Sustainable Equity Balanced Fund

Transcription

1 Sustainable Equity Balanced Fund Q Performance Update Executive Summary From a performance perspective, Q3 for the Bellarmine University Investment Group (BUIG) was seen as a turnaround from the previous quarter. More optimistic sector weightings and a lucrative market allowed the fund to experience some of the upside capture that we had previously lacked. From an operational perspective, the group gained a class of promising and hard-working new members as a direct result of this semester s recruiting efforts. As a focus on recruiting and member-retention was one of the fund s primary goals through the past quarter, the executive team considers this fact a grand success. The Sustained Equity Balanced Fund (SEBF) saw an absolute return of 568 basis points, which exceeded the benchmark return by 87 basis points. Following a Q2 in which the fund underperformed the benchmark by 1.06%, we hoped that the restructuring of our portfolio would help us to better capitalize on the bullishness seen in markets so far this year. The results of this past quarter indicate that we were able to do just this. Moving forward, we look to continue this positive performance without over-exposing ourselves to the significant interest rate risk that we believe lays present in equity markets. One of the group s objectives this upcoming quarter is the successful rollout of a new networking event to accompany our traditional panelportfolio presentation. The group has worked closely with Dr. Kerrick (Dean of the W. Fielding Rubel School of Business) to make this event happen and believe it will have a positive impact on group members as well as help raise funds for the business school scholarship fund. Additionally, from a portfolio management perspective, we aim to increase portfolio turnover, now that our junior analysts are becoming more comfortable with their sector assignments, in order to remain more closely in line with our 50% annual target. We also look to adjust our sector weights in order to protect our assets from rising yields. As a closing note, Michael Hennessy will be replacing Meagan Shirley as the Vice President of Operations for the rest of this semester. Meagan will remain an active member of the group as a senior analyst. Best Regards, Noah Braden, President

2 Fund History and Philosophy BUIG began operation on December 18, 2014 after gaining the Bellarmine University Finance Committee s approval to invest $90,000 of the University s endowment fund. A generous donation by Carl Hafele of $10,000 completed the initial balance. As a student managed fund, the Sustainable Equity Balanced Fund (SEBF) has two objectives. The first objective is to partake in educational opportunities to ensure that our members gain an enriched knowledge of the equities market, the fixed income market, portfolio management, and any other areas of interest that our members have. The second objective is to achieve superior returns above the benchmark in a risk-controlled fashion. The SEBF aims to hold positions that are trading at a discount to their fair market value, in a healthy financial position, and provide long-term sustainable qualities. SEBF targets an asset allocation of 25-30% fixed income, 55-65% equities, and 5-10% cash. Organizational Structure BUIG has a pyramidal organizational structure comprised of our advisor, the executives, senior analysts, and junior analysts. The advisor supports and moderates BUIG operations and gives the Group access to the network of Louisville financial professionals. The executive board, which consists of the President, the VP of Investment Operations, and the VP of Investment Relations, votes, executes trades on analyst proposals, and ensures the administrative duties of BUIG are complete. The senior analysts oversee one or two sectors and maintain a watch-list of potential positions to enter. The junior analysts conduct security specific research on our current positions and provide weekly updates to the Group. The benchmark for the SEBF is comprised of 70% of the S&P500 and 30% of the Barclay s Aggregate Bond Index to match the intended asset allocation. In February of 2016, the Group received permission to invest in alternative positions up to 10% of the Fund s assets.

3 Investment Process The SEBF utilizes a top-down approach when selecting portfolio positions. We analyze global economic statistics, trends, and events to generate an understanding of which securities have long-term potential with low to moderate risk. We use this information to create sector bets of up to 4% variation from the S&P 500 weighting which we discuss and update quarterly. When selecting equity positions, we aim to discover companies that have strong business models and products that are well suited for the future and are not susceptible to changing trends or could quickly become obsolete. We use a bar bell approach with the fixed income allocation in order to reduce the overall risk of our fixed income positions. When appropriate we will hedge our fixed income position by purchasing either more short-term bonds or long-term bonds. After purchasing a security, we monitor the position for several indicators that prompt us to sell or purchase more shares; however, we have no hard-set rules that would require the sale of a position as each security is unique. We are aiming for a turnover ratio of 50% annually, which we believe is low enough to ensure a long-term orientation and high enough to provide BUIG s members with transaction experience.

4 Portfolio Snapshot Bellarmine University Investment Group

5 Performance BUIG outperformed our benchmark by 87 basis points this past quarter with an absolute return of 568 basis points. Performance this past quarter was driven primarily by our holdings in financials and consumer discretionary. While our outperformance in financials was largely driven by V and rising interest rates, our consumer discretionary performance was fueled by LOW as anticipated hurricane repairs lead to greater expected revenues in the near-term. Additionally, SCI continued to perform well for the group as changing population demographics look to remain a positive driving force for the company s operations moving forward. Our largest underperforming sectors were Communication Services and Consumer Defensive. This observed underperformance was primarily due to underexposure, as our long-term outlook for these sectors was bearish at the start of the quarter. In the materials sector, we sold MMM as a direct result of our sector weighting discussion, at which we concluded that materials would be underweighted for Q As materials already accounts for a very low portion of the S&P 500, we were forced to liquidate our remaining positions. Additionally, poor recent performance from MMM leads us to believe that there will be a more viable purchasing point, should we become less pessimistic on the materials sector in forthcoming periods. In an industrials sector that has benefitted from this administration s increased military spending, our holdings in HON allowed us to outperform. This is in lieu of the poor performance seen in SWK, who s shares have fallen 9.21% since we originally purchased in February. In the healthcare sector, we purchased ITGR to meet our target weighting for the sector. ITGR stood out to us because of its diversification of operations and product offerings along with solid fundamentals and steady growth prospects. These characteristics make the stock a quintessential pick for the SEBF. ITGR has outperformed its sector considerably. *These values calculated using the time-weighted rate of return method.

6 Performance In the technology sector, we purchased EA due to group consensus that e-sports will likely gain significant popularity over the coming years. As we approach release season for the videogame making giant, we foresee better than expected results for its staple franchises in terms of revenue growth. We purchased WDC due to its diversification of product offerings, however the stock has been trending down as pervasive market fundamentals have turned against semiconductor stocks. Bellarmine University Investment Group *All risk metrics calculated assuming that all positions owned at 9/30/18 had been owned since inception