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Villanova University Student Managed Fund

Villanova University Student Managed Fund. Presented by Villanova Student Fund Managers. Objectives. Develop an organizational structure Apply “Top Down” methodology Design a socially responsible portfolio Market the portfolio for potential donors. Three Tier Management System.

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Villanova University Student Managed Fund

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  1. Villanova University Student Managed Fund Presented by Villanova Student Fund Managers

  2. Objectives • Develop an organizational structure • Apply “Top Down” methodology • Design a socially responsible portfolio • Market the portfolio for potential donors

  3. Three Tier Management System • 2 Professors • 5 Graduate MBA students • 23 Undergraduate students • 12 Graduate MSF students

  4. INVESTMENT POLICY ECONOMIC BUSINESS CYCLE/ INDUSTRY ANALYSIS MARKETING SOCIAL RESPONSIBILITY SCREENING FINANCIAL SCREENING CORPORATE GOVERNANCE PORTFOLIO ANALYSIS INITIAL INVESTMENT (3-26-04) PERFORMANCE REPORTING PORTFOLIO COMPLIANCE EXIT STRATEGY FOR SEMESTER BREAK

  5. Investment Policy Statement

  6. Investment Policy Statement • Foundation stone for any investment • Without a map, how do you know where you are? • Teams developed modules against deadlines • Refined and reviewed • What stock limits are reasonable? What is SRI? • Synthesized in late night session • Blessings of spell-check… • Reviewed internally • Vetted and approved through VU hierarchy

  7. Investment Policy Statement:Extracts The purpose : Outline an investment management philosophy which details the student-managed fund’s objectives, investment guidelines, performance measurement, and reporting guidelines. Be sufficiently specific to be meaningful, yet flexible enough to be practical. Reviewed periodically and revised, if necessary, to ensure that it adequately reflects changes related to the capital markets. The Arnone-Lerer SRI Fund is a student-managed fund (SMF) with a philosophy of investing in securities based on rigorous qualitative and quantitative analysis. A key component of the qualitative factors is the appraisal of a firm’s degree of social responsibility, with the aim of encouraging corporate behaviors that align with Villanova University’s Augustinian traditions and the donors’ mandate.

  8. Economic Business Cycle & Industry Analysis

  9. Current Economy: Revival II • Economy continues to strengthen and inflation begins to slowly rise • Positive and rising year-to-year change in industrial production • Declining trend in the weekly initial unemployment claims • Rising trend in non-farm payrolls • Historically a moderately favorable time for the stock and bond markets. 

  10. Electronics – Semiconductors Aerospace/Defense Manufacturing – Diversified Banks - Money Center Lodging/Hotels Electrical Equipment Computers - Software/Services Financial – Diversified Natural Gas  Oil – International Consumer Finance Household Products Insurance - Multi-Line Railroads Automobiles Banks - Major Regionals Office Equipment Trucks and Parts  Chemicals  Revival II Outperforming Industries

  11. Business Cycle Approach

  12. Monitoring the Economy • What to Watch: • Acceleration Phase • Monetary Base turns Up • CPI turns up • CPI 6-mth ROC goes above 0 and rises • Ease-off Phase • Significant decline across all indicators • Non-Farm Payroll turns down • Industrial Production turns down • Initial Unemployment turns up • Weekly Economic Conference Calls

  13. Invested Industries • Oil & Gas Refining/Marketing (SUN, VLO, WGR) – 12.5% • Financial Services (MER, BEN, EV, RJF, TROW) – 12.5% • Regional Banks (STI, PNC, MTB, SOTR) – 12.5% • Semiconductors (INTC, QLGC, ALTR) – 11.57% • Construction & Farm Machinery (DE, CAT) – 10% • Consumer Cyclicals (GM, HDI) – 10% • Telecommunications Equipment (HRS, PLT) – 8.43% • Electrical Components & Equip. (AME, ROK) – 6.3% • Construction Materials (CTX, FRK, LAF) – 6.2% • Auto Manufacturers (WGO) – 5% • Advertising (OMC) – 5%

  14. Social ResponsibilityScreening

  15. Social Responsibility Screening • Arnone- Lerer • Catholic Church Doctrines • Villanova University Practices • Students’ Beliefs • www.IWFinancial.com

  16. In Memory Of… Lawrence Lerer Eugene Arnone

  17. Securities and Portfolio Analysis

  18. Analysis Techniques • Initial Screening Criteria • Minimum market cap - $1 billion • Minimum share price - $10/share • Financial Models • Preliminary screening models • 2-stage valuation models • Qualitative Analysis • Fundamental analysis • Due diligence

  19. Preliminary Models • Altman Z-Score • Determines relative probability of: • Bankruptcy • Financial statement misstatements • Implied P/E Calculator • Dividend discount valuation tool • DuPont Ratio Analysis • Financial statement ratios

  20. Second Stage Growth Model • Free Cash Flow to the Firm model (FCFF) • Two-stage discounted cash flow model • High growth phase • Stable growth phase • Interface developed “in house” • Determines theoretical market value of firm’s equity • Facilitates over/undervaluation decision

  21. Deriving Free Cash Flow to the Firm • Income statement inputs • Balance sheet inputs • Cash flow statement inputs • Relevant financial markets data

  22. Arriving at Market Value of Equity • Sum of: • Terminal value of FCF in high growth phase • Discounted value of FCF in stable growth phase • Value of Firm = Debt + Equity + Preferred Value of Equity = Value of Firm – Debt - Preferred

  23. Qualitative Research Approach • Know the company’s “story” • Future earnings growth estimates • Fundamentals • Ratios • Strength of financial statements • Recent headlines

  24. Portfolio Optimization • Theory • Choose inversely correlated stocks to make market-neutral portfolio • Maximize return per unit of risk • PMSP Optimizer • Risk per unit of return analysis • Keep inline with Investment Policy Statement • Industry and individual securities “weight” limits

  25. Efficient Frontier Average Annual Rate of Return Standard Deviation Maximizing Return per Unit of Risk

  26. Compliance

  27. Compliance • Create and maintain the portfolio restricted list • Works with Social Responsible Team • Review IWFinancial for SR updates about companies in the portfolio

  28. Portfolio Monitoring • Review of proxy statements and voting when necessary • Weekly monitoring to ensure: • No stock has is 40% above original weighing • No stock exceeds the 7% weight limit.   • Monitor industries to ensure no single industry exceeds 12.5% of the portfolio

  29. Weekly Email Updates • Weekly email includes any of the companies news: • Announce of earnings • Earnings from the previous week • Major announcements (lawsuits, fraud)

  30. Performance Reporting

  31. Performance Reporting • Performance Benchmarks • Top 10 Holdings • Positions in the Industry • Performance of each security (Social Responsibility and Corporate Governance) • Methodology

  32. Exit Strategy

  33. Exit Strategy • Different Strategies to chose from • Money Market • Collar • Stop Loss • Investment Committee decision: Stop Loss • Cost advantage • Does not limit upside potential

  34. MBA Guidance • Guide for next year’s class • Summary of the semester • Organizational chart • Team responsibilities • Efficient team management

  35. Questions?

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