Student Managed Fund

Arnone-Lerer Fund Fall Presentation

Andrew Hudelson

Process Overview

• Economic Analysis• Social Responsibility• Investment Policy & Compliance • Security Analysis• Portfolio Analysis• Technical Analysis• Trade Execution

Investment Process

• Performance Reporting• Risk Analysis• Exit Strategy• Marketing

Non-Investment Process

Organizational Structure

Investment FunnelEconomic Team Analysis

Social Responsibility Filter

Investment Policy & Compliance Team

Security Analysis

Technical Analysis

Portfolio Analysis

Technical AnalysisInvestment Policy

TeamExecution

Team30 (+1)Stocks

November 5, 2010537

Stocks

September 16, 2010

Start Finish

Student Managed Fund

Economic Analysis Team

Kevin Bundschuh

Top Down Approach

Overview

Evaluation of economic landscape

Business Cycle Analysis

Select top performing industries

Continual monitoring of economic indicators

Phases of Economic Cycle

* As of November 17, 2006** As of November 6, 2009

Acceleration

Maturation

Ease Off

Plunge

Early Revival

Late Revival

Consumer & Producer Price Index

Unemployment Data

ISM Indexes

Industrial Production

Fed Funds Rate

Consumer Sentiment

Housing Data

GDP

Durable Goods Orders

Selected Indicators

Early Revival

GDP turns positive

Revival of business and consumer confidenceDecrease in initial unemployment claims

Continued decrease in inflation

Increase in industrial production

Housing market bottoms

Industrial Production

12/1/2000

4/1/2001

8/1/2001

12/1/2001

4/1/2002

8/1/2002

12/1/2002

4/1/2003

8/1/2003

12/1/2003

4/1/2004

8/1/2004

12/1/2004

4/1/2005

8/1/2005

12/1/2005

4/1/2006

8/1/2006

12/1/2006

4/1/2007

8/1/2007

12/1/2007

4/1/2008

8/1/2008

12/1/2008

4/1/2009

8/1/2009

12/1/2009

4/1/2010

8/1/201075.00

80.00

85.00

90.00

95.00

100.00

105.00

Industrial Production

ISM Indexes

12/1/2000

5/1/2001

10/1/2001

3/1/2002

8/1/2002

1/1/2003

6/1/2003

11/1/2003

4/1/2004

9/1/2004

2/1/2005

7/1/2005

12/1/2005

5/1/2006

10/1/2006

3/1/2007

8/1/2007

1/1/2008

6/1/2008

11/1/2008

4/1/2009

9/1/2009

2/1/2010

7/1/20100.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

ISM Manufacturing ISM Services

Late Revival

* As of November 17, 2006** As of November 6, 2009

GDP climbs further

Initial unemployment claims continue to fall

Interest rates and inflation begin to rise

Housing activity starts to gain momentum

Housing market is now reaching trough

Overall unemployment remains stagnant

Consumer Confidence fails to gain traction

Inflation at historically low levels

Trapped in Revival 1

Housing Starts

12/1/2000

5/1/2001

10/1/2001

3/1/2002

8/1/2002

1/1/2003

6/1/2003

11/1/2003

4/1/2004

9/1/2004

2/1/2005

7/1/2005

12/1/2005

5/1/2006

10/1/2006

3/1/2007

8/1/2007

1/1/2008

6/1/2008

11/1/2008

4/1/2009

9/1/2009

2/1/2010

7/1/20100.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

Housing Starts

Unemployment Rate

3689137011

3713437256

3737637499

3762137741

3786437986

3810738230

3835238472

3859538717

3883738960

3908239202

3932539447

3956839691

3981339933

4005640178

4029840421

0

2

4

6

8

10

12

US Unemployment Rate

Initial Unemployment Claims 4-Week Moving Average

12/1/2000

4/6/2001

8/10/2001

12/14/2001

4/19/2002

8/23/2002

12/27/2002

5/2/2003

9/5/2003

1/9/2004

5/14/2004

9/17/2004

1/21/2005

5/27/2005

9/30/2005

2/3/2006

6/9/2006

10/13/2006

2/16/2007

6/22/2007

10/26/2007

2/29/2008

7/4/2008

11/7/2008

3/13/2009

7/17/2009

11/20/2009

3/26/2010

7/30/2010200

250

300

350

400

450

500

550

600

650

700

Initial Unemployment Claims 4 week (000's)

Consumer Confidence

12/1/2000

4/1/2001

8/1/2001

12/1/2001

4/1/2002

8/1/2002

12/1/2002

4/1/2003

8/1/2003

12/1/2003

4/1/2004

8/1/2004

12/1/2004

4/1/2005

8/1/2005

12/1/2005

4/1/2006

8/1/2006

12/1/2006

4/1/2007

8/1/2007

12/1/2007

4/1/2008

8/1/2008

12/1/2008

4/1/2009

8/1/2009

12/1/2009

4/1/2010

8/1/20100.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Conference Board Consumer Confidence

Consumer Price Index

1/1/19

90

9/1/19

90

5/1/19

91

1/1/19

92

9/1/19

92

5/1/19

93

1/1/19

94

9/1/19

94

5/1/19

95

1/1/19

96

9/1/19

96

5/1/19

97

1/1/19

98

9/1/19

98

5/1/19

99

1/1/20

00

9/1/20

00

5/1/20

01

1/1/20

02

9/1/20

02

5/1/20

03

1/1/20

04

9/1/20

04

5/1/20

05

1/1/20

06

9/1/20

06

5/1/20

07

1/1/20

08

9/1/20

08

5/1/20

09

1/1/20

10

9/1/20

10-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

CPI All Items YoY ChangeCPI All Items Less Food&Energy YoY Change

Initial Economic Filtering Process

* As of November 17, 2006** As of November 6, 2009

•Analyzed the historical performance of ninety-five 8-digit GICS sectors during Revival One

•Ranked each sub-industry by annual return

•Selected top 36 industries according to return ranking

•Resulted in 537 stocks being passed on

Worked closely with SR and Investment Policy team

Filter sub-industries by return/semi-variance

Added 10 more sub-industries

Second Round Filter

Student Managed Fund

Social Responsibility Team

Bill Duplisea

Developing SR Profile

Evaluate the Catholic Bishop’s Statement

Choose and rank our criteria

Run IW Financial for Social Responsibility rankings

High sensitivity on issues

such as: Environment

Life/Choice

Tobacco

Passing Score: 75

Social Responsibility Profile

Human Rights

Military

Adult Entertainment

Median Score: 77.5

SR Elimination Breakdown

Total Stocks Received From Economics Team 537

Industrial Machinery -28

Aerospace -26

Construction & Farm Machinery & Heavy Trucks

-13

Electrical Components and Equipment -13

Oil and Gas Exploration and Production -13

All 28 Other Industries -84

Total Stocks Passed onto Investment Policy & Compliance Team

360

Student Managed Fund

Investment Policy & Compliance Team

Martha Duke

Filter stocks from Social Responsibility Team

Thorough knowledge of the Investment Policy Statement

Ensure fund is in compliance with guidelines throughout the year

Acting as a resource for all other teams

Roles & Responsibilities

Investment Guidelines

* As of November 17, 2006** As of November 6, 2009

Stock Price: Must be > $10.00

Volume: Must be > 500,000 [20 day Average]

Market Cap: Mid to Large Cap Companies; > $1 Billion

Cash Positions must not exceed 10%

All portfolio transactions must be greater than or equal to 1.5% of total portfolio at transaction.

Replacement stocks will equal percentage allocated to predecessor

Allocation Guidelines

Max Initial Investment

Rebalance

Sector 25% 35%

Industry 12.5% 17.5%

Security 5% 7%

Student Managed Fund

Security Analysis Team

Stefan Shrivastava

Roles and Responsibilities

* As of November 17, 2006** As of November 6, 2009

Receive Stock Universe from Investment Policy and Compliance Team

Coordinate effort to filter stocks using SMF Valuation Model

Filter stocks based on Security Analysis

Pass stock pool to Technical Analysis Team

Analysis

Demonstrated to class how SMF Model is used Market Insight Value Line Edgar Database Bloomberg

Assigned stocks to small analyst groups based on sub-industry to run through model

1st Round Financial Health Altman Z-Score

Forecast the probability a firm will go into bankruptcy within two years

Measures financial health

Balance Sheet Analysis Leverage Ratio Current Ratio Quick Ratio

Manufacturing company Healthy > 2.99 Unhealthy < 1.81

Altman Z-Score

Non-Manufacturing company Healthy > 2.60 Unhealthy < 1.10

Balance Sheet Analysis

DuPont Ratio Analysis

2nd Round Financial Health

ROE = Profit Margin

Asset Turnover

Equity MultiplierX X

Net Profit SalesROE = Sales

AssetsAssets EquityX X

DuPont Ratio Analysis

Profit Margin Measurement of operating efficiency

Asset Turnover Measurement of asset use efficiency

Equity Multiplier Measurement of financial leverage

10 Year growth projections Future growth rates based on analyst

research Invested Capital-ROIC Calculations

Capitalized Operating Leases WACC – Component cost of capital Enterprise Value Analyst Input and Recommendation

DCF Valuation

WACC

Enterprise Value

Aggregation

Developed stock ranking spreadsheet

Ranked stocks by industry based on analysts’ valuations

Additional factors taken into consideration Sector and industry weightings Allocation restrictions

Allocations by Industry

Stock Elimination Process

Student Managed Fund

Portfolio Analysis Team

Andrew DeVizio

Portfolio Optimization Process PMSP Iterative rebalancing with IP constraints Arnone-Lerer▪ 43 stocks 31 stocks

Overview

Asset Allocation Optimization Software

Statistically driven Risk Metrics Can be modified depending on economic

cycle Allocation outputs need to be

rebalanced Iterative process in excel Must meet IP constraints

PMSP

Did not have enough stocks IPS constraints not met PMSP input limitations

Identified problem Applied SR screen to limited pool of

stocks Did not monitor 2 and 8 digit GICs

weights

Learning Experience

Returned to economic analysis stage Able to add 10 industries

Security Analysis Team Re-filter more stocks w/ sector

weightings Technical Analysis Team

Moved after Portfolio Analysis Final Result: Better allocations

Learning Experience

2 Digit GICS Sector Allocations

Consumer, 15.2%

Energy, 18.2%

Healthcare, 16.8%

Industrials, 12.3%

Materials, 9.5%

Technology, 21.8%

Cash, 6.2%

Student Managed Fund

Technical Analysis Team

Tim Decilveo

Eliminate stocks based on charts (after security analysis) Unable to perform analysis

Recommend stocks to be bought on limit orders

Avoid good stocks at bad times

Investment Process Duties

Limit Order Example

Continuation/Reversal Patterns Long-term Support/Resistance Levels Moving Averages RSI Trends Volume

Technical Analysis Tools

Continuation Pattern

Reversal Pattern

Support & Resistance

Moving Average

RSI

Trend

Volume

Develop stop/loss & profit targets

Minimum 2:1 profit/loss ratio

Non-Investment Process Duties

Stop/Loss & Profit Target Example

Student Managed Fund

Execution Team

Rich Kline

Derive number of shares

Place limit orders and stop losses

Track replacement stock allocations

Transaction Execution

Technical Analysis

Portfolio Analysis

Transaction Execution

Student Managed Fund

Performance Reporting Team

Mark Karagelian

Weekly Performance Report

* As of November 17, 2006** As of November 6, 2009

*Since Inception:Coleman (Jan 2005)Haley Large (Nov 2006)Haley Mid (Feb 2007)Whipkey (Oct 2007)

Column1 Week Month Quarter YTDSince

Inception*Ending Balance

SMF Arnone 3.13% 3.13% 9.99% 8.34% 55.13% $152,420SMF Coleman 3.84% 3.84% 3.39% -8.86% -17.20% $81,307Haley Large Cap Fund 3.34% 3.34% 5.06% 3.13% 12.51% $112,401Haley Mid Cap Fund 2.73% 2.73% 3.88% -2.60% -6.82% $92,507Whipkey Fund 3.09% 3.09% 3.23% -5.79% -21.47% $78,640

Performance vs. Benchmarks

* As of November 17, 2006** As of November 5, 2010

0.67%

-0.10%

0.13%

2.67%

Russell 3000

FTSE KLD 400 SI

S&P 500

SMF Arnone

As of December 3, 2010 WeekSince

Inception*Since

Investment**

SMF Arnone 3.13% 55.13% 2.67%

S&P 500 3.02% -4.57% 0.13%

FTSE KLD 400 SI 2.68% -9.35% -0.10%Russell 3000 3.04% -2.55% 0.67%

Total Return

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

ARNONE LERER SPX KLD Index

Sector WeightingsIndustry +/-

Arnone-Lerer KLDEnergy 18.24 4.60 13.64Consumer 15.21 25.70 -10.49Materials 9.47 2.70 6.77Technology 21.82 26.10 -4.28Industrials 12.29 8.80 3.49Healthcare 16.77 14.90 1.87Financials - 13.20 -13.20Telecom - 2.50 -2.50Utilities - 1.60 -1.60Cash 6.21 - 6.21

% Net Assets

Sector-by-Sector Performance

1.92%

3.58%

-1.02%

4.50%

1.34%

8.22%

4.00%

2.76%

KLD ETF

Materials

Information Technology

Industrials

Healthcare

Consumer Discretionary

Energy

Arnone-Lerer

Since November 5, 2010

Pops & Drops

Pops WLT

15.45% PLCE

15.42% NUAN

10.44%

Drops ASIA

-13.98% GILD

-4.36% SCCO

-3.72%

WLT +15.45% Martha Duke

PLCE +15.42% Julia Barry

NUAN +10.44% Andrew Esposito

ASIA -13.98% John Steger

GILD -4.36% Andrew DeVizio

SCCO -3.72% Tim Decilveo

Student Managed Fund

Risk Analysis Team

Julia Barry

Portfolio Monitoring in Bloomberg: Beta Alpha VaR▪ Historical 1 Year▪ Monte Carlo▪ Risk Delta

Stress Testing

Risk Measures

Beta against S&P

1.00

1.02

1.04

1.06

1.08

1.10

1.12

1.14

1.16

1.18

1.20

1.22

Alpha

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

VaR

Column1 95% 99%Historical 1-Year 8,394 14,390 Monte Carlo 6,751 9,233 Risk Delta 5.39 9.24

VaR – Historical (95%)

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

Stress Testing

Scenarios Arnone-Lerer S&P 500 +/-Black Monday -26.24% -19.54% -6.70%September 11th -13.06% -8.20% -4.86%WorldCom Bankrupts -1.36% 0.50% -1.86%Dotcom Bubble Bursts 3.12% 4.95% -1.83%G7 Summit -5.30% -3.88% -1.42%Economic Recovery Falters -5.57% -4.60% -0.97%Flight to Quality -10.62% -9.99% -0.63%Small Cap Worries -7.30% -6.82% -0.48%

Student Managed Fund

Exit Strategy Team

Frank Tedesco

Present alternative investment options

One team member will check the portfolio on days when the market is open

If a stock reaches a profit target or stop/loss Contact Execution Team & Professor

Jablonski with replacement allocations

Responsibilities

Replacement decision: Invest in KLD: 90% invested

No stop-losses or profit targets hit

Thanksgiving Break

Student Managed Fund

Marketing Team

Amanda Brzozowski

A liaison between the fund & the outside world

Responsibilities

Marketing Team

Document Process

Website Design

Team Building

Public Relations

http://www.students.villanova.edu/smf

Website

Updating SMF website Recruitment of 2011-2012 SMF class

Raise awareness of SMF Conduct interviews

Future Responsibilities

Student Managed Fund

Thank You!

Amanda Brzozowski