CFAOF Annual Report 2007-2008

Chartered Financial Analyst Society of Orange

County Foundation (CFAOCF)

CFAOCF Investment Portfolio

2007 Annual Report

Prepared by:

Student Managed Investment Fund (SMIF)

CALIFORNIA STATE UNIVERSITY, LONG BEACH

March 14, 2008

2007 CFAOCF Annual Report

Table of Contents

Introduction 1

Economic Review 2

Company Spotlight

Apple Inc. 3

Garmin Ltd. 4

Microsoft Corp. 5

Kimberly-Clark Corp. 6


Energen Corp. 7

Baker Hughes Inc. 8

NutriSystem Inc. 9

Performance Summary 10—11

Learning Experience 12

Acknowledgements 13


INTRODUCTION

California State University Long Beach

(CSULB) has been serving the Los Angeles

and Orange County communities since its

establishment in 1949. The university’s

College of Business Administration Finance

Department offers 16 of its top students the

opportunity to participate in a year-long

honors Student Managed Investment Fund

program.

The CSULB Student Managed Investment

Fund program was created in 1995 by one

of its current directors, Dr. Lowell R. Runyon.

The program’s focus has been to enhance

each member’s academic experience by

providing them with the eswsential tools for

their post graduate life. Such tools, could not

be acquired without having a real life

portfolio management experience. Since its

inception, the students have been granted

the opportunity to manage a $50,000.00

portfolio which soon grew to $100,00.00

portfolio provided by the California State

University Long Beach (CSULB) College of

Business’s Finance Committee. Through the

years, the program has experienced several

breakthroughs such as the addition of its co-

director Dr. Peter Ammermann, procurement

of the Bloomberg Professional Service (i.e.,

a “Bloomberg machine”) for use by the SMIF

students in conducting their analysis, and

involvement with the CFAOCF RFP

Competition.

The management of the fund spanned a full

fiscal year which resulted in two

management teams contributing to the fund.

The annual report reflects the transition from

the 2006-2007 SMIF team to the 2007-2008

SMIF team, compiles the year, and presents

the results of the fund’s holdings.


ECONOMIC REVIEW

The SMIF program had forecasted a

domestic GDP growth of less than 3% for

2007. The actual GDP figure came in at

2.2%, lower than expectations primarily due

to the subprime issues. The market outlook

was more favorable, forecasting a 7.4% price

appreciation in the S&P 500 for the year

2007. The basis of this appreciation was the

strong performance in 2006, moderate GDP

growth, and the low energy prices, but once

again the subprime concerns have caused a

much lower price appreciation than originally

projected.

The concerns in the subprime housing

market that first became prevalent in the

beginning of 2007 and have expanded

beyond subprime mortgages, this broader

crisis is now called the credit crunch. The

rate of subprime mortgage delinquencies and

foreclosures rose, causing exposure fear

throughout the global financial markets. The

liquidity of these mortgage backed securities

decreased and massive write downs

followed. A wider liquidity problem

developed as banks reduced short term

lending to one another.

The equity markets showed an increase in

volatility and investor demand for quality

increased, resulting in the decrease of

government bond yields.

In an effort to reduce the effects of this credit

crisis the Fed as well as other central banks

in the world injected capital into the financial

markets along with reducing the Fed Funds

Rate from 5.25% to 4.25%.

The SMIF team had initially forecasted the

Fed Funds rate to remain at 4.50% from the

4th quarter of 2007 to the 4th quarter of 2008,

citing inflationary concerns as the main risk.

Inflationary concerns have diminished as

recessionary concerns are now the primary

economic risk. Rate cuts are expected to

continue in 2008 as the rate should dip below

2.0% in the 3rd quarter.

The price of oil has risen dramatically over

the past few months, while briefly spiking

over $100/barrel at the end of 2007. Initial

forecasts had oil trading in the mid $70 range

at the end of 2007, while the actual trading

range was in closer to the lower-mid $90

range.

Forecasted unemployment rates in the 3rd

and 4th quarter of 2007 were supposed to be

4.6% for both quarters. The actual rates

were 4.7% and 4.8% respectively. This trend

originated in housing and has moved to other

industries due to a decrease in corporate

profitability.

The forecast for GDP in 2007 was initially

projected to be below 3%. The actual GDP

figure was 2.2%. It should be noted that the

4th quarter growth was 0.6%. The low GDP

combined with the increasing unemployment

figures are making concerns of entering a

recession increase. Preliminary forecasts

showed the GDP reaching its low point of

2.2% in the 4th quarter of 2007, now it

appears GDP measures will get much lower

than that with revised projection of 0.15% in

the 1st quarter of 2008.


COMPANY SPOTLIGHT

APPLE INC.

1 Infinite Loop

Cupertino, CA 95014

408-996.1010 (Phone)

www.apple.com

Apple Inc. Profile

Apple (AAPL) incorporated on January 3,

1977, designs, manufactures, and markets

personal computers,

portable digital music

players, and mobile

communication devices

and sells a variety of

related software,

services, peripherals,

and networking

solutions.

The company is most

well known for its

signature music player,

the iPod and personal

laptop computer, the

Mac Book. Apple also

launched a new internet MP3 download

service, iTunes which ties in with iPod music

player. These products were responsible for

Apple’s phenomenal growth which sent the

stock from $89.49 to a 52-week high of

202.96. Although the stocks were stopped

out from a market sell off last summer at

$116.57, the SMIF team was able to capture

a net gain of $1489.00 which translates into a

holding period return of about 30%.


5th Floor, Harbour Place P.O. Box 30464

SMB

103 South Church Street

George Town, CYM

345-946.5203 (Phone)

www.garmin.com

Garmin Ltd. Profile

Garmin (GRMN) is a provider of navigation,

communications and information devices,

most of which are

enabled by global

positioning system

(GPS) technology.

The Company

designs, develops,

manufactures and

markets a diverse

family of hand-held,

portable and fixed-

mount, GPS-

enabled products

and other

navigation,

communications and

information

products.

The SMIF team had its biggest gains through

its holdings in Garmin. The news of Garmin

acquiring GPS Gesellschaft fur

Professionelle Satellitennavigation mbH

(GPS GmbH), the exclusive distributor of

Garmin's consumer products in Germany.

News of Garmin’s FY 2007 financial outlook

created further gains for the stock which sent

it to a 52-week high of 125.68. The SMIF

team purchased 90 shares at a price of

$55.95 on March 14, 2007 and was later

stopped out at a price of $88.06. Garmin was

stopped out on August 16, 2007 during a

rigorous sell-off of the technology sector.

Apple, another holding in the CFAOCF

portfolio, was stopped out under the same

circumstances.


One Microsoft Way

Redmond, WA 98052

425-882.8080 (Phone)

www.microsoft.com

Microsoft Corp. Profile

Microsoft Corporation (MSFT) develops,

manufactures, licenses and supports a range

of software products for computing

devices.Microsoft updated some of its

product line in

2007. On

January 30

2007, the

company

released its Vista

Operating

System. This

was the first

upgrade to its

operating system

since Windows

XP was released

in October of

2001. The

company

released Office 2007 on January 30, 2007;

which was a major upgrade from previous

version. On November 13 2007, Microsoft

released the Zune 2 MP3 Player; which was

an upgrade from the previous Zune Player.

The Zune 2 was developed to compete with

Apple’s iPod. Later in 2007, Microsoft

acquired aQuantive, Inc. an online ad firm in

order to compete with Google. With the

success of Microsoft’s X-Box and the news of

the upgrades as they were in development,

SMIF purchased 212 shares at $22.46 on

July 7, 2007. Microsoft hit 3 successive 52-

week highs starting on October 31 2007 at

$37; followed by $37.49, and $37.50. In

2007, SMIF had an unrealized gain of

21.09%.


123 Robert South Kerr Ave

MT-2796

Oklahoma City, OK 73125

972-281.1200 (Phone)

www.kimberly-clark.com

Kimberly-Clark Corp. Profile

Kimberly Clark (KMB) is a large cap value

company in the household and personal

products industry.

KMB specializes in

paper and synthetic

healthcare products

such as diapers,

bath tissue and

paper towel.

The company has

had an increase in

the overall sales, but

has shown effects of

the cost of raw

materials increasing.

Private labels

continue to exhibit

pressure in the market, products such as

diapers tend to move towards commodity-like

tendencies.

The market as a whole showed a correction

in the beginning of March 2007. The KMB

position was sold posting a 2.03% holding

period return for 2007, which was on pace

with the benchmark.


605 Richard Arrington Jr.

Boulevard North

Birmingham, AL 35203

205-326.2700 (Phone)

www.energen.com

Energen Corp. Profile

Energen Corporation (EGN) is a Birmingham, Alabama-based company. It is a diversified energy company with growing oil and gas acquisition and development. The Company has a strong and stable natural gas utility. Energen is listed on the New York Stock Exchange - ticker symbol: EGN - and its market capitalization is approximately $4.3 billion. While Alagasco's natural gas utility provides Energen with significant strength and stability, it is Energen's oil and gas acquisition and development company, Energen Resources Corporation, which has been driving the Company's long-term growth since 1995. Energen’s regulated business, Alabama Gas Corporation (Alagasco), is the largest distributor of natural gas in Alabama. With roots spanning more than 150 years, Alagasco serves approximately 455,000 homes, businesses and industries in north

and central Alabama.

The SMIF team purchased 130 shares at $37.62 on April 20, 2006 for a total amount of $4,890.60 for the CFAOCF portfolio. On June 26, 2007 Energen stock significantly dropped due to the announcement of its new CEO James McManus, while Energen’s old CEO Michael Warren will continue to hold his spot as Chairmen until he retires later in the year. On June 26, 2007 Energen was stopped out at $54.44, SIMF’s total return since Energen’s purchase was 17.42% or $1,054.35.


2929 Allen Parkway Suite 2100

Houston, TX 77019

713-439.8600 (Phone)

www.bakerhughes.com

Baker Hughes Inc. Profile

Baker Hughes (BHI) supplies reservoir-

centered products, services, and systems to

the worldwide oil

and gas industry.

The company

provides products

and service for oil

and gas exploration,

drilling, completion

and production. The

SMIF team

purchased 72

shares at price of

$69.28. On July,

Baker Hughes

reported a decline of

75% in its second-

quarter, profits in

absence of a gain from an asset sale

recorded in the prior year. Baker Hughes

total rig count decreased 1.3% in the 2ned

quarter of 07. The decline was mainly in

Canada and offshore. In Canada, Baker

Hughes had 51% less rigs during the 2nd

quarter of 07 than a year earlier. The August

sell off caused Baker Hughes holdings to be

stopped out at the price of $76.34. SMIF’s

return for Baker Hughes since was 10.57%


300 Welsh Road, Building 1 Suite 100

Horsham, PA 19044

215-706.5300 (Phone)

www.nutrisystem.com

NutriSystem Inc. Profile

NutriSystem (NTRI) is an online weight loss

community. The NutriSystem was purchased

because of the

success of its

website’s weight

management

program that

incorporates

personal

counseling,

individual diet,

and exercise

plans.

NutriSystem was

purchased 100

shares at a price

of $49.49.

In June, NutriSystem competitor GlaxoSmith

Kline introduced its nonprescription drug Alli

Pill. Since the introduction of Alli Pill,

NutriSystem stock has been on the decline.

In July, NutriSystem stock fell 18% after its

Q2 profits failed to meet analyst’s estimates.

The missed estimates were due to

GlaxoSmithKline new diet drug and

NutriSystem rising marketing costs. On July

14, 2007 it was stopped out at $57.06, while

capturing returns of 15.29%.


PERFORMANCE

At the end of 2007, the portfolio returned

11.69% over its holding period. The equity

portion returned 22.20% return since

purchase. The biggest gainer came from the

purchase of Garmin, which yielded returns of

57%, while the least returns came from

Kimberly-Clark Corp., which yielded returns

of 3.5%. None of the position suffered any

loses. Fixed income compromised of Fidelity

money market fund. The fixed income

yielded 5.37% returns.

The benchmark used to evaluate the

performance of the portfolio included 70% of

the S&P 500 index and 30% of the NBBITR.

During the course of the 2007, the weighted

S&P returned 2.5% and the weighted

NBBITR returned 1.43%, which resulted in a

benchmark return of 3.93%. Despite the

housing market bust, the credit crunch, and

record energy prices, the team outperformed

the equity benchmark by 18.63% and the

fixed income benchmark by .6%.

Total Return Benchmark:

( 70% S&P 500, 30% NBBITR)

▲3.93%

Total Return Portfolio:

▲ 11.69%

TOP PERCENTAGE GAINERS

GRMN Garmin Inc. 57%

AAPL Apple Inc. 30%

MSFT Microsoft 19.25%

CFAOC INVESTMENT PORTFOLIO

2007 SUMMARY REPORT

PURCHASE

SALE

EQUITIES

Date

Price

Shares

Amount

($)

Div &

Inter.

Date

Price

Shares

Amount Gain/Loss

ROI

Realized Gain

Energen Corp. (EGN)

12/29/200

6

$46.46

130

$6,039.80

$14.95

6/26/2007

$54.44

130

$7,077.20 $1,052.35

17.42%

Kimberly-Clark Corp. (KMB) 12/29/200

6

$65.90

86

$5,667.40

$87.72

3/8/2007

$67.24

86

$5,782.64 $202.96

3.58%

Apple, Inc. (AAPL)

3/14/2007

$89.49

55

$4,921.95

8/16/2007 $116.57

55

$6,411.35 $1,489.40

30.26%

Garm

in Ltd. (G

RMN)

3/14/2007

$55.95

90

$5,035.50

$67.50

8/16/2007

$88.06

90

$7,925.40 $2,957.40

58.73%

Nutrisystem Inc.(NTRI)

3/28/2007

$49.49

100

$4,949.00

7/25/2007

$57.06

100

$5,706.00 $757.00

15.30%

Baker Hughes (BHI)

4/4/2007

$69.28

72

$4,988.16

$18.72

8/3/2007

$76.34

72

$5,496.48 $527.04

10.57%

Unrealized Gain

Microsoft Corp. (M

SFT)

12/29/200

6

$29.35

212

$6,222.20

$86.92

12/31/200

7

$35.60

212

$7,547.20 $1,411.92

22.69%

TOTAL

$37,824.0 1

$275.81

$45,946.2 7 $8,398.07 22.20%

FIXED INCOME

Fidelity Money Market

(SPRXX)

$69,840.6 1 $3,752.57

$73,593.1 8 $3,752.57

5.37%

CASH

$11,769.7 6

$217.45

$33,050.1 1

$217.45

1.85%

Total Portfolio

$102,238.

23

$114,190.

49

Return on Portfolio

11.69%

Return on Benchmark of

NBBITR and S&P500

3.93%


LEARNING EXPERIENCES

The Student Manage Investment Fund (SMIF) is

a great opportunity for Finance students

concentrating in investments to gain an invaluable

real-world experience in portfolio management.

This year, the sixteen students that make up the

SMIF class were given the opportunity to manage

a $100,000 portfolio provided by the Certified

Financial Analyst Society of Orange County

(CFAOCF). While the assets were under

management, the members followed a top-down

approach, building upon their knowledge acquired

in previous classes. The program also provided

students the opportunity to hone their

presentation skills, as presentations were a vital

part of the class. The most valuable learning

experience was found through the students

working as teams and collaborating as a whole

class to make financial decisions.

The students in the SIMF 2007-08 classes had to

create and present a request for proposal to the

CFAOCF in order to manage the $100,000

portfolio for a following year. The students from

the pervious year’s SMIF class were also granted

the opportunity to manage $100,000 portfolio.

Since the portfolio is managed by the students for

a calendar year, the 2007-08 class had to take

over management of the pervious year’s class

portfolio. This gave the students a unique

learning experience, to have to adapt a pre-

existing portfolio, to their own management style.

The top-down approach utilized by SMIF began

with analyzing the many different variables that

affect the economy. The hardest part in using this

approach was to see which variables were most

important. The students also had to continuously

rework their outlooks as the climate of the

economy changed. Next the SMIF students used

their economic outlook to predict which sector

and industries would be the most favorable for the

holding period of the portfolio. Utilizing different

resources such as, Value Line, Morning Star,

Standard & Poor’s, and Bloomberg, the students

were able to develop an asset allocation that they

felt would beat the market. After deciding the

asset allocation, the different SMIF teams were

able to start choosing stocks to present to the

class that they thought would best fit the

CFAOCF portfolio. This helped the student’s

analytical and presentational skills.

The learning experience that the SMIF students

were able to obtain by managing $100,000 for the

CFAOCF is one of the most rewarding and

unmatched experiences in the College of

Business at California State University, Long

Beach.


ACKNOWLEDGEMENTS

The Student Managed Investment Fund that the

CFA Society of Orange County has funded allows

students to gain an unbelievable experience in

the portfolio management field. The real life

experience, teamwork skills, and networking that

each student will take away from this experience

will be forever invaluable. The support and

funding of such a program shows the commitment

of the Society to the help shape the future of the

community’s future finance professionals. The

SMIF Group would like to give special thanks to

the CFA Society of Orange County for giving us

the opportunity to be a part of the Student

Managed Fund.

The SMIF Team would also like to give special

thanks and appreciation to Dr. Lowell Runyon and

Dr. Peter Ammermann who are the other key

components to making the SMIF group possible.

Both advisors have dedicated their time to weekly

meetings and events. The time spent and

dedication is appreciated because it has allowed

for the SMIF group to have designated time to

meet and make decisions for the portfolio as a

whole. The professors have setup the SMIF

group to be guided rather than taught, which has

allowed for a unique environment and is

commended. The SMIF group would like to

express its ultimate gratitude to Dr. Lowell

Runyon and Dr. Peter Ammermann because

without them the SMIF group would not be

possible.

CFAOF Annual Report 2007-2008

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