CSIB 503, Fall 2001



Sales & Trading Report

UMBS STUDENT MANAGED FUND:

A Core Mid Cap Equity Fund

ACC/FIN 725, Section 1

Professor Richard Sloan

by:

Brian Cox

Conrad Langenegger

Sumit Mehta

April 18, 2003

Overview of Fund Investment Objective and Strategies

The UMBS Student Managed Fund (The Fund) was created on April 14, 2000 with an original endowment of $95,000. The objective of The Fund is long-term capital appreciation, using the S&P Mid Cap Index as a benchmark. The fund focuses on stocks of mid-capitalization U.S. companies with a quantitative investment style applied to mid-cap growth and value (blend) stocks.

Investment Objective:

The Fund seeks long-term appreciation of capital.  The Fund seeks this objective through a broadly diversified portfolio of equity securities within the approximate range of the market capitalization of companies constituting the S&P Mid Cap 400 Index.

Principal Investment Strategies:

Equity Securities.  The Fund’s investments are selected using a combination of quantitative techniques and fundamental research in seeking to maximize the Fund’s expected return, while maintaining risk, style, capitalization and industry characteristics similar to the S&P Mid Cap 400 Index.  Potential stock selections are initially generated using quantitative screening techniques based on fundamental valuation, earnings quality and momentum signals.  Final stock selections are made after a detailed fundamental analysis of each stock.  While the Fund invests in a blend of value and growth stocks, growth stocks are only included to the extent that they are priced attractively relative to their growth prospects.  The Fund uses the BARRA U.S. Equity Model to restrict its expected tracking error (active risk) relative to the S&P Mid Cap 400 Index to 5% per year.

Exchange Traded Funds.  Given its limited size, the Fund may invest in exchange traded funds that track US equities indices (such as Mid Cap Standard & Poor’s Depository Receipts) in order to achieve the joint goals of minimizing active risk and limiting transaction costs.  The Fund invests, under normal circumstances, at least 90% of its total assets in a combination of equity securities and ETFs.

Other Investments.  The Fund’s other investments are limited to securities that are considered cash equivalents.

Additional Information:

Additional Investment Restrictions.  The Fund’s investments in equity securities are limited to the common stock of companies with market capitalizations of at least $50 million.  Further, these securities must be traded on either the NYSE, Amex or NASDAQ NMS security exchanges.  The Fund’s investments in other investment securities are limited to securities that are intended to track the S&P 400 Mid Cap 400 Index.  Investments in cash equivalents are restricted to money market funds investing primarily in high quality money market instruments with an average maturity of 90 days or less.  The Fund is not permitted to borrow money from banks or other financial institutions (including margin loans).  The Fund is not required to immediately divest itself of any security held by the Fund simply because that security’s characteristics change while it is held by The Fund such that they no longer adhere to the above restrictions.  However, the Fund must divest itself of any security whose characteristics change such that they violate the above restrictions continuously for a period longer than six months.  The fund will be obligated to maintain compliance with the University of Michigan’s investment policies, and will report any deviations from such policies promptly to the UM Chief Investment Officer.

Reporting Requirements.  The Fund shall submit monthly reports to UM Treasurer’s Office within two weeks of the end of each calendar month.  Such reports will provide a complete Statement of Net Assets for the Fund as of the end of the calendar month, a Statement of Operations for the calendar month, a Statement of Changes in Net Assets for the calendar month, a listing of all transactions made during the calendar month and a comparison and analysis of the performance of The Fund relative to the S&P Mid Cap 400 Index.  The UM Treasurer’s Office may prescribe the format that such monthly reports may take.  Such monthly reports will be prepared in a fashion to report both monthly and year-to-date results.[1]

Recent Fund Performance

Over, the past three months, the Fund consisted of the following holdings.

Table 1: The Fund as of close of business 3/31/03.

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During this three month period, the Fund has outperformed the Mid Cap 400 (benchmark) by an average of 268 basis points.

Table 2: Overall Performance of the Fund and the Mid Cap 400.

|Date |1/27/03 |2/3/03 |2/10/03 |2/17/03 |3/3/03 |3/10/03 |

|Energy |Apache Corporation (APA) |$67.00 |17% |5% |0.44 |3.33% |

|Industrials |York International Corp. (YRK) |$27.02 |15% |30% |0.50 |4.23% |

|Technology |Take-Two Interactive Software |$30.59 |20.5% |5% |0.39 |8.29% |

| |(TTWO) | | | | | |

|Telecommunications |Bell South Corp. (BLS) |$27.15 |7.5% |29% |0.26 |1.97% |

|Materials |Quanex Corp. (NX) |$37.77 |14% |29% |0.47 |4.92% |

|Healthcare |Sunrise Assisted Living Inc. (SRZ)|$31.08 |26.7% |40% |0.65 |6.22% |

|Utilities |NICOR Inc. (GAS) |$34.02 |20.42% |26.6% |0.77 |5.61% |

|Financials, Banks |Flagstar Bancorp Inc (FBC) |$32.14 |19% |5% |0.61 |4.00% |

|Financials, Non-Banks |New Century Financial Corp. (NCEN)|$37.25 |4.60% |--- |0.16 |2.78% |

|Consumer Disc. - |Handleman Company (HDL) |$18.72 |16% |35% |0.46 |4.85% |

|Retail | | | | | | |

|Consumer Disc. - |Landry’s Restaurants Inc (LNY) |$29.25 |62% |30% |2.08 |5.26% |

|Other | | | | | | |

|Consumer Staples |John B Sanfilippo & Son (JBSS) |$18.34 |12% |44% |0.27 |6.51% |

Using the voted alphas of the new stocks, the existing positions in the Fund, and the BARRA Portfolio Manager, we optimized the new portfolio to mirror the benchmark, taking into account risk, return, and transactions costs. The goal of the optimization was to maximize the active return by beating the benchmark while minimizing the active risk (tracking error with respect to the benchmark). We optimized the portfolio using neutral sector weightings. There were no sector tilts due to the conservative investment strategy, helping to minimize the Funds active risk.

The BARRA Portfolio Manager suggested the following trades to optimize the portfolio.

Table 5: BARRA Portfolio Manager Trade List.

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Using this proposed BARRA Traded List and Quantitative Screening, we made the following trades:

Table 6: Actual Transactions Completed for the Fund.

|Buy/Sell |Name |Ticker |Shares |

|Bought |New Century Financial Corp |NCEN |50 |

|Sold |Borders Group |BGP |100 |

|Sold |ExpressJet |XJT |200 |

|Sold |Countrywide Financial |CFC |50 |

|Sold |Sector SPDR Financial |XLF |50 |

|Sold |New Century Financial Corp |NCEN |50 |

|Bought |Take Two Inter Software |TTWO |100 |

|Bought |Sanfilippo John B & Son |JBSS |50 |

|Bought |Sunrise Assisted Living Inc |SRZ |50 |

|Bought |Nicor Inc |GAS |50 |

|Bought |Quanex Corp |NX |50 |

The actual trades for the Fund deviated from the proposed BARRA Trade List for the following reasons:

- We liquidated Borders Group and ExpressJet prior to running the Portfolio Optimization; therefore, they were not identified in the Trade List to sell.

- We did not execute some trades because the numbers of shares were too small to have much of an effect on the overall portfolio. For example, we did not sell the prescribed three shares of the Utilities Sector SPDR.

- We took a more conservative approach to trading. We did not purchase LNY and only bought 50 shares of GAS instead of 137 because they did not screen well quantitatively. For example GAS did poorly quantitatively because of momentum.

- We rounded all trades to round lots.

- Taking advantage of catalytic analysis, we held NCEN briefly to realize the gains associated with the recent earnings conference call on 4/17/03. Following the release of the report, we liquidated the position to purchase 50 shares of Quanex Corp (NX).

After completing the trades outlined in Table 6 above, we have the following holdings in the Fund.

Table 7: Current Fund as of close of business 4/17/03.

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Overview of Fund Holdings

Mid Cap 400 SPDR

These depository receipts represent ownership in the Mid Cap SPDR, Trust Series 1, a unit investment trust established to accumulate and hold a portfolio of the equity securities that comprise the S&P’s Mid Cap 400 Index. These SPDRs seek investment results that, before expenses, correspond to the price and yield performance of the index. Nonetheless, there is no assurance that the price and yield performance of the benchmark can be fully matched.

Energy Select SPDR Fund and Utilities Select SPDR Fund

These funds make up 2 of the 9 Select Sector SPDR Funds; these investments are exchange-traded securities that represent ownership in any of nine Select Sector SPDR Funds. Each fund is designed to accumulate and hold a portfolio of common stocks, and seeks investment results that, before expenses, parallel the price and yield performance of its respective Select Sector Index. As with the Mid Cap SPDR above, there is no assurance that the price and yield performance of a specific Select Sector Index can be fully matched.

Griffon Corporation

Griffon manufactures and installs garage doors, makes specialty plastic films and advanced information and communications systems, and installs manufactured fireplaces. Griffon’s Clopay subsidiary sells garage doors through retailers such as The Home Depot and Lowe’s. Griffon’s plastic films are used in products such as disposable diapers, adult incontinence products, medical garments, and surgical drapes. Griffon’s Telephonics Corporation subsidiary makes radar and air-traffic control systems. Its U.S. sales account for 80%.

Humana, Inc.

Humana Inc. is a health benefits company that offers coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups and government-sponsored programs. In 2001, the Company realigned its management to better reflect its focus on the consumer. As part of this management realignment, it redefined its business into two segments, Commercial and Government. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes three lines of business: fully insured medical, administrative services only and specialty. The Government segment consists of members enrolled in government-sponsored plans, and includes three lines of business: Medicare+Choice, Medicaid, and Tricare.

J&J Snack Foods Corporation

J & J Snack Foods Corp. manufactures nutritional snack foods and distributes frozen beverages that it markets nationally to the food service and retail supermarket industries. The Company's principal snack food products are soft pretzels, which are marketed primarily under the brand name Superpretzel, and frozen juice treats and desserts, which are marketed primarily under the Luigi’s, ICEE and MinuteMaid brand names. The Company markets frozen beverages to the food service industry under the brand names ICEE and Arctic Blast in the United States, Mexico and Canada. Other snack food products include churros (a Hispanic pastry), funnel cake, popcorn and bakery products. The Company operates in two business segments: snack foods and frozen beverages.

John B. Sanfilippo & Son, Inc.

John B. Sanfilippo & Son, Inc. is a processor, packager, marketer and distributor of shelled and inshell nuts. These nuts are sold under a variety of private labels and under the Company's Fisher, Evon's, Flavor Tree, Sunshine Country, Texas Pride and Tom Scott brand names. The Company also markets and distributes, and, in most cases, manufactures or processes a diverse product line of food and snack items, including peanut butter, candy and confections, natural snacks and trail mixes, sunflower seeds, corn snacks, sesame sticks and other sesame snack products. John B. Sanfilippo & Son offers five product categories: raw and processed nuts, peanut butter, candy and confections and other products.

New Century Financial Corp

New Century Financial Corp. is a nationwide specialty mortgage banking company that originates, purchases and sells residential mortgage loans secured primarily by first mortgages on single-family residences. The Company offers mortgage products that focus on borrowers that generally do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac. The Company originates and purchases loans on the basis of the borrower's ability to repay the mortgage loan, the borrower's historical pattern of debt repayment and the amount of equity in the borrower's property. The Company has been originating and purchasing these types of loans since 1996, and has developed a comprehensive process of credit evaluation and risk-based pricing that allows it to effectively manage the potentially higher risks associated with this segment of the mortgage industry.

Nicor Inc.

Nicor Inc. is a holding company whose principal subsidiaries are Northern Illinois Gas Company (Nicor Gas), a distributor of natural gas in the United States, and Tropical Shipping, a transporter of containerized freight in the Caribbean. Gas distribution is Nicor's primary business, representing approximately 90% of consolidated operating income and assets in a typical year. Nicor also owns several other energy-related ventures, including a 50% interest in Nicor Energy, a retail energy marketing joint venture.

Penford Corp

Penford Corporation is in the business of developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications. The Company uses its carbohydrate chemistry expertise to develop functional ingredients with starch as a base for value-added applications in several markets, including papermaking, textiles and food products. Penford manages its business in three segments. The first two, industrial ingredients and food ingredients, are broad categories of end-market users, primarily served by the Company's United States operations. The third segment is its geographically separate operations in Australia and New Zealand. Penford's Australian and New Zealand operations are engaged primarily in the food ingredients business.

Quanex Corp

Quanex Corporation is engaged in the production of engineered carbon and alloy steel bars, aluminum flat-rolled products and precision-formed metal and wood products that primarily serve the vehicular products and building products markets. The vehicular products segment is comprised of MACSTEEL, Piper Impact and Temroc Metals. The segment includes engineered steel bar operations, impact-extrusion operations, steel bar and tube heat-treating services, steel bar and tube corrosion and wear-resistant finishing services, as well as aluminum extrusion and fabricated metal products. The building products segment is comprised of the Engineered Products and Nichols Aluminum divisions. The segment includes four fabricated metal components operations, two wood fenestration product operations, two aluminum sheet casting and three stand-alone finishing operations.

R&G Financial Corp

R&G Financial Corporation is a Puerto Rico-chartered financial holding company that operates R-G Premier Bank of Puerto Rico, a Puerto Rico commercial bank, and R&G Mortgage Corp., a mortgage company in Puerto Rico. Through R&G Mortgage, R&G Financial also operates The Mortgage Store of Puerto Rico, Inc., a Puerto Rico mortgage company. R&G Financial also operates Home & Property Insurance Corporation, a Puerto Rico insurance agency, and R-G Investments Corporation, a licensed broker-dealer. In June 2002, R&G Financial acquired The Crown Group, Inc., a Florida-based thrift.

Sanderson Farms, Inc.

Sanderson Farms, Inc. is a fully integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. The Company conducts its chicken operations through its Production Division and its Processing Division. The Production Division is engaged in the production of chickens to the broiler stage. The Processing Division is engaged in the processing, sale and distribution of chickens. In addition, through its Foods Division, the Company is engaged in the processing, marketing and distribution of processed and prepared food items.

Sunrise Assisted Living, Inc.

Sunrise Assisted Living, Inc. offers a full range of assisted living services based upon individual resident needs. Upon move-in, Sunrise assesses the resident, generally with the resident's family and physician, to determine the level of care required, and develops an individualized service plan. This individual service plan includes selection of resident accommodations and determination of the appropriate level of care. The plan is periodically reviewed and updated by Sunrise, and communicated to the resident and/or the resident's family. The range of services offered by Sunrise includes Basic Care, consisting of assistance with activities of daily living and other personalized support services; Plus Care, consisting of more frequent and intensive assistance or increased care, and Reminiscence Care, consisting of care programs and services to help cognitively impaired residents, including residents with Alzheimer's disease.

Take-Two Interactive Software, Inc.

Take-Two Interactive Software Inc. is an integrated global developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the PC, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The Company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering, Joytech, PopTop, Global Star and under the Take-Two brand name. The Company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland.

Travelers Property Casualty Corp

In March 2002, the Company spun-off approximately 20% of Travelers Property Casualty Corp., and in August 2002, the Company completed the spin-off of Travelers Property. Travelers Property Casualty Corp. (TPC) is a property and casualty insurance company that provides a wide range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. TPC conducts its operations through indirect, wholly owned subsidiaries in two business segments: Commercial Lines, which provides a variety of commercial coverages to a broad spectrum of business clients; and Personal Lines, which primarily offers automobile and homeowners insurance to individuals. Commercial coverages and personal coverages accounted for 58% and 42%, respectively, of the Company's combined net written premiums for the year ended December 31, 2001.

UMBS Student Fund Risk Profile

Upon completion of the aforementioned trades, the Sales and Trading group completed a risk decomposition. As indicated in Figure 1 below, the Fund’s total standard deviation of its expected return is 14.66%. In comparing this risk relative to the S&P Mid Cap 400, we found that the benchmark’s percentage standard deviation of its expected return is 15.38%. Furthermore, 3.13% of the Fund’s total risk is due to active risk. Active risk is that which arises from the manager’s effort to outperform the benchmark and is commonly referred to as tracking error. Figure 1 expounds on the active risk by indicating that 31.21% of the Fund’s active risk is due to Common Factor Risk (risk that arises from asset’s exposure to common factors such as capitalization and industries) and 68.79% of the active risk is due to asset selection:

Figure 1: Risk Decomposition Chart

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Our analysis further includes a review of the risk index exposure which is 11.21% of the total active risk. Figure 2 (below) indicates that the Fund remains more value than growth oriented. The Fund is less sensitive to currency volatility than its benchmark and is more sensitive to earnings yield. The Fund also appears to have taken on an aversion to earnings variation. Figure 2 is included below for further analysis.

Figure 2: Risk Index Exposures

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Figure 3 (below) breaks down the Fund’s exposure to the 13 sectors relative to its benchmark. It clearly indicates that the Fund is overexposed in Basic Materials, Consumer Non-Cyclicals, Financials, and Utilities and underexposed in Consumer and Commercial Services.

Figure 3: Sector Exposures.

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Figures 4 and 5 further elaborate on the Fund’s exposure to the 55 industries relative to the benchmark. According the Industry Exposures chart, the Fund is overweighted in the Computer Software, Construction and Real Property, Food and Beverages, Gas Utilities, Medical Services, Property/Casualty Insurance, and Securities and Asset Management industries whereas it is underweighted in all the other industries.

Figure 4: Industry Exposures.

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Figure 5: Remaining Industry Exposures.

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Next, we analyzed the marginal contribution ranking with respect to overall risk (see Table 8). This displays the effect a one percent increase in exposure would have on the portfolio’s risk, holding all else constant. As such, it would be possible to reduce the risk by minimizing the factors that have positive marginal contributions. A review of the marginal contribution ranking output from the BARRA software reveals that the overall risk of the Fund can be readily lowered by reducing its exposure to J&J Snackfoods Corp and Travelers Property and Casualty.

Table 8: Marginal Contribution Ranking of Risk.

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Finally, the UMBS Student Managed Fund has performed very well considering the recent performance of the market. The fund has consistently outperformed the S&P Mid Cap 400 Index since inception. It has provided investors with greater returns than the benchmark while minimizing the additional risk exposure by adhering to the five percent tracking error guideline. Furthermore, by using the selected benchmark, the fund is positioned to meet its objective of long term capital appreciation. Although the fund has not yet generated additional capital, it has essentially maintained its value during challenging economic times when other indices are yielding large negative returns. Ultimately, the Fund has outperformed many of the market indices, including the DOW, S&P 500, Russell 1000, and the NASDAQ, and is well positioned to continue this trend in the future.

Appendix A: Fund’s Return since Inception versus the Return of the Major Indices

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Appendix B: New Stock Summary Coversheets

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[1] ACC725 CourseTools Site and UMBS Student Fund Website.

[2] Bureau of Economic Analysis

[3] Bureau of Labor Statistics

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