Arnone

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ArnoneLerer Student Managed Fund
Performance Review Fall, 2007
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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
• Villanovas Augustinian principles
• US Catholic Bishops Statement on Socially
  Responsible Investing
• Student-Managed Fund (SMF)
• Based on the donors commitment to experiential
  learning

3
The Staff

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

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How We Invest

• Top-Down Investment approach
• Students teams working around a specific function
• Classroom discussion
• Teams are cross-functional and fund specific

5
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

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Results Thus Far

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

7

• Marketing and Public Relations

Jennifer Coppolino
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The Marketing Team

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

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How We Do It

• Maintain Team Relationships
• VSB PR and Marketing Group
• Update Website

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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
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• Investment Policy Compliance

Joshua Coleman
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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

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Restrictions on Investment

• General Restrictions
• Daily volume gt500,000 shares in 20-day window
• Price gt10
• 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

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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.

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• Business Cycle and
• Economic Analysis

Alex Zozos and Clarissa Sereda
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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

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The Cycle

• 5-Stage Business Cycle
• Ease-off
• Plunge
• Revival 1
• Acceleration
• Maturation
• Phase 6-18 months
• Not Market Timing
• Data signals cycle transition

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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

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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

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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

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• Socially Responsible Investing

Michael Brandao
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Socially Responsible Investing

• Embodying our core values
• The Mission of the Funds Founders
• Villanova University
• Catholic Bishops Statement
• Reward socially responsible companies
• In conjunction with economic analysis
• Suitable returns are possible

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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, KLATencor)
• Some firms not socially responsible despite
  passing threshold criteria

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IWFinancial
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• Security Analysis

Patrick Murray
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Security Analysis

• We evaluated companies within given sectors
• - Seek undervalued stocks
• Evaluation of models to find areas for
  improvement while increasing understanding of
  outputs
• Utilized Villanovas resources through Market
  Insight, Bloomberg, and Reuters

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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

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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

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Security Analysis
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Security Analysis
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Security Analysis
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• Portfolio Analysis

Yulia Barnakova
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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

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Optimization Process

• Correlation Matrix
• Efficient Frontier
• Optimization Nawrocki LPM

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Portfolio Allocation by Sector
Consumer Discretionary 25
Materials 2.1
Information Technology 25
Consumer Staples 5.0
Financials 9.2
Industrials 11.0
Health Care 22.7
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Stocks in Optimized Portfolio
Consumer 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
Healthcare
AMGEN INC
AMERICAN MEDICAL SYS HLDGS
CELGENE CORP
GENZYME CORP
HOLOGIC INC
LIFECELL CORPORATION
MEDTRONIC INC
MENTOR CORP
STRYKER CORP
Industrials
CINTAS
RYDER SYSTEM INC
TELETECH HLDGS
Information Technology
APPLIED MATERIALS INC
ARROW ELECTRONICS INC
COGNIZANT TECH SOLUTIONS-A
KLA-TENCOR CORPORATION
PAYCHEX INC
QUALCOMM INC
TEXAS INSTRUMENTS INC
Materials
VULCAN MATERIALS
Consumer Staples
NBTY INC
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Risk Comparison
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• Technical Analysis

Kevin Okolie
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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

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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

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RPrice - 47.12 Stop Loss - 41.75 Target -
55.60
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CAKEPrice - 23.08 Stop Loss - 20.50 Target -
26.00 Shouldnt Buy, not enough growth
potential.
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Stop Losses

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

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• Performance Reporting

Joseph Negri
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General Fund Performance

• Returns
• Week 3.33
• Month 3.33
• Quarterly 0.32
• Year to Date 13.14
• Investment 0.86
• Inception 47.90

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Comparison to Benchmark

• Returns for Domini
• Week 1.38
• Month 1.38
• Quarterly -.95
• Year to Date 4.84
• Investment -.65
• Inception 30.47

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Biggest Gainers/Losers

• Gainers
• 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

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Individual Sector Performance
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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)