Student Managed Investment Fund Annual Report - 2018

University of South Florida Student Managed Investment Fund 2018 Annual Report

Table of Contents 2018 Economic Overview....................................................................................................................................... 2 Holdings .................................................................................................................................................................. 3 Fund Overview: Top Performers ............................................................................................................................ 4 Fund Overview: Laggards....................................................................................................................................... 5 Fund Overview: Additions & Denied Positions ..................................................................................................... 6 Investment Policy.................................................................................................................................................... 7 Portfolio Statistics ................................................................................................................................................... 7 Sector / Industry Breakdown .................................................................................................................................. 8 Top Performer: Square Inc. (SQ) ........................................................................................................................... 9 Bottom Performer: Packaging Corp of America (PKG) ...................................................................................... 10 Portfolio Addition: Quanta Services (PWR)......................................................................................................... 11 Investment Philosophy .......................................................................................................................................... 12 Investment Philosophy (Cont.) ............................................................................................................................. 13 The SMIF Process ................................................................................................................................................. 14 Events/Exposure ................................................................................................................................................... 15 Student Success ..................................................................................................................................................... 15 Student Analysts ................................................................................................................................................... 16

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2018 Economic Overview

The Federal Reserve, in an attempt to create a cushion for the fast-growing U.S. economy, increased interest rates four times over the course of 2018. The year ended with interest rates sitting at 2.59%. 2018 brought on a record low unemployment rate. For the year, unemployment started at 4.1%, with the months of September, October, and November having a rate of 3.7%, a 49 year low. For the year there was approximately 2.674 million jobs created. The year ended with an unemployment rate of 3.9%. The reported GDP growth for quarter 3 of 2018 was 3.5%, placing the dollar value of the U.S. economy at $20.66 trillion for the reported 3rd quarter. Annual 2018 GDP data is set to release on February 28th, 2019. The United States Federal deficit increased 17% from $666 billion to $779 billion, driven by corporate revenue cuts, an increase in federal spending, and an increase in the military and domestic budget. 2018 was a rollercoaster of a year for the markets, characterized by volatility, dramatic highs and lows, and tension from political unease. The S&P 500 and the Dow Jones Industrial Average had their worst year, since 2008, decreasing 6.2% and 5.6% respectively. For the year the NASDAQ decreased by 3.9%. On top of having their worst year since 2008, the S&P and the Dow had their worst December since 1931, Decreasing 9.18% and 8.7%, respectively. On Christmas Eve the S&P 500 entered bear market territory, down 20% from its high, “on an intraday basis.” On December 26th, the Dow rallied, pulling other indexes with it, with a record point increase of 1,086.25. Overall 2018 created investor fear with pending trade disputes, the looming thoughts of an economic slowdown, and increasing interest rates. 2018 ended with consumer confidence declining off its historical October high. Investor confidence ended the year with a 9.4 decline placing the index at 70.2 points.

During 2018 the USF Student Managed Investment Fund, (SMIF), returned 0.58% beating out the S&P 500 which reported a year loss of -4.38%. SMIF also outer performed the Russell 3,000 and the Russell 2,000 both indexes performed at a decline, -7.75%, and -13%, respectively. SMIF held a few top performers that offered substantial double - and in some cases, triple-digit returns. The Top Performers were Square Inc., Intuitive Surgical Inc., and Bank of New York Mellon. Top Performers were offset by the 2018 laggards such as FLIR Systems, Southwest Airlines, and Syneos Health. Despite the laggards, SMIF’s holdings of strong triple-digit Top Performers, Square and Intuitive Surgical Inc. offset the losses and allowed SMIF to outperform the S&P by 5.17%.

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Holdings

At year end 2018 The SMIF held 20 positions as indicated in the preceding table. 15.92% in the S&P 500 ETF is the largest portfolio holding with Square, the years top performer, at 11.77% and Intuitive Surgical at 9.02%. As of 12/31/2018 thirteen portfolio holdings had positive returns with the top three Square 225.73%, Intuitive Surgical 108.50% and Bank of New York 70.48%. Seven holdings have negative overall returns with Syneos Health the bottom performer at -28.49%.

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Fund Overview: Top Performers

Square San Francisco based Square was the top performer of 2018, advancing 61.78% during the year. The strong stock performance was mainly due to strong revenue growth of 33%, bolstered by increasing growth in the large-retailer segment with payment volume growth of 41%, accounting for more than half of Square’s total payment volume.

Intuitive Surgical Intuitive Surgical’s stock increased 31.23% during 2018 as the company saw strong adoption of its da Vinci surgical systems as well as increased growth in recurring revenue from instruments. Earnings expansion and stronger sales at the company impressed investors even as high multiple stocks declined during the year.

Dell Technologies Dell Technologies tracking stock provided a 30.24% return in 2018 following the sale of the portfolio’s position in mid-December. Dell Technologies stock increased significantly following reports that the company will be returning to the public market.

Palo Alto Networks Cyber security company Palo Alto Networks stock increased 29.95% during 2018. The stock moved higher amid increased revenues as the company surpassed $2 billion in annual revenue.

Additionally, the company has made a few smaller acquisitions to shift focus to more complex security issues, pleasing investors.

Target Corp Minneapolis based Target Corp stock returned 11.94% for the portfolio since its addition in early March. The stock has been helped by an especially strong consumer spending environment, as well as its build out of its delivery arm and store renovations.

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Fund Overview: Laggards

Packaging Corp of AmericaThe stock entered into 2018 hitting a new closing high of 128.47 in January. The optimism quickly faltered as concerns regarding economic growth and trade battered the market. Packaging Corporation closed the year at $83.46 vs its $120.55 starting price for a loss of -30.77%.

Facebook Facebook had a extremely volatile year, trading as high as $218 and as low as $123. The stock fell sharply following data privacy scandals and the company’s lowered guidance. Shares ended the year near $131, down from $176 at the beginning of the year.

Vulcan Materials Aggregates and concrete company Vulcan Materials fell 23.03% during the year as fears of rising inflation and increasing energy costs would hamper the company. Despite increasing worries, the company continued to report sharp increases in earnings as compared to the year previous.

Stamps.com Stamps.com stock declined 22.08% for 2018 as the company’s earnings quality fell and increased political talk aimed at the United States Postal Service turned investors off to the name. The stock soared to $281 in early August before entering a sustained downtrend as a Presidential Task Force looked into rate changes at the US Postal Service.

Comerica Dallas-based Comerica fell 20.87% in 2018, mostly in-line with regional banks. Increasing interest rates put pressure on many financial stocks during the year. However, financial stocks received relief late in 2018 as worries about “out-of-control” interest rates subsided.

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Fund Overview: Additions & Denied Positions Additions During 2018, the Student Managed Investment Fund added six new positions. Two names in the energy sector, one information technology, one consumer discretionary, one industrial, and one in the engineering & construction sector.

The best performing recent addition to the portfolio was Target Corporation. Target’s stock was bolstered by an extremely strong consumer spending environment with the CEO of Target stating it was one of the strongest consumer environments he had ever seen. The second-best performer was Tetra Tech, a diversified oil & gas and water infrastructure company. The stock surged above $70 by summer but fell along with the broader market.

Southwest Airlines and Stamps.com were the laggards of the new additions in 2018. Southwest Airlines came under pressure has the company lowered its passenger revenue per available seat mile (PRASM) while Delta and United increased their guidance. Cost increases as well as tragedies onboard aircrafts helped contribute to the underperformance. Stamps.com suffered through the year with the overhang of the current administration’s criticism of the U.S. Postal Service and their “flawed” business model and pricing.

Denied Nine stocks were denied entry into the Student Managed Investment Fund. While stocks may be undervalued, they are not always suitable for the fund. The two best performing stocks were defensive stocks that could have provided protection to the portfolio in a volatile year.

The best performing denied stock was Dollar Tree, a discount retailer coming off the merger with Family Dollar.

The stock moved higher as the company reported a strong quarter and calmed investor fears of trade tariffs and the weak results from the Family Dollar acquisition.

Disney returned 0.87% following the pitch as management provided more insight into their own streaming service to combat Netflix. Additionally, the company experience the same tailwinds of a strong consumer environment in their theme parks as well as the company’s film business.

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Investment Policy The SMIF Fund is a Sub-portfolio of the USF foundation and is managed using the following policy: •

The fund is permitted to invest in all stocks listed in the U.S., including ADRs and ETFs.

•

Cash held in the fund is permitted to be invested in the money market funds.

•

The fund is an all-cap fund with a preference for small and mid-cap issues

•

The fund targets a 3-5 year holding period

•

All dividends are reinvested.

•

Short-selling and leverage are prohibited.

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Derivatives are not used.

•

The maximum investment in the equity of a single issuer is 10% of fund assets at the time of the investment.

Portfolio Statistics

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Sector / Industry Breakdown

The SMIF portfolio, exclusive of the S&P 500 ETF, is allocated across 8 sectors.

Information Technology

represents 30.38% of individual equity allocation with Healthcare and Industrial at 18.71% and 18.16% respectively. The four best performing holdings in the portfolio for 2018 were in technology and healthcare. The significant outperformance of those positions aided the funds outperformance vs. the S&P 500.

15 Industries are represented across the SMIF portfolio with the largest concentrations in software applications at 22.02% engineering and construction 14.31% and medical instruments and supplies 10.97%. In keeping with the sector commentary above the concentrations in software applications and medical instruments and supplies aided the overall fund performance and its excess return vs the S&P 500.

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Top Performer: Square Inc. (SQ)

For the second year Square led the SMIF portfolio performance with 2018 return of 61.78%. The company has continued its penetration with larger merchants which is driving payment processing growth. In addition, the company has been quick to respond to market opportunity by providing additional services such as merchant lending through Square Capital that facilitates loans to sellers based on real-time payment and point-of-sale data.

The company also provides Square Point of Sale software; Cash App, which provides access to the financial system, allowing customers to electronically send, store, and spend money; Caviar, a food ordering platform for restaurants to offer food ordering, pickup and delivery, to their customers and digital currency functionality. The company continues to innovate and though the shares have exhibited volatility Square continues to perform solidly for the SMIF portfolio.

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Bottom Performer: Packaging Corp of America (PKG)

Packaging Corporation of America started 2018 making a new high but faltered as concerns about economic growth weighed on the market overall and on cyclical issues in particular.

PKG is the fourth-largest

producer of containerboard and corrugated packaging products and the third-largest producer of uncoated freesheet in North America, based on production capacity. The company has acquired several corrugated manufacturers in recent years in an effort to augment its capacity and competitiveness. With the prospect of slower economic growth and given the cyclical nature of PKG’s business the company may face headwinds such as more challenging earnings comps and cost inflation in the form of wages, energy, and chemicals.

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Portfolio Addition: Quanta Services (PWR)

Purchase Price: $34.18

Intrinsic Value: $XXX

Target Price: $46

Company Description: Quanta is the leading integrated infrastructure solutions provider for the electric power, oil and gas and telecommunication industries. The company prides itself on its reputation for quick and reliable responsiveness and performance, global reach, extensive and comprehensive services, emphasis on safety, and financial strength.Quanta reports its results by focusing on two servicing segments: Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. The consolidated revenues between the two segments were $9.47 billion for the year ended December 31, 2017. The Electric Power Infrastructure Services segment contributed 59% of these revenues, and the remaining 41% came from the Oil and Gas Infrastructure Services segment.

Investment Thesis: Aging energy infrastructure in the United Sates and around the world will necessitate a prolonged upgrade cycle which will benefit Quanta. Bilateral support for infrastructure projects in the United States coupled with transmission infrastructure which is rapidly approaching the end of its useful life will further support the company looking forward.

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Investment Philosophy The foundation of the Student Managed Investment Fund’s philosophy is based on creating a balanced portfolio by fundamental strengths and enriching students with experiences that will allow them to be better prepared financial professionals. The three key principles that accumulate into our philosophy are: I. A Balanced Portfolio II. Fundamental Strength III. Student Driven Results The USF Student Managed Investment Fund is unique in the fact that these principles do not stand mutually exclusive from one another. These values are deliberately acknowledged and evaluated to maintain consistent performance of the fund while also enhancing the analytical skills of its students. This groundwork allows for any number of additional considerations to be applied to the investment philosophy of this portfolio. In doing so, objective synergy is achieved and maintained under numerous circumstances.

Balance The first principle of the USF Student Managed Investment Fund is the importance of maintaining balance within the financial services industry. This principle not only applies to the personal lives of each analyst, but also the portfolio as a whole. By sustaining this balance during the analysis process and during the management of securities within the fund, two essential benefits are derived. First, the analysts undergo an exercise in discipline— attaining an appreciation for the value of constraints and policies. Second and most importantly, the fund is subsequently better positioned to succeed due to diversification and acknowledgement of macro-economic factors. The USF Student Managed Investment Fund maintains several explicit policies dedicated to bringing inherent balance. These policies include market cap, investment, and sector guidelines. First, the USF Student Managed Investment Fund encourages investment in a broad array of market cap sizes. Per the written bylaws, the portfolio may contain securities of large-cap stocks (+$10 billion market cap), mid-cap stocks ($2-10 billion market cap), small cap stocks ($300 million to $2 billion market cap) and micro-cap stocks ($100million - $300 million). This policy encourages analysts to broaden their range of analysis, bolstering each of their scope of modeling capabilities. Regarding individual securities within the portfolio, the maximum investment in the equity of a single issuer is 10% of fund asset at the time of the investment. This serves as a preventative measuring— ensuring that the fund is never over-invested in a single position regardless of risk. Under the same guidance, the maximum investment in stocks of a single industry is 25% of fund assets, (however, shares held in the SMIF Fund’s score equity index fund are not counted against this limit). These constraints are binding and essential to the philosophy of the Fund and the principle of balance.

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Investment Philosophy (Cont.)

Fundamental Strength The core nature of this fund is to promote the essence of long-term equity investing while also striving to achieve superior investment performance to the market. Naturally, the guiding principle of the valuation metrics within the USF Student Managed Investment Fund are based on the fundamental strength of the securities themselves.

This brings the academic nature of the coursework together with the pragmatic objectives of the fund itself. By performing thorough fundamental analysis on each of the prospective positions, the portfolio analysts are best positioned to identify opportunities of both value and growth. Per the USF Student Managed Investment Fund’s policies and procedures guideline, the portfolio will invest exclusively in US Equities, ADRs, and near cash assets such as money market funds or securities. This particular selection of security types best allows for the style of fundamental analysis performed by the student managers and the interpretation of intrinsic value. As the analysts are groomed to be long-term investors, the investment horizon of the USF Student Managed Investment Fund reflects that principle. The expected holding period of any purchased security is stated to be at least two years, with preferred holding being made for periods between three and five years. Even if the target price of a security is reached, the position is not automatically sold—in fact it is reevaluated by the student analysts and their recommendations are made to the advisory board when necessary. Under these principles, this fund only maintains long positions, as short-selling is strictly prohibited. Returns within the portfolio are to be earned off of the strength of the individual holdings within it. Leverage will not be used to magnify returns. Derivatives will also not be utilized in any manner. By maintaining this policy, the fundamental capabilities of the fund and its analysts are better displayed.

Student Driven Results Arguably the most distinctive, crucial, and inherently valuable aspect of the USF Student Managed Investment Fund is the student analysts themselves. This fund melds the worlds of academia and professional finance in a manner unlike almost any other opportunity. The student analysts embody a blank canvas of ambition and innovation that perpetuates a palpable sense of passion about investment management. Because of the absence of biases developed over long, esteemed careers students provide unique ideas and insights that may not be visible to others. The entire fund’s performance is driven by the individual analyses of the student analysts and their respective valuation models. The target prices are set by the analysts and each report is then pitched to the members of the Student Managed Investment Fund advisory board, external advisors, and selected faculty members. Once the presentations are complete, an extensive question and answer session is undertaken. These sessions are typically very rigorous—filtering securities to the best possible position based on the performance of the analysts. In between stock pitches, the analysts consistently manage the fund to ensure that the portfolio is in proper condition at all times. Using reports from the selected positions, target prices are monitored and evaluated with adjustments being made if necessary. These experiences are grooming the student analysts to become better equipped financial professionals of tomorrow.

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The SMIF Process The SMIF Applied Security Analysis program employs collaborative team approach to both portfolio management and security selection. Given the current class size three teams of three to four analysts are formed and assigned a portion of the current portfolio to monitor. Each analyst creates a weekly monitoring journal which includes; summary of economic news, summaries of four news articles the analyst deems important, sector specific research and commentary, summary of two outside research opinions and two news articles specific to the analysts assigned portfolio holdings, and two stock ideas produced by individual screening with basic investment thesis and rationale.

Presentation teams are also comprised of three or four analysts. In preparation for investment presentations each team initially determines a screening criterion based on the overall goals of the fund and in light of current macroeconomic and resultant market conditions. Based on the results of screening a short list of at least three ideas is generated and presented to the class. The result is a primary and secondary selection which are then analyzed in greater detail as follows: 1. Analysis of historical financial statements including profitability, liquidity and solvency ratios.

2. Projection of future performance based on revenue modeling and ratio assumptions 3. Analysis of beta, cost of debt, and cost of equity capital to derive WACC/discount rate 4. Primary value assessment is conducted using discounted cash flow analysis to produce a two-year price target 5. Secondary valuation analysis is conducted using relative valuation techniques to support the values produced by the DCF 6. Sensitivity and/or scenario analysis is conducted to determine the fragility of the value assumption produced by the DCF under various situations 7. Using the aforementioned techniques, a bull, bear, and base case analysis is produced to provide a corridor of potential outcomes.

The final work product is compiled in a written report containing information and research supportive of the team’s value assessment. The research report is provided to the investment committee for review in advance of the presentation.

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Events/Exposure Raymond James Challenge

Bloomberg Investment Challenge

CFA Challenge

Money Show Conference

CFA Awareness Scholarships

Student Success • 9 Students • 2 full time position placements • 100% internship placement • Representative placement companies:

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Student Analysts Francesca Arrigoni - francesca8@mail.usf.edu Francesca Arrigoni is a first-generation American and a first-generation college student, highly familiar with what it takes to excel with limited resources. Arrigoni is pursuing a finance major and an international business minor, set to graduate in May 2019. In Fall 2019, she will graduate with a bachelor’s degree in personal financial planning. Outside the classroom she is involved in the American Marketing Association and Corporate Mentor Program at USF to heighten her leadership and communicative skills to grow into the best job candidate after graduation. Fluent in Italian and Spanish, Arrigoni hopes to help corporations perform international business.

Ayush Chauhan - achauhan1@mail.usf.edu Ayush Chauhan moved to the United States from his native India with his parents in search of a better life. Inspired by their sacrifices, Chauhan is a hardworking and driven individual who aspires to work in equity research upon graduation. His commitment to be the best version of himself can be seen through his work ethic in the classroom by maintaining a 4.0 GPA. Currently interning at Raymond James Financial, Chauhan plans to pursue his CFA designation after graduation.

Frank Lee Harris IV - frankh@mail.usf.edu Frank Lee Harris IV is a finance major with an economics minor, who has found a passion for financial markets while being drawn to the fast-paced environment on Wall Street. He previously served as the vice-president of the Student Investment Club, helping students to understand the movements of markets and hosting local business professionals to discuss their experiences. He currently works at Raymond James as a corporate credit analyst intern and will be an equity research intern in spring 2019. Harris also serves as a campus ambassador for Raymond James and is currently pursuing his CFA designation. Upon graduation, Harris plans to work in equity research, hoping to one day manage his own long/short hedge fund.

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Jessica Kelso - jessicakelso@mail.usf.edu Jessica Kelso is a finance major in the Applied Securities Analysis program, the Business Honors Program, Honors College and the Provost Scholars Program. She learned about financial planning, wealth management and retirement plan consulting as an investment intern at Jaffe Tilchin Wealth Management. As part of the Applied Securities Analysis program, Kelso and her classmates manage a portfolio of $1 million. She was the academic achievement chair of the executive board of Zeta Tau Alpha, serving 130 women and managing a budget of $12,000. She is passionate about ZTA's philanthropy: Breast Cancer Education and Awareness.

Alexander Mendez - afmendez@mail.usf.edu Alexander Mendez fell in love with the strategic thinking and competitive aspect of the science of finance and investing. Mendez aspires to work in private equity.

Ultimately, Mendez plans to continue to challenge himself by pursing a graduate degree. In addition to being a team member of the Applied Securities Analysis program, Mendez is also the president and a founding member of the Professional Sales Club and a first-generation college student within USF's Corporate Mentor Program. Mendez has high expectations for himself and is constantly striving to improve and grow as a student and a person.

Ashtyn Paschall - paschall@mail.usf.edu Ashtyn Paschall will finish his collegiate career in three years as of the spring of 2019 with a double major in finance and accounting. Throughout his undergraduate experience, Paschall has served as lead mentor for the Bulls Business Community where he assisted in developing an intricate living and learning environment for 150 business students. He is currently vice president of member development for the Sigma Phi Epsilon fraternity at USF and is responsible for the academic and personal development of more than 50 members. Paschall hopes to enter the field of investment banking where he hopes to use his research and fundamental analytic skills while collaborating with financial professionals.

Dawson A. Ransome - dransome@mail.usf.edu Dawson Ransome is a finance major with a concentration in asset management. He is completing his education at USF after working as a financial adviser and managing a real estate investment company that he founded during the financial crisis. Ransome has made the dean's list each semester, maintaining a 4.0 GPA while working full time. An accomplished athlete, Ransome is a former AMA amateur national motocross champion and inductee into the AMA amateur national motocross hall of fame.

Ransome hopes to become a fund manager and is pursuing his CFA designation. He would eventually like to pursue his longstanding personal ambition to earn a Juris Doctor degree.

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Morgan Trask - matrask@mail.usf.edu Morgan Trask played college tennis at a Division II college in South Carolina prior to coming to USF and joining the Applied Securities Analysis program. The highly competitive sport taught her numerous lessons such as pursuing and achieving her goals. Her goal now is to excel in the world of finance. Trask currently interns as an investment banker at Crosstree Capital and seeks to apply her education to a job in finance after graduation. As the treasurer of PrevCare at USF, she focuses on educating the community on how to live a healthy lifestyle and how to prevent illness.

Taylor Zick - taylorzick@mail.usf.edu Taylor Zick's became interested in financial markets after making his first trade in 2015. Since then, he has taught himself investment strategies and financial analysis.

He joined the Student Investment Club and later became president, educating members on trading and investing as well as hosting guest speakers. He held a summer internship with Raymond James Tax Credit Funds and later joined the firm's Equity Research Department. After college, Taylor plans to pursue a career in equity research as well as obtaining his CFA designation.

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