Investment Process Presentation

1
Student Managed Fund

• Investment Process Presentation
• May 2nd, 2006

2
Overview

• Business Cycle
• Security Analysis
• Technical Analysis
• Arnone-Lerer Fund
• Social Responsibility
• George Coleman Fund
• Domestic ETF
• International ETF
• Currency Exposure
• Portfolio Style Analysis
• PMSP Compliance
• Performance Reporting
• Marketing
• Stop-Loss Policies

3

• Business Cycle

Dan Urbanowicz Andrew Kolb
4
Business Cycle Analysis

• Define Stages of the Business Cycle
• Identify Current Stage
• Identify Industries that Historically Perform
  Well
• Monitor Economy for Change in Stage

5
Define Stages of Business Cycle

• 5-Stage Overall Cycle
• Stages Last 6-18 Months
• Based Upon Various Govt. Economic Data
• All Economic Data Must Signal Transition
• Not Attempting to Time the Market

6
Five Stages of Business Cycle

• Ease-Off
• Slowing of Recovery
• Plunge
• Negative Growth
• Revival 1
• Beginning of Recovery
• Revival 2
• Solid Recovery
• Accelerate
• Growing Too Fast

Dr. Lacey Hunt QInsight Investment Advisory
Group
7
Identify Current Stage (Stats.)

• Money Supply
• Consumer Price Index (CPI)
• Producer Price Index (PPI)
• Components of GDP
• Unemployment Claims
• Industrial Production
• Non-Farm Payrolls
• Weekly Hours Worked
• Housing Starts

8
Where We Are

• Ease-Off period where Fed is tightening to
  control inflationary pressures by slowing growth
  of economy
• Traditional Indicators
• Industrial Production Declines
• Initial Unemployment Increases
• Non-Farm Payrolls Declines
• Additional Indicators
• Weekly Hours Worked Declines
• Housing Starts Declines
• GDP Growth Declines
• PPI Steady
• CPI Steady
• Monetary Base Declines
• FOMC Statements

9
Ease-Off - Outperformers

• Biotechnology
• Tobacco
• Health Care Equip/ Supp
• Pharmaceuticals
• Airlines
• Food Staples Retailing
• Software
• Commercial Banks

• Health Care Providers
• IT Services
• Electric Utilities
• Computer Peripherals
• Aerospace Defense
• Construction/Engineer
• Gas Utilities

10
Monitor Economy

• Attend Weekly QInsight Conference Calls
• Monitor Govt. Statistics for Change in Stage
• Peak in Federal Funds Rate
• Increase in Monetary Base
• Bias of Fed from Tightening to Stimulating

11
Recent Economy

• Long Ease-Off Period
• Rising Federal Funds
• Focused on Inflation, Housing, and Oil
• Weaker Econ. Data Fed May Stop Rate Hikes

12

• Security Analysis

James Keller Steven Morris
13
Security Selection

• Securities with Strong Fundamentals
• Growth and Profitability
• Liquidity and Financial Strength
• Valuation Ratios Indicating Undervalued Assets
• Conducted Two Separate Rounds of Analysis

14
Round 1 Fundamental Analysis

• Gathered Balance Sheet, Income Statement, Cash
  Flow Statement Data
• Input Financial Statement Data into Round 1
  Analysis Workbook
• Analytic Spreadsheet Generated Financial Ratios
  Used to Assess Companies Strengths Weaknesses

15
Round 1 Output Summary
16
Round 1 - Fundamental Analysis

• Securities were eliminated for various reasons
• Fundamental Ratios
• Negative Trends
• Significantly Below Industry Averages
• Low Bond Ratings
• Unhealthy Altman Z-Scores
• Manufacturing Below 1.81
• Non-Manufacturing Below 1.10

17
Round 2 Security Valuation

• Where is value derived from?
• PV of Free Cash Flows
• Terminal Value of Assets
• BV of Debt and Preferred Stock
• Market Value of Equity Per Share

18
Round 2 Output Summary
19
Round 2 - Security Valuation

• Securities eliminated based on
• Uncertainty on Free Cash Flows
• High Market Capitalization vs. Aggregate Value
• High Market Price/Share vs. Intrinsic Value

20
Final Security Selection

• Stocks Passing Both Rounds
• Reexamined Qualitatively
• Ranked In Comparison to Others in Industry
• Entered Portfolio Process by Demonstrating Strong
  Fundamentals Undervalued Pricing

21

• Technical Analysis

Ryan Doyle Colin Darretta
22
Goals

• Action on current positions
• Enhance entry and exit points
• Appropriate profit targets and stop losses
• Find significant technical changes to current
  holdings
• Document and analyze past recommendations for
  accuracy to determine value of technical analysis

23
Group Structure

• 6 analyst monitoring approximately 7-10
  securities each
• Spreadsheet includes data such as RSI, projected
  profit/loss targets, alerts, and recommended
  actions
• PowerPoint presentation is designed to propose
  recommendations to changes in portfolio to be
  discussed and voted on in class

24
Methodology

• Long term support and resistant trends
• RSI analysis to determine if security is
  overbought or oversold
• Chart moving averages
• Project relevant profit targets and stop losses
  based on these trends
• Recommend action based purely on chart
• Report to class any charts of significance and
  vote on action after discussing fundamentals

25
Example SKYF

• Sell recommendation
• Broke through long term channel
• Short term moving day average approaching long
  term

26
One-Month Performance
Price at Time of Recommendation
Price 1 Month Later
27
SKYF Performance
28
Recommendation Summary
29
Value of Performance
30
Individual Performance

• Data collected for 2 months on recommendations
  made on entire portfolio
• Divided into two periods
• Calculated average recommendation over first 2
  weeks of period
• Calculated error relative to stocks 1 month
  performance

31
Individual Performance
32
Summary

• Provide technical analysis of all current
  holdings and recommended securities
• Provide additional perspective for discussion
• Provide statistical performance report on
  recommendations based on technical analysis

33

• Arnone-Lerer Social Responsibility Fund
• Undergraduate Students

34

• Social Responsibility

Juliana Mozulay Lauren Aquilina
35
What is Socially Resp. Investing?

• World Economic Forum, 2005
• ABN - AMMRO

36
Why Invest in Socially Resp. Co.?

• Additional Financial Cost
• Avoid Companies Detrimental to Society
• Reward Companies
• Comparable Return

37
Steps to Investing

• 1.) Read the Catholic Bishops Statement
• 2.) Reviewed Evaluations from Past Years
• 3.) Ranked Criteria
• 4.) IWFinancial for Social Responsibility Rankings

38
Catholics Bishops Statement

• Policies for Guidance with Investing Strategies
• Values, Directions, and Criteria

39
Summary of Rankings
40
IWF Workstation
41
Example Starbucks (SBUX)
42

• George Coleman Fund
• Graduate Students

43

• Domestic ETF

Tracey Schmidt John Strzalka
44
Teams

• Financials/Insurance
• Consumer Goods
• Materials/Construction
• Energy
• Real Estate
• Healthcare/Biotech
• Technology
• Industrials
• Utilities
• Transportation

45
Methodology

• ETF options and desired exposure
• Significant historical holding period returns
  under the desired phase of the business cycle
• Ie. 1/89-11/89, 12/89-5/91, 12/94-12/95,
  4/00-4/01, 4/01-3/03, 9/04-10/06
• Highest percentage of holdings and performance
• If already held, expansion or contraction
• Analyst outlook, other concerns

46
ETFs as of December 2005

• iShares Dow Jones US Financial Services (IYG)
• iShares Dow Jones US Utility (IDU)
• iShares Dow Jones US Real Estate (IYR)
• iShares Dow Jones US Healthcare (IYH)
• iShares NASDAQ BioTech Index Fund (IBB)
• iShares Goldman Sachs Semiconductor (IGW)
• Select Sector SPDR Technology (XLK)
• Select Sector SPDR Financials (XLF)
• Select Sector SPDR Energy (XLE)
• Vanguard Consumer Staples VIPERs (VDC)

47
This Semesters Sells

• XLF Financials February 1, 2006 (316.99) Stop
  Loss
• IYH Healthcare February 1, 2006 (1,992.28)
  Stop Loss
• IGW Semiconductors March 13, 2006 (8,216.18)
  Stop Loss
• XLE Energy March 27, 2006 (4,399.94) Stop
  Loss
• IYH Healthcare April 4, 2006 (3,419.91) Stop
  Loss
• IBB Biotech April 6, 2006 (7,460.52) Stop
  Loss
• IYR Real Estate April 12, 2006 (4,810.10)
  Negative market effect on REITs/Overbought
• VDC Consumer Staples April 18, 2006
  (5,397.33) Stop Loss

48
This Semesters Buys

• XLY Consumer Discretionary February 1, 2006
  (-4,395.46) Strong historical plunge
  performance
• XLE Energy February 1, 2006 (-4,761.72)
  Energy Exposure
• IBB Biotech February 1, 2006 (-3,924.10) Tech
• IGW Semiconductors February 1, 2006
  (-6,379.78) Tech
• IYG Financial Services February 1, 2006
  (-2,331.70) Financial Services Exposure
• IYR Real Estate February 1, 2006 (-625.84)
  Real Estate Exposure
• IGN Multimedia March 20, 2006 (-6,514.90)
  Tech
• XLY Consumer Discretionary April 21, 2006
  (-2,547.25) Expanding Consumer Discretionary
  Exposure
• XLE Energy April 21, 2006 (-2,352.90)
  Expanding Energy Exposure
• IYT Transportation April 21, 2006 (-5,091.10)
  Transportation growth/soft landing hedge

49
Domestic ETFs as of May 2006

• ETF Amount Held Domestic
  Overall
• iShares Biotech (IBB) 3851.50
  8.27 3.52
• Consumer Discretionary SPDR (XLY) 7046.28
  15.12 6.43
• iShares Financial Services (IYG) 7300.80
  15.67 6.66
• iShares Semiconductor (IGN) 6330.60
  13.59 5.78
• iShares Healthcare (IYH) 6115.10
  13.12 5.58
• Energy SPDR (XLE) 6897.00 14.80
  6.29
• Financial SPDR (XLF) 4008.00
  8.60 3.66
• iShares Transport (IYT) 5049.00
  10.84 4.61
• 46,598.28 100.00 42.53

50

• International ETF

Regan Greco
51
Teams

• Americas Africa
• Europe
• Far East
• Benchmark is EAFE

52
International

• Economic Factors
• Real GDP growth trend
• Inflation
• Currency/Exchange rate trend
• Unemployment
• Fundamental Factors
• Current Political situation
• Current Events
• Price Trend

53
Additional Factors

• Top 3 Holdings Performance
• Historic Performance of Fund
• Currency Exposure
• Geographical Exposure

54
Previous Holdings

• Australia
• Austria
• Brazil
• Japan
• Netherlands
• Singapore
• South Korea
• Spain
• Switzerland
• United Kingdom

55
Current Holdings

• Australia
• Austria
• Belgium
• Brazil
• Japan
• The Netherlands
• Singapore
• Spain
• Sweden
• Switzerland
• United Kingdom

56
MSCI Brazil ETF

• The iShares MSCI Brazil Index Fund seeks to
  provide investment results that correspond
  generally to the price and yield performance,
  before fees and expenses, of publicly traded
  securities in the Brazilian market, as measured
  by the MSCI Brazil Index.
• Beta 1.97
• Price 43.10

57
Brazil GDP
58
Brazil CPI
59
Sector Weights

• 28.32 Materials
• 24.51 Energy
• 17.64 Banks
• 7.09 Utilities
• 7.04 Telecommunication Services
• 5.84 Food Beverage Tobacco
• 3.06 Capital Goods
• 1.60 Transportation
• 1.05 Retailing
• 0.89 Household Personal Products

60
Returns ()
61

• Currency Exposure of iShares

Mike Hetzner
62
Currency Exposures (i)

• Euro
• British Pound
• Swiss Franc
• Japanese Yen
• Singapore Dollar
• Australian Dollar
• Brazilian Real
• Swedish Krona

USD Local Equity Return Currency Return
63
Currency Exposure (ii)

• iSHARES traded in USD, and invested in Foreign
  Equity Markets (some ADRs).
• International ETFs expose US investors to both
  local equity returns and foreign currency risks.
  
• This exposure provides diversification given
  equities and currencies are often driven by
  different economic and market factors
• Currency exposure is highly dependant upon the
  relationship between local equity returns and the
  change in value of the local currency relative to
  the US dollar

64
Currency Exposure
65
Impact of Strong or Weak USD

• A weakening USD adds to the returns of an
  investor
• A weaker USD implies a stronger foreign currency,
  thus enhancing fund returns
• A strengthening USD subtracts from the returns of
  an investor
• Equity holdings denominated in the foreign
  currency are now worth less in USD terms

66
Various Impacts of the Dollar
As of 4/25/06 from Yahoo Finance
67
Current Scenario

• Fed raised rates to 4.75 with additional
  increases possible
• Highest level since April 2001
• Once rates peak the USD may weaken further
• Bank of Japan is anticipated to increase rates
• This could happen as soon as July affecting
  global money flows
• European Central Bank
• ECB is anticipated to increase rates from 2.5 in
  May or June
• Many of the Worlds Central Banks have begun to
  diversify their holdings away from the Dollar
• Citing fluctuations and instability of the
  dollars value against major currencies
• With US Rates peaking, the dollar has depreciated
  compared to most other major currencies

68
Global Performance Attribution
69

• Portfolio Style Analysis

Grant Ashlin
70
VaR Analysis

• Arnone-Lerer
• Using historical returns, weekly portfolio VaR is
  2,726.45
• VaR on annual basis is 19,660.68
• Annual VaR of benchmark using same time period is
  28,317.04
• Annual VaR is 16 of portfolio value
• 1 Violation, p-value .725

VaR calculated at 99 confidence level
Historical return period 1/1/05 to 4/24/06 (68
data points)
71
VaR Analysis

• George Coleman
• Using historical returns, weekly portfolio VaR is
  3,193.86
• VaR on annual basis is 23,031.30
• Annual VaR of benchmark using same time period is
  25,131.54
• Annual VaR is 21 of portfolio value
• 0 Violations, p value.242

VaR calculated at 99 confidence level
Historical return period 1/1/05 to 4/24/06 (68
data points)
72
Portfolio Style Analysis

• As part of our portfolio management process, it
  is to the SMF class advantage to know the
  general style composition of our portfolio.
• To this end, a modified Markowitz Optimization
  program was used to perform Sharpe Style analysis
  on the portfolio.
• This program is able to look at the returns on
  various benchmarks and the fund itself to
  determine our style composition.

73
George Coleman Fund Style

• The parfait chart is based on a 20 week moving
  average of the G. Coleman funds position
• Moved from Small Cap Value (pink) to
  International (Pacific Ex-Japan - light blue
  Europe - purple)

74
Arnone-Lerer Fund Style

• The parfait chart is based on a 20 week moving
  average of the Arnone-Lerer funds position
• Operates as Small Cap Value (pink). Large cash
  balance (light purple) reflects effects of
  stop-losses

75

• PMSP Compliance

John Dellanoce
76
PMSP Overview

• After selecting securities, allocated using
  Portfolio Management Software Program (PMSP)
• Analyzes historical returns, std. deviations, and
  correlations among securities to select most
  efficient portfolio
• Choose portfolio with highest expected return per
  unit of downside risk
• Portfolio with Highest Return to Lower Partial
  Moment Ratio
• Modify output to ensure allocations meet
  compliance

77
Compliance Arnone-Lerer Fund

• Individual Security Limits
• No security, when purchased, may exceed 5 of the
  overall portfolio value
• Rebalance to 5 when security reaches 7 of
  portfolio value
• Sector Limits
• Initial investment in securities within the same
  GICS Subindustry may not exceed 12.5
• Other Restrictions
• When purchased, securities must have minimum
  price of 10
• Minimum market capitalization of 1 billion.

78
Arnone-Lerer Sector Breakdown

• Financials, 25.0
• Healthcare, 24.4
• Cons. Discretionary, 17.1
• Info. Technology, 8.7
• Utilities, 4.9
• Consumer Staples, 4.9
• Cash, 4.9
• Industrials, 4.1
• Telecommunications, 3.8
• Materials, 2.2

79
Arnone-Lerer Sub-Industries
Top Five Holdings JP Morgan Chase,
5.2 Citigroup (C), 4.9 CVS Corp (CVS),
4.9 Covance (CVS), 4.6 American Express (AXP),
4.6
80
Compliance George Coleman

• Fund Breakdown
• 50 Domestic, 50 International
• Foreign Country Limit
• Maximum initial investment of 25 of total
  foreign value
• Rebalance to 25 when investment reaches 30 of
  foreign
• Domestic Sector Limits
• Maximum initial investment of 20 of portfolios
  total domestic value
• Rebalance to 20 when investment within sector
  reaches 25 of domestic total

81
George Coleman Breakdown (i)

• Top Holdings Domestic
• Fin. Services (IYG), 6.7
• Energy (XLE), 6.4
• Con. Discretionary (XLY), 6.4
• GS Networking (IGN), 5.7
• Healthcare (IYH), 5.6

• Top Holdings Foreign
• Japan (EWJ), 7.4
• Austria (EWO), 7.3
• Singapore (EWS), 6.3
• Switzerland (EWL), 5.6
• Netherlands (EWN), 5.5

• International, 48.5
• Domestic, 42.5
• Cash, 9.1

82
George Coleman Breakdown (ii)

• Sector as of Domestic
• 20 Limit, Rebalance at 25
• Financials, 20.1
• Healthcare, 17.6
• Energy, 12.4
• Con. Discretionary, 12.4
• Information Tech, 10.8

• Country as a of Foreign
• 25 Limit, Rebalance at 30
• Japan, 15.3
• Austria, 15.1
• Singapore, 13.1
• Switzerland, 11.6
• Netherlands, 11.4

83

• Performance Reporting

Robert Brooks John Dellanoce
84
Financial Performance
The Villanova Student Managed Fund (SMF) has
prepared and presented this report in compliance
with the Global Investment Performance Standards
(GIPS)
Notes1. The Villanova SMF is currently a
balanced portfolio, split 75/25 amongst domestic
and international equities. The SMF is an
investment group affiliated with the Villanova
University Endowment.2. The benchmark 75
percent Standard and Poors 500 25 percent
iShares MSCI EAFE Index Fund (EFA). The
3/04-3/05 benchmark is based on 100 percent
Standard and Poors 500.3. Valuations are
computed in USD.4. The dispersion of annual
returns is measured by the standard deviation
across asset-weighted portfolio returns
represented within the Composite for the full
year5. Performance results are presented before
management and custodial fees but after all
trading commissions. 6. This composite was
created in March, 2004 and modified in March
2005. No alteration of composites as presented
here has occurred because of changes in personnel
or other reasons at any other time.7. Past
performance is not indicative of future
results8. On December 14, 2005 The George
Coleman Fund Received an additional 25,000 to
invest.
85
Key Transactions Realized Gains/(Losses)
86
Key Holdings Unrealized Gains/(Losses)
87
Arnone-Lerer Performance Since 11/2/ 2005

• 8.32 - SMF Arnone-Lerer SRI Fund
• 6.83 - Domini Social Index
• 10.03 - SP 500 Total Return
• 8.33 - KLD Select Social Index
• 11.08 - Russell 3000 Total Return
• 10.27 - Russell 1000 Total Return

88
Arnone-Lerer Performance YTD

• 3.67 - SMF Arnone-Lerer SRI Fund
• 3.36 - Domini Social Index
• 5.61 - SP 500 Total Return Index
• 4.10 - KLD Select Social Index
• 6.46 - Russell 3000 Total Return
• 5.75 - Russell 1000 Total Return

89
George Coleman Performance Since 11/2/2005

• 12.44 - SMF George Coleman
• 16.22 - 50/50 EAFE-SP
• 10.03 - SP 500 Total Return
• 16.22 - EAFE

90
George Coleman Performance YTD

• 6.69 - SMF George Coleman
• 10.19 - 50/50 EAFE-SP
• 5.61 - SP 500 Total Return
• 14.78 - EAFE Total Return

91
Since Inception

• 28.82 - SMF Arnone-Lerer SRI Fund (3/24/04)
• 24.70 - SP 500 Total Return
• 15.53 - Domini Social Index
• 28.04 - Russell 3000 Total Return
• 26.91 - Russell 1000 Total Return
• 
  
• 10.86 - SMF George Coleman (3/4/05)
• 9.50 - SP 500 Total Return
• 26.37 - EAFE
• 17.93 - 50/50 EAFE-SP

92
Arnone-Lerer Risk-Adjusted Returns 05
93
Arnone-Lerer Risk-Adjusted Returns YTD
94
George Coleman Risk-Adjusted Returns 05
95
George Coleman Risk-Adjusted Returns YTD
96

• Marketing

Christopher Van Woeart
97
Website
http//www.students.villanova.edu/smf
98
RISE Symposium 06 Dayton, OH
March 29 April 1, 2006

• Overview
• Keynote presentations by renowned industry
  professionals
• William Dudley, Chief Economist Goldman Sachs
• Michael Oxley, US Congressman Sarbanes-Oxley
  Act
• Breakout sessions on investments, careers and
  academics
• Security analysis and portfolio management
  workshops

Even a lesson in Iranian theology from the cab
driver!
99
2006/2007 SMF Recruitment

• Recruitment Initiative
• Presentation to Rising-Senior Finance Classes
• Advertisement on CF Bauer Atrium TV Monitor
• Tent Cards Throughout Bartley Exchange
• Information E-mail Distributed to Rising-Seniors
• Interviews Held April 27, 2006
• Results
• 26 Qualified Applicants
• 20 Students Accepted (4 from VU Equity Society)

100

• Stop-Loss Policies

Dominic Genuardi
101
Stop-Loss Procedures

• Active vs. Passive Management
• Active Management - occurs after initial
  investments while classes are in session
• Passive Management - fixed stop-loss benchmarks
  are enforced at other times

102
Active Management (i)

• Several checks and balances over transactions in
  the George Coleman and Arnone-Lerer funds
• Investment Groups students are divided into
  small groups focused on particular
  industries/sectors
• Analytics Several students are assigned
  responsibility for creating/maintaining
  stop-losses.

103
Active Management (ii)

• Investment Committee (whole class) votes on class
  recommendations and findings of Analytic Teams
• Dr. Nawrocki has oversight over the Student
  Managed Funds and can overrule any decisions, if
  necessary.
• Dr. Nawrocki will place all transaction orders.

104
Passive Management

• During the summer and winter breaks, the fund
  defaults to pre-determined stop-loss values.
• Positioning in the stop-loss bands is based on
  the underlying volatility of the asset.
• Selected Stop-Loss Bands
• 93 to 98 of benchmarked values in George
  Coleman
• 91 to 96 of benchmarked values in Arnone-Lerer

105
Stop-Loss Benchmarks Summer 06

• Refer to Handout for Final Stop-Loss Values

106

• Questions

107

• Thank You!