Arnone–Lerer Student Managed Fund

Performance Review

Fall, 2007

Arnone - Lerer Fund Overview • Founding of the Fund

– In memory of Eugene Arnone & Lawrence Lerer– Maria A. Stumpf and Stephen A. Stumpf

• Socially Responsible Fund– Villanova’s Augustinian principles – US Catholic Bishop’s Statement on Socially

Responsible Investing

• Student-Managed Fund (SMF) – Based on the donors’ commitment to experiential

learning

The Staff• Dr. David Nawrocki • Professor James Jablonski• MBA Students• Undergraduate Students• In conjunction with MSF and equity society

teams

How We Invest• Top-Down Investment approach• Students teams working around a specific

function• Classroom discussion• Teams are cross-functional and fund

specific

The Investment Process• Marketing and Public Relations• Investment Policy & Compliance• Business Cycle• Economic Analysis• Socially Responsible Investing (SRI)• Security Analysis• Portfolio Analysis• Technical Analysis• Performance Reporting

Results Thus Far• Initial Investment (Fully Invested)• Re-assessment and re-run process• Re-Investment

Marketing and Public Relations

Jennifer Coppolino

The Marketing Team

The MarketingTeam

WebsiteDesign

Organize Team

EventsPublications

PublicRelations

• A liaison between the fund and the outside world• Ongoing Process

How We Do It• Maintain Team Relationships• VSB PR and Marketing Group• Update Website

Future Initiatives• Increase Awareness• Recruit• Maintain Website

– http://www.students.villanova.edu/smf

“Student-run investment funds are taking off as a

teaching tool.”

The Wall Street Journal article featuring Villanova

Investment Policy & Compliance

Joshua Coleman

Investment Policy Statement• Sets

– Fund objectives– Investment objectives and guidelines– Reporting and performance requirements

• Reviewed thoroughly

• Approved by Investment Committee– Comprised of members of the class and faculty– Approved by the University Investment Committee

Restrictions on InvestmentGeneral Restrictions• Daily volume: >500,000 shares in 20-day window• Price: >$10• Minimum market capitalization: $1.0 billion

Position-Based Restrictions • Max initial investment (one security): 5%• Security increase 40% in value: Rebalance Portfolio

(5%)• Securities of the same industry: 12.5% portfolio total

value• Cash positions must not exceed: 10% of the total

portfolio

Continuous Process• Constant re-assessment

– Shifts in economic life cycle– Liquidated or re-balanced– Emerging issues of social responsibility– Performance consistent with goals/benchmarks

• All decisions regarding the portfolio are proposed and voted on by the Investment Committee.

Business Cycle and Economic Analysis

Alex Zozos and Clarissa Sereda

The Process• Sources

– A Time to be Rich – Dr. Lacey H. Hunt– Q-Insight Conference Call– Peripheral materials

• Federal Reserve Bank, WSJ, Periodicals

• Reviewed all available indicators– Use specific factors to determine current phase

• Evidence brought to class for discussion

The Cycle• 5-Stage Business

Cycle– Ease-off– Plunge– Revival 1– Acceleration– Maturation

• Phase: 6-18 months• “Not Market Timing”

– Data signals cycle transition

Ease-Off

Acceleration

Maturation

Revival

Plunge

First Assessment - 9/18/2007• Plunge Phase

– Red Flag Indicator: Interest Rate Peak

– Negative Trends in Major Indicators• Government Spending• Housing Starts• Non-Farm Payroll

– Class discussion & Investment Committee vote

Revised Assessment - 10/11/2007

• Reevaluation of phase– A number of factors indicate Revival– Investment Committee disagrees via class vote

• Outcome: Remain in Plunge phase– Current market volatility– Speed of information– Forward-looking Federal Reserve

Economic Summary• Red Flag: Interest Rate Peak• Crude-oil prices rise• The Fed continues to lower interest rates• Housing market continues to struggle• Credit quality falls, defaults on the rise

Socially Responsible Investing

Michael Brandao

Socially Responsible Investing• Embodying our core values

– The Mission of the Fund’s Founders– Villanova University – Catholic Bishop’s Statement

• Reward socially responsible companies

• In conjunction with economic analysis

• Suitable returns are possible

How to Assess SRI• Vote social responsibility

– Adjust and analyze each stock differently– Open minded and socially conscious

• IWFinancial – SRI online tool– Initial cut-off: 60– Cut off of 55 (0-100 scale)– Lowest Stock: 56 (Vulcan Materials, KLA–

Tencor)

• Some firms not socially responsible despite passing threshold criteria

IWFinancial

Security Analysis

Patrick Murray

• We evaluated companies within given sectors

- Seek undervalued stocks

• Evaluation of models to find areas for improvement while increasing understanding of outputs

• Utilized Villanova’s resources through Market Insight, Bloomberg, and Reuters

Security Analysis

• First Assessment (2+ weeks)

- Valuation models from previous years

- Did not return enough companies to pass on

- Some stocks did not meet IPS

• Updates made to model, process re-run

Security Analysis

• Second Assessment (24 hours)- Modifications of evaluation model gave us increased efficiency and quality of results- All stocks were found to meet IPS- More diversification by inclusion of different sectors

• Results- 75 companies believe to be undervalued at their current price to pass on to Technical Analysis Team

Security Analysis

Security Analysis

Security Analysis

Security Analysis

Portfolio Analysis

Yulia Barnakova

PMSP Software• Portfolio optimizer

– Correlation of securities– Efficient Frontier– Nawrocki Lower Partial Moment Heuristic

• Industry returns – Historic Plunge performance– Override of individual returns

• Constrained optimization– CRSP Data– Security/Industry/Sector

Optimization Process• Correlation Matrix

• Efficient Frontier

• Optimization: Nawrocki LPM

Consumer Discretionary 25%

Consumer Staples 5.0%

Financials 9.2%

Health Care 22.7%

Industrials 11.0%

Information Technology 25%Materials 2.1%

Portfolio Allocation by Sector

Stocks in Optimized PortfolioConsumer Discretionary

ANNTAYLOR STORES CORP

DOLLAR TREE STORES INC

HARMAN INTERNATIONAL

KOHLS CORP

LIMITED BRANDS INC

RYLAND GROUP INC

SHERWIN-WILLIAMS CO/THE

Financials

CITIGROUP INC

FANNIE MAE

FREDDIE MAC

HealthcareAMGEN INC

AMERICAN MEDICAL SYS HLDGS

CELGENE CORP

GENZYME CORP

HOLOGIC INC

LIFECELL CORPORATION

MEDTRONIC INC

MENTOR CORP

STRYKER CORP

Information Technology APPLIED MATERIALS INC

ARROW ELECTRONICS INC

COGNIZANT TECH SOLUTIONS-A

KLA-TENCOR CORPORATION

PAYCHEX INC

QUALCOMM INC

TEXAS INSTRUMENTS INC

IndustrialsCINTAS

RYDER SYSTEM INC

TELETECH HLDGS

Consumer Staples

NBTY INC

MaterialsVULCAN MATERIALS

Risk Comparison

0

0.1

0.2

0.3

0.4

0.5

0.6

%

Risk Reward/Risk

Risk Comparison

Arnone-Lerer

KLD

9.5

10

10.5

11

11.5

12

12.5

13

An

nu

al R

etu

rn (

%)

Arnone-Lerer KLD

Annual Return Comparison

0.21

0.215

0.22

Ske

wne

ss

Arnone-Lerer KLD

Skewness Comparison

Technical Analysis

Kevin Okolie

Technical Analysis• Determine best time to enter and exit

positions– Analyze both short and long term trends

• The Process– Divide securities amongst the analysts.– Using common tools

• RSI, Trend Lines, and Moving Averages – Advice of Professors– In-Class discussions

Technical Analysis• What we found

– Some securities were fundamentally but not technically sound

– not enough profit potential to invest

• Dropped 12 stocks from portfolio – Will monitor for potential future entry

RPrice - $47.12 Stop Loss - $41.75 Target - $55.60

CAKEPrice - $23.08 Stop Loss - $20.50 Target - $26.00 Shouldn’t Buy, not enough growth potential.

Stop Losses- Determine support and resistance levels - Is risk to return ratio is reasonable?- Set stop loss and profit target accordingly

Performance Reporting

Joseph Negri

General Fund PerformanceReturns• Week: 3.33%• Month: 3.33%• Quarterly: 0.32%• Year to Date:

13.14%• Investment: 0.86%• Inception:

47.90%

Performance Since Investment

-7%-6%-5%-4%-3%-2%-1%0%1%2%

Arnone

Comparison to BenchmarkReturns for Domini• Week: 1.38%• Month: 1.38%• Quarterly: -.95%• Year to Date: 4.84%• Investment: -.65%• Inception:

30.47%

Fund Comparisons

-7.00%-6.00%-5.00%-4.00%-3.00%

-2.00%-1.00%0.00%1.00%2.00%

11/9/07 11/16/07 11/23/07 11/30/07 12/7/07

Arnone S&P Domini

Biggest Gainers/LosersGainers• Fannie Mae: 36.53%• Freddie Mac: 25.52%• Ryder Systems: 21.20%

Losers• NBTY Inc: -5.85%• Amgen Inc: -2.21%• Qualcomm Inc: -1.88%

Individual Sector Performance

-3.3%

0.7%1.8%

3.2%

5.7%

7.8%

18.4%

-0.05

0.00

0.05

0.10

0.15

0.20

Re

turn

(%

)

ConsumerStaples

Industrials InformationTechnology

Health Care ConsumerDiscretionary

Materials Financials

Sector

Return By Sector

First Semester Performance

• High market volatility led to a complete restructuring

• The first investment phase: loss (-9%)– Market volatility – Short timelines for improvement/changes

• The second investment phase: growth (+7%)