University of Delaware Blue Hen Investment Club Midyear Report

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1 University of Delaware Blue Hen Investment Club Midyear Report July 2012 Prepared by Chris Polisano & Chris Castellini

2 Blue Hen Investment Club General Information Mission Statement The mission of the Blue Hen Investment Club is to provide a valuable educational experience to its members by allowing them to manage a real dollar investment portfolio. Throughout the process of this portfolio management, club members will engage in discussion, interact with experienced professionals in the field, and expand their knowledge and skills in the various aspects of finance and investing. Due to the diversity of required tasks within the club, members also develop analytical, decision making, public speaking, and teamwork skills while being forced to withstand constructive criticism and support any points they may make with valid findings. Investment Goals/Strategy The goal of the Blue Hen Investment Club is always to outperform the S&P 500 Index on a risk-adjusted, yearly basis. The club utilizes a strategic value strategy which aims to identify and take position in undervalued stocks with the intention of holding for a long-term period. In addition and of equal importance, the BHIC is committed to diversifying its portfolio among the sectors of the benchmark S&P 500 index in an effort to minimize unsystematic risk and ultimately achieve an optimal Sharpe ratio. This approach limits the risk presented by an over-concentration of capital in any one sector. Achievements in In the process of developing a new system for tracking club members attendance at scheduled meetings and making sure they are keeping up with the learning process. In the past, members were permitted to vote after simply attending three meetings so that they were able to make informed decisions within the club. Currently, the club is attempting to develop a probationary period for new club members and a mandatory number of goals completed successfully within this time period to earn voting privileges regarding club decisions. The probationary period will likely be one full semester and some of the goals could include attendance during the probationary period, a written test or interview with the executive board, recommendation for the head of that particular sector, and additional qualifications as the club sees necessary. -Restructured the portfolio with respect to its size in terms of number of equities. The club portfolio held nearly fifty stocks in years prior and was just this year cut down to a size of about thirty five. The club took action to cut down the number of positions in the portfolio because of its desire to outperform the benchmark S&P 500. With fifty stocks, it is difficult to be sufficiently distinct from the benchmark and meet the goal of outperforming it. In other words, a fifty stock portfolio would seem more like the actual index itself as opposed to the thirty five stock portfolio which could more effectively outpace the index.

3 -Guest Speakers: Mark Bonapace, J.P. Morgan Asset Management Global Real Assets Chris Potavin, J.P. Morgan Asset Management Global Real Assets Saul Grossel, J.P. Morgan Investment Bank Munish Pahwa, Bank of America Credit Risk Future Initiatives Continue to strive for perfection in the attempt to have perfect balance of responsibility in the leadership structure of the club. Proper delegation of responsibility to executive board, sector head, and common club members will be stressed so that the structure of the club can help itself thrive. This will be achieved first and foremost through strict adherence to the following executive board members roles and responsibilities: President- Acts as the Chief Executive Officer of the BHIC. Ensures that the constitution of the BHIC and the BHIC policies for Fund Operations are adhered to and followed by all members. Leads the executive board and conducts regularly scheduled BHIC meetings. Primary spokesman for the BHIC. Vice President- Acts as the Chief Operating Officer of the BHIC. Temporarily carries out the duties of another elected officer if he/she is not able to do so. Leads discussion to help enhance the current equity analysis strategy. Acts as a guide to all sector heads and ensures that each sector of the club is up to standards, on time, and ready for any presentations or analysis that will be offered to the club. Also aids the President in leading discussions throughout each meeting and works with each member of the executive board as an additional resource for any task that must be completed. Treasurer- Acts as the Chief Financial Officer of the BHIC. Responsible for the custody of the portfolio as well as all operating funds. Periodically reports the members of the club at regularly scheduled meetings regarding the balance of the portfolio and operating fund information. Maintains the budget for and dispenses all operating funds as approved by the executive board and voting members of the club. Secretary- Acts as the Chief Information Officer of the BHIC. Produces a syllabus made available to all current and prospective members of the club at the beginning of each semester. The syllabus includes the dates and times of regularly scheduled meetings among other important club information. Responsible for scheduling and reserving a room for all regularly scheduled meetings. Maintains a list of all club members (voting and non-voting) and takes attendance at every meeting. Also keeps track of who is and is not a voting member for each meeting and is responsible for recording minutes at all regularly schedules meetings. Publishes the minutes and all recorded information to all members of the club. Initiatives Chair- Acts as the Chief Communications Officer of the BHIC. Coordinates guest speakers and travel opportunities which will provide educational and real-life financial experiences for member of the club.

4 Market Analyst- Acts as the Chief Analysis Officer of the BHIC. Tracks markets in a macroeconomic sense across all sectors to aid the sector heads, executive board, and all club member to ensure that asset allocation is at its optimal levels throughout the portfolio. Presents periodic analysis at regularly scheduled meetings and is available for meeting throughout the year for any member interested in obtaining important information about the state of the macroeconomic economy. Stays current through the use of Bloomberg and other informational resources to ensure accuracy and relevance in all findings. -Increase the number and quality of guest speakers. The BHIC attracts intelligent young investors and future leaders in the financial world. For this reason, it strives to connect members with leaders at top financial firms such as Goldman Sachs, JP Morgan, Citi, Blackrock, etc. Through engagement with guest speakers from important firms, knowledge and exposure to real financial situations are gained. This presents a long-term benefit for members of the club while strengthening ties between the University of Delaware and top firms in the industry. The club and university reputations can be enhanced through recruitment of students through connection with the BHIC. -Continue to increase focus on alumni relations. Many great connections have and will continue to develop through the university experience. By keeping records of the career paths of BHIC alumni an increased connection to employees in financial sectors has been achieved. Use of the recently created website where this data has been entered must be taken advantage of. Alumni are able to submit contact information so that club members of the past and future will be available for networking and future success. This website can be found at the following address: Technology -The entire BHIC portfolio is available on the Bloomberg interface. The use of this tool helps further enhance club members analysis of both the club portfolio and interaction within the market as a whole. All members of the club have access to the BHIC portfolio and are able to utilize Bloomberg to conduct, thorough, accurate analysis. This analysis gives members the opportunity to become comfortable using leading financial software packages. This opportunity is not available to many students in other leading business schools across the country. By routinely working with a financial software package such as Bloomberg, members are able to gain a unique edge in the financial industry. -Many BHIC members work with the Bloomberg Essentials Training Program and become Bloomberg certified. This certification is of great benefit for business students because so few universities offer this tool. University of Delaware students are able to gain a unique advantage in this regard which can be useful in the professional world. -The use of Sakai is also stressed to members of the club for its usefulness in organization and club communication. This is a web-based platform used by the University of Delaware to facilitate communication among students and professors. Through use of Sakai within the club, portfolio data information and meeting times/scheduling are easily communicated and readily available to all members.

5 Education -The club has and will continue to maintain focus on education. Recruiting will continue into the fall and spring semesters as it always has in the past. When making investment-related decisions, the club encourages an open discussion among members. By encouraging this dialogue among the members of the club at meetings, more informed and accurate decisions can be made. The club currently consists of mainly upperclassmen with financial course and internship experience whose skills, experience, and knowledge are made available to all through open discussion. Club members also include several dedicated and enthusiastic underclassmen that learn from the older members of the club. While eager to grow, the club maintains a size reasonable enough to manage an active discussion while screening for quality among members. -Members learn the tools and uses of Bloomberg throughout time with the club by watching videos and participating in hands-on research. The videos made available are through Bloomberg s Online Training Program page or by viewing tutorial videos created by former club treasurer Kevin Pisciotta. -To ensure members are familiar with the club and with the investment strategies they must actively participate in the club s routine meetings and activities before obtaining voting privileges. -Students can connect with the club through another website which can be found at the following link: Blue Hen Investment Club Performance: 2012 Midyear (6/30/11 through 6/29/12) The portfolio in its current form is in a strong position and the club feels that the upcoming months and start to the school year will bring good news and more productivity. Several changes have been made and many hours have been logged doing research, studying the market, and meeting as a group to refine our decisions and plan future action. The past year brought many challenges to the club and due to our recent restructuring of the portfolio by significantly reducing the number of securities, we feel that our best performance is to come in the future. The absolute return for the BHIC portfolio for this time period was 0.45% while the benchmark S&P 500 returned 1.26%. We have fallen short of our goal in this regard as well as in the measure of standard deviation which came to 19.3% for the BHIC portfolio and 18.2% for the S&P 500. September brought our worst monthly return of -9.3% during a month in which the S&P 500 returned -7.2%. October was our best month returning 12.3% during a period in which the S&P 500 returned 10.7%. The beta for the portfolio for this time period is 1.03, indicating that our returns vary slightly more than the market s returns during this period. Generally, we use the Sharpe Ratio as the ultimatum for whether or not we were successful during a specific time period, and due to the fact that the BHIC portfolio had a ratio of 0.06 while the S&P 500 s was 0.10 we did not meet our goal. We use the Sharpe Ratio as a measure of performance because it eliminates the possibility of claiming success which could have been gained through excess risk rather than good investing which is actually sustainable.

6 The BHIC portfolio Treynor Ratio of 0.01 was very similar to that of the S&P 500 at This is a measure of the excess returns over the risk free rate relative to the amount of additional systematic risk the portfolio took on. The portfolio experienced an M², another measure of risk-adjusted performance, of -0.63%. Once again this figure measures the risk-adjusted returns of the portfolio relative to its benchmark, which in this case is the S&P 500. The tracking error for the portfolio was 1.27% which represents the difference in behavior of the holding in the BHIC portfolio and that of the benchmark index. The BHIC portfolio had a very high correlation of 95% with its benchmark index. This was due in part to the number of securities which were previously held but have since been sold. We feel that the main reason for falling short of several of our goals was due to holding too many positions. With a new executive board and a newly restructured portfolio we are confident in the future of the portfolio. Never before have such important and drastic changes been made to the portfolio in this time period and we feel that these adjustments will aid us in achieving the results we have envisioned from the start. In September, we will continue to work on perfecting our holdings. We will decide where to be underweight, even, or overweight in our allocation to the sectors first. Next, sectors will individually adjust their holdings to be in line with these weights. We realize that our returns will come first and foremost through sector allocation. We do not claim to be able to hand pick stocks for success based on single equity valuation alone and this is not our strategy. Note: Performance measures calculated using monthly data from 6/30/11 thru 6/29/12 BHIC S&P 500 Absolute Return 0.45% 1.26% Standard Devation 19.3% 18.2% Beta 1.03 Sharpe Ratio Treynor Ratio Jensens Alpha 0% M 2 (Risk-adj Return) -0.63% Tracking Error 1.27% Correlation 95% Worst Monthly Return (Sept.) -9.3% 7.2% Best Monthly Return (Oct.) 12.3% 10.7% The above table displays statistics based on the BHIC portfolio as a whole and the benchmark S&P 500. They are explained individually in the Blue Hen Investment Club Performance section of the report.

7 The above table displays the weights by sector for the BHIC portfolio (Port) and the S&P 500 index (Bmrk) in the first two columns. The third column is the difference between the two weights. This graph is an indication of how the portfolio s securities were diversified throughout the sectors. The club s strategy was to be underweight sectors in which we expected to underperform. Likewise, sectors which we expected to outperform were given overweight positions. The above graph displays portfolio performance broken down by sector for the first half of the year. The center of the graph shows the performance of the portfolio as a whole. Green sectors are the best performers while red sectors were our worst performers.

8 The above chart displays the historical returns of the BHIC portfolio against the Vanguard 500 index for the time period of 6/30/11 to 6/29/12. As you can see, the BHIC perfolio outperformed the S&P 5090 Index during bear markets but underperformed during bull markets. This is in part to our sector over/underweights. The above graph displays the hypothetical growth of $1 invested in the BHIC portfolio from 6/30/11 to 6/29/12.