Student Investment Management SIM Program

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• Student Investment Management (SIM) Program

Steve Condon Hiren Ghala Sanjay Gupta Mary Kanet
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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Objectives

• Capital Appreciation
• Outperform the SP 500
• Capital Preservation
• Control risk to ensure the continued existence of
  the portfolio and program
• Education
• Gain a deeper understanding of portfolio
  management

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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Investment Philosophy
Frequently, the Market Imperfectly Absorbs and
Responds to Available Information Creating
Inefficiencies

Fundamental Analysis (Top-Down/Bottom-Up) (What
to Buy?)

Quantitative Analysis (Tools to Utilize in
Analysis?)

Technical Analysis (When to Buy?)
of
Large Capitalization/Growth Stocks

Diversification

Portfolio Success
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Philosophy Reducing Risk

• Large Capitalization Stocks (primarily)
• More diversified and higher quality companies
• More information available
• Growth (primarily)
• Stories cleaner
• Faster realization of catalysts
• Diversification
• Invest in all sectors
• Business, financial and valuation analysis of
  sectors and stocks

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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Performance
Periods ending 1Q 2003
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Performance
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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Portfolio Overview

• Initial Investment 5 Million Feb 1990
• Portfolio 14.6 Million Apr 2003
• Assets 97.5 Equity, 2.5 Cash
• Style 86 Large Capitalization
• Sector Ten Sectors
• Stock 40 Stocks
• Lower Valuation, Higher Growth than SP 500

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Overview Style Allocation

• 86 of Portfolio Large Capitalization Stocks
• Growth Only Slightly More than Value Because of
  Recent Value Purchases (MCD)

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Overview Sector Allocation

• Financials Largest Sector Concentration

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Overview Sector Allocation
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Overview Stock Allocation

• Top Ten Holdings 46.9 of Stock Holdings
• Higher Growth, Higher Profitability, Lower
  Valuation than SP 500
• Similar Size and Yield as SP 500 Companies

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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Investment Process

• Good Portfolio Management Requires a
• 30,000 ft Overview and a
• Ground Level View

30,000 ft
Economy
Asset
Style
Sector
Industry
Stock
Ground level
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Investment Process

• Different Stages of Analysis

• Importance in Division of Labor

• Importance of Value Added

• Degree of Difficulty is Consistent with the
  Levelof Added Level

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Investment Process

• Class Debate on Economic Outlook

• One Team is Responsible for the Economic Outlook
• Outlook Determines Agenda for the Asset, Style,
  and Sector Analysis

• Class Debates on Sector Bets

• Ten Sectors and Multiple Teams
• Industry Bets Determined by Sector Teams
• (Subject to Class Approval)

• Sector Teams Recommend Stocks within the 10
  Sectors

• Class Debates on Stock Bets

• Class Trades Stocks

• Timing Determined by the Class
• One Sector Team is Responsible for Trading Stocks

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Outline

• Objectives
• Investment Philosophy
• Performance Review
• Portfolio Overview
• Investment Process
• Strategy Implementation (with Examples)

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Strategy Implementation
Multi-faceted Approach with Every Area Confirming
or Rejecting Each Conclusion

• Fundamental (What to Buy?)
• Top-Down Determines Asset, Style, and Sector
  Outlooks
• Bottom-Up Determines Stock Bets within Sectors

• Quantitative (How to Analyze Factors?)
• Determines Appropriate Tools (Business,
  Financial, and Valuation) to Apply to
  Growth/Value Stocks

• Technical Analysis (When to Buy?)
• Helps with Timing
• Tells When Market Recognizes Catalysts

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Strategy Implementation
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Strategy Top-Down

• Top-Down Fundamental Analysis Determines the
  Phase of the Economy
• Quantitative Analysis Determines the Best Asset,
  Style, and Sectors To Buy During the Four Phases
  of Economy
• What Asset, Style, and Sectors to Buy is Based
  on a Combination of Top-Down Fundamental and
  Quantitative Analysis
• Technical Analysis Determines When the Market
  Recognizes the Catalysts Uncovered from
  Top-Down Fundamental Analysis

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Strategy Top-Down
Natural Resources
Physical Capital
Technology
Labor Force
Potential Output
Consumer Demand
Unemployment Rate
Embedded Inflation
Business Demand
Output Gap
Output (GDP)
Government Demand
Net Foreign Demand
Inflation
Change in Inventories
Inflation Premium
Demand for Liquidity
Federal Reserve Policy
Interest Rates
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Strategy Top-Down (Economy)
Percentage Change in GDP (1Q994Q02)
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Strategy Top-Down
Natural Resources
Physical Capital
Technology
Labor Force
Potential Output
Consumer Demand
Unemployment Rate
Embedded Inflation
Business Demand
Output Gap
Output (GDP)
Government Demand
Net Foreign Demand
Inflation
Change in Inventories
Interest Rates
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University of Michigan Consumer Sentiment
Strategy Top Down (Consumer)
Percent Change of Personal Consumption
Expenditures

• 2002 Actual
• 2.5 up
• RDPI 6 up
• Reconciliation Act
• Residential Investment
• 2003 Estimate
• 2.0 up
• Fiscal/Monetary policies

• 2002 Actual
• Up/down
• Equity Prices
• Low but ok

• 2003 Estimate
• Improve
• War/Uncertainty
• Positive impact

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Strategy Top Down (Business)
Percent Change in Business Investment

• 2002 Actual
• 5.7 down
• Corporate Scandals
• Geopolitical Concerns
• Hi -Tech Vs. Airline
• 2003 Estimate
• Turning Around
• Inventories, Taxes, War

Recession
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Strategy Top Down (Government)
Percent Change in Government Expenditure

• 2002 Actual
• 4.4 up
• Investments and Taxes
• Defense and Medicaid
• Security Home Income
• Present War/Taxes
• 2003 Estimate
• Increase Demand

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Strategy Top Down (Net Foreign)
Percent Change in Net Exports

• 2002 Actual
• 17 down
• Trade Deficit 44.2B
• Dollar Overvalued
• 2003Estimated
• Cut 0.25 GDP
• Further Weakening

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Strategy Top Down (Inventories)
Change in Inventories

• 2002 Actual
• 108 up
• Business expansion/taxes
• Restocking till Fall
• 2003 Estimate
• Increase Inventory levels
• Lean Inventories/Sales
• Increase in Business

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Strategy Top-Down
Natural Resources
Physical Capital
Technology
Labor Force
Potential Output
Consumer Demand
Unemployment Rate
Embedded Inflation
Business Demand
Output Gap
Output (GDP)
Government Demand
Net Foreign Demand
Inflation
Change in Inventories
Interest Rates
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Strategy Top Down (Unemployment)

• As of March 2003
• Unemployment at 5.9
• Output gap slack
• manufacturing durables
• construction
• Reservists on active duty
• Extended benefits unclear
• 2003 Estimate
• Unemployment at 5.6

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Strategy Top Down (Inflation)
Consumer Price Index (Monthly Increase)

• 2002 Actual
• 1.6
• Productivity
• impacts
• 2003 Estimate
• 1.5

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Strategy Top-Down
Natural Resources
Physical Capital
Technology
Labor Force
Output Gap
Inflation Premium
Demand for Liquidity
Federal Reserve Policy
Interest Rates
Interest Rates
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Strategy Top Down (Fiscal/Monetary)

• Fiscal Policy
• Government spending
• Tax cuts

• Monetary Policy
• 2002A FF rate
• 2003E 0.25bps

Fed Receipts and Expenses
Fed Funds Rate
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Strategy Top-Down
Natural Resources
Physical Capital
Technology
Labor Force
Output Gap
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Strategy Top Down (2003 Projections)
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Strategy Top-Down
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Strategy Top-Down

• Evidence Soft Landing Moving to Recovery
• Stock Market Outlook
• Positives Low Interest Rates, Rising Earnings
• Negatives Uncertainty High
• Positive/Subdued Outlook for Stock MarketCash
  Position is Low
• Style
• Growth/Large Best During Periods of Falling Rates
  and Sluggish Economy
• Current Outlook Positive for Chosen Large/Growth
  Style, Moving Away Later this Year
• Sector
• Defensive/Growth Best (Cyclical/Value Worst)
  During Periods of Economic Sluggishness
  (Recovery)
• Moving Toward Underweight Consumer Staples
• See One Pager

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Consumer Staples 9 of Benchmark and Under-Weight
in Portfolio Because of Deteriorating Relative
Fundamentals and Unattractive Valuation
One of Ten Sectors in SP 500 (the Benchmark)
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Strategy Implementation
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Strategy Bottom-Up

• Bottom-Up Fundamental Analysis Determines What
  Stocks to Buy in each SectorBuy Fear (Cheap
  Catalyst Imminent) and Sell Greed (Expensive
  About to Fail)
• Quantitative Analysis Determines the Factors
  (Business, Financial, Valuation) To Utilize for
  Analysis of Each Sector
• Technical Analysis Determines When the Market
  Recognizes the Catalysts Uncovered from Bottom-Up
  Fundamental Analysis

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Strategy Bottom-Up

• The Goal of Stock Analysis is to Find the
  Outliers
• Stocks within Industries and Industries within
  Sectors Tend to Move Together
• Buy/Sell Stocks that will Rise/Fall More than the
  Industry and Sector
• Growth and Value Stocks Analyzed Differently
• Business, Financial, and Valuation Factors
  More/Less Important Based on Type of Stock
• Underweight Consumer Staples (Top-Down), but
  Overweight Walgreen (WAG) within the Sector
  (Bottom-Up), a Company that Exhibits Growth
  Characteristics
• Style Characterization Important Because Styles
  Move In/Out of Favor

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Strategy Bottom-Up
Business, Financial, and Valuation Factors
More/Less Important Based on Stock
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What Time Is It?
What Time is It?
3
9
3
9
6
6
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Strategy Bottom-Up
Walgreen (WAG) Exhibits Growth Characteristics
It Is 900!
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Walgreen (WAG) 2 of Portfolio Because of Strong
Fundamentals
One of Four Stocks in Consumer Staples
Under Weight Consumer Staples Because of
Improving Economy
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What Time is It? Multi-faceted Approach
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• Student Investment Management (SIM) Program

Steve Condon Hiren Ghala Sanjay Gupta Mary Kanet