MBAStudent InvestmentManagement Fund
MBAStudentInvestmentManagementFund
ArizonaStateUniversity
Semi-AnnualPresentation
December2020
MBASIMFundTeam
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Aleksey Kim
Johnathan Hoke
Festus Olatunde
Makayla Ragnone
Farrukh Solhail
Abraham Levi
I. InvestmentThesis
II. StrategyImplementation
TableofContents
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Equityofafirmwithdebtinitscapitalstructureisanalogoustoacalloptionwrittenontheassetsofthefirm.
400
350
300
250
200
150
100EquityValue($)
GraphicalRepresentationofEquityasaCallOption
Firmassetvalue=FaceValueofDebt50
00 250 500 750
FirmAssetValue ($)Black,Fischer,andMyronScholes,1973,“ThePricingofOptionsandCorporateLiabilities”,JournalofPoliticalEconomy81,637–654.&Merton,RobertC.,1974,"OnthePricingofCorporateDebt:TheRiskStructureofInterestRates",JournalofFinance29,449–470.
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CallOptionReplicatedTraditionalvaluationmodelsdonotadequatelyreflecttheembeddedoptionthatequityholdersenjoy.
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Equity=Assets– Debt
Equity=Assets+PutOption– SafeDebt
Structuralmodel
Traditionalmodel
Eisdorfer,Goyal,andZhdanovhypothesizethatifinvestorsdonotvaluethedefaultoption,misvaluationcanoccur.
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InvestmentThesis
HighDefaultOption LowDefaultOption
TraditionalValuation(e.g.DCF)
Misvalued AppropriateValuation
ValuationwithDefaultOption
AppropriateValuation AppropriateValuation
Eisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.
ValuationofEquityintheModel
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Therearetwocomponentstovaluingequitywithinthemodel,1)valuetotheequityholders(iftheyweretooperateintoperpetuity),2)valueofdefaultoption.
ValueofEquity=ValuetoEquityHolders+ValueofDefaultOption
Eisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.
ValueofDefaultOptionThe default option can be deconstructed into two parts: 1) discountingthe cash flows of a firm until an optimal stopping time, 2) discounting thecash flows of a firm into perpetuity.
Optimal StoppingTime
Equity Assets– SafeDebtEisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.
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ComparingModelValuetoMarketValueStocksaresortedintodecilesaccordingtotheratiooftheequityvalueimpliedbythevaluationmodeltotheactualequityvalue.
2.5B2.0
5B
TheoreticalValue
5B0.5
2.5BCurrentMarketValue
TheoreticalValue
CurrentMarketValue
Undervalued
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Overvalued
Characteristicsoffirmswithhighdefaultoption
Eisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.
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• Higher distress probability
• High volatility
• Low profitability
PortfolioConstructionProcessOverview
*CRSP/Compustat till2018,supplementedwithBloombergforcurrentinfo
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Source accounting and return data
Calculate the theoretical equity value
Calculate model equity/current equity value
Sort ratios into deciles and invest in the 9th and 8th decile
PortfolioConstruction:Inputs&Assumptions
ModelEquityValue
ModelInputs
SG&A Proxy forfixedcosts
SICCodesUsed tocalculateindustry averagesforDepreciation&CAPEX
ReturnonAssets EqualsWACC
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• Currentliabilities
• Long-termliabilities
• Revenue• FixedCosts• Volatility• Risk-free rate• COGS• WAAC• CAPEX• Depreciation• Leverage• SICCode
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DecileDetailsandConstruction
Size
Market-to-Book
StdevofReturns
Ourdata
Paper’sdata
Decile1
21,419 833
12.50 2.69
2.3 4.2
3.85
2.1
Decile5
9,828 2,034
1.96
2.9
Decile10
5,768 436
5.51 1.4
2.2 4.9
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Paper data an average of 1983 – 2012, our data a snapshot of October 2019
… …
Final#ofStocks:69
Russell 3000
$1- $6billionmarketcap
Decile9th and8th
Newscheck
InvestableUniverse
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FilteringforInvestableUniverse
SectorWeightingComparisonOurPortfolioRussel3000
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2%
12%
12%
4%
7%
14%3%11%
2%
9%
24%
2%
12%
12%
4%
7%
14%3%
11%2%
9%
24%
0%
Basic MaterialsConsumer CyclicalFinancial SevicesReal EstateConsumer DefensiveHealthcareUtilitiesCommunication ServicesEnergyIndustrialsTechnologyCash
SectorWeightingComparison
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Asset Russel 3000 Portfolio Number of Stocks Allocation per equity Average Market Cap
Basic Materials 2.44% 2.31% 3 0.8% $2.7BConsumer Cyclical 12.05% 11.62% 12 1.0% $2.7BFinancial Services 12.47% 12.03% 11 1.1% $2.5BConsumer Defensive 6.76% 6.51% 7 0.9% $2.6BHealthcare 14.45% 13.92% 6 2.3% $2.1BCommunication Services 10.51% 10.13% 5 2.0% $2.9BEnergy 1.91% 1.81% 3 0.6% $1.7BIndustrials 9.15% 8.82% 9 1.0% $3.3BTechnology 23.70% 22.84% 13 1.9% $2.4B
Rebalancing
WewillpullthemostupdateddataonBloombergascompanies’reportfinancialinformation.
PullLatestDataAvoidBankruptCompanies
Wewillhaveadedicatedteamtomonitorthatthesecuritiesarenotunderbankruptcy.
RebalanceAccordingly
WeshallrebalanceourportfoliomonthlyusingsectorweightsofRussell3000.
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TaskAllocationProcess
MonitoringCompanyStatus
ExecutingTradesandRebalancingPortfolio
DataPulling
PythonCoding
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Eachteammemberwill rotatepositionsthroughoutthesemester.Thiswill ensureallteammembersareexposedtoeveryaspectoftheinvestmentprocess.
InputtingMarketData
ValueofDefaultOptionContinued
TaxRate
(Sales– COGS)
InterestPaymentstoDebtholders
DistressCosts*
*Incurredwhenafirmincursnegativecashflows.
Principal Repayment
CapitalExpenditures
TaxShieldDuetoDepreciation
Expense
FixedCosts
Eisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.
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