Student Managed Investment Fund - 2012

transcript

Student Managed Investment Fund

Table of Contents

• Disclaimer

• FundBasics

• SMIF:AddingEducationalValue

• PortfolioManagement

• BuildinganEnduringFund

• Appendix

Disclaimer

ThisreportispublishedforeducationalandinvestmentpurposesonlybystudentsenrolledinAmericanUniversity’sStudentManagedInvestmentFund.Thisreportdoesnotcontaininvestmentrecommendations.AmericanUniversityanditsaffiliatesdonotacceptanyliabilityforanydirect,indirectorconsequentialdamagesorlossesarisingfromanyuseofthisreportoritscontents.Theinformationinthisreportwasobtainedfromsourcesbelievedtobeaccurate,butwedonotguaranteethatitisaccurateorcomplete.TheopinionshereinarethoseoftheAmericanUniversityStudentManagedInvestmentFundandaregeneratedforeducationalpurposesonly.

Fund Basics

Thank You to Our Donors

Wewouldliketothankthefollowingalumni,parents,facultyandfriendswhoprovidedinitialfunding,supplementingthatfromlegacystudentorganizationsandtheKogodoperatingbudget:

Anonymous(2)DeanJ.FactorKSB/BSBA’87andShannonFactorRichardP.GolaszewskiKSB/BSBA’07DorothyMatzaandRobertMatzaOyebolaOyedijoKSB/MBA’00DavidC.WajsgrasKSB/MBA’89andTeenaM.Wajsgras

Mission Statement

TheStudentManagedInvestmentFundisbuiltonAmericanUniversity’scorecommitmentsoffosteringresearch,interactiveteaching,andpracticalapplicationofknowledge.

TheFundseekstoprovidestudentsoftheKogodSchoolofBusinesswithreal-worldinvestmentexperiencethatenhancesandaddsvaluetotheiroveralleducation.

Inadditiontoitseducationalvalue,thisexperientiallearningclassismeanttobetterpreparestudentsforthehighexpectationsandrigoroftheworkingworld.

Fund Overview

• TheKogodSMIFisanupper-levelfinanceclassopentohighlycapablegraduateandundergraduatestudents.

• Approximately20studentstaketheclasseachsemesterfillingrolesthatrangefrombuy-sideanalyststofundmanagementpositions.

• Graduatesandundergraduatesworktogethertomanageanequityportfoliosharingtheirknowledgeandexperience.

• Fundingisprovidedbygenerousdonorsandinitialseedmoniesallocatedfrompredecessorstudentorganizations,andtheKogodoperatingbudget.

• SeeAppendixforabreakdownofatypicalclasssession.

Recent Pitches

• SMIFstructuresaredesignedtoprovidesafeguardssothatnooneindividualisresponsibleformakingormonitoringinvestmentdecisions.

• AllinvestmentdecisionsarereviewedbyanadvisoryboardofAmericanUniversityfinancefaculty.

• Companynewsandupdatesaremonitoredincoveragegroups.Executiveboardmembersprovideasecondlayerofcoverageforallholdings.

Checks and Balances

Investment Policy Statement

• ThefundinvestsinUS-tradedequities.

• Thefundstyleisablendofvalueandgrowth.

• Investmentsaremadewitha3to5yeartimehorizon.

• Eligiblefirmsmusthaveaminimummarketcapitalizationof$500million.

• Eligiblefirmsmusthaveaminimumsharepriceof$5.

• Nosinglepositionisallowedtocomposemorethan5%oftheoverallportfolio(excludingthecashposition).

SMIF: Adding Educational Value

• Conceptually,thefundactsasabridgebetweentheoryandpractice.

• Eachmembergraduateswithexperienceasabuy-sideanalystandpotentiallyexperienceinmanagement.

• Eachstudentwritesaminimumof1reportpersemesterandpresentstheinvestmentopportunitytotheclass.

• Additionaldeliverablesincludeindustryreports,amacro-economicoutlook,andasemester-endfundreport.

• Facultyplayalimitedroleallowingstudentstogainvaluablelessonsfrommistakesaswellassuccesses.

• Thefundiscompletelystudent-rungivingstudentstheopportunitytogainpracticalmanagementexperience.

Complementing a Kogod Education

Adding Value: Professional Guests

• Visitsfrompractitionersofferwindowsintocareersinthefinancialservicesindustry.

• Guestshelpillustratetheapplicationofdifferentapproachestoinvesting.-Activevs.passivemanagement-Managerselectionvs.securityselection

• Recentguestsinclude:-DennisGogarty,CFP–PresidentRaffaWealthManagement-BillMann,CFA–PortfolioManagerMotleyFoolFunds,SIS‘92-IraJersey–DirectorUSInterestRateStrategyCreditSuisse,SPA/SOC‘93-EricJ.Green,CFA–SeniorManagingPartner&DirectorofResearchPennCapital,KSB‘92

• Thecollaborativeenvironmentfacilitatessharingofknowledgeandexperience.

• Graduatestudentsbringworkexperiencefrommanydifferentindustries.-Ex.logistics,energyexplorationandproduction,banking,etc.

• Notallmembersarebusinessmajorsbringingperspectivesfromotherschools.-IncludesstudentsfromtheSchoolofInternationalServiceandtheCollegeofArtsandSciences.

Adding Value: Collaboration

Portfolio Management

Macro Economic

Industry Specific

Firm Specific

Level of Analysis Coverage Responsibilities

Fund Economist

Coverage Groups

Individual Analysts and Coverage Groups

A Top Down Approach

Forthepasteightmonths,SMIFhasheldacautiouslyoptimisticeconomicoutlook.

Reasonsforoptimism:-Manufacturingexpansion-Improvementinconsumerconfidenceandspending-Labormarketimprovement-Economicgrowth-Increasedrisktakingacrossassetclasses

Near-Term Economic Outlook

• Short-TermConcerns-SeverityoftheEuropeanrecession-Currencyfluctuationsandtheirimpactonlocalizedprofits-Volatilityoffoodandenergy-Stabilizationinthehousingmarket-Domesticandinternationalpoliticalturbulence

• Long-TermConcerns-Inflationresultingfromongoingmonetaryexpansionindevelopedmarkets-Integrityofthefinancialsystem

Economic Risks

Pricefluctuationsinenergyandfoodpressureconsumersintheshortrun,whichaffectsconsumerspending,businessinvestment,andemployment.

Food and Energy Volatility

RecentmonetaryexpansionthroughtheFederalReserve’s“QuantitativeEasing”createsconcernsaboutrisingfutureinflation.

Inflationposesasignificantthreattomargins,earnings,andultimatelythevalueproducedfrommanyequitiesinourportfolio.

Inflation

AprolongedrecessioninEuropecontinuestobeacentralrisk.

InterventionbytheInternationalMonetaryFundandEuropeanCentralBankhasreducedshort-termpressureontheEurozone,butsignificantstructuralchangeshavenotyetbeenmade.

European Recession

EU GDP Change (Annualized) 2011 Q4

Moderate Bullishness

Sustainedcorporateearningsgrowthmaintainsattractiveassetlevels.S&Pearningsareatanall-timehigh,yettheindexis11.74%offofits2007peak

P/Evaluationisloweryearoveryear,indicatingvaluationshavenotkeptupwithearningsgrowth

Consumer Spending

Consumerspendingreboundedquicklyaftertherecession.Creditremainedscarceuntilthesecondhalfof2010,buthassinceexpanded.Thishashelpedtoincreaseconsumerspending.

Companieswithintheconsumerdiscretionaryandstaplesindustriesaredrivenbychangesinpersonalconsumption.

Manufacturing Improvement

Manufacturingexpansioncontinuedthroughearly2012,butthepacehasslowed.

Asaleadingindicatorofeconomicprogress,thistrendshowsanongoing,stablerecoveryintheU.S.

U.S.labormarketsareslowlyimproving.Recentdatasuggestmorerapiddeclinesinunemployment.

Increasedemploymentsupportsgrowthinconsumerspendingandsentiment,ultimatelyenhancingassetprices.

Unemployment

Industry Weightings

Operationally,thefundiscurrentlybenchmarkedagainsttheS&P500withadjustmentsmadetoeachindustryweightingbasedona3-5yearoutlook.

Thefundcurrentlyfavorscyclicalindustries-Ouroutlookanticipatesacyclicalupswinginthenext3to5years-Eachweightingisspecifictotheoutlookforeachindividualindustry-Outlooksweredevelopedthroughgroupindustryreports

Target Weights

10.00%

15.00%

20.00%

25.00%

Consumer Discretionary

Consumer Staples

Energy Financials Healthcare Materials Industrials Technology Utilities Telecom

S&P 500 Recommended Weights

Industry Weighting Rational

9.50% 10.00% 10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50%

S&P Weight Ideal Weight

Consumer Discretionary

10.00%

10.50%

11.00%

11.50%

12.00%

12.50%

Consumer Staples

Overweight

The US economy is heavily driven by consumer spending. As the economic cycle turns upward we expect higher than average discretionary goods spending.

Overweight

Though less favorable than consumer discretionary, there is less downside for staple products. Slower growth in commodity prices and improving consumer confidence will help the American consumer and correspondingly, this sector.

10.00%

12.00%

Healthcare

Materials

Underweight

In spite of demographic trends, high levels of uncertainty concerning future Medicare/Medicaid payments make this sector look relatively less attractive than some of the cyclical sectors.

Underweight

This industry is becoming increasingly reliant on imports from developing countries. With growth slowing in Asia, we remain concerned about a supply-demand imbalance.

Industry Weighting Rational

Telecom

Utilities Underweight

We see utilities threatened by historically low natural gas prices and high stock valuations. Also, as a result of the industry’s stable nature, it will not benefit from a cyclical upswing as much as other industries.

Underweight

With a cautiously optimistic outlook, we believe that better opportunities exist in other industries.

Actual Portfolio Weights

10.00%

15.00%

20.00%

25.00%

Consum

er Disc

retionar

Consum

er Sta

Energy

Financia

Health

Industr

nology

Utiliti

SMIF Recommended Weights

• Selldown-Consumerdiscretionary-Consumerstaples-Industrials-Materials

• Investmoreheavilyin-Technology-Healthcare-Financials-Energy

• ReduceCashPosition

Necessary Actions

• ReturnSinceInception:4.83%

• ReturnYeartoDate:6.49%

• SharpeRatio:0.003

• Beta:1.00

• DividendYield:1.96%

Portfolio Performance

Portfolio: Top and Bottom

  Boston Beer Inc. (SAM) 44.58%

  W W Granger Inc. (GWW) 41.58%

  Continental Resources Inc. (CLR)

31.62%

  Polypore International Inc. (PPO) -24.03%

  Goldman Sachs Group Inc. (GS) -23.07%

  Petroleo Brasileiro SA Petrobras (PBR) -18.53%

Winners Losers

AAPL JPM GE SMIF Russell 2000

MSCI Emerging Markets

S&P 500 DAX Index Dow Jones Industrial Average

MSCI ALL Country World Index

FTSE 100 Nikkei

Comparative Sharpe Ratios

Portfolio Risk

STUDENT MANAGED INVESTMENT FUND S&P 500 INDEX

Relative Returns

Building an Enduring Fund

• Thereiseducationalvalueinbothsuccessesandfailures.

• Introspectionrevealsareasforimprovement.

• Thefollowingcasestudiesillustrateasamplingoflessonslearnedandresultingchangestothefund.

Implementing Lessons Learned

Downside Sell Discipline

• ResearchinMotion(RIMM)

• FailuretosellourstakeinRIMMidentifiedaproblemwithdownsideselldiscipline.

• Keymisjudgment:Over-estimatedthestrengthofRIMM’scorporatecustomerbaserelativetoitscompetitors.

Bought Resulting Changes:   Coverage was restructured to be

conducted in teams based on industry.

  Enables members to make the most use of overlapping information, such as understanding the strengths of competitors.

ContinentalResources(CLR)

TherapidgrowthofCLRdemonstratedtheimportanceofunderstandingthenuancesineachindustry.-CLRisisolatedfromtherecentcollapseinnaturalgaspricesunliketheoilmajors.-CLRbenefitsfrompoliticalriskpremiumsincludedinoilprices,butisnotexposedtopoliticaldangersconcentratedintheMiddleEastandAfrica.

Delving into Industry Nuances

Bought Resulting Changes:

  Opted to look beyond industry weightings.

  A section was included in our industry reports where analysts were asked to identify specific areas within each industry that offer the best potential.

Structural Resiliency

• OrganizationalstructuresinSMIFareconstantlyevolving.

• AprincipalgoalforSMIFhasbeentodevelopresilientstructuresthatinsulatethefundfromstudentturnover.

• Coverageteamsdividedbyindustryspreadknowledgesothatcontinuingmemberscanshareitwithincomingstudents.

• Advisoryboardensuresconsistencyinoperationalrules.

Looking Forward

• Thebasicequityfund,asitisnowstructured,isanexcellenttoolforteachingbroadinvestingandmanagementskills.

• Equityfundsarecommoninuniversities.

• Thelong-termgoalfortheSMIFistoexpandinawaythatplaystoAmericanUniversity’sstrengths.

Future Opportunities

Long-termVisionIncludes:

• FixedIncomeFund–Fewuniversitieshavefixedincomefunds.Creatingonewouldprovidestudentswithanopportunitytopracticemanagingfixedincomeinvestments.

• InternationalEquityFund–AmericanUniversityisknownforitsinternationalrelationsprogram.EmphasizinginternationalfinancewouldplayintothisacknowledgedareaofUniversityexpertise.

• ConstrainedOptimizationFund-Auniqueopportunitytoteachsustainableandsociallyresponsibleinvesting.InadditiontobeingpartofAmericanUniversity’scorevalues,sustainabilityandsocialresponsibilityareareasofincreasinginterestinfinance.

Appendix

Holdings (as of 3/17/2012)

Fund History: Timeline

• InitialFundingSources:-AlumniDonations-One-timeallocationfromtheKogodOperatingbudget-Fundsfrompredecessorfinanceclubs

• Thefund’sfirsttradesweremadeintheFallof2010.

• Academicyear2010/2011sawthedevelopmentofformalorganizationalstructureswithinthefund.

• CashPositionwasfullyinvestedbytheFallof2011.

• TheFallof2011alsosawanincreasedefforttoavoidstyledriftasholdingswereheavilyweightedtowardslargecapitalizationequities.

• Springof2012-implementationofatop-downapproachandincreasedemphasisoncollaboration.

Quick Facts

• 27securities

• Avg.MarketCap:$45B

• 20dividendpayingsecurities

• PortfolioBeta:1.00

• Buysthissemester:5

• Sellsthissemester:4

• Cashposition:8.27%

• Winners:17

• Losers:10

• TotalReturnSinceInception:4.83%

Typical Class Session

• Reportsarecirculatedseveraldaysbeforeeachclass,sothatanalystscanstudytheproposedaction.

• Eachclassbeginswithcoverageofthefund’sholdings.Membersshareanddiscussrelevantnewsandfinancialinformation.

• Thisisfollowedbytwotothreestockpitchpresentationswherememberssuggestnewsecuritiestopurchaseorcurrentholdingstosell.

• Aquestionandanswersessionfollowseachpresentation.Membersthenvoteonthesuggestedcourseofaction.

• Theclassalsoregularlyhostsindustrypractitionersasguestspeakers.

Student Leadership: Spring 2012

John Stefos, Fund Manager John is a senior with a major in international studies and minors in finance and Arabic language. John is originally from Lancaster, Massachusetts, but moved to Washington, DC to study international politics. During his first two years at American University, he developed a passion for finance while learning about the root causes of the 2008/2009 financial crisis. Following graduation, John will be joining Raytheon Company's corporate Finance Leadership Development Program.

Seth Borko, Portfolio Manager Seth is a senior at the Kogod School of Business specializing in finance. Seth became interested in investing after taking Investment Analysis, a class with Professor Phil English. He now maintains his own portfolio in addition to his role with the SMIF. As portfolio manager, Seth aims to refine the fund's stock selection routine to create a top down process. This summer Seth will be joining J.P. Morgan in their Private Banking division.

Ashley Rose Stumbaugh, Investor Relations Officer Ashley Rose is a Kogod senior, specializing in finance with a minor in economics. She is originally from Hamilton, New Jersey and transferred to AU during her junior year. The two years she spent in DC were full of AU activities: Washington Initiative, Honors Alumni Program, 1955 Club, Professional Women's Association among others. Upon graduation, she looks forward to joining J.P. Morgan's Corporate Development Team as a financial analyst.

Mike Hirschberg, Economist Mike is a second-year MBA student from Chicago, IL, concentrating in Finance. He currently works at Greenberg Advisors, LLC, an investment bank focused on M&A advisory and raising capital. Prior to going back for his MBA, he worked in Logistics. He holds a BS from Indiana University. After graduation, he will join WCF Advisors in Minneapolis, MN, as an Investment Banking Associate.

Ashley Rose Stumbaugh, Investor Relations Officer Ashley Rose is a Kogod senior, specializing in finance with a minor in economics. She is originally from Hamilton, New Jersey and transferred to AU during her junior year. The two years she spent in DC were full of AU activities: Washington Initiative, Honors Alumni Program, 1955 Club, Professional Women's Association among others. Upon graduation, she looks forward to joining J.P. Morgan's Corporate Development Team as a financial analyst.

Mike Hirschberg, Economist Mike is a second-year MBA student from Chicago, IL, concentrating in Finance. He currently works at Greenberg Advisors, LLC, an investment bank focused on M&A advisory and raising capital. Prior to going back for his MBA, he worked in Logistics. He holds a BS from Indiana University. After graduation, he will join WCF Advisors in Minneapolis, MN, as an Investment Banking Associate.

Kristen Owen, Accountant Kristen is currently obtaining her MBA from American University's Kogod School of Business with a concentration in Finance. Originally, from Cleveland, Ohio, Kristen graduated with honors from Kent State University with a Business Administration degree and was recognized as a Golden Key International Scholar. With interest in International Finance, Kristen has studied abroad in London, England and Sao Paulo, Brazil. Before beginning her MBA, she had previous experience in banking and personal finance.

Bryan Schapperle, Operations Manager Bryan is a junior in the Kogod School of Business majoring in Finance. Bryan first became interested in investing after joining the Kogod Finance Group during his freshman year. An avid sailor, he also holds the position of Treasurer for American University's Club Sailing Team.

Student Managed Investment Fund - 2012

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