April 11, 2013 BOARD MATTER NO. D-1. University of Wyoming Student Portfolio Management Program Update INFORMATION ONLY

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1 April 11, 2013 BOARD MATTER NO. D-1 ACTION: University of Wyoming Student Portfolio Management Program Update INFORMATION ONLY ANALYSIS: The State Loan and Investment Board on December 15, 2005, authorized the State Treasurer to work with the University of Wyoming Student Portfolio Management Program and the Attorney General's Office to craft an arrangement with the program which would allow the students to act as investment advisors. On February 2, 2006, the SLIB approved amendments to the Board's Master Investment Policy to allow for a separate policy for this purpose. A Memorandum of Understanding (MOU) dated February 7, 2006, approved by the State Treasurer; Attorney General's Office and the University of Wyoming allowed students in the program to manage $500,000 equity investments for the University Permanent Land Fund. The State Treasurer increased this amount to $1 million effective March 1, 2007, under the provisions of the MOU. The program currently manages $620,000 of the University Permanent Land Fund. Patrick Fleming, faculty member of the Department of Economics and Finance in the UW College of Business, oversees the two portfolio management classes. He and students from the program will provide the Board with a program update. DIRECTOR'S RECOMMENDATION: Information Only

2 University of Wyoming Portfolio Management Class Presentation April 11 th, 2013

3 History of Portfolio Management Program In 2005, The State Loan and Investment Board authorized the creation of an arrangement between the State Treasure and The University of Wyoming Student Portfolio Management Program to become investment advisors. After approval by the State Treasurer, Attorney General s Office, and the University of Wyoming, students were allowed to manage $500,000 in equity investments for the University Permanent Land Fund. In 2007, the State Treasurer increased the amount to $1 million. Currently, Patrick Fleming and the students of the University of Wyoming manage $633,000. Under the new supervision of Patrick Fleming, an Economics and Finance facility member, students are able to gain real world investment experience. Patrick Fleming Bio A seasoned participant in global markets with 30 years of investment and management experience. Patrick worked in Tokyo, Hong Kong, London and New York while trading Equity, Commodity, Government, Corporate, High Yield and Emerging Markets. Former CEO of a 77 year old investment management company that believes the world is dynamic and that over time the keys to investment and business success include: personal integrity, rigorous analysis, risk management, flexibility, and intellectual honesty. University of Wyoming Portfolio Management Program The goal of our program is to prepare the students for opportunities in portfolio management. We focus on structures and strategies to produce Alpha. Currently, over 70% of managers do not produce Alpha over their respective benchmarks.

4 Our current view on the Global Economies: In , there was a massive shift in debt from the private sector to the public sector. Global governments have responded by lowering rates and embarking on quantitative easing. QE has massively inflated the balance sheets of the Federal Reserve, Bank of Japan and the ECB. This has caused a supply/demand imbalance in the debt markets as market participant rush for duration. This is evident with negative 2 yr. Government rates in Germany and Sweden, 45 basis point yields on 10 yr. Japanese Government Bonds and 1.75 yields on U.S. Treasury 10 year yields. This has caused Global bonds to become very expensive and offer little value. Investors are more concerned with return of capital rather than return on capital. Even with this unprecedented liquidity injection, the major economies of the world remain weak. This is important as approximately 45% of the S&P 500 earnings come from abroad.

5 The Baltic Dry Index is currently showing slow growth and low demand for raw goods This is a chart of all base metal inventories in Shanghai and the London Metal Exchange Electric usage in China. Economic Data from China is questionable. We look at other indicators

6 When we look to ascertain value in the various assets classes, we start with the macro factors and then move to the micro view. The average correlation between these estimated returns and the following 10-year S&P 500 total return is 84%. When looking forward to the estimates of the S&P 500 the market is expected to yield 3.6% nominally in the next decade.

7 How do we get stock price increases from here-margin or P/E expansion? Headwinds include: NY Fed chairman Bill Dudley stated that the sequester will cause a -1.75% GDP hit for Payroll Tax hike is estimated to cause a -.6% for Gasoline price increases are estimated to cost $1b for every 1 cent increase. YTD gas prices have gone up 30 cents, thus reducing consumer spending of approximately $30 billion annually. Global Governments are engaged in the race to the bottom. Currency depreciation is a zero sum game. Currently the dollar index is up 13% over the last 2 years. This will hurt US exports.

8 (Headwinds Continued) According to Reinhardt and Rogoff, when an economy exceeds 90% debt to equity, the economy tends to lose 1% of GDP. Others argue the loss of baby boomers will cause another 1%. Our current unemployment rate is vastly understated at 7.6% We currently have 90 million people who have left the labor force or a participation rate of 63%, a 34 year low. Sentiment- I.I. reports that the percentage of bearish advisors has declined to just 18.8%. According to John Hussman, there are only a few historical points when bearish sentiment below 20% was joined by a 4-year high in the S&P 500 and a Shiller P/E over 18. They are 2007, 1987, 1972 and 1966 all prior to significant bear market declines, though the market drifted a few percent higher over a 6-month period in the 1972 instance. Geo Political risks are normally present Our Position: With the above mentioned concerns, we have a defensive position yet aware that the US is one of the few places to invest. As Bill Gross from Pimco has commented, we are the cleanest dirty shirt.

9 Conclusion Our equity view is as follows: The US dollar will continue to rally. A strong dollar has a tendency to pressure financials, commodities and hurt our exports. Global interest rates will remain low until inflation returns. A flat yield curve pressures financials. We expect Europe to remain weak, China to continue to slow down and the Japanese Yen to weaken even further. The weakening spread between WTI and Brent oil will pressure certain energy stocks. The S&P is expensive on a 10 yr. time frame and fairly valued in the short term. This argues for underweighting in Materials, Industrials, Consumer Discretionary, Energy, Financials and the index. We are overweight Consumer Staples, Health Care, Technology, Utilities and cash.

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11 Trade Reduce weighting to XLV (Health Care) and increase position in MRK Merck & Co. Inc. Global health care company Prescription medications, vaccines, biologic therapies, animal health and consumer care products. Positive Pipeline: 4 under FDA review. -Expected response: 12/2013

12 Factors Inexpensive MRK P/E: S&P 500 P/E: XLV P/E: Impressive Dividend yield 3.75% annually bond-esque Underperformance 2 sigma Underperformamce Vs. the XLV Exhibit 2 Overbought Market Conditions MRK vs. XLV Exhibit 1

13 Exhibit 1 Exhibit 2

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17 Apple Vs. Technology Sector ETF (XLK