Student Managed Investment Fund - 2012
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Student Managed Investment Fund
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Table of Contents
• Disclaimer
• FundBasics
• SMIF:AddingEducationalValue
• PortfolioManagement
• BuildinganEnduringFund
• Appendix
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Disclaimer
ThisreportispublishedforeducationalandinvestmentpurposesonlybystudentsenrolledinAmericanUniversity’sStudentManagedInvestmentFund.Thisreportdoesnotcontaininvestmentrecommendations.AmericanUniversityanditsaffiliatesdonotacceptanyliabilityforanydirect,indirectorconsequentialdamagesorlossesarisingfromanyuseofthisreportoritscontents.Theinformationinthisreportwasobtainedfromsourcesbelievedtobeaccurate,butwedonotguaranteethatitisaccurateorcomplete.TheopinionshereinarethoseoftheAmericanUniversityStudentManagedInvestmentFundandaregeneratedforeducationalpurposesonly.
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Fund Basics
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Thank You to Our Donors
Wewouldliketothankthefollowingalumni,parents,facultyandfriendswhoprovidedinitialfunding,supplementingthatfromlegacystudentorganizationsandtheKogodoperatingbudget:
Anonymous(2)DeanJ.FactorKSB/BSBA’87andShannonFactorRichardP.GolaszewskiKSB/BSBA’07DorothyMatzaandRobertMatzaOyebolaOyedijoKSB/MBA’00DavidC.WajsgrasKSB/MBA’89andTeenaM.Wajsgras
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Mission Statement
TheStudentManagedInvestmentFundisbuiltonAmericanUniversity’scorecommitmentsoffosteringresearch,interactiveteaching,andpracticalapplicationofknowledge.
TheFundseekstoprovidestudentsoftheKogodSchoolofBusinesswithreal-worldinvestmentexperiencethatenhancesandaddsvaluetotheiroveralleducation.
Inadditiontoitseducationalvalue,thisexperientiallearningclassismeanttobetterpreparestudentsforthehighexpectationsandrigoroftheworkingworld.
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Fund Overview
• TheKogodSMIFisanupper-levelfinanceclassopentohighlycapablegraduateandundergraduatestudents.
• Approximately20studentstaketheclasseachsemesterfillingrolesthatrangefrombuy-sideanalyststofundmanagementpositions.
• Graduatesandundergraduatesworktogethertomanageanequityportfoliosharingtheirknowledgeandexperience.
• Fundingisprovidedbygenerousdonorsandinitialseedmoniesallocatedfrompredecessorstudentorganizations,andtheKogodoperatingbudget.
• SeeAppendixforabreakdownofatypicalclasssession.
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Recent Pitches
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• SMIFstructuresaredesignedtoprovidesafeguardssothatnooneindividualisresponsibleformakingormonitoringinvestmentdecisions.
• AllinvestmentdecisionsarereviewedbyanadvisoryboardofAmericanUniversityfinancefaculty.
• Companynewsandupdatesaremonitoredincoveragegroups.Executiveboardmembersprovideasecondlayerofcoverageforallholdings.
Checks and Balances
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Investment Policy Statement
• ThefundinvestsinUS-tradedequities.
• Thefundstyleisablendofvalueandgrowth.
• Investmentsaremadewitha3to5yeartimehorizon.
• Eligiblefirmsmusthaveaminimummarketcapitalizationof$500million.
• Eligiblefirmsmusthaveaminimumsharepriceof$5.
• Nosinglepositionisallowedtocomposemorethan5%oftheoverallportfolio(excludingthecashposition).
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SMIF: Adding Educational Value
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• Conceptually,thefundactsasabridgebetweentheoryandpractice.
• Eachmembergraduateswithexperienceasabuy-sideanalystandpotentiallyexperienceinmanagement.
• Eachstudentwritesaminimumof1reportpersemesterandpresentstheinvestmentopportunitytotheclass.
• Additionaldeliverablesincludeindustryreports,amacro-economicoutlook,andasemester-endfundreport.
• Facultyplayalimitedroleallowingstudentstogainvaluablelessonsfrommistakesaswellassuccesses.
• Thefundiscompletelystudent-rungivingstudentstheopportunitytogainpracticalmanagementexperience.
Complementing a Kogod Education
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Adding Value: Professional Guests
• Visitsfrompractitionersofferwindowsintocareersinthefinancialservicesindustry.
• Guestshelpillustratetheapplicationofdifferentapproachestoinvesting.-Activevs.passivemanagement-Managerselectionvs.securityselection
• Recentguestsinclude:-DennisGogarty,CFP–PresidentRaffaWealthManagement-BillMann,CFA–PortfolioManagerMotleyFoolFunds,SIS‘92-IraJersey–DirectorUSInterestRateStrategyCreditSuisse,SPA/SOC‘93-EricJ.Green,CFA–SeniorManagingPartner&DirectorofResearchPennCapital,KSB‘92
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• Thecollaborativeenvironmentfacilitatessharingofknowledgeandexperience.
• Graduatestudentsbringworkexperiencefrommanydifferentindustries.-Ex.logistics,energyexplorationandproduction,banking,etc.
• Notallmembersarebusinessmajorsbringingperspectivesfromotherschools.-IncludesstudentsfromtheSchoolofInternationalServiceandtheCollegeofArtsandSciences.
Adding Value: Collaboration
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Portfolio Management
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Macro Economic
Industry Specific
Firm Specific
Level of Analysis Coverage Responsibilities
Fund Economist
Coverage Groups
Individual Analysts and Coverage Groups
A Top Down Approach
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Forthepasteightmonths,SMIFhasheldacautiouslyoptimisticeconomicoutlook.
Reasonsforoptimism:-Manufacturingexpansion-Improvementinconsumerconfidenceandspending-Labormarketimprovement-Economicgrowth-Increasedrisktakingacrossassetclasses
Near-Term Economic Outlook
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• Short-TermConcerns-SeverityoftheEuropeanrecession-Currencyfluctuationsandtheirimpactonlocalizedprofits-Volatilityoffoodandenergy-Stabilizationinthehousingmarket-Domesticandinternationalpoliticalturbulence
• Long-TermConcerns-Inflationresultingfromongoingmonetaryexpansionindevelopedmarkets-Integrityofthefinancialsystem
Economic Risks
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Pricefluctuationsinenergyandfoodpressureconsumersintheshortrun,whichaffectsconsumerspending,businessinvestment,andemployment.
Food and Energy Volatility
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RecentmonetaryexpansionthroughtheFederalReserve’s“QuantitativeEasing”createsconcernsaboutrisingfutureinflation.
Inflationposesasignificantthreattomargins,earnings,andultimatelythevalueproducedfrommanyequitiesinourportfolio.
Inflation
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AprolongedrecessioninEuropecontinuestobeacentralrisk.
InterventionbytheInternationalMonetaryFundandEuropeanCentralBankhasreducedshort-termpressureontheEurozone,butsignificantstructuralchangeshavenotyetbeenmade.
European Recession
EU GDP Change (Annualized) 2011 Q4
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Moderate Bullishness
Sustainedcorporateearningsgrowthmaintainsattractiveassetlevels.S&Pearningsareatanall-timehigh,yettheindexis11.74%offofits2007peak
P/Evaluationisloweryearoveryear,indicatingvaluationshavenotkeptupwithearningsgrowth
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Consumer Spending
Consumerspendingreboundedquicklyaftertherecession.Creditremainedscarceuntilthesecondhalfof2010,buthassinceexpanded.Thishashelpedtoincreaseconsumerspending.
Companieswithintheconsumerdiscretionaryandstaplesindustriesaredrivenbychangesinpersonalconsumption.
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Manufacturing Improvement
Manufacturingexpansioncontinuedthroughearly2012,butthepacehasslowed.
Asaleadingindicatorofeconomicprogress,thistrendshowsanongoing,stablerecoveryintheU.S.
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U.S.labormarketsareslowlyimproving.Recentdatasuggestmorerapiddeclinesinunemployment.
Increasedemploymentsupportsgrowthinconsumerspendingandsentiment,ultimatelyenhancingassetprices.
Unemployment
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Industry Weightings
Operationally,thefundiscurrentlybenchmarkedagainsttheS&P500withadjustmentsmadetoeachindustryweightingbasedona3-5yearoutlook.
Thefundcurrentlyfavorscyclicalindustries-Ouroutlookanticipatesacyclicalupswinginthenext3to5years-Eachweightingisspecifictotheoutlookforeachindividualindustry-Outlooksweredevelopedthroughgroupindustryreports
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Target Weights
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Consumer Discretionary
Consumer Staples
Energy Financials Healthcare Materials Industrials Technology Utilities Telecom
S&P 500 Recommended Weights
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Industry Weighting Rational
9.50% 10.00% 10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50%
S&P Weight Ideal Weight
Consumer Discretionary
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
S&P Weight Ideal Weight
Consumer Staples
Overweight
The US economy is heavily driven by consumer spending. As the economic cycle turns upward we expect higher than average discretionary goods spending.
Overweight
Though less favorable than consumer discretionary, there is less downside for staple products. Slower growth in commodity prices and improving consumer confidence will help the American consumer and correspondingly, this sector.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
S&P Weight Ideal Weight
Healthcare
2.50%
3.00%
3.50%
S&P Weight Ideal Weight
Materials
Underweight
In spite of demographic trends, high levels of uncertainty concerning future Medicare/Medicaid payments make this sector look relatively less attractive than some of the cyclical sectors.
Underweight
This industry is becoming increasingly reliant on imports from developing countries. With growth slowing in Asia, we remain concerned about a supply-demand imbalance.
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Industry Weighting Rational
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
S&P Weight Ideal Weight
Telecom
2.50%
3.00%
3.50%
S&P Weight Ideal Weight
Utilities Underweight
We see utilities threatened by historically low natural gas prices and high stock valuations. Also, as a result of the industry’s stable nature, it will not benefit from a cyclical upswing as much as other industries.
Underweight
With a cautiously optimistic outlook, we believe that better opportunities exist in other industries.
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Actual Portfolio Weights
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Consum
er Disc
retionar
y
Consum
er Sta
ples
Energy
Financia
ls
Health
care
Mate
rials
Industr
ials
Tech
nology
Utiliti
es
Telec
om
Cash
SMIF Recommended Weights
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• Selldown-Consumerdiscretionary-Consumerstaples-Industrials-Materials
• Investmoreheavilyin-Technology-Healthcare-Financials-Energy
• ReduceCashPosition
Necessary Actions
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• ReturnSinceInception:4.83%
• ReturnYeartoDate:6.49%
• SharpeRatio:0.003
• Beta:1.00
• DividendYield:1.96%
Portfolio Performance
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Portfolio Performance
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Portfolio: Top and Bottom
Boston Beer Inc. (SAM) 44.58%
W W Granger Inc. (GWW) 41.58%
Continental Resources Inc. (CLR)
31.62%
Polypore International Inc. (PPO) -24.03%
Goldman Sachs Group Inc. (GS) -23.07%
Petroleo Brasileiro SA Petrobras (PBR) -18.53%
Winners Losers
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-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
AAPL JPM GE SMIF Russell 2000
MSCI Emerging Markets
S&P 500 DAX Index Dow Jones Industrial Average
MSCI ALL Country World Index
FTSE 100 Nikkei
Comparative Sharpe Ratios
Portfolio Risk
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-15%
-10%
-5%
0%
5%
10%
15%
20%
12/16
/2014
1/16
/2015
2/16
/2015
3/16
/2015
4/16
/2015
5/16
/2015
6/16
/2015
7/16
/2015
8/16
/2015
9/16
/2015
10/16
/2015
11/16
/2015
12/16
/2015
1/16
/2016
2/16
/2016
STUDENT MANAGED INVESTMENT FUND S&P 500 INDEX
Relative Returns
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Building an Enduring Fund
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• Thereiseducationalvalueinbothsuccessesandfailures.
• Introspectionrevealsareasforimprovement.
• Thefollowingcasestudiesillustrateasamplingoflessonslearnedandresultingchangestothefund.
Implementing Lessons Learned
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Downside Sell Discipline
• ResearchinMotion(RIMM)
• FailuretosellourstakeinRIMMidentifiedaproblemwithdownsideselldiscipline.
• Keymisjudgment:Over-estimatedthestrengthofRIMM’scorporatecustomerbaserelativetoitscompetitors.
Sold
Bought Resulting Changes: Coverage was restructured to be
conducted in teams based on industry.
Enables members to make the most use of overlapping information, such as understanding the strengths of competitors.
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ContinentalResources(CLR)
TherapidgrowthofCLRdemonstratedtheimportanceofunderstandingthenuancesineachindustry.-CLRisisolatedfromtherecentcollapseinnaturalgaspricesunliketheoilmajors.-CLRbenefitsfrompoliticalriskpremiumsincludedinoilprices,butisnotexposedtopoliticaldangersconcentratedintheMiddleEastandAfrica.
Delving into Industry Nuances
Bought Resulting Changes:
Opted to look beyond industry weightings.
A section was included in our industry reports where analysts were asked to identify specific areas within each industry that offer the best potential.
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Structural Resiliency
• OrganizationalstructuresinSMIFareconstantlyevolving.
• AprincipalgoalforSMIFhasbeentodevelopresilientstructuresthatinsulatethefundfromstudentturnover.
• Coverageteamsdividedbyindustryspreadknowledgesothatcontinuingmemberscanshareitwithincomingstudents.
• Advisoryboardensuresconsistencyinoperationalrules.
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Looking Forward
• Thebasicequityfund,asitisnowstructured,isanexcellenttoolforteachingbroadinvestingandmanagementskills.
• Equityfundsarecommoninuniversities.
• Thelong-termgoalfortheSMIFistoexpandinawaythatplaystoAmericanUniversity’sstrengths.
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Future Opportunities
Long-termVisionIncludes:
• FixedIncomeFund–Fewuniversitieshavefixedincomefunds.Creatingonewouldprovidestudentswithanopportunitytopracticemanagingfixedincomeinvestments.
• InternationalEquityFund–AmericanUniversityisknownforitsinternationalrelationsprogram.EmphasizinginternationalfinancewouldplayintothisacknowledgedareaofUniversityexpertise.
• ConstrainedOptimizationFund-Auniqueopportunitytoteachsustainableandsociallyresponsibleinvesting.InadditiontobeingpartofAmericanUniversity’scorevalues,sustainabilityandsocialresponsibilityareareasofincreasinginterestinfinance.
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Appendix
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Holdings (as of 3/17/2012)
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Fund History: Timeline
• InitialFundingSources:-AlumniDonations-One-timeallocationfromtheKogodOperatingbudget-Fundsfrompredecessorfinanceclubs
• Thefund’sfirsttradesweremadeintheFallof2010.
• Academicyear2010/2011sawthedevelopmentofformalorganizationalstructureswithinthefund.
• CashPositionwasfullyinvestedbytheFallof2011.
• TheFallof2011alsosawanincreasedefforttoavoidstyledriftasholdingswereheavilyweightedtowardslargecapitalizationequities.
• Springof2012-implementationofatop-downapproachandincreasedemphasisoncollaboration.
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Quick Facts
• 27securities
• Avg.MarketCap:$45B
• 20dividendpayingsecurities
• PortfolioBeta:1.00
• Buysthissemester:5
• Sellsthissemester:4
• Cashposition:8.27%
• Winners:17
• Losers:10
• TotalReturnSinceInception:4.83%
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Typical Class Session
• Reportsarecirculatedseveraldaysbeforeeachclass,sothatanalystscanstudytheproposedaction.
• Eachclassbeginswithcoverageofthefund’sholdings.Membersshareanddiscussrelevantnewsandfinancialinformation.
• Thisisfollowedbytwotothreestockpitchpresentationswherememberssuggestnewsecuritiestopurchaseorcurrentholdingstosell.
• Aquestionandanswersessionfollowseachpresentation.Membersthenvoteonthesuggestedcourseofaction.
• Theclassalsoregularlyhostsindustrypractitionersasguestspeakers.
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Student Leadership: Spring 2012
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John Stefos, Fund Manager John is a senior with a major in international studies and minors in finance and Arabic language. John is originally from Lancaster, Massachusetts, but moved to Washington, DC to study international politics. During his first two years at American University, he developed a passion for finance while learning about the root causes of the 2008/2009 financial crisis. Following graduation, John will be joining Raytheon Company's corporate Finance Leadership Development Program.
Seth Borko, Portfolio Manager Seth is a senior at the Kogod School of Business specializing in finance. Seth became interested in investing after taking Investment Analysis, a class with Professor Phil English. He now maintains his own portfolio in addition to his role with the SMIF. As portfolio manager, Seth aims to refine the fund's stock selection routine to create a top down process. This summer Seth will be joining J.P. Morgan in their Private Banking division.
Ashley Rose Stumbaugh, Investor Relations Officer Ashley Rose is a Kogod senior, specializing in finance with a minor in economics. She is originally from Hamilton, New Jersey and transferred to AU during her junior year. The two years she spent in DC were full of AU activities: Washington Initiative, Honors Alumni Program, 1955 Club, Professional Women's Association among others. Upon graduation, she looks forward to joining J.P. Morgan's Corporate Development Team as a financial analyst.
Mike Hirschberg, Economist Mike is a second-year MBA student from Chicago, IL, concentrating in Finance. He currently works at Greenberg Advisors, LLC, an investment bank focused on M&A advisory and raising capital. Prior to going back for his MBA, he worked in Logistics. He holds a BS from Indiana University. After graduation, he will join WCF Advisors in Minneapolis, MN, as an Investment Banking Associate.
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Ashley Rose Stumbaugh, Investor Relations Officer Ashley Rose is a Kogod senior, specializing in finance with a minor in economics. She is originally from Hamilton, New Jersey and transferred to AU during her junior year. The two years she spent in DC were full of AU activities: Washington Initiative, Honors Alumni Program, 1955 Club, Professional Women's Association among others. Upon graduation, she looks forward to joining J.P. Morgan's Corporate Development Team as a financial analyst.
Mike Hirschberg, Economist Mike is a second-year MBA student from Chicago, IL, concentrating in Finance. He currently works at Greenberg Advisors, LLC, an investment bank focused on M&A advisory and raising capital. Prior to going back for his MBA, he worked in Logistics. He holds a BS from Indiana University. After graduation, he will join WCF Advisors in Minneapolis, MN, as an Investment Banking Associate.
Kristen Owen, Accountant Kristen is currently obtaining her MBA from American University's Kogod School of Business with a concentration in Finance. Originally, from Cleveland, Ohio, Kristen graduated with honors from Kent State University with a Business Administration degree and was recognized as a Golden Key International Scholar. With interest in International Finance, Kristen has studied abroad in London, England and Sao Paulo, Brazil. Before beginning her MBA, she had previous experience in banking and personal finance.
Bryan Schapperle, Operations Manager Bryan is a junior in the Kogod School of Business majoring in Finance. Bryan first became interested in investing after joining the Kogod Finance Group during his freshman year. An avid sailor, he also holds the position of Treasurer for American University's Club Sailing Team.