University of South Florida Student Managed Investment Fund 2019 Annual Report
Table of Contents 2019 Economy in Review............................................................................................................................... 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: Target Corp. (TGT) ............................................................................................................. 9 Investment Philosophy ................................................................................................................................. 10 Investment Philosophy (Cont.) .................................................................................................................... 11 The SMIF Process ........................................................................................................................................ 12 Events/Exposure ........................................................................................................................................... 13 Student Success ........................................................................................................................................... 13 Student Analysts ........................................................................................................................................... 14 Student Analysts ........................................................................................................................................... 15
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2019 Economy in Review Unemployment Rate 5% 4% 3% 2% 1% 0%
United States GDP 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
1Q 2019
2Q 2019
3Q 2019
4Q 2019
The U.S. economy defied recession fears that dominated the headlines throughout the year. It continued its expansion and took the title as the longest economic expansion in history. Throughout 2019, the Federal Reserve cut rates three times. Economists consensus remains that rate cuts will now cease with rates in their benchmark range of 1.5 – 1.75 percent. During 2019, SMIF returned 31.2% outperforming the S&P 500, DJIA, Russell 1000, Russell 2000, and Russell 3000, excluding dividends. Historical Performance Annualized 1 year 3 year 5 year USF - SMIF Fund 31.2% 16.8% 12.8% S&P 500 Index 28.9% 15.3% 11.7% DJIA 25.3% 15.7% 12.6% Russell 1000 28.9% 15.0% 11.2% Russell 2000 25.5% 8.6% 8.1% Russell 3000 28.5% 14.5% 11.0%
SMIF held a few positions that offered both double-digit. The Top Performers were Target Corp, Tetra Tech, and Facebook. These top performers were met by laggards including Vistra Energy, Constellation Brands, Marathon Petroleum, and Comerica. Despite the laggards, SMIF’s holdings of strong 2019 double-digit performers, Target and Tetra Tech, offset any sustained losses and allowed SMIF to outperform the S&P Index by 2.3%.
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Holdings Holding Description (Name)
Sector
Alibaba Group Holding LTD Comerica Inc Constellation Brands Inc Enterprise Products Partners FLIR Systems Facebook Inc Gilead Sciences Inc Intuitive Surgical Jacobs Engineering Group Inc Littelfuse Inc Lockheed Martin Corp Malibu Boats Inc Marathon Petroleum Corp PGT Innovations Inc Packaging Corp of America Palo Alto Networks Inc Quanta Services Inc Quest Diagnostics Inc SPDR S&P 500 ETF Trust Syneos Health Inc Target Corp Tetra Tech Inc Tyson Foods Inc Vistra Energy Corp Jazz Pharmaceuticals PLC U.S. Dollar Cash & Cash Equivalents Total
Consumer Discretionary Financials Consumer Discretionary Energy Information Technology Information Technology Health Care Health Care Industrials Industrials Industrials Consumer Discretionary Energy Consumer Discretionary Materials Information Technology Industrials Health Care S&P 500 Health Care Consumer Discretionary Energy Consumer Staples Utilities Health Care -
Market Value $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
24,883.70 17,957.50 18,017.70 37,063.00 23,989.00 29,090.60 22,240.65 62,794.20 24,324.30 21,092.50 27,461.00 21,032.40 19,955.10 20,986.00 20,201.40 24,521.70 42,477.20 25,025.15 45,211.60 21,767.10 42,533.70 58,028.70 29,216.00 17,272.50 24,420.80 13,843.43 735,406.93
Weight
Performance
3% 2% 2% 5% 3% 4% 3% 9% 3% 3% 4% 3% 3% 3% 3% 3% 6% 3% 6% 3% 6% 8% 4% 2% 3% 2% 100%
23% 51% -11% 17% 61% 44% -11% 160% 21% 4% 36% 5% 0% 38% 67% 60% 21% 24% 8% 7% 114% 70% 47% -13% 20% -
Overview At the end of 2019, the SMIF held 26 positions as indicated in the table above. The largest
holding in the portfolio is Intuitive Surgical with $62,794.20 or 9%. Target Corp is the largest gainer in 2019. Shares were purchased at $65 and ended the year at $125.7, increasing 93%. The portfolio holds 22 stocks with positive returns since their purchase. Only 3 stocks in the portfolio have a negative return at the end of 2019: Vistra Energy, Gilead Sciences, and Constellation Brands. In 2019, the SMIF added Tyson Foods, Jacobs Engineering, Jazz Pharmaceuticals, Lockheed Martin, Quest Diagnostics, Marathon Petroleum, Constellation Brands, Vistra Energy, Malibu Boats, and Alibaba Group Holding.
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Fund Overview: Top Performers
*Some prices are not taken from the beginning of the year, but at purchase date.
Target Corporation Minneapolis-based Target Corporation was the top performer of 2019, increasing 94.0% during the year. The strong stock performance was due to rapidly improving margins, bolstered by a favorable sales mix, and cost-saving initiatives adopted by the company. The strong consumer spending environment allowed Target to capitalize on its market leadership position and significantly increase its sales. Tetra Tech Tetra Tech stock increased 66.4% during 2019 as the company’s earnings surpassed estimates throughout the year. The company enjoyed a strong backlog level while strengthening its client businesses which rapidly impacted Tetra Tech’s top-line performance. Facebook Inc Tech giant Facebook saw its stock appreciate by 56.6% in 2019 following a rough 2018. Facebook finished 2019 close to its all-time high at $205.25 per share after earnings reports showed encouraging numbers for user engagement, sales, and profits across its platforms. Syneos Health Inc On Dec 27, shares of Syneos Health reached a 52-week high of $59.03 per share as the company exited the third quarter with impressive results. Much of the upside can be attributed to new business growth as the Clinical Solutions segment registered a 5.9% rise on a year-over-year basis. Tyson Foods Inc Shares of Tyson Foods climbed by 45% since the stock was added to our portfolio. The high upside was directly related to the African swine fever epidemic which decreased Chinese pork production by 14% sending pork prices up by more than 60%.
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Fund Overview: Laggards
*Beginning prices indicated for Vistra Energy at purchase date Nov. 25th 2019, Marathon Petroleum Corp. at purchase date April 25th 2019, Constellation Brands at purchase date April 25th 2019.
Vistra Energy Corp. Texas based Vistra Energy Corp. was the worst performing stock within the portfolio for 2019 with a loss of -14%. The company is a holdings company engaged in the electricity market through generation, wholesale energy sales & purchases, commodity risk management, and retail energy sales. The company underperformed after unforeseen shareholder activity exerted downward pressure on the stock though valuation remains positive. Constellation Brands New York based Constellation brands was the second worst performer for 2019 with a return of -11.6%. The company has a portfolio of brands across the wine, imported beer, and distilled spirits categories. Constellation Brands shares slid due to the company’s poor M&A executions, investment activities, and substantial cuts to their full-year earnings guidance. PGT Innovations Florida based PGT Innovations yielded a loss of -5.9% in 2019. The company produces building products with its portfolio of offerings consisting of impact-resistant windows, doors and other related products. Shares of PGT Innovations fell after reporting earnings below analyst consensus with bleak outlook for 2020 and company layoffs due to restructuring. Marathon Petroleum Corp. Marathon Petroleum returned 2% in 2019. The company is an American petroleum refining, marketing and transportation company headquartered in Ohio. The stock underperformed due to increased debt level on its balance sheet taking on more debt relative to its competitors and Elliot Management’s activist investor sentiment that the company’s size hinders operations suggesting a breakup of Marathon into three separate entities. Gilead Sciences Gilead Sciences underperformed with a 3.9% return in 2019. The company is an American biotech company focusing primarily on antiviral drugs for treatment of HIV, Hepatitis, and influenza. The stock underperformed due to flat revenues year over year with gains in the HIV business undermined by declines in Hepatitis sales and heavy competition in key areas of Gilead’s business.
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Fund Overview: Additions & Denied Positions Additions During 2019, the Student Managed Investment Fund added ten new positions: three names in the consumer discretionary sector, two health care, one utilities, one consumer staple, one industrials, one technology, and one defense.
Company
Alibaba Group Holding LTD Constellation Brands Jacobs Engineering Group Inc Jazz Pharmaceuticals PLC Littelfuse Inc Lockheed Martin Corp Malibu Boats Inc Marathon Petroleum Corp Quest Diagnostics Inc Tyson Foods Inc Vistra Energy Corp
New Positions Purchase Date Purchase Price Since Purchase
October 16, 2019 April 25, 2019 February 25, 2019 Feburary 25, 2019 March 26, 2019 January 26, 2019 November 25, 2019 March 26, 2019 Feburary 25, 2019 Feburary 25, 2019 November 25, 2019
$176.56 $213.09 $74.38 $126.76 $183.79 $288.74 $39.23 $60.71 $86.07 $62.03 $26.56
20% -12% 21% 18% 4% 35% 4% -1% 24% 47% -13%
The best performing recent addition to the portfolio was Tyson Foods. Tyson’s stock was bolstered by an extremely strong consumer spending environment and a push into the alternative meats segment. The secondbest performer was Lockheed Martin as the defense giant’s stock was driven higher due to increased government defense spending and consolidation within the industry Constellation Brands and Marathon Petroleum were the laggards of the new additions in 2019. Constellation was hit hard by a poor investment in Canopy Growth, a Canada-based marijuana startup which they invested over $4 billion. Marathon also faced pressure from a beaten down energy sector which saw large drops in the price of oil and higher regulation throughout the industry. Vistra Energy also saw pressure in late 2019 as a result of heavy institutional ownership. Take into account the time horizon of the investment, we do not believe this is an accurate representation of Vistra’s future performance. Denied Six 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 technology stocks, which were one of the best performing sectors in the S&P 500 for 2019.
Company
DXC Technology Co Kadant Inc PagSeguro Digital Ltd Spotify Inc Styrker Corp WD-40
New Positions Purchase Date Purchase Price Since Purchase
March 26, 2019 April 25, 2019 February 25, 2019 April 25, 2019 October 16, 2019 October 16, 2019
$64.83 $97.68 $27.52 $132.82 $215.75 $180.70
-42% 8% 24% 13% -3% 7%
The best performing denied stock was PagSeguro Digital, a payment processing company based in Brazil which has benefited from the recovery of the Brazilian economy following its recent recession. Spotify also showed strong growth due to a growing premium subscriber base and large investments into their growing podcast segment.
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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.
•
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 2019 SMIF Sector Weight 25% 20% 15% 10% 5% 0%
2019 S&P 500 Sector Performance 60% 50% 40% 30% 20% 10% 0%
2019 SMIF Sector Performance 40% 30% 20% 10% 0% -10% -20%
Cons. Discret.
Cons. Staples
Energy
Financials
Health Care
Industrials Information Materials Tech.
Utilities
*The SMIF portfolios $735,407 of assets under management was allocated across nine sectors in 2019.
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Top Performer: Square Inc. (SQ) TGT 2019 Share Price 140 120
Share Price
100 80 60 40 20 0
Minneapolis based Target Corporation was the top performer of 2019, advancing 94% during the year. The strong stock performance was mainly due to rapidly improving margins, bolstered by a favorable sales mix and cost-saving initiatives adopted by the company. A strong consumer spending environment allowed Target to capitalize on its market leadership position and significantly increase its sales. Target’s considerable investments in e-commerce, partly contributable to their Shipt acquisition, will allow it to compete in an increasingly omnichannel retail world, particularly against subscale rivals that cannot match its standing. Target’s store renovation program has delivered results, particularly important as the firm can continue to leverage its locations’ proximity to customers. A new loyalty program could unlock customer data insights that may meaningfully improve Target’s marketing, inventory management, and product assortment. Target has adapted well to a fast-digitizing retail landscape, but it faces an intensely competitive environment in which customers have negligible switching costs, exacting relentless pressure to elevate service levels while holding prices low.
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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 ($210 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 2020 Quinnipiac Game Forum X Student Managed Portfolio Competition Raymond James Financial Stock Pitch CFA Society Dinner Hillsborough County Board of Education Information Series (Guest Lecturers) Global Asset Management Forum Conference
Student Success • 8 Students • 4 full-time position placements • 75% internship placement • Representative placement companies:
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Student Analysts Francesca Arrigoni Francesca Arrigoni is pursuing a degree in Personal Financial Planning, to accompany her already achieved B.S. in Finance with a concentration in Asset Management. This past summer, Francesca interned at the U.S. Embassy in Bern Switzerland where she was heavily involved in the Embassy’s foreign direct investment portfolio, overseeing financial documents of businesses expanding to the United States. Francesca’s dedication to the investment field has led her to pursue the internationally recognized CFA charter. Jonathan Ebberhart Jonathan Ebberhart is pursuing a degree in Finance, concentrating in Asset Management, accompanied by minors in both Political Science and Economics. Prior to joining the Applied Securities Analysis program, Jonathan spent a summer as an Operations Associate Intern with Anchor Wealth Management and this last summer as a Wealth Management Summer Analyst with the J.P. Morgan Private Bank. Graduating in May 2020, Jonathan is a CFA Level 1 Exam candidate. Cristiano Fernandes Filho Cristiano Fernandes Filho is a finance major with an economics minor currently pursuing his CFA designation. Originally from São Paulo, Brazil, Fernandes is the president of the Brazilian Student Association at USF and a first-generation college student who holds a USF GPA of 3.97. After spending a summer in a Financial Planning & Analysis internship with Citi, he joined the Applied Securities Analysis program to gain experience with Equities. After college, Cristiano plans to pursue a career in Investment Banking. Gregory Klug Gregory Klug is set to graduate in May 2020 with a degree in Finance. He is currently an Intern at Hyde Park Capital. As a Tampa native, Greg hopes to continue to reside in the Tampa Bay area and start his career in asset management, investment banking, or investment research. Greg was an intern this summer at J.P. Morgan Chase as an analyst in the Corporate Analyst Development Program and has previously interned at Foresters Financial.
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Student Analysts Timothy Davis Timothy is a first-generation American, born and raised in the Tampa Bay area. He is pursuing a finance major and has a background in applied statistics, upper-level mathematics, and information technology. Recently finished a 10-month internship at Morgan Stanley as a wealth management intern analyzing client portfolios, performing market research and assisting in the development of portfolio management models. Davis aspires to enter the field of private equity and is currently pursuing his CFA designation. Macey Graham Macey is a first-generation college student and was born and raised in Umatilla, Florida. She is pursuing a degree in Finance and graduates in summer of 2020. Macey is an avid golfer and reader in her spare time. After graduation she plans to pursue a career in wealth management or equity research.
Dylan MacFarquhar Dylan was born and raised in Palm Beach Gardens, Florida. Member of the Honors College and Business Honors Program pursuing a double-major in finance and personal financial planning with a concentration in asset management. Has held internships in asset management, investment banking, and private wealth management at firms such as UBS, Raymond James, PNC, and Crosstree Capital Partners. Dylan aspires to enter the investment management industry after graduation and is currently pursuing his CFA and CFP certifications. Samuel Steck Samuel was born in St. Louis, Missouri and had been in Tampa for the past 18 years. He is pursuing a dual degree in Finance and Accounting. This Fall Samuel is an M&A Investment Banking Intern at Crosstree Capital, this spring an M&A Investment Banking Intern at LCG Advisors. Samuel is part of the Honors College, Student Investment Club, Club Golf Team, and is an Adventure Trip Leader for USF Outdoor Recreation. After graduation, Samuel plans on pursuing a career in investment banking.
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