SMIF Annual Report 2010-2011

Issue 24 – September 2010

ON PAGE 5Editor Robert Forest about MM

ON PAGE 12An interview with Dave Johnson

ON PAGE 22Travelling around the world

IN THIS MONTH’S ISSUE2 showcases with stunning photography

InDesign CS5 templateA4 FORMAT – PRINT READY

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CHARACTER STYLES

Special featuresAUTOMATIC FORMATTING

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12 Master pagesFOR ARTCLES, INTERVIEWS, COLUMNS

AND MUCH MORE

Annual Report 2010-2011

Student Managed Investment Fund

Dick RunyonThis will be the last year that the CSULB SMIF founder, Dr.

Lowell R. Runyon, will be serving as Director. As you head into retirement from CSULB, we would like to thank you for the incomparable experience you have provided to us through the SMIF program. We highly value your dedication, insight, and charity. We would like to dedicate this year’s annual report to you as a profound contributor and mentor to SMIF students over the past sixteen years. You will be missed, and this program will not be the same without you.

2 CSULB - STUDENT MANAGED INVESTMENT FUND

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CSULB - STUDENT MANAGED INVESTMENT FUND 3

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Table of ContentsPORTFOLIO MANAGERS

Ross Atefi

Artoud Caloni

Jesus Caro

William Chau

Katie Christensen

Sean Filbin

Brian Leip

Taketoshi Mikami

Whitney Odom

Daniel Russell

Piero Sandoval

Nupur Shah

Bruce Sparks

Elizabeth Van

Kai Xu

DIRECTORS

Dr. Lowell R. Runyon

Dr. Peter Ammermann

ANNUAL REPORT EDITOR

Joseph Tinervia

1 Introduction

2 Portfolios Under Management SMIF Portfolio CFAOCF Portfolio Forty-Niner Shops, Inc. Portfolio

4 Economic Forecast Gross Domestic Product (GDP) Unemployment Rate Inflation Oil Prices Housing Conclusion

8 Capital Market Outlook Fixed Income Forecast Equity Forecast Global Markets

12 Asset Allocation SMIF CFAOCF Forty-Niner Shops, Inc.

15 Portfolio Benchmarks

19 Evolution of Strategy

22 Strategic and Tactical Asset Allocation Model Strategic Asset Allocation Tactical Asset Allocation Performance Comparison

27 Fixed Incom Holdings

32 Equity Holdings Positions taken by the 2009-10 SMIF Team iShares Dow Jones U.S. Technology Sector Index Fund (IYW) Health Care Select Sector SPDR Fund (XLV) Rock-Tenn Company (RKT) Positions taken by the 2010-11 SMIF Team Individual Equities

38 Portfolio Performance SMIF Performance CFAOCF Performance 49ers Performance

42 Learning Experiences Management of Real Money Portfolios Networking Host-A-Student QGAME Conference CFAOCF Portfolio Competition

49 Recruitment and Marketing Website Redesign

50 Future of SMIF

53 Student Portfolio Manager Biographies

55 Acknowledgements

68 Appendix A: Portfolio Guidelines SMIF and Forty-Niner Portfolios CFAOCF Portfolio


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SMIF currently manages three unique portfolios worth over a quarter of a million dollars.

It was designed to provide students with a valuable hands-on experience gained through practical knowledge in researching, selecting, investing, monitoring, and measuring the per-formance of stocks. Students are selected for the program after three summer “boot camp” sessions where quality of work and dedication are assessed. The program was established in 1995 by Dr. L. R. Runyon; who was later joined in 2002 by Dr. Peter A. Ammermann joined as Co-Director.

SMIF currently manages three unique portfolios worth over a quarter of a mil-lion dollars. The original SMIF portfolio has grown from $50,000 at inception in 1995 to a current balance of over $110,000. The CFA Society of Orange County Foundation (CFAOCF) portfolio’s current assets under management amount to about $65,000. The Forty-Niner Shops, Inc. portfolio—acquired in 2009—consists of $100,000 in assets under management. Each portfolio differs some-what in risk tolerance and restrictions on investments and requires regular updates on portfolio performance.

The program uses a top-down approach that is widely used by many industry pro-fessionals. It begins at the macroeconomic level and progressively zooms in to sec-tors, industries, and, finally, the individual companies. Students work in small groups conducting research and analysis and pres-ent formal investment recommendations to the team members and the SMIF Directors in regularly scheduled weekly meetings. The SMIF organization is responsible for managing

all aspects of the portfolio, including research, investment management, administration, and client services.

Managing portfolios is only a small aspect of the full SMIF program. Students are also required to address the educational aspects of the program by performing numerous profes-sional-quality presentations (both to SMIF and to external parties), networking with industry professionals, attending events in the Orange County and Los Angeles areas and nationally, and writing expansive papers such as the 160-page annual RFP Competition as well as this annual report.

The program’s success could not be possible without the many University-provided resources available for their investment research, including, but not lim-

ited to, the Bloomberg Professional Service Terminals, IHS Global Insight, Morningstar, ValueLine Investment Survey, and IBIS World Industry Service.

Note: This year’s annual report begins a new trend to review on a calendar-year basis and not on an academic-year basis. For example, previous years would have covered October 2010 to April 2011, and this report covers January 2010 to March 2011.

IntroductionThe Student Managed Investment Fund (SMIF) program at California State University, Long Beach (CSULB) is a year-long honors-level finance course that gives students real-life portfolio management experience not found in a typical classroom setting.


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SMIF Portfolio The original portfolio of the CSULB Student Managed Investment Fund program was created at the inception of the program in 1995 and is funded through the University’s Department of Finance. The SMIF portfolio is monitored by CSULB’s Investment & Finance Committee, to whom the SMIF members report their activities at the end of each aca-demic year. Like each of the SMIF-managed portfolios, the SMIF portfolio has specific invest-ment guidelines. For example, all purchase decisions must be made by a supermajority (75 percent) of SMIF participants, and the SMIF Directors maintain the right to veto. The SMIF portfolio guidelines are listed in full detail in the Appendix.

Traditionally, the SMIF portfolio has been liquidated at the end of each calendar year. However, beginning in 2010, the SMIF portfolio became perpetual to mirror the responsibili-ties and challenges seen in real-world portfolio management.

CFAOCF Portfolio The CSULB SMIF program has benefitted tre-mendously from the support and influence of the CFA Society of Orange County Foundation (CFAOCF). Each year, the CFAOCF sends out Requests for Proposals (RFPs) to Orange County-area universities to give student invest-ment-management teams the opportunity to compete for the management rights of the Foundation’s portfolios for the following calen-dar year. In 2010 SMIF competed and acquired the right to manage a $60,000 portfolio for 2011. This portfolio is overseen by the CFAOCF’s Investment Policy Committee, and student teams report their activities to this Committee quarterly.

Forty-Niner Shops, Inc. Portfolio In late 2008 the SMIF program began its efforts to establish ties with the campus-affiliated Forty-Niner Shops, Inc. After several meetings with the organization, the Forty-Niner Shops Board of Directors agreed to establish a working relationship with the SMIF program. In late 2009, the Forty-Niner Shops finalized the details regarding its relationship with SMIF, and in January 2010 an initial portfolio was established at Citigroup. Due to a prohibitive commission structure there, however, the cus-todianship of the portfolio was transferred to Wells Fargo Advisors, and the SMIF students began managing this $100,000 portfolio in January 2011. In addition to managing this portfolio on behalf of the Forty-Niner Shops, SMIF has also been asked to act as an advisor and provide input on the management of the organization’s other assets, which are currently managed by Morgan Stanley Smith Barney.

The Forty-Niner Shops specifies a preserva-tion-of-capital objective within its Investment Policy Statement. This objective has led the SMIF program to pursue a more quantitative approach to management, which includes a 200-day moving average with a 5 percent band strategy, as well as a tactical asset allocation strategy.

Portfolios Under Management SMIF currently manages three different portfolios

Gross Domestic ProductThe SMIF forecast of 2010 bore significant resemblance to the reality of the United States economy in 2010. GDP numbers reflected continued weakness in the first three quarters of the year but renewed strength in the final quarter. Also, due to unexpected market corrections in the sec-ond quarter, GDP growth was significantly lower during the second and third quarters of the year; however, despite these market corrections, GDP reached 2.8 percent by the end of the year. For the first quarter of 2011, SMIF anticipates GDP growth to be about 2.9 percent.

Unemployment RateThe 2010-2011 SMIF team forecast a slightly optimistic view of unemployment rates throughout 2010. The SMIF team felt the job market was being stimulated by continuous government infrastructure spending, and also by manufacturing, con-struction, health care, and the public sector adding 192,000 jobs to the U.S. economy in February, according to the U.S. Bureau of Labor & Statistics. With President Obama’s job creation plans and his business tax breaks to promote hiring in the private sec-tor, the job market recovery will continue to gain momentum, and the unemployment rate ended the year 2010 at 9.6 percent, which was better than SMIF had predicted.

Inflation The 2010 SMIF forecast was that inflation would continue to rise. The Federal Reserve has fought diligently to avoid a deflationary environment through “Quantitative Easing.” Quantitative Easing is a monetary policy in which the Federal Reserve creates money which it uses to buy treasury bonds in order to increase the money supply. SMIF recog-nizes the success of Quantitative Easing, but we are also aware of the kinds of risks that are associated with this kind of monetary policy, such as higher inflation than desired (or even hyperinflation), rising commodity prices, and a negative impact on trade rela-tionships with other countries.

Oil PricesThe SMIF team predicted oil prices would hover in a range above $100 a barrel due to the increase in demand for oil, the decrease in the supply of oil, and the increased ten-sions in the Middle East. According to OPEC, the price of crude oil has risen due to the strong performance of the futures market, attributed mainly to fears of a supply short-age due to the turmoil in the Middle East. As the supply of oil slowly dwindles, the price of oil will start to rise. Since substitutions for oil are not readily available, consumers will consume oil and gas at a growing rate. Due to the current crisis in North Africa and the shortage of oil supply, SMIF foresees the possibility, albeit slim, of an oil crisis in the future.

HousingIn addition to the revisions made to the economic forecasts, the 2010-2011 SMIF team added two other metrics to its mac-roeconomic forecasts—housing and oil prices. In 2010, housing prices declined, as indicated by the Case-Shiller Index. This decline was due to an oversupply of hous-ing combined with continued weak housing demand. Other factors supporting hous-ing prices included improved affordability, lower unemployment, and a house-price-to-income ratio lower than the average between 1987 and 2009. On the other hand, factors weakening housing prices included continued high levels of unemployment, economic uncertainty, fears of further price falls, and tightening credit conditions.

ConclusionOverall, the 2010-2011 SMIF team had a positive outlook of the U.S. economy going into 2011. Despite the fear of a “double-dip” recession, the SMIF team believed the U.S. economy would continue its slow recovery. The SMIF team will continue to monitor these indicators as the year pro-gresses, because the only thing certain about the future is that it is uncertain.

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Economic ForecastThe United States economy at the time of the 2010-2011 SMIF class inception was in a state of uncertainty. There were questions as to whether the economy was going to start showing signs of recovery or instead to enter a “double-dip” recession. In July 2010 Federal Reserve Chairman Ben Bernanke stated that the markets are “unusually uncertain.” Just like previous years’ SMIF alumni, the 2010-2011 SMIF class had the initial challenge of predicting the future of the financial markets during highly uncertain times. In order to do so, the students had to assess the economic environment and determine the sustainability of the economic recovery. To assist in this challenge, the class incorporated economic forecasts from a number of lead-ing firms, including Moody’s, Goldman Sachs, Barclays Capital, and IHS Global Insight. Among other economic gauges, SMIF forecast Gross Domestic Product, Unemployment, Inflation (as measured by the Consumer Price Index), Oil Prices, and Housing.

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Global MarketsThroughout the year 2010 there were still high levels of uncertainty within the market. We learned in the first quar-ter that the recession had officially ended in 2009, but there were multiple crises in the Middle East, inflationary concerns in the emerging markets, bailouts of Greece and Portugal, and a devastating earthquake in Haiti that have all served to sustain the level of uncertainty regarding the economy’s future. Despite all of this terrible news, the All Country World Index (ACWI) is up approximately 5 percent this year, because worldwide GDP growth is still anticipated to remain high.

The emerging markets index has struggled throughout 2010 primarily due to concerns that inflation is going to cause governments to tighten monetary policy and slow down GDP growth. The large influx of capital into emerg-ing markets in recent years has put inflationary pressures on local currencies. Thus far, countries have been adopting protectionist policies, but governments may have to start increasing their interest rates to keep inflation in check, and that will slow down growth.

Sovereign debt crises in Europe played a significant role in driving volatility in the markets throughout 2010. These events have been talked about widely in the news and the investors have been expecting them, so large mar-ket declines have been occurring prior to the announced bailouts of Greece in May and Ireland in November. More recently, the International Monetary Fund’s proposal for Portugal’s bailout will be the largest thus far at $123 billion euro. Next on the list could be Spain and Italy, which, if res-cue is needed, would be much larger because of the larger size of their economies.

If the example of the three previous economic crises is a reasonable guide, then throughout the remainder of 2011, as global economic conditions improve, the degree of cor-relation among the financial markets of different geographic regions and different countries should tend to fall. The best performances should come from those countries that stand to benefit most greatly from the major global themes we project going forward, including rising commodity prices, high sovereign debts, continued unrest in the Middle East, and robust demand from emerging market countries.

Among the developed markets, Canada, Australia, and Germany are well positioned for the global economic envi-ronment. Canada and Australia are commodity-exporting nations that are not vulnerable to the political and monetary

pressures that the emerging market commodity exporters will be facing. Germany will experience continued demand for its industrial equipment exports as infrastructure spend-ing remains robust in the emerging markets.

In the emerging markets, political uncertainties and cur-rency valuations render individual country investment too volatile to be considered for the portfolio. As an alternative, investment in a broad-market emerging markets ETF focus-ing on value companies would provide an appropriate buffer against these risks.

Fixed-Income ForecastThe fixed-income forecast was derived using a top-down approach by considering market conditions, economic data, and Federal Reserve activities. A driving force behind the fixed-income market is the federal funds rate, which is currently being maintained at its historic low of 0.00-0.25 percent in an effort to spur lending and promote economic growth. This federal funds rate is the base interest rate from which all short-term interest rates are determined. Also, indi-rectly, long-term interest rates are affected as investors seek a risk premium over these short-term rates for longer term securities. SMIF’s analysis of the federal funds rate suggests no change until late 2011.

For longer term interest rates, inflation plays an impor-tant role. During the last recession from the end of 2007 to the beginning of 2009, there was a degree of deflationary pressure in the U.S. economy; one of the main causes was the collapse of the housing market. Our economic analysis indicated high unemployment rates would continue the trend of deflationary pressure.

Capital Market Outlook“When the market does turn, as we’ve seen in the past, it will turn sharply and very swiftly.” - Sean Simko, SEI Investments Co.,

Bloomberg News)


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In addition, we also experienced a second round of quan-titative easing by the Federal Reserve to drive down yields, which has been accounted for in our forecast. The Federal Reserve announced on November 3, 2010, that it would be purchasing an additional $600 billion of Treasuries through June 2011 (about $75 billion a month) in an effort to reduce unemployment and avert deflation. Eighty-six percent of these purchases targeted bonds coming due in 2.5 to 10 years. Although significant, the market has already priced most of this quantitative easing into the current yields, as they have steadily dropped through the third and fourth quarters of 2010 in expectation. Therefore, SMIF forecast that treasury yields would likely remain steady or rise slightly during the early portion of 2011 as the Fed undertook this action.

“The goal of quantitative easing is not to get interest rates to the lowest level possible, it’s to get the expectations that rates will remain at these low levels for a long time to try to change investor behavior and get them investing in riskier assets.” (Ira Jersey, Credit Suisse AG)

However, SMIF also believes there is significant risk in the fixed-income market, particularly beginning in the third quarter of 2011. As the asset purchasing of QE2 ends in June, the economy will be feeling the delayed effects of this effort, including inflation and economic growth, causing interest rates to rise rapidly.

“When the market does turn, as we’ve seen in the past, it will turn sharply and very swiftly.” - Sean Simko, SEI Investments Co., Bloomberg News

Analysis of the fixed-income markets also concentrated on expected credit spreads over the course of SMIF’s hold-ing period. As the United States economy has shown recent signs of recovery, investors have gained confidence in corpo-rate issuers’ capacity to service their debt obligations, and as a result, credit spreads have narrowed. Also, with the Federal Reserve purchasing such a high volume of Treasuries and decreasing supply, investors will be forced to turn to riskier assets such as corporate bonds. Therefore, we expect these credit spreads to continue to narrow over the coming year until they reach pre-crisis levels.

SMIF also utilizes professional analyst projections in deter-mining our quantifiable fixed-income market outlook. By combining SMIF’s thorough analysis with similar analysts’ fore-casts gleaned through the Bloomberg Professional Service Terminals, SMIF developed the fixed-income market outlook shown below.

Equity ForecastThe 2009-2010 SMIF team’s forecast for the equity markets in 2010 called for continued and sustained recovery. By the end of 2010, the market level, as measured by the S&P 500 Index, had already reached 1257.64, which was almost identi-cal to its forecast high. Unfortunately, the team didn’t foresee the uncertainty and volatility that would dominate the market throughout the second and third quarters.

The first quarter of 2010 saw strong positive returns for equities. These were driven primarily by the much-better-than-anticipated economic growth numbers posted for GDP growth in the fourth quarter of 2009, stronger-than-antici-pated earnings numbers for most listed companies, and a sense of optimism that the economy had turned the corner was headed for another period of expansion.

In the second quarter, however, the GDP numbers for first quarter growth came out and were disappointing, because, while they showed significant growth, the rate had slowed dramatically from the first quarter. Further, there was growing concern about the sustainability of the economic recovery. Growing concern about worldwide sovereign debt and the need for the European Union to step in to rescue Greece to prevent default on its bonds added significantly to this period of insecurity. Equity investors, with memories of the meltdown of the markets in 2008, were very nervous, and volatility in the markets rose significantly. On May 6, 2010, the markets experi-enced what would become known as the “flash crash.” Midday, with no warning, the equity market dropped dramatically. While it would recover much of the drop by the end of the day, investors’ level of fear would remain high for some time. After peaking in late April, the market would drop over 16 percent before turning again in late August. Throughout this period, the fear that the U.S. economy might end up in a “double dip” recession was high, and volatility levels made investing in equities for portfolios that required the use of stop losses, such as those managed by SMIF, nearly impossible.

On August 24, 2010, the stock market formed a bottom and from that point would rise dramatically for the remainder of the year. The turnaround was fueled by strong corporate earnings and the removal of uncertainty that surrounded the election and issues such as tax rates for 2011. Further, there was a growing consensus that GDP was again growing and that the U.S. would avoid another slip into recession.

In September 2010, the 2010-2011 SMIF team assumed responsibility for the portfolios under SMIF management. In September and October we developed our macroeconomic and equity-market forecasts. Overall, our forecast called for strong appreciation in the S&P 500 of between 9 and 18 per-cent for 2011. This turned out to be an accurate forecast, as it aligned closely with actual market levels at the end of each quarter.

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Equity Forecast: Q1 2010 - Q4 2011

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Asset AllocationAsset allocation can be one of the most crucial decisions in portfolio management and determines a major portion of a portfolio’s returns. The SMIF team takes this factor strongly into consideration and has customized asset allocations for all three portfolios to handle various market conditions. Due to guidelines and restrictions on the portfolios under management, there are three available asset classes that are permissible for investment: the equity market (stocks), the fixed-income market (bonds), and the money market (cash).

SMIF determines asset allocation through a top-down approach beginning with the macroeconomic environment and over- or underweights certain asset classes based on our outlook for the future. For example, if the stock market is forecast to be very strong, we will overweight the equity market and underweight the fixed-income market. All portfolios under management specify an acceptable range for allocation to the various markets. Additionally, certain portfolios—such as the 49er Shops portfolio—specify an ideal target asset allocation. These are taken into account in our asset allocation process.

In 2010 SMIF adopted a quantitative risk management strategy called “the Strategic Asset Allocation model” (discussed in a later section). This model will occasionally give a signal that tells us when to exit the equity market in order to avoid crashes like the recent financial crisis and the dot-com bust. At that point, SMIF would shift asset allocation out of the stock market and into the fixed-income and money markets.

The current target asset allocation is 80 percent equities and 20 percent fixed income. This allocation was approved by the SMIF student portfolio managers on January 4, 2011, with 10 out of 12 voting in favor of the change.

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Target Asset Allocation - Signal to Shift Out of Equity Market


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Volatility was a major factor in the 2010 equity markets, especially during the second quar-ter. The “flash crash” on May 6, 2010, was the single largest one-day decline in the history of the Dow-Jones Industrial Average, which lost 9 percent intraday only to recover a significant portion of that loss in a matter of minutes. Because SMIF places a 15 percent preventa-tive trailing stop-loss order on all positions, the volatility triggered the stop losses on all open positions. As the market recovered, we reen-tered those positions and were subsequently stopped out again with the continued volatility.

It became quickly apparent that the strat-egies SMIF was employing would all have to be reevaluated for effectiveness and immedi-ate action would have to be taken to properly handle the volatile markets. The first strategy that was reevaluated was the sector rotation

strategy, which had been underperforming the market. Members of the SMIF team ran a postmortem analysis and discovered that while sector rotation models work well in theory, it is virtually impossible to determine what stage of the sector rotation the market is currently in at any given point in time. Timing is crucial for sector rotation to perform well, and without the ability to know the precise point when sectors are rotating, the strategy is rendered ineffec-tive. A better model with clear, easily discernible rules would need to be developed.

The second strategy that was reviewed was the use of the VIX Volatility Index as a trigger for when to get out of the equity market when it is too volatile. We learned that while it can be a helpful tool in order to know when to steer clear of hostile market environments, it mea-sured only how volatile the markets are and

could not give us ideal entry/exit points in order to maximize market returns. As a team, SMIF felt that we would need to develop a tool with clear signals for equity market entry and exit points.

Lastly, SMIF took a look at our equity valua-tion techniques. We learned that the thorough analysis and rigorous vetting process is a sound one and the equities we selected ended up outperforming the market; however, for that to occur, it takes patience, time, and the ability to endure volatile markets in the meantime.

In response to the challenges of the first half of 2010, the SMIF team tested and unanimously voted to employ a new strategy developed by a SMIF alumnus, Reuben Conceicao, working in conjunction with the SMIF program Directors. The strategy incorporates both a strategic and a tactical asset allocation model.

Evolution of Strategy

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The Strategic and Tactical Asset Allocation model is easily the biggest change to SMIF’s investment strategy in 2010 and played a major role in all three portfolios as well as the CFAOCF competition. It is based on an award-winning paper entitled “A New Quantitative Approach for the Management of a Student-Managed Investment Fund,” which has been accepted for publication in Managerial Finance. The strategy used in the paper was co-developed by the SMIF Directors, Dr. Runyon and Dr. Ammermann, along with Reuben Conceicao, a 2009 SMIF alumnus.

The model is broken into two components: Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA). The strategic model is the foun-dation, and the tactical model builds on top of the strategic model, further improving the potential for gains. Each component model will be explained in the following sections.

Strategic Asset AllocationThe underlying concept for the Strategic Asset Allocation model is to gen-erate clear, objective, and reliable signals for when to be in or out of the equity market. The SMIF team concluded this was a necessity because of the fact that the equity market has been marred by two terrible bear markets in the last twenty years: the dot-com crash and the recent financial crisis. A simple “buy-and-hold” strategy could no longer be relied upon for consistent

gains of around 10 percent per year. For example, if one had purchased the S&P 500 Index on December 31, 1997, and simply held it for 11 years, this position would have seen a run-up to a peak gain of 61.28 percent on October 8, 2007, only to have those gains wiped out and be left with a –6.92 loss by the end of 2008. Our fiduciary responsibilities to our clients prevent us from employing such a risky strategy, and the SAA strategy was devel-oped for that reason.

The signals to enter or exit the equity market are created using a 200-day simple moving average (SMA) with an upper band that is 5 percent above the 200-day SMA and a lower band that is 5 percent below the 200-day SMA. Then, the entry and exit signals are as follows:

● Entry signal: The S&P 500 Index closes above the upper band (200 SMA + 5 percent)

● Exit signal: The S&P 500 Index closes below the lower band (200 SMA – 5 percent)

The chart below displays the entry and exit signals that would have been generated from December 31, 1999, to December 31, 2010:

Strategic Asset Allocation Model

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S&P 500: Entry & Exit Signals

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Over the 20-year period depicted in the plots above, the Strategic Asset Allocation model would have outperformed a buy-and-hold strat-egy while simultaneously reducing volatility by a significant amount, as reflected in the higher Sharpe ratio.

While the model is quite robust, it is by no means perfect. First, there is a possibility of a “false signal” being generated where an exit signal is followed shortly thereafter by an entry signal (or vice versa). However, this is infrequent and has only occurred twice in the last 20 years. The second flaw is that a small portion of the gains at the beginning of a bull mar-ket will always be missed while waiting for an entry signal to be given. However, even with those minor flaws, the Strategic Asset Allocation model still outperformed the buy-and-hold strategy, as seen previously. To further improve the strategy and outperform buy-and-hold by an even wider margin, the Tactical Asset Allocation overlay was developed.

Profit-and-Loss Equity Curve—Buy & Hold S&P 500 (1/1/1990 to 03/31/2011)Annual Rate of Return: 6.14% Sharpe Ratio: 0.10Trades/Year: n/a, Percent of Time in Market: 100%

Profit-and-Loss Equity Curve—Strategic Asset Allocation Model (1/1/1990 to 03/31/2011)Annual Rate of Return: 8.02% Sharpe Ratio: 0.25Trades/Year: .25 Percent of Time in Market: 75.37%

The effect of these signals is to enable us to capture the majority of the gains during bull (positive) markets while avoiding the majority of the losses during bear (negative) markets, as the following profit-and-loss charts demonstrate:

ADDITIONAL BENEFITS OF ThE SAA AND TAA MODELS

In addition to the benefits provided by the SAA and TAA models, such as supe-rior returns and reduced risk, there are other significant benefits. A recurring challenge inherent in the SMIF program is how to handle the transition between teams while still fully managing three portfolios and attempting to outperform the benchmarks. Getting the incom-ing class up to speed and imparting the top-down process can be very time-consuming. The SAA and TAA models can be learned, implemented, and main-tained much faster than the thorough top-down and equity analysis approaches, while still offering superior returns to the benchmark. Another valuable benefit of the models is that they give students exposure to technical and quantitative analysis techniques that had previously not received the same level of focus as fundamental analysis techniques.


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The Tactical Asset Allocation (TAA) model is a “style-rotation overlay” used in conjunction with the Strategic Asset Allocation (SAA) to further improve the potential gains beyond what is likely from the basic buy-and-hold approach. The TAA model exploits the well-known market anomaly of momentum (cf., e.g., Jegadeesh & Titman, 1993; Chan, Jegadeesh & Lakonishok, 1999) by pur-chasing the five top-performing ETFs that mimic the nine Morningstar styles:

The idea behind the TAA

model is that momentum tends to persist longer in styles than in sectors, so by purchasing the top relative performers, they will continue to outperform their peers as well as the benchmark. Process for assessing style momentum and getting invested:

1. The Strategic Asset Allocation model triggers a buy signal ● S&P 500 crosses above the 5 percent upper band of the 200-day simple

moving average.2. Measure the relative performance of each style ETF.

● From the recent market bottom or six months ago, whichever is sooner. ● Rank the style ETFs in order of returns since the bottom/6 months.

3. Purchase the top five ETFs ● Distribute capital equally between the five ETFs.

4. Recalculate the top five style ETFs on a monthly basis and sell/buy as needed if the rankings change

Performance ComparisonThe chart below shows the performance of buy-and-hold versus

Strategic Asset Allocation versus Strategic Asset Allocation with the Style Rotation Overlay (also referred to as “TAA”). Over the eight- year period, the three strategies returned 70.29 percent, 145.74 percent, and 196.58 percent, respectively. Another great advantage of this strategy is that it has superior gains while also reducing the volatility of returns.

The performance of the style rotation strategy (TAA) since the 2010-2011 SMIF team took over has been outstanding. From October 15, 2010 (the date of the buy signal from the Strategic Asset Allocation model) to April 30, 2011, all of the top styles have significantly outperformed the S&P 500 benchmark, and the ranking of the top five styles only changed one time over the 6.5 months. (See relative performance below.)

Tactical Asset Allocation Model

-50%

0%

50%

100%

150%

200%

12/31/2002 2/3/2004 5/3/2005 8/2/2006 11/2/2007 12/1/2008 2/2/2010 3/31/20111

Comparative Performance - December 31 2002 – March 31, 2011

Portfolio total Return 200-SMA Total Return SPY Total Return

196.58%

145.74%

70.29%

19.34%

23.76%

18.67%

22.91%

26.94%

22.35%

0%

5%

10%

15%

20%

25%

30%

IWR (Mid-Cap

Core) & IWF (Small-Cap

Growth)

IWP (Mid-Cap Growth)

IWN (Small-Cap

Core)

IWM (Small Cap)

IWO (Small Cap

Growth)

Composite Style Rotation

Relative Performance ofStyle Rotation vs. the S&P 500

S&P 50015.91%


smif annual report


smif annual report

Capital Preservation During Bear MarketsAs mentioned above, the SAA model gives a signal when it is highly likely that the equity market is heading into a bear (unfavorable) market so that we can shift assets into the fixed-income and money markets. Over the last 20 years, using this model would have avoided the majority of the losses from both the dot-com crash and the financial crisis crash, while still benefitting from a majority of the gains.

Stop Losses – Change from Trailing Stop to ATR Trailing StopTraditionally, SMIF has implemented a 15 percent trailing stop loss on all open positions. A trailing stop loss follows the position as the price moves upwards, and the stop is always 15 percent below the recent high. The intention is to protect the portfolio at all times from a sudden drop in price. However, with the volatility in the equity market over Q2 and Q3 2010, those trailing stop losses forced us out of all open positions, and reentering those positions forced addi-tional stops in the continued volatility. Once the volatility subsided and the market skyrocketed upwards over Q4 2010, the stop losses had effectively prevented us from capturing those gains. For example, the RKT position in the CFAOCF portfolio was stopped out twice in May 2010 for a net –15 percent loss. Similarly, ICON was stopped out in March 2011 for a near zero return. As of April 28, 2011, if the positions had not been stopped out, RKT would have had a 48 percent return and ICON would have had a 22 percent return. SMIF needed to find a better risk management method, one that would allow flexibility for volatile markets. (See below for a screenshot of RKT with a trailing stop loss. Over the year dis-played, RKT would have been stopped out five times with a

15 percent trailing stop loss, which was standard policy for all equity positions in portfolios managed by SMIF.) In response to the volatility concerns, the SMIF team has explored various options for stop losses. We agreed on a method of handling stop losses that dynamically adjusts to the volatility inherent in the market. We have chosen to adopt the Average True Range (ATR) technical indicator as a trailing stop, originally developed by the innovative J. Welles Wilder in 1978. The ATR formula is:

Averagen (Max(H,C[1] )- Min(L,C[1] ) )*M

where n = number of days lookback for average, H = today’s high, L = today’s low, C[1] = yesterday’s close, M = ATR multiplier

The benefit of ATR is that it will expand during volatile markets to give the position “breathing room” and contract during calm markets, ensuring that the stop loss is custom-ized to the current market. To further improve customization to the individual position, the two ATR inputs (n = number of days lookback for average and M = ATR multiplier) are optimized for the ideal parameters over the entire history of the stock or ETF using the TradeStation software platform. Since technical stops are not offered by the current portfolio brokerages, the ATR stop will be monitored at all times by a designated member of the SMIF team who will immediately send a sell order once the signal is triggered. (See below for a screenshot of an optimized ATR trailing stop loss on RKT. Over the yearlong time frame, the position would have been stopped out only once.)

Risk ManagementWith the 2007-2008 financial crisis and the volatility of Q2 2010 fresh in our minds, risk management was a major factor in the 2010-2011 team’s new strategy.

Effect of 15% Trailing Stop Loss on RKT Effect of an ATR Trailing Stop Loss on RKT


smif annual report

SMIF anticipated that there would be a rising interest rate environ-ment in Q3 and Q4 2010 and all of 2011. Under this type of environment, cash equivalent investment vehicles such as money market funds were one of the choices for the portfolio to reduce its duration in a hostile fixed-income environment. Moreover, SMIF believed that in a bear equity market, money-market funds would provide the portfolio with a level of principal stability that corresponded to SMIF’s investment philosophy of capital preservation. However, considering that the money-market fund can provide only the minimal yield, SMIF explored still other alternatives, such as taking several bond exchange-traded fund (ETF) positions with a combined duration lower than AGG, which is Barclays Aggregate Bond Index, considered the benchmark of the fixed-income market. In this way, our fixed-income positions could outperform the benchmark with maximum return. At the start of October 2010, SMIF began intensive research and came up with the following Exchange-traded funds (ETFs) as candidates of our final fixed-income positions:

SMIF analyzed each of these investments to determine the most appropriate instruments for inclusion in portfolios. CSJ (iShares Barclays 1-3 Year Credit Bond Fund) and VCSH (Vanguard Short-Term Corp Bond Fund ETF) offered great liquidity as well as satisfied the primary objectives for SMIF’s fixed-income allocation. CIU (iShares Barclays Intermediate Credit Bond Fund), on the other hand, offered interme-diate securities with the highest yield but the longest duration. MINT (PIMCO Enhanced Short Maturity Strategy ETF) was one of PIMCO’s most successful actively managed ETFs and was targeted to earn higher return than the money-market fund, with the shortest duration and lowest yield.

Given the extremely hostile environment in the fixed-income market, SMIF believed the short-maturity fixed-income ETFs provided acceptable return with a lower risk and offered protection against unforeseen downturns in the stock market.

In the CFAOCF and 49er Shops portfolios, from Q1 to Q4 in 2010, SMIF held CSJ and CIU for a combined 30 percent of the total portfolio to satisfy the fixed-income position. However, MINT (PIMCO Enhanced Short Maturity Strategy ETF) stood out with lowest duration among bond ETFs and an acceptable return due to our forecast of sharply increasing interest rates. So, on January 5, 2011, SMIF decided to select MINT as the main investment for the fixed-income allocation, which was reduced from 30 percent to 20 percent of the portfolio due to our pro-jection of bullish performance of equity market.

In the SMIF portfolio, from Q1 to Q4 in 2010, SMIF held CSJ, VCSH, and CIU for 30 percent of the total portfolio to satisfy the fixed-income position. Although the durations of CSJ and VCSH were a little longer, they provided higher yields, and 1.97 and 2.80 durations were bearable. However, SMIF believed that the yield on the CIU did not adequately compensate for the increase in risk. In addition, considering that the fixed-income allocation was reduced from 30 percent to 20 percent and the high transaction cost at Smith Barney Morgan Stanley, on February 22, 2011, the SMIF team decided to sell only CIU and to keep CSJ and VCSH in the SMIF portfolio.

The following table illustrates the allocations of each fund from Q1 2010 to Q1 2011:

Fixed-Income Holdings

Ticker Total Asset

Avg. Maturity

Avg. YTM

Duration

CSJ $5.2B 2.07 1.42% 1.97

VCSH $1.4B 3 2.05% 2.8

CIU $3.18B 5.06 2.79% 4.27

MINT $1.19B 0.88 0.19% 0.74

Ticker Avg. Maturity

Avg. YTM

Duration% of Portfolio

(% of Fixed Income)

Initial Allocation in SMIF Portfolio

CSJ 2.07 1.42% 1.97 10% (33%)

VCSH 3 2.05% 2.8 10% (33%)

CIU 5.06 2.79% 4.27 10% (33%)

Total 3.37 2.08% 3.01 30% (100%)

Initial Allocation in CFAOCF Portfolio

CSJ 2.07 1.42% 1.97 21% (70%)

CIU 5.06 2.79% 4.27 9% (70%)

Total 2.97 1.83% 2.66 30% (70%)

Revised Allocation in SMIF Portfolio

CSJ 2.07 1.42% 1.97 10% (50%)

VCSH 3 2.05% 2.8 10% (50%)

Total 2.54 1.74% 2.39 20% (100%)

Revised allocation in CFAOCF Portfolio

MINT 0.88 0.79% 0.74 20% (100%)

Initial allocation in 49er Portfolio

MINT 0.88 0.79% 0.74 25% (100%)


smif annual report

Health Care Select Sector SPDR® Fund (XLV)A similar screening process was followed in the assessment of

Health Care ETFs. Once again, only ETFs that met the established liquid-ity and volatility thresholds were considered for inclusion. Next, each of the remaining ETFs was assessed based on its industry allocations.

OBjECTIvE:

“The Health Care Select Sector SPDR® Fund, before expenses, seeks to closely match the returns and characteristics of the Health Care Select Sector Index (ticker: XLV). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.” (SPDRS.com)

SMIF closely monitored news surrounding the ongoing health care legislation debate and believed that the Health Care Bill would be substantially less invasive to businesses in this sector than many had originally thought. SMIF carefully tracked the sector’s performance and its reaction to news about health care legislation and felt that much of the market’s uncertainty about the possible legislation had resulted in unjustifiably depressed prices. Therefore, rather than a short-term cycli-cal investment decision, SMIF saw strength within this sector based on these perceived price inefficiencies, as well as the belief that a long-term trend in United States demographics would contribute to the strength of this sector, including the aging of the large baby-boomer population.

SMIF’s assessment of industry allocation within each ETF was based on the assessment of the Health Care Bill, as well as this long-term per-spective. This industry assessment led SMIF to favor Pharmaceuticals, Health Care Equipment and Supplies, and Health Care Technology. Also, SMIF desired minimum exposure among the available ETFs to the Biotechnology industry due to its volatile nature and the Health Care Providers and Services industry due to the intrusive nature of the pro-posed Health Care Bill.

The members of SMIF voted on a 5 percent total allocation to XLV for all three of the portfolios under SMIF management.

Positions Taken by the 2009-2010 SMIF Management Team *The 2008-2009 SMIF class was responsible for managing the program’s portfolios during one of the most severe market downturns in history. The class

accurately assessed this environment and appropriately allocated the program’s assets in money-market funds in an effort to preserve capital. The key chal-lenge that the 2009-2010 SMIF team faced was reassessing the market environment as well as ensuring that the assets under management were responsibly reallocated. SMIF’s assessment foresaw continued growth of the equity market. To facilitate a reallocation into equities and gain this market exposure, SMIF chose to utilize sector Exchange-traded funds (ETFs). Using the top-down approach to investing, SMIF concluded that the following sectors appeared to yield more attractive investment opportunities: Information Technology, Health Care, Materials, Consumer Discretionary, and Financials.

In order to determine which ETFs would be most appropriate for each portfolio, SMIF looked at a number of ETF metrics. First, a minimum average-trading-volume threshold was established to ensure any ETF that was considered would be sufficiently liquid to ensure ease of entry and exit into securities. Additionally, SMIF analyzed the frequency of 10 percent and 15 percent price declines since the March 2009 lows, which helped simulate the trailing stop-loss policies held in each of the portfolios managed and allowed SMIF to gauge the relative volatility of each security. Finally, SMIF researched each sector ETF’s specific industry allocations. SMIF analyzed the industries represented in the sector ETF to ensure the industries that SMIF expected to outperform had a heavier relative weight in that particular ETF. Within the chosen sectors, SMIF analyzed and purchased the following sector ETFs.

*Note: Because this annual report now covers the full calendar year of 2010—which includes work done by the previous SMIF team—much of the research in this section is credited to them.

Equity Holdings: 2009-10

Source: Bloomberg

iShares Dow Jones U.S. Technology Sector Index Fund (IYW)Within the Information Technology ETF universe, there were a number of

possible investment options. SMIF’s analysis of these alternatives was limited to ETFs that experienced an average volume threshold that SMIF deemed appropriate. In addition, Information Technology ETFs that demonstrated unacceptable volatility were not considered for inclusion in the portfolios. The remaining Information Technology ETFs were analyzed on the basis of their individual allocations within industries that SMIF deemed desirable. Industry selection was based primarily on SMIF’s market forecast and its relationship to critical success factors for industries within Information Technology. This analy-sis was coupled with analyst estimates to add credence to SMIF’s initial outlook on these industries. Within the Information Technology sector, the SMIF team concluded that the Computers, Software, and Semiconductor & Semiconductor Equipment industries were most favorable. The team deemed iShares Dow Jones U.S. Technology Sector Index Fund most appropriate due to the alloca-tion to these industries.

OBjECTIvE:

“The iShares Dow Jones U.S. Technology Sector Index Fund seeks invest-ment results that correspond generally to the price and yield performance, before fees and expenses, of the largest public companies in the technology sector of the U.S. market, as represented by the Dow Jones U.S. Technology Index.” (iShares.com)

SMIF concluded that IYW would be an appropriate investment for each of the portfolios and recommended a 5 percent total allocation to the SMIF, CFAOCF, and Forty-Niner Shops portfolios.

Source: Bloomberg


smif annual report

Rock-Tenn Company (RKT)Through the top-down approach to investing, the SMIF team con-

cluded that the United States economy was beginning to stabilize and recover from the severe recession that began in late 2007. Subsequently, SMIF assessed traditional market-cycle trends to determine those sec-tors that typically perform well during an economic recovery. Through this assessment, as well as an analysis of industry critical success factors and analysts’ recommendations, SMIF concluded that the Containers & Packaging industry would be among the best performing industries dur-ing 2010.

Given this assessment, SMIF concentrated a portion of its research efforts on securities within the Containers & Packaging industry. From this industry analysis, SMIF became cognizant of the fact that typical securi-ties within this industry display core-style characteristics, displaying both value and growth prospects. Given the nature of this industry, the SMIF team tailored an equity screen that could be described as a Growth at a Reasonable Price (GARP) screen.

For this equity screen, SMIF incorporated several different price multi-ples to assess the relative prices of each security within the industry. These price multiples included price-to-earnings, price-to-sales, price-to-free-cash-flow, and enterprise-value-to-EBITDA. Using these price multiples helped SMIF gauge which securities could potentially be more attractively priced relative to their industry peers. In addition to these price multiples, SMIF’s screen incorporated several financial ratios that are very important in assessing the quality of an equity security, including return on invested capital (ROIC) and return on equity (ROE).

Finally, SMIF incorporated the future growth prospects of each secu-rity by applying estimates of cash flow per share and earnings per share for the forward 12 months. These estimates were obtained through the estimates of Bloomberg Professional Service Terminal’s analysts.

Using these screening criteria, SMIF utilized the Bloomberg Ranking System to assess the most attractive securities. Using the results of this equity screen, SMIF began company-specific analysis of each of the top securities from the screening process. This analysis included peer evaluations, financial statement analysis, and multiple valuation models. Through this analysis, SMIF concluded that Rock-Tenn (RKT) had the best investment potential within its industry.

COMPANy OvERvIEw

Rock-Tenn (RKT) is a leading manufacturer and distributor of packaging products, recycled paperboard, containerboard, bleached paperboard, and merchandising displays. The majority of Rock-Tenn’s sales come from the United States; however, the company also has manufac-turing facilities in Mexico, Canada, Chile, and Argentina.

SMIF found several qualitative aspects of Rock-Tenn to be attractive. Among these was the fact that Proctor & Gamble, one of Rock-Tenn’s big-gest customers, recently named the company “2009 Supplier of the Year,” which underscored to the SMIF team Rock-Tenn’s success in becoming the low-cost provider of these products and the resultant competitive advantage. Also, Rock-Tenn recently began making concerted efforts to pay off its heavy debt load, which resulted in credit rating upgrades by both major credit rating agencies in November 2009.

SMIF’s assessment of the company’s financial statements concluded that Rock-Tenn’s cash from operating activities, return on invested capital, and improving EBITDA margins were all major signs of company strength. Rock-Tenn is classified as a small-cap company with over 10,000 employ-ees as of March 2010.

vALUATION

SMIF’s equity selection process entails in-depth valuation models that allow SMIF to calculate an estimated intrinsic value and target prices for its equity selections. The 2009-2010 SMIF team utilized several valuation models when assessing equity securities. These valuation models included the Bloomberg Dividend Discount Model, the Relative Valuation Model, and the Discounted Cash Flow Model. The following figure displays the Dividend Discount Model, as provided through the Bloomberg Professional Service Terminal.

In addition to the Dividend Discount Model, SMIF also used relative valuation to assess Rock-Tenn. SMIF’s Relative Valuation Model used price multiples to assess the current price of Rock-Tenn in comparison with aver-age price multiples for its closest peers as well as with the security’s 10-year average price multiples. In addition, SMIF utilized the Discounted Cash Flow Model to assess the fair market value of Rock-Tenn. Given the extreme dif-ficulty of forecasting future cash flows, growth rates, and the applicable discount rate, SMIF’s philosophy was aimed at formulating conservative estimates of these variables to ensure a margin of safety and, therefore, to limit the downside risk to SMIF’s portfolio. SMIF’s Discounted Cash Flow Model incorporated variables that also accounted for industry dynamics.

SMIF combined these three valuation models, as well as the average analyst target price, to arrive at a target price for Rock-Tenn. SMIF meticu-lously scrutinizes and reassesses this target price over the course of the investment’s holding period to ensure that it is conscious of changing mar-ket, industry, and company-specific conditions. The SMIF sell discipline, in combination with a trailing 15 percent stop loss, also incorporates this tar-get price estimation and any potential revisions to this target price going forward during the holding period.

PERFORMANCE

On April 9, 2010, SMIF purchased 99 shares of Rock-Tenn for the CFAOCF portfolio at $47.75. As of market close on April 30, 2010, Rock-Tenn had returned 11.47 percent, compared to a benchmark return of 1.04 percent. At the time of purchase, this security was deemed too volatile for inclusion in the Forty-Niner Shops and SMIF portfolios, which were (as of the end of Q1 2010) restricted to a 10 percent trailing stop-loss policy. (Note: Following a revision to the SMIF Investment Guidelines, Rock-Tenn was also purchased for the SMIF portfolio on May 5*.)

*Note: Investment in Rock-Tenn (RKT) occurred following the first quarter of 2010.

Source: Bloomberg


smif annual report

CSULB SMIF Team 2010-11Back row: Whitney Odom, Daniel Russell, Piero Sandoval, Bruce Sparks, Sean Filbin, Nupur Shah, William ChauFront row: Brian Leip, Kai Xu, Artaud Caloni, Elizabeth Van, Jesus Caro, Taketoshi Mikami, Ross Atefi, Katie Christensen


smif annual report


smif annual report

On January 5, 2011, we assumed management of a new portfolio for the CFAOCF, and we purchased the five style ETFs that were demon-strating the most momentum at that time. The following table shows the detailed information about the positions taken:

This strategy was also adopted for the 49er Shops portfolio after a presentation demonstrating the methodology and per-formance. On February 3, 2011, we purchased the following positions:

Rydex S&P Equal Weight ETF (RSP)SMIF realizes that the process of researching, presenting, revis-

ing, approving, and purchasing individual equity positions can take a considerable amount of time. In order to gain market exposure while that research was being conducted, SMIF voted on and approved the purchase of RSP, an equal-weighted version of the S&P 500 for the CFAOCF portfolio. As opposed to the more commonly used market-cap weighted S&P 500 (SPY), the equal-weighted version had historically outperformed over bull markets, yet underperformed in bear markets. Because the Strategic Asset Allocation model gives a clear signal of when to exit the equity market when a crash is coming, the SMIF team decided that would be the superior broad market index to use.

On May 9, 2011, SMIF purchased 50 shares of RSP for the CFAOCF portfolio at $51.50.

Equity Holdings: 2010-11Tactical Asset Allocation Model – Top Five Styles

As the 2010-2011 team was being selected in the summer “boot-camps”, the members began their macroeconomic assessment of the investing environ-ment. By the end of August, as the directors made their selections of the team members, the equity markets were hitting the bottom of a 16 percent sell-off and all of the positions taken by the prior team in the CFAOCF portfolio and the Forty-Niner Shops portfolio had been stopped out. The only surviving position was Rock-Tenn in the SMIF portfolio.

The volatility in the market initiated a necessary reevaluation of our risk management strategy. After examining several alternatives, we decided on the Strategic Asset Allocation model and ATR trailing stop loss (both discussed in previous sections).

During the downturn over the summer, the price of the S&P 500 had breached the lower 5 percent band of the SAA technical indicator, and that was a signal to be out of the equity market. As the market turned back to the posi-tive in the fall of 2010, we waited until the upper 5 percent band was breached. This happened on October 15, 2010, and we immediately voted to buy the five top-performing style ETFs for the CFAOCF portfolio in accordance with the TAA model. The investment was approved, and the shares were purchased on November 5, 2011. The following table shows the ETFs we purchased, the style they represented, the number of shares we bought and the purchase price.

* Includes commissions.

These positions were held until January 4, 2011, when all of the positions were liquidated in the portfolio as the SMIF team’s tenure as managers shifted to a different CFAOCF portfolio. The holding period return for the positions, from November 5, 2010, to January 4, 2011, was a cumulative 6.30 percent, which compared to the return of the S&P 500 over the same period of 4.01 percent. The strategy was very successful over the holding period, as the return of each and every position exceeded the S&P 500’s return for the same period.

Ticker Style No. of Shares

Price Per Share

Total Investment*

IWP Mid-cap growth

125 $53.53 $6,690.75

IWO Small-cap growth

82 $81.42 $6,676.44

IWN Small-cap value

100 $67.50 $6,749.80

IWM Small-cap blend

91 $73.54 $6,692.14

IWF Large-cap growth

120 $55.63 $6,675.60

Ticker StyleNo. of Shares

Price Per Share

Total Investment

IWM Small-cap blend

60 $78.64 $4,718.40

IWN Small-cap value

66 $71.37 $4,710.42


53 $87.98 $4,662.94

IWP Mid-cap growth

82 $56.90 $4,665.80

IWR Mid-cap blend

46 $102.15 $4,698.90

Ticker StyleNo. of Shares

Price Per Share

Total Investment

IWM Small-cap blend

126 $79.73 $10,045.98

IWN Small-cap value

138 $72.44 $9,996.72


113 $89.10 $10,068.30

IWP Mid-cap growth

171 $58.61 $10,022.31

IWR Mid-cap blend

95 $105.13 $9,987.35


smif annual report

Iconix Brand Group, Inc. (ICON)For 2011 the SMIF team adopted a modified version of the earlier

selection process for individual equities. Our process began with looking at the styles that our momentum model showed were in favor with the equity markets. Within these styles we attempted to find individual equi-ties that in-depth analysis suggested are likely to outperform the style as a whole.

In October, when our indicator signaled that we should be investing in equities, the top-performing style was small-cap growth. Therefore, we began our search for individual equities in this style.

In order to narrow the number of stocks to a manageable number, we began by running a ranking screen of the small-cap companies on the Bloomberg Professional Service Terminal. The following chart shows the factors used and the weight given to each one:

Among over 1000 small cap companies that Bloomberg examined, the individual equity that best matched this combination of factors was Iconix Brand Group (ticker: ICON). It is important to note that the factors and weights of the screen are different for value, growth, or blend.

Our next step in the process is to determine the intrinsic value of an equity we are considering. We do this using a variety of methods, includ-ing the dividend discount model (DDM) and the discounted cash flow model (DCF) and comparing relevant ratios to industry peers. In the Iconix case, the company does not pay dividends; therefore, we used the DCF and relevant ratios. Both of these methods yielded intrinsic values that significantly exceeded the market price. When there is a significant differ-ence between the market price of an equity and our valuation, the next step is to relentlessly search for an understanding of the reasons that might underlie the market value. In-depth analysis of the Iconix financial statements and the SEC filings showed that much of the growth over the last five years had been financed by issuing new equity shares. Therefore, we recast the forward-growth estimates to include the effects of a similar dilution of the shareholders’ position. After these adjustments, our best evaluation of the value of the Iconix stock was $29.50. This target price became part of our sell discipline.

On January 23, 2011, we purchased 117 shares at a price of $19.69 per share for the CFAOCF portfolio. The stock rose to $23.17, but dropped as a result of the volatility that occurred in March due to the political unrest in the Middle East. Our 15 percent trailing stop loss was triggered on March 17, and the shares were sold for $19.68 per share.

Rock-Tenn Company (RKT)As discussed previously, Rock-Tenn was purchased by the 2009-2010

SMIF team for all portfolios; then, during the May 2010 volatility, Rock-Tenn was stopped out in the CFAOCF and 49er Shops portfolios but remained open in the SMIF portfolio. On January 24, 2011, Rock-Tenn com-pany announced the acquisition of competitor Smurfit-Stone Container Corporation. As a result of the news, prices for both companies shot up, and the position was showing a 33 percent gain for the SMIF portfolio. This drew the focus of the 2010-2011 student portfolio managers, and there was in-depth discussion about whether the $3.8 billion debt that Rock-Tenn incurred to finance the purchase would make the company insolvent, whether we should take profits, or whether the positive market reaction indicated that this is a strong move for the company and the position should be held.

A thorough analysis of Rock-Tenn individually, Smurfit-Stone indi-vidually, and the projected combined company was required. There were extraordinary challenges involved. This was the first time a SMIF team per-formed a merger-and-acquisition analysis. Also, the limited availability of data on the combined company required a complicated combination and extrapolation of both companies’ financial information. Lastly, to ensure the most reliable and credible evaluation results, multiple separate testing methods were performed and repeated for various scenarios.

First, SMIF analyzed the company’s ability to repay the debt. This was completed through a financial stress test, Altman’s z-scores, and the evalu-ation of the management team’s skill set in handling large acquisitions. It was determined that Rock-Tenn’s repayment ability had declined in the short term, but was in line with previous successful acquisitions by Rock-Tenn and had a strong likelihood to improve over time.

Next, SMIF conducted a peer analysis, calculated the intrinsic value and target price, and looked at the opportunities and uncertainties after merger. The valuation models of discounted cash flow and relative valu-ation projected that the intrinsic price of the combined company was between $95 and $110. As a result of the in-depth merger analysis and the positive implied result for the combined company, SMIF decided not only to hold the position in the SMIF portfolio but also to purchase the position in both the CFAOCF and the 49er Shops portfolios.

On May 9, 2011, SMIF purchased 37 shares of Rock-Tenn for the CFAOCF portfolio at $69.10. At the same time, on May 9, 2011, SMIF also purchased 37 shares of Rock-Tenn for the 49er Shop portfolio at $69.10.

Fully Invested – CFAOCF PortfolioWith the purchases of RKT and RSP, the SMIF team achieved a fully

invested CFAOCF portfolio. This achievement was a notable milestone because it was the first time in the history of the SMIF program that this portfolio had been fully invested. We anticipate future SMIF teams to con-tinue this trend until all three portfolios are fully invested.

Factor Weight

Projected growth in EBITDA (1 year forward) 10%

Historical growth in EBITDA (last 3 years) 10%

ROE (latest ttm) 15%

Projected sales growth (2010-2011) 10%

Historical sales growth (last 3 years) 15%

Histroical FCF growth (last 3 years) 25%

Profit Margin 15%

RSP34%

RKT5%

IWM8%

IWN8%

IWO8%

IWP9%

IWR8%

MINT20%

CFAOCF Portfolio - Fully Invested


smif annual report

CFAOCF Portfolio PerformanceThe CFAOCF portfolio recorded a 1.00 percent return for the

2010 calendar year and 2.86 percent year-to-date return by the end of Q1 2011. The result, as shown below, indicates that the total port-folio return of CFAOCF portfolio was 3.76 percent compared to the benchmark return of 15.20 percent. Our underperformance was due in large part to the volatility over Q2 and Q3 2010, stopping us out of all open positions, and the resultant majority cash position when the market rebounded in Q4. It should be noted that although the March 31, 2011, holdings show 38 percent in money market, that portion was invested in RKT and RSP before the end of the Spring 2011 semester, and the CFAOCF portfolio is now fully invested.

49er Shops Portfolio PerformanceRights to manage the 49er Shops portfolio were originally

granted in 2010. However, the portfolio was in the process of trans-ferring brokers to Wells Fargo and was unavailable until February 2011. SMIF immediately began the process of getting the portfolio invested and on February 3, 2010, voted to invest 50 percent of the portfolio to the TAA style rotation model and 25 percent to the ultra-low duration fixed-income ETF, MINT. The vote was approved, and investments were made. Even with one quarter of the portfolio held in near-zero-return money markets, the portfolio performed admi-rably over Q1 2011, returning 2.44 percent versus the benchmark return of 3.79 percent. Similar to the CFAOCF portfolio, Rock-Tenn (RKT) was purchased at 5 percent of the total portfolio subsequent to the March 31, 2010, holdings shown below.

SMIF Portfolio PerformanceAfter the merger of Smith Barney and Morgan Stanley in 2009,

the cost structure for the SMIF portfolio increased, thus mak-ing investing in that portfolio prohibitive. The student portfolio managers explored multiple options on how to best navigate this challenge, including passive management through broad market ETFs, an elaborate quantitative sector rotation strategy with less frequent trades, and discussing potential cost structure changes with Wes Seegers at Morgan Stanley Smith Barney. Once all avail-able options were considered, it was decided that changing cost structure to a 1.1 percent flat annual fee instead of a transactional-based cost structure was the best option and would eliminate the cost consideration from the investment decision-making process. The cost structure change was proposed to the SMIF Advisory Board for approval on May 9, 2011. No new positions were taken over the 2010-2011 year due to the detrimental cost implications. We anticipate the SMIF Advisory Board will approve the change in cost structure, at which point the SMIF portfolio will be invested similarly to the CFAOCF portfolio.

Portfolio PerformancePortfolio Benchmarks: To benchmark our performance, SMIF uses a composite index that comprises 70 percent U.S. equity market and 30 percent U.S. government and investment-grade corporate bond market . This allocation is intended to represent our asset allocation under normal, bullish market conditions. For the 70 percent U.S. equity market portion of the composite index, we will use the S&P 500. For the 30 percent fixed-income portion, we will be using AGG (iShares Barclays Aggregate Bond Fund) as opposed to the LGCI (Lehman Government and Corporate bond index) because the data is available for free, can be easily accessed from any financial information Web site, and represent the investment-grade fixed-income markets that are permissible for us to invest in.

-9.00%

-6.00%

-3.00%

0.00%

3.00%

6.00%

9.00%

3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011

CFAOCF Portfolio Performance

CFAOCF Benchmark

0.00%

1.00%

2.00%

3.00%

4.00%

3/31/2010 6/30/2010

49ers Portfolio Performance

49ers Benchmark

-10.00%-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%

12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011

SMIF Portfolio Performance

SMIF Benchmark

CFAOCF Portfolio - Holdings as of March 31, 2011Money Market: 38%, IWM: 9%, IWN: 8%, IWO: 9%, IWP: 8%, IWR: 8%, Mint: 20%

49er Shops Portfolio - Holdings as of March 31, 2011Money Market: 24%, IWM: 10%, IWN: 10%, IWO: 11%, IWP: 10%, IWR: 10%

SMIF Portfolio - Holdings as of March 31, 2011Money Market: 73%, CSJ: 10%, VCSH: 10%, RKT: 7%

Quantitative Sector Rotation ModelConcerns over the prohibitive cost struc-

ture in the SMIF portfolio led to an exploration of alternative investment techniques, one of which, the quantitative sector rotation model, involved countless hours of research. Although the model was not at a stage that the team was ready to implement, the research that was done and the learning process was valuable enough to warrant mention in the annual report.

As noted above in the evolution of strat-egy section, the “traditional” sector rotation model is plagued by many flaws that caused the strategy to become unprofitable in 2010. The quantitative sector rotation was developed both to address those flaws and also to reduce the transaction cost structure for use in the SMIF portfolio. The model is composed of two parts: the Strategic Asset Allocation (SAA) and the quantitative sector rotation model. As indi-cated by the name, the SAA layer is identical to the one mentioned previously. It provides the foundation that the quantitative sector rotation model builds on.

The quantitative sector rotation model layer is similar to the style rotation in that it attempts to isolate and profit from momentum anoma-lies inherent in the market. However, there are many subtle variances from the style rotation model, such as the time frame to measure relative performance rankings, the number of sectors chosen to invest in, the inclusion of RSP as a “fixed” investment, and of course the num-ber of trades.

SMIF made intense efforts to address all questions by fellow team members and

Directors by analyzing the past sector perfor-mances, finding relationships between the sectors and the stock market in mathematical expressions, and doing multiple time-consum-ing back-tests. Changes were made week after week, and the updated model was presented to the class and the Directors for intense scrutiny and discussion.

The performance of the model was impres-sive, but members of the SMIF team and the Directors remain concerned with some aspects of the model design that have not been addressed and that could lead to problems in the future. These will remain a legacy issue and will hopefully be tackled and resolved by a future SMIF team. In the end, as education is the primary goal of SMIF, this research project suc-cessfully served that purpose.

Investing InternationallyThe SMIF team had initially carved out a

percentage of the equity portion of the port-folio for investing internationally. International ETFs were preferred over foreign equities in the investment policy statements for each portfolio. A major benefit of investing internationally is the reduction of systematic risk—which, unlike diversifiable risk, cannot be eliminated through diversification in U.S. market equities—due to the difference in correlation between the countries.

The SMIF team reviewed the available international ETFs and the financial headwinds and tailwinds involved with each country, such as uneven GDP growth, debt overhang,

increasing trade among emerging market countries, population dynamics, international trade and currency issues, and unique risk fac-tors. After the analysis, SMIF recommended two international ETFs for purchase in the portfo-lios: Wisdom-Tree’s Dividend Paying Emerging Market ETF (DEM) and MSCI Canada Index ETF (EWC).

SMIF Directors were concerned about making international investments without a thoroughly researched risk management strat-egy. International markets are on average 40 percent more volatile than U.S. markets, and the huge spikes in volatility over Q2 and Q3 2010 made investing internationally a potential risk. The team was tasked with determining a risk management sell strategy that would properly handle the volatility inherent in international markets while avoiding potential losses. Many different technical indicators were attempted, such as simple moving average crossovers, relative strength indicators, moving average convergence/divergence (MACD), and Bollinger bands; however, all were found to be insuffi-cient in managing risk and protecting capital. Toward the end of the Spring 2011 semester, a momentum/rotation model similar to the TAA style rotation model was attempted; however, it resulted in a large number of trades and still had more volatility than was acceptable for the port-folio’s risk tolerance. As with the quantitative sector rotation model, even though a satisfac-tory international risk management model was never determined, much was learned by the students in the process of exploring and researching it.


smif annual report

Research and DevelopmentCSULB SMIF Students discussing ideas

From lef to right:

Bruce Sparks, Artaud Caloni, and Dan Russell


smif annual report

Management of Real-Money PortfoliosStudents in the SMIF program get the rare privilege

of being able to manage real-money portfolios for three unique clients. As mentioned above, this gets the lion’s share of attention for the program, but the majority of a typical SMIF student’s time is directed toward other pursuits.

TeamworkThe SMIF program encourages students to think critically

of ourselves and one another. This created a safe space for us to come to disagreements and reach different conclusions on certain issues. It also encouraged a sense of camaraderie between us because we could explore new ideas we other-wise would not have explored. Learning to work in groups with people you may not completely agree with is an essen-tial skill in today’s workplace. Additionally, the demanding schedule that SMIF requires encouraged us to use modern communication tools to complete our work. The 2010-2011 SMIF team utilized cutting-edge communication and collab-oration tools such as Google groups and DropBox, a shared cloud storage program.

NetworkingNetworking events provided an array of learning experi-

ences for the SMIF class. Our networking events ranged from CFAOC/CFALA events, to Host-A-Student events, to private lunches with financial professionals. CFAOC/CFALA events required both a time, a driving, and a monetary commitment from students, as the events were in various places around the OC and LA areas and each event fee was furnished by the students. Although the actual networking opportunities at these events were few, the information often presented useful knowledge in applying our portfolio strategy. Host-A-Student events provided a less formal setting for learning and a better forum for developing our network of contacts. At Host-A-Student events we speak to a financial professional,

usually in a close private setting, and the information is pre-sented less formally and more interactively. They allowed us insights into the job market and our conception of the finan-cial markets. Private lunches offered the best opportunity for networking and learning because they were more personal. They offered one-on-one interaction with investment profes-sionals that students would rarely find elsewhere.

Host-A-StudentHost-A-Student events were an important part of the

learning experiences for the SMIF class. A less formal setting allowed us to engage our presenters with questions and understand their portfolio strategies. Host-A-Student events also introduced us to many trading strategies in the market. One common lesson was the way segmentation allowed many financial firms to operate effectively with little risk of competition. We were able to learn how many professionals developed their careers by finding a niche segment in the market and establishing a firm. Host-A-Student events were also more personal and allowed the presenters to meet all the students in more engaged way.

CFAOCF Portfolio CompetitionCFAOCF portfolio competition provided many learning

experiences for the SMIF class. The legacy of CSULB SMIF is the quality of the work that it presents. This legacy required our class to understand the development and application of our strategy in a passionate way. The presentation of our material required work to be assigned, distributed, and completed in a meticulous fashion. A strict adherence to that level of quality forced many of us to increase the qual-ity of work we produced. This was demonstrated during all of the CFAOCF portfolio presentations. The questions posed by the CFAOCF board were always carefully and thoughtfully answered. We were often commended on the reasonable-ness on our answers.

Learning ExperiencesThough portfolio returns might get the most attention by onlookers

of the SMIF program, in reality that is only a small part of the full

SMIF program experience. The program’s main focus is on learning,

networking, working in teams, creating new experiences, and developing

professional skills that will be vital in the students’ future careers.


smif annual report

Q-G.A.M.E. ForumThe University of Quinnipiac in Connecticut presented the

inaugural Quinnipiac Global Asset Management Education (Q-G.A.M.E.) Forum from March 31 to April 2, 2011. Q-G.A.M.E. provided a unique forum bringing together students, faculty, and Wall Street professionals in an interactive learning envi-ronment to discuss a range of issues facing the investment profession. SMIF sent eight representatives to this event to learn and exchange insights on investing with industry pro-fessionals, academia, government representatives, and other student-managed investment funds from all over the world. Our representatives were funded in part by a grant from the Instructional Related Activities Board, to whom the student-managers owe a debt of gratitude. This forum helped our students enhance their learning experiences and network with investment professionals. Each ten-hour day was filled with activities ranging from keynote presentations with question-and-answer sessions, to smaller breakout sessions focusing on a range of investment topics, including security analysis, portfolio management, and career strategy.

On the first day, speakers discussed topics ranging from the economy, the stock market, alternative investments, and corporate governance. Each keynote presentation began with the speakers introducing themselves and framing the issues which were of greatest importance to them. A distinguished student panel then offered a few questions before opening the discussion to the floor. Bruce Sparks, a member of the SMIF team, was honored by being a part of the student panel ask-ing questions regarding corporate governance. Popular topics included government intervention, monetary policy, alterna-tives to the U.S. dollar as a global currency, and the future of the investment profession.

The second day consisted of breakout sessions, which were held in smaller classrooms and covered more spe-cialized topics. The smaller group size and more intimate setting allowed for interactive discussions. Our SMIF rep-resentatives had the opportunity to attend various topics, including Equity Portfolio Management, Operation and Regulation of Investment Vehicles, Security Analysis, and Portfolio Construction. The opportunity to hear from the top names in the industry and get answers to our questions, which were more complex than textbook questions, was a rewarding experience.

The final day consisted of career strategy forums, which were also held in small groups. They gave our representatives a chance to find out how the professionals achieved their

goals, which strategies they used, and how to avoid common mistakes in career planning. The experience at Quinnipiac was enlightening and rewarding, and we are confident that the lessons learned will play a key role as we enter the investment profession. The learning experience, which transcended text-books, will remain with us for the rest of our lives.

ChallengesIn addition to all of our successes, the SMIF class also faced

some challenges. Some of these challenges included limited access to the portfolio an overemphasis on presentations, and market penetration.

Having limited access to the actual portfolio created a unique challenge to the SMIF class because it meant that we could not get accurate and timely information and that that there would be a delay in the execution of our stock and ETF trade orders. SMIF overcame part of this concern by developing a spreadsheet with live updates that showed the student-managers the balance of the portfolio and positions at all times.

Another major challenge came from the heavy empha-sis on presentations and papers. This included quarterly and annual updates, the RFP competition, the CFA annual report, and the SMIF annual report, as well as the weekly presen-tations to classmates required whenever a new potential position is proposed. This shifted the majority of the weekly class time to creating, practicing, and polishing presentations. While presentations are a vital skill for the students’ future careers, the sheer number of presentations and papers over-whelmed the portfolio management aspect of the program.

This may have also contributed to the last major challenge, market penetration. The SMIF class requires a supermajority in order to execute a purchase order. In practical terms this means that 12 out of 15 students must be convinced that the investment will be profitable. With a room full of strong and educated people, there are bound to be disagreements. One additional problem with this structure is that if three students are absent, only a unanimous vote will pass, and if four or more are absent, voting is impossible. Both of these factors made investing in the portfolios an exercise in sheer determination. Student-managers who were able to make take their investment ideas through “the gauntlet,” success-fully address the myriad concerns of the Directors and their classmates, and then get the position voted into the portfolio deserved accolades.

CSULB SMIF Team at Q-GAME Forum with Mr. Tom Keene, CFA

Tom Keene is an editor-at-large for Bloomberg News and host of Bloomberg Surveillance on Bloomberg Radio and Surveillance Midday on Bloomberg Television.


smif annual report

SMIF students work to promote the pro-gram through in-class presentations to all of the finance classes, posters, word of mouth, the SMIF Informational Night, and the SMIF pro-gram applications that the Directors send to qualified Finance majors.

Posters are readily seen throughout the College of Business Administration Building, and current SMIF students work to promote the program by informing friends and fellow class-mates. The in-class presentations are meant to raise awareness and provide students with a brief summary of the SMIF program. Also, dur-ing the presentation students are encouraged to attend the SMIF Informational Night to gain a more in-depth understanding of the program. At the Informational Night, students learn about the benefits of joining the program and the real-world experiences that one could expect to gain by participating in the management of three different portfolios. The event also pro-vides students with an overview of what the program entails and the strategies that are cur-rently being utilized in the portfolios.

SMIF’s extensive marketing efforts aim to reach out to those who are best qualified to ensure the portfolios are managed carefully and responsibly. All of the marketing efforts will serve to promote awareness of the program and to expand the recruitment pool.

Recruitment and Marketing

Website RedesignSMIF’s website went through a major revamp during the

2010-2011academic year. The goal of the new design was to emphasize the student-managers of the portfolio. The header rotates through por-traits of all the student-managers.

The new site is designed to impart the key information points to all types of audiences. Each section is summarized in the first paragraph, which stands out more than the other paragraphs. The site has a certain aesthetic look and feel to it and creates a permanent SMIF brand recog-nized in many places.

The student portraits, presented throughout the website, are intended to emphasize each individual student and to reflect his or her hard work and dedication put forth throughout the year-long program.


smif annual report

Future of SMIFOver the years, SMIF has been working to make the transition process from the present class to the incoming class run more smoothly and more efficiently. To do so, SMIF employs three boot camp sessions during the summer. Prospective students are quickly brought up to speed on what is currently happen-ing in each of the three portfolios under SMIF’s management. The boot camp sessions allow students to interact with the cur-rent year’s SMIF students and familiarize themselves with what would be expected of them should they be selected to into the program. Students update themselves on the condition of the economy, the financial markets, and specific sectors and industries to become better prepared once they enter into the program. The SMIF program offers a challenging experience, and the expectations from each incoming class increases as the years go by.

The SMIF program always seeks to increase the amount of funds under its control. As a result of the program’s efforts, the Forty-Niner Shops portfolio was recently added under SMIF’s management. More funds tend to translate into a higher degree of attractive-ness from prospective students, and this will increase the number of applicants in the recruitment pool. Also, with more funds available, students will be able to incorporate more strategies and add more securities to the portfolios, thus fostering their learning experience. Another advantage of enlarging the pool of assets under SMIF’s management is that it will serve to raise not only the prestige of the program but the prestige of the Finance Department, as well as enhance the reputation of CSULB.


smif annual report

Ross AtefiRoss Atefi will be graduating in Spring 2011 with a BS in Finance-Investments. After attaining his degree, he plans to begin his career as a comprehensive Financial Planner. This career choice stems from his inter-est in assisting individuals with their investment decisions, managing their portfolios, and guiding them to a successful retirement. Ross holds a GPA above 3.5 overall with a 4.0 in Finance courses. He has also worked at sev-eral internships in the financial services industry, including an internship with Morgan Stanley Smith Barney, and is currently working for Lincoln Financial Advisors. He attests to the SMIF program as an unmatched learn-ing and networking experience while in school.

Artaud CaloniArtaud Caloni graduated in 2008 with a joint baccalaureate program awarding degrees from the Business School of La Rochelle, France, in International Finance and from University of West of England, Bristol, United Kingdom. In 2011 Artaud graduates with a Master of Business Administration, with a major in Finance and a concentration in invest-ments. He carries a 4.0 GPA in-major and a 3.85 GPA overall. He holds Bloomberg Product Certification in both Equity and Fixed-Income Analysis. Through his participation in the SMIF, Artaud participated in the development of the program’s economic forecast. He also monitored, established profit and loss statements, reconciled official documents, and tracked the performance of the CFAOCF portfolio. Artaud is currently seeking employment in a research or sales department of a major invest-ment bank, located in New York City, with the ultimate goal of becoming a CFA® Charter Holder and potentially moving toward a buy-side position. In his spare time, Artaud enjoys running, swimming, and the French culi-nary arts, which is part of his culture.

Jesus CaroJesus Caro will be graduating in the Spring of 2011, receiving a BS in Finance-Investments and Accounting. As an undergraduate, Jesus has competed in parliamentary debate with other public and private univer-sities. He won the Pacific Southwest Conference Forensics Association tournament and was ranked among the top 20 percent in the country. He also competed academically and was awarded a position on the Dean’s List in 2008 and 2010. Jesus was also active in his local chapter of the Financial Management Association and held the positions of General Vice-President and Vice-President of Marketing in 2010 and 2011, respec-tively. In addition to being on the Executive Committee, Jesus is also a part of the FMA National Honor Society. He is Bloomberg Certified in Core Functions as well as Fixed Investments. He plans on taking the CFA Level 1 Exam in Spring 2012 and later entering the investment and tax consulting field.

William ChauWilliam Chau graduates in Spring 2011 with a BS in Business Administration, with an emphasis in Finance-Investments. Upon gradu-ation he plans on gaining experience as a junior analyst within the investment banking or money management professions. He holds a 3.1 GPA and is Bloomberg Certified in Fixed-Income and Equity markets. In the future he intends to earn an MBA and start up his own business. He enjoys investing, reading, running, and cooking.

Student Portfolio Managers


smif annual report

Brian LeipBrian Leip is a senior at CSULB and will be graduating with a BS in Finance-Investments in Spring 2011. He has a 3.7 upper-division GPA with a 4.0 GPA in the major and was on the Dean’s List and President’s List in Spring 2009 and Fall 2009, respectively. He is a member of multi-ple honor societies including Beta Gamma Sigma, Golden Key, Financial Management Association, Phi Theta Kappa, and the CSULB College of Business honors program. As part of the CSULB CBA honors program, he recently completed an honors thesis study entitled “Profitability and the Impact of Complexity on Automated Technical Trading Systems in the Foreign Exchange Market,” for which he received an honorable mention in the 2011 student research competition. Brian has further advanced his career while finishing his degree, recently being promoted to the position of Treasury Manager at a local leasing firm. After Brian graduates in May, he will begin preparing for the CFA® Level I exam in December as well as the GMAT. He hopes to gain admittance to a top-tier business school so he can continue exploring his passion for finance.

Sean FilbinSean Filbin will be graduating in Spring 2011 with a BS in Finance – Financial Management. After graduation, he plans to begin his career as a junior analyst for a wealth management firm in Southern California. He is Bloomberg Certified in equity markets. During the SMIF program, Sean helped develop the international forecast and focused on managing risk in international investments. He hopes to work locally so he can continue to surf on a regular basis.

Taketoshi MikamiTaketoshi Mikami is graduating in Spring 2011 with a BS in Finance-Investments. He holds an above-3.5 in-major GPA. During his undergraduate study he attained Dean’s List honors in Fall 2009 and Spring 2010. After attaining his degree, he plans to work in finance domestically or internationally. He is currently seeking to gain experience as a junior analyst within the investment banking or money management professions. He plans to pass the CFA® Level I exam in December 2011. His ultimate goal is to manage a fund size above one or two billion dollars.

Katie Nicole ChristensenKatie Nicole Christensen is a junior and plans on graduating in Spring 2012 with a BS in Finance – Investments. She currently holds an overall GPA of 3.545 and a 3.6 GPA for upper-division courses in the College of Business Administration. She was on the President’s List both semesters of her sophomore year and on the Dean’s List in Fall 2010. In addition, she is a member of several honor societies, including the National Society of Collegiate Scholars, the Golden Key International Honour Society, and the Order of Omega Honor Society. Katie is currently the Treasurer for her sorority, Delta Zeta. She currently holds an internship at Lincoln Financial Advisor as a marketing assistant and also works as an assistant to two planners in the office. This summer, she plans to obtain her Real Estate Salesperson License in order to meet her broad range of interests, which stretch from real estate to financial management. Katie enjoys traveling, reading, and watching movies.


smif annual report

Whitney M. OdomWhitney M. Odom is graduating in May 2011 with a B.S. in Finance with a concentration in Investments. Whitney earned the honor of being included on the Dean’s List for academic achievement. She is currently a member of the Financial Management Association and is Bloomberg Certified in Fixed Income and Equities. Whitney’s interests include both Finance and Accounting, and she plans on going back to school to finish up her Accounting degree. After graduating, Whitney plans on working for a major financial firm and attaining an MBA in Mathematics.

Nupur ShahNupur Shah will be graduating in May 2011 with an MBA with a concen-tration in Finance, and he has a BS in Computer Science from California State University, Long Beach. Nupur currently works as a Senior Web Architect for the College of Business Administration at CSULB. His interests include strategic management, technical analysis of the stock markets, and valuations of companies in different industries and sectors. He has a strong penchant for looking at the big picture rather than focusing on minor details. Upon graduation, he plans to pursue his CFA designa-tion while developing a career in business valuations in the Mergers and Acquisitions (M&A) field with subsequent focus on the Technology sec-tor. In his free time, he likes to research human psychology—in particular, studies that focus on human behavioral patterns.

Piero SandovalPiero Sandoval will be graduating in Spring 2011 with a BS in Finance-Investments. Originally from Peru, Piero has lived in five different countries and has an extensive international background. His passion for leader-ship and politics drove him to run for, and hold, multiple management roles in various student organizations. He has been Senator-at-Large for Associated Students Incorporated and had the honor of being appointed to the Board of Control. He currently holds the title of Executive Vice President of the Business College Council and has been involved in major program funding as well as the implementation of new procedures. Piero has attained the honor of being on the Dean’s List and is also Bloomberg Certified. He is currently preparing for the December 2011 CFA® Level I exam.

Daniel RussellDaniel Russell will be graduating in Spring 2011, receiving a BS in Business Administration with a concentration in Finance-Investments. After attain-ing his degree, he plans to pursue a career in analytics and portfolio management while pursuing his MBA and CFA. During his undergradu-ate study he earned Dean’s List honors in Fall 2010. Daniel is Bloomberg Certified and enjoys investing, reading, puzzles, traveling, and ocean and other outdoor activities.


smif annual report

Kai XuKai Xu will be graduating in May 2011, receiving a BS in Business Administration with a concentration in Finance. His passion for invest-ments drives him to be a portfolio manager for his future career. In order to achieve his goal, he studies hard and has a 3.8 cumulative GPA and a 4.0 Finance GPA. Currently, he is a member of the Phi Kappa Phi Honor Society and Beta Gamma Sigma Honor Society. Kai was named to the President’s Honors List in the Summer and Fall semesters of 2010. He is preparing for the CFA® Level I exam in December 2011.

Bruce SparksBruce Sparks is an MBA student who anticipates graduating in May 2012. He holds a Bachelor’s degree in Finance-Investments from California State University, Long Beach. For the last 93 units of Bruce’s undergraduate work and for his MBA program, he has maintained a 4.0 GPA. Currently, Bruce is preparing to take the CFA® Level I exam in June 2011 and plans to take the CFA® Level II exam in 2012. Mr. Sparks is seeking to successfully tran-sition to a career in financial management, after building and running a retail furniture business from an undercapitalized start-up to a multistore, multimillion-dollar business with a strong reputation for customer service and integrity.

Elizabeth VanElizabeth Van is a double major in Accounting and Finance, with a concentration in Investments. She currently serves as the Corporate Relations Director for the Financial Management Association. She has been on the President’s Honor List and is Bloomberg Certified. Upon graduation, she hopes to gain experience at a wealth management firm while working toward a CFA designation. Once she becomes a CFA, she plans to move on to graduate school and eventually pursue a career as a portfolio manager.


smif annual report


smif annual report

SMIF PROGRAM DIRECTORS

Dr. Lowell R. RunyonDr. Peter A. Ammermann

We would like express tremendous gratitude to our two program Directors, Dr. Lowell Runyon and Dr. Peter Ammermann, for your unyield-ing support of the SMIF program. Thank you for all of your time and dedication that went into making this SMIF experience possible. SMIF rep-resents a focal point in our college careers, and we appreciate your being there for us and guid-ing us through it all.

ThE SMIF ADvISORy BOARD

Lowell R. Runyon, D.B.A., Director, Student Managed Investment Fund, Chair Peter A. Ammermann, Ph.D., Co-Director, Student Managed Investment Fund Maureen Flanagan, CFA, Senior Vice President, U.S. Trust Charles Hassell, The Capital Group Companies Doug Lopez, CFA, Portfolio Manager, Bradford & Marzec Russell Murdock, CFA, President, Seabreeze Capital Management Daniel Nikaiyn, Manager, Business Development Support, PIMCO John Prichard, CFA, Principal, Knightsbridge Asset Management Wes Seegers, Senior Vice President, Morgan Stanley Smith Barney Michael E. Solt, D.B.A., Dean, College of Business Administration Rocky Suares, CFP, Investment Officer, Wells Fargo Advisors

Thank you for your time, effort, and dedication to SMIF. Your guidance has played a critical part in the program, and we value your continual support. Your expertise and advice is always appreciated.

CFALA & CFAOC

Thank you for your insight into the investment field and for welcoming and supporting the students. Your encouragement has helped us realize the possibilities that are open to us in the investment world.

CFA SOCIETy OF ORANGE COUNTy FOUNDATION (CFAOCF)

Benjamin C. Lau, CFA, President Tony Relvas, CFA, Treasurer Erin Campbell, Secretary Ramin Modiri, CFA, Scholarship Chair Timothy Stevens, CFA, Investment Policy ChairAndrew Aw, Host-A-Student Chair

Thank you for allowing SMIF to act as stewards for the CFAOCF portfolio. We would also like to express our gratitude for granting the SMIF scholarships, for organizing the Host-A-Student events, and for allowing us to participate in the RFP process. All have been integral to the edu-cational experience of the SMIF students.

CFAOCF INvESTMENT POLICy COMMITTEE

Timothy Stevens, CFA, ChairRaymond Goldblatt, FIA, CFAMitch Needelman, CFAFadel LawandyDominic Nolan, CFA

Thank you for enhancing our learning experi-ences through your keen perception in the field. We appreciate your efforts and dedication to the program.

hOSTS

Hunter Wise Financial Group, LLCKnightsbridge Asset Management Wealth Management Network401(k) AdvisorsIwamoto Kong Investment Group First Foundation AdvisorsModiri Asset Management Pacific Asset Management

Thank you for allowing us to visit and learn more about your firm and profession. We appreciate your taking time out of your day to offer us your insights and your know-how.

IhS GLOBAL INSIGhT

Thank you for providing a professional invest-ment service that has offered SMIF another useful tool in conducting our research and analysis.

FORTy-NINER ShOPS, INC.

Thank you for providing SMIF with the oppor-tunity to manage your $100,000 portfolio. We appreciate the additional experience that we have gained from this.

CSULB INSTRUCTION RELATED ACTIvITIES (IRA) BOARD

Thank you for sponsoring our trip to the Quinnipiac University Q-G.A.M.E. Forum in Hamden, Connecticut. We were able to learn a lot from some of the most influential people on Wall Street and gain insight from the invest-ment professionals at our workshops.

DEAN MIChAEL E. SOLT & ThE CSULB COLLEGE OF BUSINESS ADMINISTRATION

Thank you very much for your strong and continuing support of the SMIF program and its activities, including the provision of the Bloomberg Professional Service Terminals, which have been invaluable to the Program’s research and analytical activities.

ANNUAL REPORT EDITOR

Joseph Tinervia

Thank you for your time and effort in editing the SMIF annual report.

A SPECIAL ThANkS TO DR. LOwELL R. RUNyON

This will be the last year that the CSULB SMIF founder, Dr. Lowell R. Runyon, will be serv-ing as Director. As you head into retirement from CSULB, we would like to thank you for the incomparable experience you have provided to us through the SMIF program. We highly value your dedication, insight, and charity. We would like to dedicate this year’s annual report to you as a profound contributor and mentor to SMIF students over the past sixteen years. You will be missed, and this program will not be the same without you.

AcknowledgmentsThe SMIF team would like to express our gratitude to the following people and organizations that have contributed to

the continual success of the program and have played key roles in fostering the learning experiences for each student.

SMIF and Forty-Niner Shops PortfoliosThe Student Managed Investment Fund (SMIF) is open to qualified senior-level undergraduate students and second-year MBA students in the College of Business Administration specializing in finance and investments. Other students may be admitted to the program if deemed quali-fied by the program Directors. The objective of the SMIF program is to provide participants with the opportunity to obtain experience in security analysis and portfolio management uti-lizing multiple real-dollar portfolios. In order to be accepted to participate in this honors-level program, a number of prerequi-site courses must be taken. Student applicants are interviewed, and approved, by the pro-gram Directors. SMIF has a fiduciary duty and has implemented multiple levels of invest-ment checks and balances to monitor the various portfolios. All decisions are subject to veto by any of the program Directors. Fund benefactors at all times have access to finan-cial statements audited by a major accounting firm and to an annual report. These guidelines describe the mechanics of the program, explain the acceptable types of securities, specify the diversification strategies, and describe the vari-ous safeguards and security measures that are an integral portion of the program. Importance of Capital Preservation The primary objective of the SMIF Program is capital preservation, combined with income and growth of capital, to ensure future classes will continue to have funds to manage. Rate of Return The return should be equal to or better than the composite benchmark set forth by SMIF. As the assets of the fund increase in value, a portion of the portfolio may be used to finance scholar-ships, special projects, and course-related field trips. Suggested Investment Guidelines SMIF FUNDS MAY BE INVESTED IN THE FOLLOWING TYPES OF INVESTMENTS: - Common stocks of companies listed on the three major exchanges—NASDAQ, NYSE, and AMEX – in companies with market capitaliza-tions greater than $500 million

- Government and investment-grade corporate bonds (Moody’s or S&P-rated - BBB or higher)

- Exchange-traded Funds (ETFs) subject to restrictions cited below

- Mutual funds, subject to conditions established by program Directors SMIF FUNDS ARE PRECLUDED FROM BEING INVESTED IN THE FOLLOWING MANNER:

- Short sales or in any instruments that consti-tute the equivalent of short sales

- Utilization of leverage or in any instruments that utilize leverage

- Futures or derivatives- Foreign equities or debt investments not traded on U.S. exchanges Suggested Portfolio Diversification Guidelines

- 25 to 75 percent to be invested in equities - 25 to 75 percent to be invested in fixed income - Portfolio Beta not to exceed 1.5 - Mix of income (dividends) and growth (capital gains) stocks

- No more than 5 percent of the portfolio may be invested in any one company

- No more than 15 percent of the portfolio may be invested in any one industry

- No more than 10 percent of the portfolio may be invested in any one equity ETF

- No more than 25 percent of the portfolio may be invested in any one fixed-income ETF Suggested Transaction Guidelines

- Purchase decisions must be supported by a supermajority of the SMIF participants - Purchase decisions are subject to veto by any of the program Directors

- An irrevocable 15 percent stop-loss provision must be communicated to the broker at the time of purchase with a full review of the invest-ment position at a decline in price of 7.5 percent

- Any bond, or equivalent investment vehicle, falling below investment grade is to be sold Other GuidelinesTrades are recommended and voted upon by students and approved by the program Directors. SMIF participants formally meet once a week, and trading decisions are made at that time. In emergency situations an appointed member from each team will contact each other team member to discuss possible actions. A vote by a supermajority is required to adopt any transactions outside of class meetings.

LIMITED DIRECTORS’ DISCRECTION

SMIF program Directors are granted reasonable limited discretion in modifying these

guidelines to accommodate the practical needs of the program. The Directors may seek to

obtain Board approval prior to modification, if practical. Otherwise, modifications should be

brought to the Board’s attention at the next regu-larly scheduled meeting for consideration for

permanent modification.

yEAR-ROUND MANAGEMENT OF ALL SMIF-MANAGED PORTFOLIOS

SMIF program participants are responsible for the management of multiple portfolios and

therefore must commit to participate in the orderly transition of portfolio-management

responsibilities by attending one or more of the SMIF summer boot camp sessions. The objective of these sessions is to ensure that all portfolios receive the full attention of the

outgoing students while the new incoming students become familiar with the portfolio-

management strategies that have been deployed.

Appendix: Portfolio Guidelines


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CFAOCF Portfolio

CFAOCF Investment Policy StatementThe purpose of this statement is to provide

a clear understanding of the investment objec-tives, policies, and guidelines for the CFAOCF. This statement will outline an overall philoso-phy that is specific enough to allow the Student Investment Management Team to know what is expected, while at the same time giving flexibil-ity for changing economic conditions.

Return Objective: The CFAOCF’s total annual return objective is equal to the spending rate plus the expected tuition inflation rate, thus maintaining the real value of the scholarships and the fund.

To guide the Student Investment Management Team, it is suggested that this long-term objective can be achieved by adhering in the short-term to a benchmark composed of 70% S&P 500 Index and 30% Barclays Government Corporate Intermediate Index (BGCI).

Definitions:Total annual return equals the sum of divi-

dends, interest, and other current income, plus the net impact of price change, time-adjusted for capital additions and withdrawals, all after transaction costs and management fees, for a given fiscal year.

Spending rate, set as a percentage of the previous year’s ending market value, includes annual scholarships and all management expenses, and is initially targeted at 6% (5% for scholarships and 1% for operating expenses).

Tuition inflation rate is the average rise in tuition cost at the 6 major Orange County/Long Beach Universities offering business pro-grams in Orange County, California (Chapman, CSULB, CSUF, Pepperdine, UCI, USC) over the academic year.

Risk Tolerance: The need to pay out annual scholarships and to maintain the real value of those scholarships; the inexperienced and annually rotating management team; and the expectations of the learning process, all dictate moderate risk for the fund.

Time Horizon: Infinite foundation horizon, short-term management horizon.

Liquidity Requirements: Due to the long-term life of the foundation minimum liquidity is required to meet the periodic distributions described by the spending rate. As a public foundation, the initial targeted spending rate is 6%, with that rate being set annually by the IPC. 1% is targeted for operating expenses through-out the year. These liquidity needs are typically satisfied via Foundation funds that are separate from the student-managed portfolios. Thus, although the Foundation’s Investment Policy Statement establishes target asset allocation guidelines for these portfolios (see below), there

are no specific liquidity requirements imposed on the operations of the student investment-management teams.

Tax Considerations: Public foundations unlike private foundations are not subject to excise taxes.

Regulatory Issues: In general foundations are subject to little in the way of federal regu-lation. The fund would be subject to California State regulation of foundations.

Unique Circumstances: The CFAOCF faces a unique challenge in that its fund assets are overseen by the volunteer Investment Policy Committee and managed by the Student Investment Management Team, both with changing memberships each year. Both of these groups will consist of members with vary-ing levels of investment skill, experience, and understanding. They will have a wide range of personal preferences, prejudices, and invest-ment styles.

Portfolio GuidelinesPermissible Investments

● All assets must have readily ascertainable market value and be easily marketable.

● Any proposed position requires the sub-mission to the IPC of concrete evidence of due diligence conducted on the pro-posed investment.

● Equity ○ Equity investments may be chosen

from the NYSE, the AMEX, the Nasdaq, and regional exchanges.

○ The portfolio will be generally fully invested with minimal emphasis on market timing and broadly diversified, with no individual equity exceeding 5%, no industry exceeding 10%, and no sector exceeding 30% of the equity portfolio at time of pur-chase. Sectors and industries for the S&P 500 are defined by Barra and can be found at: http://www.barra.com/research/sector_detail.asp. If any individual stock should rise to 10% of the equity portion of the portfolio, the security must be sold down to at least 5% of the equity portfolio.

○ Market capitalization restrictions: ū Investment in stocks of firms with a

total market capitalization of less than $500 million is prohibited. ū No more than 50% of the equity alloca-

tion of the portfolio may be invested in small-cap stocks (market capitalization of between $500 million and $2 billion). ū Up to 100% of the equity allocation of

the portfolio may be invested in mid- to large-cap stocks (market capitalization of greater than $2 billion).

○ Foreign equities are limited to ADRs, U.S. listed foreign stocks, and ETFs and should not exceed 30% of the equity portfolio at time of purchase.

● Fixed Income ○ Investments in fixed income securi-

ties should be limited to mutual funds or exchange traded funds (ETFs) until such time as the Fund grows to $500,000 in assets.

● Exchange-Traded Funds (ETFs) ○ The use of ETFs must be consistent with

the guidelines of the IPS. ○ The holdings of any proposed ETF posi-

tion must conform to the restrictions and diversification guidelines of the IPS.

○ The trading techniques utilized by the proposed ETF must also conform with the trading techniques allowed by the IPS.

○ Equity ETFs: ū One or more broad market ETFs (e.g.,

SPY, NYC) can comprise a total of no more than 50% of the equity allocation of the portfolio. ū No non-broad-based equity ETFs can

comprise more than 10% of the equity allocation of the portfolio.

○ Fixed Income ETFs: ū Up to 100% of the fixed income alloca-

tion of the portfolio may be invested in one or more well-diversified fixed income ETFs.

○ Other Assets ū The Manager may not purchase assets

other than those previously mentioned without a written permission from the CFAOC Board of Directors.

Prohibited Transactions and Types ● Buying on margin ● Short selling

○ Any ETFs utilizing leverage, short posi-tions, or the equivalent are also prohibited.

● Option trading ● Commodity trading including all

futures contracts ● Private Placements

Asset AllocationIt is understood that changing market

cycles require that some flexibility in asset allocation be permissible. With this in mind, minimum and maximum asset allocation restrictions are given to allow movement of capital within the asset classes as deemed appropriate by the Managers for the purpose of increasing investment returns and/or reducing risk. Accordingly, the allowable asset mix ranges are as follows:

Asset Type Target RangeCash 0-20%Equities 0-100%Fixed Income 0-100%


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TurnoverDue to the uniqueness of the annually changing management of the fund and the likely desire for each new management team to invoke its own style, annual portfolio turnover is limited to 125% if the portfolio is held in cash at the start of the year (to enable the team to fully invest the portfolio and then still have some leeway to sell “losing” positions during this initial year) and 75% if the portfolio is fully invested (in accordance with the above asset allocation guidelines) at the start of the year.

Review ProceduresThe Investment Policy Committee will review all objectives, policies, and guidelines for appropriate-ness and adherence, on at least an annual basis.

Evaluating PerformanceThe IPC will evaluate the performance of the fund against a benchmark consisting of 70% S&P 500 Index and 30% BGCI Index. The Student Investment Management Team is welcome to benchmark against a short-term style benchmark.

CFAOCF Portfolio Operations Manuali. Defined terms: PORTFOLIO = the CFAOCF portfolio.TEAM = The Management Team for the PORTFOLIO.IPS = The Investment Policy Statement for the PORTFOLIO.IPC = The CFAOCF Investment Policy Committee, charged with oversight of the PORTFOLIO.

ii. CFA Institute Code & Standards Each member of the TEAM (including the faculty advisor(s)) will affirm, in writing, their adherence to CFA Institute’s Code of Ethics and Standards of Professional Conduct in conjunction with the management of the PORTFOLIO. CFAOCF will pro-vide copies of the CFA Institute Code of Ethics and Standards of Professional Conduct to each TEAM member and to the faculty advisor(s).

iii. TEAM StructureThe TEAM will consist of a group of at least five undergraduate or graduate students and at least one faculty advisor. Eligible students will have at least junior or graduate student status and intend to graduate no sooner than the end of the port-folio management term. There will be a standard calendar for each year’s activities. The 2011 TEAM will (1) apply to manage the PORTFOLIO during the Fall 2010 semester; (2) be selected no later than December 15, 2010; (3) begin its manage-ment activities on January 1, 2011; (4) manage the PORTFOLIO through December 31, 2011, pro-viding quarterly reports to the IPC; (5) prepare an annual report covering the activities and outcomes of the PORTFOLIO from January 1, 2011 through December 31, 2011; and (5) make a formal presen-tation regarding the PORTFOLIO’s performance during the 2011 calendar year at a special event held just prior to CFAOC’s annual Forecast Dinner in January of 2012. Therefore, eligible students for

the 2011 TEAM must plan to graduate no sooner than December 2011.

The faculty advisor can be any business school professor (or other instructor officially recog-nized by the university); however, the application process will make note of the professor’s (1) edu-cational background within the investments area; (2) professional background, qualifications, and certifications within the investments area; (3) teaching experience within the investments area; and (4) willingness to design, obtain approval for, and teach an appropriate course to the TEAM in conjunction with their management of the PORTFOLIO (note: this course may be open to non-team members, allowing for smaller schools or those whose state funding makes teaching of small classes difficult.) Nothing precludes the pos-sibility of multiple faculty advisors. It is anticipated that the team advisor (or one of the advisors, in the case of multiple advisors) will serve as an ex-officio, non-voting member of the CFAOCF’s Investment Policy Committee.

iv. Investment Process TEAM MeetingsThe TEAM is expected to hold formal meetings on a regular basis. Attendance at these meetings is one of the primary responsibilities of TEAM mem-bers. Meetings should be scheduled weekly while school is in session, and at least monthly during the summer recess. TEAM member attendance should be noted in the minutes of each meet-ing. A TEAM member who misses more than one third of the weekly meetings during any semes-ter should be removed from the program (i.e., a TEAM member who misses more than five weekly meetings during the Spring semester will not be permitted to participate during the following Fall semester and will be stricken from the TEAM’s ros-ter and a TEAM member who misses more than five weekly meetings during the Fall semester will be stricken from the TEAM’s roster.) More latitude is permitted during summer months, particularly if a TEAM member is employed at a geographic distance. Latitude is, of course, also permitted in cases of adverse personal circumstances, at the discretion of the Faculty Advisor.

Minutes should be taken at each formal meeting of the TEAM, to include a list of those attending, a review of all performance results presented or discussed, a summary of the specific securities dis-cussed, recommendations made, votes taken, and decisions made, and a copy of all reports or other written materials reviewed. A journal or log should be constructed to compile these meeting minutes. At the end of the year, one copy of this journal (and copies of previous year’s journals) will be provided to the new TEAM. Another copy of the journal will be provided to the IPC for safekeeping.

It is recommended that one TEAM member be responsible for chairing each meeting and another be responsible for taking, transcribing, and dis-tributing minutes and that these duties rotate

among the TEAM members. The duty for compil-ing the annual journal or log should rest with one person, either a selected TEAM member or the fac-ulty advisor.

IPC members are welcome and encouraged to attend all TEAM meetings. The faculty advisor is responsible for informing the IPC of the time and place of all team meetings.

Portfolio Goals and the IPSAll actions taken by the TEAM should reflect the IPS and the fiduciary obligations owed to the CFAOCF and future scholarship recipients. The TEAM must remain mindful of this core responsi-bility and guard against placing their own desires for experience, activity, and excitement ahead of their clients’ wishes and needs. The composition of the PORTFOLIO should at no time violate the guidelines on asset class, asset allocation, liquid-ity, diversification, concentration, or other matters defined in the IPS. All additions to or deletions from the PORTFOLIO should be judged first by these criteria. Within these constraints, the goal of the TEAM is to select securities that will create a PORTFOLIO that (1) has a permissible level of tracking error (defined as the standard deviation of monthly returns against the defined benchmark) and (2) earns positive excess returns relative to the benchmark, in that order of importance.

Oversight of PORTFOLIO PerformanceOn at least a monthly basis, the TEAM should ana-lyze the performance of the PORTFOLIO, including return performance against the benchmark, cumulative tracking error, and individual security performance. Correction of deviations from IPS guidelines (e.g., concentration limits, asset alloca-tion requirements, tracking error constraints, etc.) should receive first priority. Poorly performing individual holdings should be the target of further investigation and analysis. The TEAM is encour-aged to develop a clear “sell” discipline and apply it rigorously. This discipline should be applied both to securities that have met their growth expectations and to significant underperformers.

Research and Analysis ProcessThe purpose of research and analysis of individual securities by TEAM members is to identify poten-tial additions to, deletions from, or replacements for the PORTFOLIO. Potential additions, deletions, or replacements with particular securities should be analyzed from four perspectives: (1) the effect the proposed action will have on the composition of the PORTFOLIO; (2) the current pricing of and anticipated return on the individual security; (3) the current condition and future prospects of the issuer of the security; and (4) the downside risks associated with the security (the events that could trigger significant underperformance.) TEAM members are reminded that a strong issuer does not necessarily imply a good investment, as the security’s price may already reflect that strength and more.


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The TEAM is encouraged to develop a standard-ized research report form to be completed for each security under consideration for addition to, deletion from, or replacement in the PORTFOLIO. This report should include (1) the date of prepara-tion; (2) the potential action to be taken (e.g., add, remove, replace and the volume recommended); (3) a checklist to insure that the potential action would leave the PORTFOLIO in compliance with IPS constraints; (4) indicators of current market pricing and investment desirability (e.g., P/E and PEG ratios, analyst opinions, past and projected pricing); (5) information regarding the health and future prospects of the issuer (including key accounting ratios (trend and comparison to indus-try), discussion of industry/issuer growth prospects, recent news, etc.); and (6) specific risks associated with the security and its issuer.

During regular meetings, TEAM members will make investment recommendations, using their research and analysis to support the recommenda-tion. A copy of each research and analysis report should be included in the minutes of the meet-ing at which it is presented. Following an initial recommendation, the TEAM should discuss the report. Additional information or analysis may be requested at this time.

Decision Making ProcessAll addition to, deletions from, a replacements in the PORTFOLIO must be approved by a major-ity (51% or more) of the TEAM members present when the vote is taken. A quorum of at least 70% of the members of the TEAM must be physically present before a vote can be taken. The vote on whether to approve a research and analysis recom-mendation [see (d)] will take place no sooner than the meeting following the initial recommendation. If additional information or analysis was requested, the vote to approve may take place immediately following presentation and discussion of that infor-mation. The faculty advisor will monitor all votes and ensure a quorum.

The faculty advisor retains veto power over all investment decisions, although this power should be used sparingly. When a decision that requires positive action (i.e., the purchase or sale of secu-rities) has been approved by the TEAM and the faculty advisor, the advisor (or the official student representative of the team, once the advisor’s approval has been given) should convey that deci-sion within 24 hours, in writing (email suggested), along with minutes of the meeting in which the trade was approved, a record of the vote leading to the purchase request, and any supporting docu-mentation that is required or requested, to the IPC. The order should indicate the security, the volume, and whether it is a buy or a sell. It is the responsi-bility of the IPC to order the approved trade within 48 of its receipt, barring a decision to veto the trade or a request for additional information about

the proposed trade (see (f ) below.) Supporting documentation should include, at a minimum, a copy of the research and analysis report, as approved by the TEAM.

Trading Oversight and ControlEach PORTFOLIO trade requires (1) a majority approval by the TEAM; (2) approval by the faculty advisor; and (3) approval by the IPC or its desig-nated representative. All trades will be ordered by the IPC or its designated representative. No mem-ber of the TEAM, nor its faculty advisor, will have trading authority. The TEAM shall have account access to trading history and PORTFOLIO composi-tion information only.

In the event that the IPC or its representative deems a TEAM-approved trade undesirable, it is their responsibility to convey that belief and supporting information back to the TEAM and its faculty advisor, within 48 hours. The IPC or its representative should limit its authority to block approved trades to instances of (1) failure to comply with the IPS; (2) incomplete or incorrect information; and (3) demonstrably faulty analysis. A trade should not be blocked because it differs from IPC members’ personal or professional invest-ment outlooks or preferences.

v. Reporting RequirementsMeeting MinutesAs described in section (4)(a), Team Meetings, the TEAM is responsible for writing and maintain-ing detailed minutes of each meeting, to include TEAM member attendance, a summary of all issues discussed, recommendations made, actions approved, and copies of all materials reviewed. These minutes will be maintained in a journal or log and copies of that journal (and all past journals) will pass at the end of the year from one TEAM to the next. In addition, a copy of the journal will be provided to the IPC. The IPC is responsible for maintaining historical journals in case they are lost or damaged by a TEAM.

Quarterly Report and Presentations to IPC On a quarterly basis, the TEAM will provide a PORTFOLIO performance report to the IPC. The performance report will include (1) a summary of the PORTFOLIO condition at the beginning of the quarter; (2) a summary of all transactions (pur-chases, sales, dividends and interest earned, etc.) over the course of the quarter; (3) a summary of the PORTFOLIO condition at the end of the quar-ter; (4) monthly return performance relative to the benchmark during the quarter; and (5) cumulative tracking error.

Quarters run on a calendar basis (e.g., the first quarter of the year is January 1st through March 31st.) The quarterly report is due to the IPC within 30 days of the end of the quarter (e.g., the first quarter’s report is due by April 30th.) Note: The

2010 TEAM is responsible for completion of the 4th quarter 2010 report (as well as the 2010 annual report, described below.) TEAMS are required to make quarterly presenta-tions to the IPC. The quarterly presentations will comprise of the quarterly performance report along with general market and economic update. The calendar for the upcoming year is as follows:

● February 11, 2011 2pm - Quarterly Review via Conference Call

● April 29, 2011 2pm - Quarterly Review - loca-tion tbd

Annual Report and Presentation to CFAOCOn or before the end of January 2011 the 2010 TEAM will prepare and provide to the IPC an Annual Report summarizing the activities and per-formance of the PORTFOLIO during their tenure as its managers. The information included in the report should include, at a minimum, the informa-tion contained in the four quarterly reports. The report should include a discussion of the recom-mendations that the team made in its original RFP, the actual investment decisions that were made during the year, what changed from the original recommendation to the final implementation, and why. Each TEAM is encouraged to produce a professional looking report that includes informa-tion about TEAM members, highlights from the year, and appropriate graphics. Reasonable costs (to be approved in advance by the CFAOCF Board) for reproducing the Annual Report are deemed acceptable overhead costs to be reimbursed by CFAOC or the PORTFOLIO. The Annual Report will be distributed to CFAOC members, the larger Orange County investments community, the local press, local academic institutions, and others. The team will have the opportunity to make a pre-sentation to the CFAOC and CFAOCF Boards of Trustees and committees and to significant donors at a special pre-Forecast Dinner event to be held on the same day as the Annual CFAOC Forecast Dinner.

Contact InformationAt the beginning of the year, complete contact information for the TEAM and its faculty advisor(s) will be provided to the IPC. This should include TEAM member’s names, addresses, phone num-bers, and email addresses. In addition, the IPC will provide its members contact information to the TEAM and will designate one of its members as the primary contact for the TEAM.


smif annual report

SMIF Annual Report 2010-2011

Documents

Transcript of SMIF Annual Report 2010-2011