MBA Investment Club

2009 Update

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Summary

In line with the S&P 500 on a risk adjusted basis

Low portfolio turnover

Overweight vs. S&P

Financials

Healthcare

Concentrated portfolio

Index 3 Years 5 Years 3 Years Std Dev 5 Years Std Dev 3 Year Sharpe 5 Year Sharpe

MBA Inv. Club -13.08% -5.53% 18.42% 15.46% -0.90 -0.58

S&P 500 -13.06% -4.76% 17.42% 14.57% -0.95 -0.57

Russell 2000 -16.80% -5.24% 21.42% 19.68% -0.95 -0.44

Russell 1000 -13.24% -4.54% 17.73% 14.88% -0.94 -0.54

Dow Jones -9.52% -3.61% 16.56% 13.89% -0.79 -0.51

Treasury Note 10yr 10.20% 5.89% 8.50% 7.89% 0.79 0.30

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Organizational Structure

Seven sector teams based on S&P 500 Industries

3 – 5 members per team

Previously organized as stock pitch teams

New structure encourages idea generation

Co VP’s

Financials Tech Healthcare Industrials Consumer Manufacturing Energy

Structure of Peer Programs

Cornell

• 2 Semester Class, 2nd yrs

• Seven sector teams

• Market Neutral hedge fund, stocks only

• No 1st year participation

• $14.4m AUM

Darden

• Darden Capital Management

• 4 investment funds, varying strategies

• 2nd years PM’s, 1st years analysts

• $6m AUM

Wharton

• Weekly meetings, 6-8 pitches per meeting

• Market Analysts monitor portfolio, update members

• Value Investing

• $700k AUM

Organizational Structure - Proposed

Chief Investment

Officer

Portfolio Manager

Analysts

Portfolio Manager

Analysts

Portfolio Manager

Analysts

Portfolio Manager

Analysts

Chief Risk Officer

Quantitative Investment

Group

Governance

Faculty Advisor

Professor Langley

Joint leadership

Two elected Vice Presidents

Governed by Finance and Investment Club Constitution

Create an Advisory Board

Past VP’s, professors

Receive Quarterly Updates

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Investment Process

End of semester rebalancing

Recommendation

Decision by majority vote of members

Stock Valuation

Discounted Cash Flow Relative Value Qualitative Factors

Sector Level Analysis

Review Current Holdings Screen New Investment Ideas

Current Investment Guidelines

Invest in only domestic US equities

Target ten holdings

Constraint due to having the resources to monitor the

stocks and evaluate new ideas

Target a full position of 10% for each holding

Hold only enough cash to cover fees

Portfolio Rebalancing

Utilize modern portfolio theory to map current

holdings into risk return space

10% “full position” may not be optimal

Holding Current ORP vs Current ORP - 15% vs Current

AAPL 14.17% 0.00% -14.17% 0.00% -14.17%

AMGN 7.27% 38.15% 30.88% 15.00% 7.73%

BAC 5.71% 5.42% -0.29% 15.00% 9.29%

HI 13.76% 10.79% -2.97% 15.00% 1.24%

HRC 1.78% 15.34% 13.56% 15.00% 13.22%

MS 7.19% 0.00% -7.19% 0.00% -7.19%

STT 14.14% 0.00% -14.14% 0.00% -14.14%

TWC 2.61% 6.64% 4.03% 15.00% 12.39%

TWX 8.49% 0.00% -8.49% 0.00% -8.49%

UNH 15.02% 23.65% 8.63% 15.00% -0.02%

XOM 8.95% 0.00% -8.95% 10.00% 1.05%

Risk Adjusted Returns

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

0.00 0.07 0.15 0.22 0.29 0.37 0.44 0.51 0.59 0.66 0.73

Risk Adjusted Returns – 15% Max

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0.00 0.07 0.15 0.22 0.29 0.37 0.44 0.51 0.59 0.66 0.73

Investment Process Enhancements

Goal: To better utilize the risk adjusted perspective in

portfolio management

Create a Quantitative Research Group

Manage Portfolio Level Risk

Build and Maintain Models

Invest across capital structure

Bonds may better compensate for risks

Develop stock screeners to facilitate idea generation

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Macroeconomic Environment

Near term severe recession

Outperform – Time Warner Cable, United

Health, Amgen

Underperform – Apple, ExxonMobil, Financials

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

GDP Unemployment

Monetary Policy and Inflation

Dramatic rise in inflation may occur over next 2-3

years

Outperform – Apple, ExxonMobil, Hillenbrand

Underperform – State Street, Morgan Stanley, BofA

-2%

-1%

0%

1%

2%

3%

4%

5%

-40%

-20%

0%

20%

40%

60%

80%

100%

CPI % Change, 1 yr MA M1 % Change, 1 yr MA

Industry Specific Risk

Big bet on Financials and Healthcare

Financials appear significantly undervalued

Secular trend in increased healthcare spending

12.87%

3.22%

10.04%

9.16%

12.26%14.17%

12.16%

18.11%

3.90%

4.11%

S & P 500

Energy

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

Information Technology

Telecommunications Services

27.91%

23.76%24.69%

10.28%

13.37%

MBA Portfolio

Financials

Health Care

Consumer

Energy

Information Technology

Firm Specific Risk

Holding AAPL AMGN BAC HI HRC MS STT TWC TWX UNH XOM

AAPL 100% 33% 34% 31% 24% 56% 53% 37% 48% 53% 52%

AMGN 33% 100% 28% 34% 21% 46% 46% 33% 53% 54% 66%

BAC 34% 28% 100% 34% 25% 61% 66% 27% 52% 41% 44%

HI 31% 34% 34% 100% 18% 37% 33% 30% 41% 36% 40%

HRC 17% 16% 24% 18% 100% 28% 23% 26% 30% 31% 28%

MS 38% 35% 61% 37% 28% 100% 58% 45% 60% 65% 59%

STT 38% 35% 65% 33% 23% 58% 100% 37% 54% 47% 45%

TWC 32% 29% 27% 30% 26% 45% 37% 100% 50% 36% 36%

TWX 34% 42% 50% 41% 30% 60% 54% 50% 100% 54% 64%

UNH 32% 38% 36% 36% 31% 65% 47% 36% 54% 100% 56%

XOM 38% 47% 40% 40% 28% 59% 45% 36% 64% 56% 100%

With so few holdings, it is optimal to choose holdings

that are relatively uncorrelated with each other

Risk Mitigation

Hedge Downside Risk

Short ETF’s

Index Options

Periodic rebalancing

Team responsible for monitoring and recommending

changes

Consult with additional faculty with expertise in hedging

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Conclusion

Give members the experience of working in an

investment fund

Practical skills

Networking

Enhance ties with investment management

community

Investment Management Symposium

Support the University by being professional

custodians of endowment funds

MBA Investment Club - 2009 Update

Summary

Organizational Structure

Investment Process

Portfolio Risks

Conclusion

Performance Appendix

Performance Since Inception

0

200

400

600

800

1000

1200

1400

1600

1800

0

50

100

150

200

250

300

350

400

450

500

MBA S&P

Historical Returns vs. Benchmarks

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

1 Month 3 Month 1 Year 3 Years 5 Years

Russell 2000 DJIA S&P 500 Investment Club

Financial Sector vs. Benchmark

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0% 5% 10% 15% 20% 25% 30%

Retu

rn

W eight

MBA S&P

Healthcare Sector vs. Benchmark

-25%

-20%

-15%

-10%

-5%

0%

0% 5% 10% 15% 20% 25%

Retu

rn

W eight

MBA S&P

Consumer Sector vs. Benchmark

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Retu

rn

W eight

MBA S&P

Technology Sector vs. Benchmark

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0% 5% 10% 15% 20%

Retu

rn

W eight

MBA S&P