phases
• Focused on last two plunges
• September of 1998
• January of 2001

53
Plunge Industries

• Semiconductors
• Household products
• Financial Services
• Basic materials
• Telecommunications
• Consumer services
• General merchandise stores
• Home improvement retail

54
Social Responsibility
ARNONE 6.0 PROFILE
55
Social Responsibility

• Thresholds
• Not a specific benchmark
• Looked over the companies and allowed maximum
• 10 of the portfolio does not comply with SRI

56
ETF Composition
57
ETF Composition
58
ETF Composition
59
ETF Selection
60
Dow Jones U.S. Basic Materials
61
Dow Jones U.S. Consumer Goods Sector
62
Dow Jones U.S. Consumer Services Sector
63
Dow Jones U.S. Financial Sector
64
Goldman Sachs Semiconductor Index
65

• Compliance

Trent Musso
66
George Coleman Fund

• 50 International Investment
• Maximum initial investment in one country limited
  to 20 of total international investment
• Rebalance investment after 25 change
• Ex. Rebalance investment to 20 when it reaches
  25
• 50 Domestic Investment
• Maximum initial investment limited per sector to
  20 of total domestic investment
• Rebalance investment after 25 change
• Ex. Rebalance investment to 20 when it reaches
  25

67
George Coleman Fund
68
George Coleman Fund
69
George Coleman Fund
70

• Performance

Ryan Reko
71
Portfolio Value
72
Performance Ratios

• Sharpe Ratio
• Benchmark 3.69
• Coleman Fund 5.51
• Sortino Ratio
• Benchmark 4.49
• Coleman Fund 5.19

73
Coleman Fund International
74
Coleman Fund Domestic
75
Portfolio Performance
76

• Questions

77

• VILLANOVA
• EQUITY SOCIETY

Thomas Mazzaferro Nick Carosella
Christopher Mazza Andrew Robinson
Inauguration of the Christopher Haley Fund
78
Mission Statement

• Our mission is to provide opportunities for
  students interested in obtaining real-world
  investment experience.  Analysts perform in-depth
  analysis of equity securities while utilizing the
  Villanova School of Business and the new Applied
  Finance Lab. 

79
Organizational Structure
80
Society Leadership

• Operating Committee
• Controls all day to day aspects of the society
• Schedules meetings, events, speakers, and trips
• Handles all school related business
  administrative work
• Budget, meetings with dean, meetings with student
  senate board
• Investment Committee
• Through SMF and equity society, control and run
  the large-cap and mid-cap fund
• Train analysts and sector captains on fundamental
  and technical analysis

81
Analysis

• Top-down fund approach to determine weightings
• Use IW-Financial to insure compliance with SRI
  profile
• Pick stocks through fundamental research
• Use technical analysis to determine enter and
  exit strategy
• Use buy-limits to enter and stop-losses to exit
• Use PMSP to determine optimal portfolio

82
Evaluation Techniques

• Value Investing
• Business Overview
• Business Environment
• Fundamental Analysis
• Relative valuation
• Comparative Analysis to industry
• Recent Developments
• World News

83
Funds

• Large Cap received 100,000 in the fall
• Majority invested by November
• Mid Cap will receive 100,000 at the start of the
  Spring semester
• Should be totally invested by mid Feb.

84
Stock Criteria

• Stocks need to be listed on US exchanges
• This can include ADRs (American Depository
  Receipts) of foreign based companies
• Securities need to have a 20 day moving average
  of 250,000 shares or more
• Large Cap Restrictions
• 5 Billion market cap or greater
• Mid Cap Restrictions
• 1 - 10 Billion in market cap
• Some overlap with Large Cap

85
Stock Price Restrictions

• Cannot buy security under 10
• Larger bid and ask prices
• If a security drops below 10, review required

86
Analysis of Companies

• Understanding companies major products,
  services, competitive advantage, and what
  economic trends affect performance
• Financial statements of companies growth rate of
  revenue, cash flow, and margins (est. future
  growth rate)
• Evaluate P/E of company compare to industry

87
Financial Modeling

• Wall Street database listing US companies
• Separate list into 5 sectors and then divide into
  sub-sectors
• Database updated live via Reuters
• Identify undervalued stocks with above-average
  growth

88
Social Responsibility

• Analysts initially choose 100 stocks over all
  sectors
• Screened via IW Financial
• Using SMF profile
• Also utilize news to further screen companies
• End with about 50 stocks

89
Optimization

• Same PMSP procedure as Arnone Coleman funds
• Nawrocki Heuristic
• Final Portfolio 30-35 stocks

90
Rebalancing

• Limit initial investment of 5 for each security
• Must rebalance if security reaches a portfolio
  weighting of over 7
• Initial investment of each sector need to be
  limited to 25 and rebalanced if over 35
• Sub-industry investment limited to 12.5 and
  rebalanced when 15 is reached

91
Large-Cap Portfolio

• Large-Cap
• Total 102,615.77
• Performance Since Inception (11/8) 2.62
• Domini 400 Gain 1.47
• SP 500 Gain 2.10

92
Large-Cap Portfolio
As of December 8, 2006
93
(No Transcript)
94
(No Transcript)
95
Mid-Cap Portfolio

• Mock Portfolio
• Same restrictions as large-cap fund
• Not optimized (stock selections tentative)
• Total Value 103,051.56
• Percentage Gain 3.75
• Will be used as a basis for real fund
• Benchmarked by Russell 2000
• 4.09 same-period return

96
Pending rebalancing of energy sector due to
growth
97
(No Transcript)
98
Questions