Reality Investing at Stern

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Reality Investing at Stern

• The Michael Price Student Investment Fund
• April 25, 2006
• ________________________________________

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Tonights Program
Overview of MPSIF Richard Levich, Faculty
Advisor
MPSIF Experience Debbie Jones, President
The MPSIF Funds
Fixed Income
Growth
Small Cap
Value
Questions Answers
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Overview of MPSIF
Origin of The Michael Price Student Investment
Fund (MPSIF)
Organizational Overview
MPSIF as an MBA Course
MPSIF as an Endowment Fund
Goals for the Future
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MPSIF Established in 1999
Founded with 2.0 million gift - Michael F. Price

Michael F. Price - Managing partner of MFP
Investors and former chairman of Franklin Mutual
Series funds.
Gift enabled establishment of three funds
Three Funds - Red, Green and Blue - Each
allocated 600,000. Each Fund had a different
investment objective.Note 200,000 allocated
for administrative expenses
Fund part of the overall NYU endowment
Fund has a mandated 5 per annum distribution
Distribution provides scholarships to selected
students from the Price College of Business at
the Univ. of Oklahoma for study at NYU Stern.
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MPSIF Established in 1999
Advisory Board for MPSIF
Board determines general investment guidelines
and provides administrative oversight
Management Advisory Council
Council receives annual and semi-annual reports
and visits class to review operating practices
Executive Committee
The Faculty Advisor, President, Treasurer and
Portfolio Managers - Exec Committee oversees
activities of the fund over the semester
Individual Funds
Student portfolio managers oversee day-to-day
operations, other students perform related tasks
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Organizational Overview
Advisory Board
Executive Committee
Faculty Advisor, President, Treasurer, Portfolio
Managers
Growth
Small Cap
Value
Portfolio Manager (2)
Portfolio Manager (2)
Portfolio Manager (2)
Fixed Income
Portfolio Manager (1)
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Pedagogical Objectives
We operate MPSIF as a Course not a Club

• Course promotes responsibility for managing
  significant real assets, and a vehicle for
  selecting and organizing students
• To promote continuity, students are required to
  participate over two semesters. Half register
  fall-spring, half register spring-fall.
  Overlapping generations setup

Goals

• An 8-11 month immersion course for honing
  analytical and presentation skills
• A capstone, interdisciplinary course in which
  managing diverse tasks relies on teamwork
• Deeper understanding of governance and fiduciary
  responsibilities in running an endowment fund

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MPSIF as an MBA Course
Not an ordinary class

• Some outside speakers, but very few lecturers
• Emphasis is hands-on, experiential,
  learning-by-doing

Students perform all of the key tasks

• 45 students populate 3 equity fund teams
• Economic, sector and company research
• Stock selection, buys sells, monitoring
• Fiduciary duties Annual and semi-annual
  reports, minutes of activities, Board
  presentations

The deliverables

• Financial writing, oral presentations,
  financial decision making in a group setting

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Recent MPSIF Initiatives
Management Advisory Council
Wilshire analytics portfolio analysis
Alumni Panel and Alumni Reunion
Annual Report upgrade
Web-site upgrade
The Educated Investor newsletter
Resume book
Proxy voting, litigation filings
Re-balancing of MPSIF portfolio

• Gross flows in excess of 400,000

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Deliverables
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MPSIF as an Endowment Fund
Student run MPSIF, but within limits Rules of
the Game

• MPSIF is a long-only endowment fund.
• Permitted securities include Stocks, bonds,
  money market instruments, and limited mutual
  funds. NYU is a tax exempt institution.
• Goals include
• (a) returns in excess of inflation over a 3-5
  year period,
• (b) returns exceeding an appropriate benchmark,
  
• (c) focus on long-term opportunities rather
  than short-term trading gains, (d) an
  acceptable level of diversification

MPSIF Operates on an open book policy

• Stands ready to make its results, activities,
  reports available to anyone within the NYU
  community with an interest. (Active web site)

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How has MPSIF Performed?
Six year record Inception March 1, 2000
Since Inception1.8B to 2.01B
Does not include 461,000 in distributions
44 Total Returnin first six years (6.18 p.a.)
Well ahead of benchmark 75 Equity, 25 Debt
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Goals for the Future
Enhance MPSIF profile inside and outside Stern
Enhance MPSIF as a vehicle for student
recruitment and placement, as well as fundraising
Attract more funds under management from NYU
endowment or other benefactors
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MPSIF Student Experience

• The Michael Price Student Investment Fund
• President Debbie Jones
• ___________________________________

The Fund
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My StoryWhy NYU, Why MPSIF
Why to get my MBA
First Annual Student Alumni Mixer
Previously analyzed mutual fundsneeded to
improve my fundamental stock picking skills
Where to get my MBA
Deutsche Bank
Met with alum from my undergraduate school who
was also the original MPSIF President
CMC NYU
Financial Modeling? DCF?
How to get a job/internship
Stock pitches are standard for MBA internship
and full-time job applicants (both buy side and
sell side)
MPSIF After Stern
With six years of history there are numerous
MPSIF alum working in the investment management
profession
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The MPSIF Experience
Placement into Fund (Team)
Generally 15 students per fund requests are
considered. Management seeks a diversified
background.
MPSIF Pitch/Update Format

• Spent three years at a successful start-up
  biopharmaceutical company.
• Spent a year as a post- doctoral fellow at
  Harvard Medical School, focusing on the
  research of anti- cancer drugs.
• He holds a Ph.D. degree in chemistry from
  Harvard University.

• Investment Summary
• Performance
• Valuation (DCF, multiples, etc.
• Business Description
• Industry Outlook
• Competitor position
• Earnings Outlook
• Financial Statements

Standard MPSIF written pitch format Presentation
to Individual Fund (mon/weds mtgs)
Student Feedback
Question Answer period students are required
to defend their ideas Students vote on stock
purchase
Student Responsibilities
Additionally Students are required to take on an
extra role, (e.g. alumni relations, historical
analytics)
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Benefits of Reality Investing
You are accountable
Fund Simulation just isnt the same
SEACOR is in the business of owning, operating,
investing in, marketing and remarketing
equipment, primarily in the offshore oil and gas
and inland transportation industries. It also
provides oil spill response and environmental
remediation services.
Seacor (CKH)
Russell 2000 Index
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Performance as of February 28th, 2006
Source Wilshire Analytics The Quantum
growth/value style score is created from a
weighted average of a standardized book/price and
forward looking earnings/price (standardized
against the Dow Jones Wilshire U.S. 2500 Index,
75 book/price and 25 forward earnings/price).
Beating our Benchmark
25 Russell 1000 Value Index 25 Russell 1000
Growth Index 25 Russell 2000 Index 25 Vanguard
Total Bond Index
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The Fixed Income Fund

• The Michael Price Student Investment Fund
• Portfolio Managers Marc Strauss and Michael
  Flood
• ___________________________________

Fixed Income
Fixed Income
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Fund Overview
Fund Objective

• The fund aims to outperform its benchmark, the
  Vanguard Total Return Bond Fund (VBMFX) by
  taking positions in mutual funds and exchange
  traded funds (ETFs).

Fund Strategy

• The Fund implements its views through a top-down
  allocation approach to the main sub sectors of
  the US Fixed Income investment grade market,
  namely U.S. Treasuries, Corporates and
  MBS/ABS, as well as the Foreign investment
  grade bond market

Fund is tax exempt No municipal bonds
Looking forward, we hope to start the next
semester with the ability to trade in individual
bonds across all sectors
Growth Fund
Fixed Income
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Performance as of February 28th, 2006
For the six months ended February 28, 2006, the
fund had a negative net return of 69 basis
points, trailing our benchmark by 50 basis points

• Overexposure to the short end of the Treasury
  yield curve
• Failure to capitalize on the continued strength
  of the MBS market
• Slight overweighting of the Corporate sector

After bottoming out in October 2005, the fund
enjoyed four straight months of positive returns,
with a YTD return of 98 basis points, 70 basis
points above our benchmark
Over the past three months, we have focused our
attention to being more closely aligned with our
benchmark, reducing our exposure to the foreign
sector and spreading our exposure to Treasuries
across the yield curve
Growth Fund
Fixed Income
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Performance as of February 28th, 2006
Fixed Income
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Sector Allocations as of February 28th, 2006
Fixed Income
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Fund Holdings as of February 28th, 2006
Fixed Income
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Sector Update and Outlook
U.S. Treasuries

• The Federal Reserve, reacting to inflationary
  fears as the economy remains resilient, is
  likely to continue to raise rates one or two
  more times in the short term. Future policy is
  likely to remain data dependent.
• Should the economy start to sputter, rate cuts
  are a distinct possibility by Q4 2006.
• Although the calendar year started with
  softness in the Treasury market, we are
  bullish on Treasuries and recommend
  overweighting the index with longer duration
  positions.

MBS

• With mortgage rates forecasted to rise to as
  much as 6.40 by the fourth quarter of 2006,
  slower growth in the housing market is expected.
  Higher rates will slow prepayments and curb home
  price appreciation, creating potential credit
  challenges ahead.
• As spreads widen we will continue take a
  slightly underweight position with respect to
  the index.

Growth Fund
Fixed Income
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Sector Update and Outlook cont.
Corporates

• In terms of business fundamentals, competition
  from emerging economies has challenged many
  U.S. companies and industries.
• Rising interest rates will likely erode future
  profitability as borrowing costs rise and
  consumer spending slows.
• We recommend avoiding sectors like consumer
  discretionary, which may be adversely affected
  by a slowing housing market and high energy
  prices.

Foreign

• A shrinking interest rate differential, coupled
  with an ever growing current account deficit,
  could spell trouble for the dollar.
• With rates in Europe and Japan likely to rise,
  we will look to further reduce our exposure in
  the near term, especially as the Fed looks to
  put the brakes on future rate hikes.

Growth Fund
Fixed Income
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Challenges Looking Forward
Challenges

• Future Fed Policy
• Future of the MBS market
• Dollar weakness
• Tight credit spreads

Switching Platform

• Performing our own credit research

Fixed Income
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The Growth Fund

• The Michael Price Student Investment Fund
• Portfolio Managers Nelson Shim and Rafael Tejada
• ___________________________________

Growth Fund
Growth Fund
Fixed Income
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Fund Overview
Fund Objective

• Achieve returns above Russell 1000 Growth Index
  benchmark.
• Achieve positive absolute returns.

Investment Strategy

• Search for stocks with long-term EPS growth
  expectations exceeding 15 that are
  attractively priced on a fundamental and relative
  basis.
• Search for stocks with a long-term, sustainable
  competitive advantage.
• Such companies may be

.

• pioneering a new product or service that will
  see dramatic future demand
• altering pre-established norms in a static
  industry and gaining significant market share
• applying their business model to new regions or
  leading in an industry that is experience high
  levels of growth

Growth Fund
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Fund Performance as of February 28th, 2006
The fund outperformed its benchmark by 365 bps
with an absolute return of 8.75 through the six
months ended February 28, 2006
Growth Fund
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Sector Allocation as of February 28th, 2006
Growth Fund
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Fund Holdings as of April 23rd, 2006
Growth Fund
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The Small Cap Fund

• The Michael Price Student Investment Fund
• Portfolio Managers Shivanker Saxena and Lei Mu
• ___________________________________

Small Cap
Small Cap
Growth Fund
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Fund Overview
Strategy

• Focused upon stock selection and Identifying
  small-cap companies with strong fundamental
  prospects, and that are under followed by the
  market.
• No explicit bias toward growth or value
  investing.
• Invest exclusively in U.S.-traded equities,
  (market cap lt 2B).
• Concentrated portfolio of 20 to 25 positions,
  with a standard position size of 20,000.
• Security selection driven primarily by
  bottom-up fundamental research.
• In conjunction with the teams overall sector
  and economic views.

Objective

• Achieve returns above Russell 2000 Index
  benchmark.
• Achieve positive absolute returns.

Small Cap
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Fund Performance as of February 28th, 2006
The Fund outperformed its benchmark by an average
monthly 100 bps in the last sixth months

• An absolute return of 28.22 in LTM ended
  Feb 28, 2006 (Russell 2000 return
  16.59)
• An absolute return of 15.70 in 6 months
  ended Feb 28, 2006 (Russell 2000 return
  10.24)
• An absolute return of 9.05 in 3 months
  ended Feb 28, 2006 (Russell 2000 return
  7.88)

Small Cap
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Sector Allocation as of February 28th, 2006
Small Cap
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Winners and Losers
Name Change Reason
WINNERS WINNERS WINNERS
DIOD 59.73 DIOD has completed a significant transition over recent years and constantly brings competitive new products to the market. The company has right mix of revenue, lean operations and predictable demand. We are still holding full position of the stock as we believe the companys competitive edge could continue to support its price growth. The stock is now 75.07 higher than purchase price.
MIPS 44.46 Royalty payback on significant number of licenses signed in 2003 together with end users strong momentum in consumer electronics have boosted MIPSs royalty revenue in recent quarters. We had chosen a good entry point for the stock when MIPS announced a disappointing Q4-FY05 result which lowered its P/E ratio down to a quarter of the sector average. Robust royalty revenue in Q1-FY06 made the stock price soar and we reduced to half position in Jan 06, right before it went down with a 52.75 return.
RI 35.24 RIs stock price growth has benefited from the improving same stores sales growth, a successful marketing strategy and a business turnaround in FY06. The high margins also grant the stock price higher multiples relative to its peers. We began to hold the stock when it had an adverse run in the last 12 months, with the share price declining quite near to its 52-week low. We sold the stock in Mar 06 when it hit target price.
NFP 34.05 NFP enjoyed successful expansions in institutional life insurance market via aggressive acquisitions, providing a complementary geographic footprint to NFP. We liquidated the stock in Mar 06 with a 40.30 gain.
LOSERS LOSERS LOSERS
MOGN (34.61) While its biggest revenue source Aloxi remained strong revenue growth, MOGN suffered from further delay in FDA approval on its widely-expected product Dacogen as well as failures in Phase 3 trials of its next important product. We liquidated the position in Mar 06 for a loss.
Small Cap
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Current Holdings as of April 23rd, 2006
Small Cap
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The Value Fund

• The Michael Price Student Investment Fund
• Portfolio Managers Benjamin Macdonald and Chao
  Mui
• ___________________________________

Value Fund
Value Fund
Small Cap
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Fund Overview
Fund Objective

• Outperform the benchmark on a total return basis
  by investing in securities that provide
  superior returns on a risk/return basis through
  capital appreciation and dividends.

Fund Benchmark Russell 1000 Value Index
New Strategic Implementations

• Stronger Discipline
• Top-Down Approach
• ETFs
• Increased Holdings to 30 Positions
• Mid-Large Cap Focus (over 2bn)
• Minimum 20 Total Return Potential
• Stop-Loss on Every Position
• Stop-Loss and Sell Limit During Summer and
  Winter Breaks

Value Fund
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Fund Performance as of February 28th, 2006
(a) Prices as of 4/21/2006
Value Fund
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Sector Allocation as of February 28th, 2006
Value Fund
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Winners and Losers
Ticker Name Buy Date Sell Date Buy Price Sell/Current Price (a) Return
PERFORMERS            
AWGI Alderwoods Group, Inc. 12/13/04 02/15/06 12.03 16.73 39.1
EC Engelhard Corporation 11/08/04 01/09/06 29.79 37.84 27.0
FSL Freescale Semiconductor Inc 03/30/05 NA 16.85 31.45 86.6
RML Russell Corporation 10/05/05 NA 13.54 18.23 34.6
STX Seagate Technology 11/02/05 NA 14.87 25.10 68.8
             
LOSERS            
BCGI Boston Communications 02/14/05 04/04/06 7.29 2.90 -60.2
BSX Boston Scientific Corp. 03/09/05 NA 29.65 22.49 -24.1
HELE Helen of Troy 11/29/04 04/04/06 27.08 20.51 -24.3
SAFM Sanderson Farms, Inc. 10/13/05 NA 36.51 24.77 -32.2
(a) Prices as of 4/21/2006
Value Fund
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Current Holdings as of April 24th, 2006
Value Fund
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Reality Investing at Stern

• Questions Answers
• ___________________________________