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Interim Report Student Managed Fund MBA class of 2004 March 11, 2004 2 MBA Fund Managers Anjana Radhakrishnan Jessie LeBlanc Christopher Bodnar Michael Appell Ganesh Padmanabhan Saipriya Menon Geoffrey Munger Tanzhuo Liu Heather Utter Wiebke WannerBorchardt 3 Agenda Investment Philosophy & Approach Investment Criteria Portfolio Performance Attribution Analysis Retrospection and Self-Analysis Economic Outlook 4 Investment Philosophy Outperform the S&P500 Strategic sector allocation Selection of stocks with strong growth potential Close monitoring of the portfolio Fundamental analysis Historical performance Business models Economic outlook for the industry Valuation Undervalued stocks Long-term (3-5 year) investment horizon 5 Investment Approach Sector Allocation Investment Criteria Fundamental Analysis •Historical Growth •Free Cash Flow •Profit Margin Valuation •PEG and P/E Models •Discounted Cash Flow •Economic Profit Constant Portfolio Performance Monitoring 6 Investment Criteria Quantitative Qualitative ROA Industry Growth Quantitative ROE Company Market Share & qualitative ROIC Corporate Governance factors Growth in EPS Institutional Ownership checked Free Cash Flow/Net Income Insider Trading Gross Margin Market Power Product Differentiation Low-cost Producer Customer Relationship Retention Ratio Economic Profit Debt/Equity Beta across industries Qualitative Investment Criteria - Portfolio OCR EBAY JEC INTU Industry Growth 19.42% 27.20% 12.7% 18.5% Company Market Share 2.29% 17.62% 12.00% 3.38% Medium Low Medium High High High Medium Low High High High Medium Market Power Product Differentiation Low-cost Producer Customer Relationship Corporate Governance 6/12 6/13 6/9 5/8 Institutional Ownership 95% 67.44% 65.50% 83.38% Insider Trading 7.70% -0.5% 0.01% -0.30% 8 Quantitative Investment Criteria - Portfolio OCR EBAY JEC INTU ROA 6.18% 9.10% 7.86% 10.27% ROE 13.12% 10.50% 16.35% 14.70% ROIC 7.37% 10.18% 13.10% 14.55% Cost of Capital 6.80% 8.74% 8.12% 7.81% Economic Profit 15M 62M 49M 159M EPS Growth 28.30% 84.6% 34.53% 96.86% FCF/NI 1.30 1.03 0.73 1.56 Debt/Equity 0.68 0.02 0 0.01 Beta 0.85 1.55 0.95 1.20 9 Portfolio Monitoring - Sell Criteria Stock reaches its price objective Industry-sector weighting exceeds predetermined limits Risk/reward profile deteriorates Earnings figures lower than estimates Stop loss on all positions 10 SMF Holdings – 12/26/03 Ticker Equity Weight CONSUMER DISCRETIONARY 31.46% Our sector ALV 4.21% allocation closely EBAY 6.12% HOTT 5.85% tracks the S&P500 with exceptions MAT 5.86% WSM 4.42% YCC 5.00% HEALTHCARE 29.28% GILD 6.56% HSIC 5.78% OCR 5.27% UNH 5.77% ZMH 5.89% based on economic outlook 11 SMF Holdings – 12/26/03 Ticker Equity Weight Our sector INFORMATION TECHNOLOGY 18.77% allocation closely COGN 3.36% FDC 4.17% tracks the S&P500 INTU 5.68% with exceptions MSFT 5.56% INDUSTRIALS based on 9.15% economic outlook CD 5.62% JEC 3.53% FINANCIALS WFC CONSUMER STAPLES MO 5.38% 5.38% 5.97% 5.97% 12 SMF Holdings - Adjustments Sold COGN and ALV Initiated positions in: Materials: Newmont Mining (NEM) IT: Intel (INTC) Reviewing positions in: JEC, INTU, WSM, EBAY, and OCR Seeking positions in Energy and Telecom Sectors 13 SMF Holdings – 02/17/04 Ticker Quantity Purchase Price Market Value (02/17/04) HPR ALV* 300 $32.43 $11,337 16.53% CD 700 $21.05 $16,051 8.92% COGN* 300 $34.80 $9,042 -13.39% EBAY 260 $56.49 $17,997 22.55% FDC 280 $35.96 $11,312 12.35% GILD 300 $53.32 $17,412 8.85% HOTT 550 $27.43 $16,159 6.82% HSIC 230 $66.06 $16,505 8.63% INTC 420 $30.75 $12,949 0.26% INTU 290 $51.87 $14,370 -4.48% JEC 200 $47.86 $8,712 -9.27% * SOLD 14 SMF Holdings – 02/17/04 Ticker Quantity Purchase Price Market Value (02/17/04) HPR MAT 830 $19.19 $15,770 -0.97% MO 300 $51.87 $16,518 6.15% MSFT 550 $26.56 $14,900 1.98% NEM 215 $42.41 $9,729 6.7% OCR 350 $36.93 $16,328 26.03% UNH 275 $54.63 $16,657 10.88% WFC 250 $55.23 $14,480 4.64% WSM 350 $33.84 $14,403 -3.9% YCC 500 $27.71 $14,180 2.35% ZMH 230 $69.74 $17,848 11.27% 15 SMF Holdings – Performance Period: Sep 4, 2003 – Feb 17, 2004 SMF S&P 500 Return 11.28% 11.96% Annualized Return 23.47% 24.97% Beta 1.014 1.00 Annualized Standard Deviation 7.67% 7.46% Sharpe Ratio 2.67 2.93 Treynor Index 20.19% 21.87% 16 Attribution Analysis Analyze determinants of portfolio performance Sector allocation decisions Equity selection decisions Sector Allocation and Equity Selection Effect Determinants Sector-wise weights and returns of the Portfolio Sector-wise weights and returns of the S&P 500 index Overall holding period returns of the S&P500 Analysis Period: Dec 26, 2003 – Feb 17, 2004 S&P 500 holding period return: 5.58% Portfolio holding period return: 3.27% Total value added: -2.31% 17 Sector Allocation Effect LEGEND Wai - Wpi Rpi - Rp {(Wai - Wpi)* (Rpi - Rp)} Consumer Disc. 20.17% -2.1386% -0.4314% Consumer Staples -5.03% -0.4047% 0.0203% Energy -5.79% 0.8799% -0.0510% Financials -15.25% 2.2509% -0.3433% Health Care 15.97% 1.1151% 0.1780% Industrials -1.82% -2.4278% 0.0441% IT 1.04% -0.8548% -0.0089% Materials -3.05% -5.1317% 0.1565% Telecomm Services -3.38% 7.6488% -0.2587% Utilities -2.85% -2.1540% 0.0615% Sectors Sector Allocation Effect -0.6328% Wai -- MBA Wts As of Dec 26 2003 Wpi -- S&P Wts as of Dec 26 2003 Rpi -- S&P Sector returns {12/26 to 2/17} Rp -- S&P Overall Return {12/26 to 2/17} {(Wai - Wpi)* (Rpi - Rp)} -- Sector Allocation Effect 18 Equity Selection Effect LEGEND Sectors Wai Rai - Rpi Wai * Rai - Rpi Consumer Disc. 31.46% 0.873% 0.27% Consumer Staples 5.97% -2.375% -0.14% Energy 0.00% -6.455% 0.00% Financials 5.38% -8.724% -0.47% Health Care 29.28% 0.757% 0.22% Industrials 9.15% -2.932% -0.27% IT 18.77% -7.833% -1.47% Materials 0.00% 6.726% 0.00% Telecomm Services 0.00% -13.224% 0.00% Utilities 0.00% -3.421% 0.00% Selection Effect -1.85% Total Value Added = Sector Allocation Effect + Equity Selection Effect = - 2.48% Wai -- MBA Wts As of Dec 26 2003 Rai -- MBA SMF Sector Returns {12/26 to 2/17} Rpi -- S&P Sector returns {12/26 to 2/17} Rp -- S&P Overall Return {12/26 to 2/17} {(Wai - Wpi)* (Rpi - Rp)} -- Sector Allocation Effect 19 Attribution Analysis Observations from Analysis Impact of allocation effect more favorable than that of the selection effect Review both allocation & selection strategies Benefit from future investments in un-invested sectors Over-weighted Sectors Consumer Discretionary, Health Care, IT Under-weighted Sectors Consumer Staples, Financials, Industrials, Materials Un-invested Sectors Utilities, Energy, Telecom 20 Retrospection and Self-Analysis Sector Allocation Use S&P 500 Sector Allocation as a guide Make adjustments based on Industry Research Stock Selection Growth vs. Value Stocks Cyclical vs. Non-Cyclical Stocks Benchmark Risk Underperforming Stocks Sound Fundamentals vs. Poor Price Momentum Hold, Add, or Sell 21 Outlook Continued economic strength Growth at a more moderate pace Continued stock market strength Modest interest rate increase 22 Impact Overweight IT and Healthcare Be aware of interest rate sensitivity of holdings Select stocks leveraged to the current economic environment 23 Activity Update As of Mar 05, 2004 Received additional $150,000 from the Foundation Initiated positions in: WAG, NXTL, CTSH Stock selection process underway 24 Thank you University of Connecticut Foundation Inc. Investment Advisory Board Dr. Chinmoy Ghosh 25 Questions?