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Anne Rife Cox Endowment Fund Portfolio Practicum

2003 Annual Report

April 29, 2003

Anne Rife Cox Endowment Fund · Cox School of Business · PO Box 750333 · Dallas, Texas 75275 · 214.768.3289

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Table of Contents

Class Roster

page 3

Letter to the Investments Committee

page 4

Economic Outlook Year 2002 in Review Domestic Outlook for 2003 World Outlook for 2003

page 7 page 8 page 10

Asset Allocation

page 13

Equity Profile Value, Growth, and Risk Characteristics Sector Exposure

page 16 page 18

Sector Overview

page 21

Transactions Sell Information Buy Information Equity Holdings

page 25 page 31 page 37

Fixed Income

page 39

Performance Summary

page 44

Online Documentation page 47

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Anne Rife Cox Endowment Team – Spring 2003 Name 2003-2004 Occupation Professor Rex Thompson …………………………………………………..…Cox Faculty

Lucas Barton…......…………………...…………………………………………Undecided

Brian Busby……………………………………………………………………..Undecided

Erik S. Collard……………………..………………Business Analyst, Deloitte Consulting

Kathryn Meghan Tonner Dawson………………………………..……..Royal Dutch Shell

McCall Dorr………………………………………Train for 2004 Summer Olympic Trials

Cameron W. George……...... Energy Investment Banking Analyst, RBC Capital Markets

John Harvin……………………….…………………….UT Southwestern Medical School

Scott Anthony Krouse……….…………………Analyst, Mercer Management Consulting

Pierce Lowrey …..…………………….……………………………….. SMU Law School

Molly McDonough ……………………………Analyst, Mercer Management Consulting

Ted Mitchell ………………………………………………………………..…. Undecided

Brooke Nelson………………………………………..University of Virginia Law School

Chinyere Okoro ……………………………………………………...…………Undecided

Robert L. Olivier …………………………………………...…….Commercial Real Estate

Ivan Ossa ……...…………………………………Financial Analyst, True North Advisors

Kathleen Riggs ……………….. Masters of Accounting at Notre Dame, Ernst and Young

Irby P. Rozelle ………………..…………………………………………… Travel Abroad

Andrew G. Sutton ……..……………………… Credit Analyst, Southwest Bank of Texas

Patrick Van Ooteghem ………………………. Masters of Accounting Program at SMU

Jessica Yau ……………………………………. Analyst, Mercer Management Consulting

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Spring 2003 To the Investments Committee of the University Board of Trustees: Thank you for your continued trust in allowing us to manage the Anne Rife Cox Endowment Fund (“ARC Fund”). As students, we value this course as an extraordinary opportunity to practice tangible money management skills. On December 31, 2002, at the start of the Spring 2003 semester, the ARC Fund had a market value of $1,899,000. The ARC Fund is part of the University’s comprehensive endowment, which was established for the provision of student scholarships, interdepartmental support, and supplementary assistance in meeting the University’s operating expenditure commitments. This fund had an aggregate value of $765,500,000 on December 31, 2002. Throughout the management process, we gave careful consideration to the University’s stated performance goals:

(1) Preserve the purchasing power of the ARC Fund; (2) Provide a predictable, stable, and inflation-adjusted stream of earnings consistent

with the University’s 5.1% spending rate on a three-year rolling average; (3) Outperform the benchmark of a blended 82.5% Russell 3000 and 17.5% Government

Credit Index portfolio over perpetual rolling five-year periods; and (4) Rank in the top third of NACUBO college and university endowment returns for

rolling five-year periods. Above all, we sought to provide returns and investment advice tailored to our clients’ needs. As described in our annual report, we developed a cautiously optimistic asset allocation that best reflected the aspirations and risk tolerance of the University. Arriving at an asset allocation involves the appraisal of broad asset classes, their expected risk and return characteristics, and how those characteristics impact the goals of our portfolio. The approach we took to arrive at our asset allocation was to reflect on the goals for the portfolio and determine what combination of asset classes would meet these goals. Given historical returns and risk characteristics, we arrived at an asset allocation that would meet a 5.1% expenditure rate stated by the Investment Committee. However, in an effort to preserve the purchasing power of the endowment, we believe a target return of 9% would expose the ARC Fund to an excessive amount of risk. Faced with the highly volatile market conditions, our portfolio has instead taken a more conservative approach with respect to our asset allocation. We have also included short synopses of our sell recommendations and the front pages of our buy recommendations to summarize the results of our analysis. Due to the necessary constraints of this document, these overviews do not adequately convey the quality and depth of our research. We have provided our full reports on the class website for a more comprehensive review.

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We appreciate the power and trust that Southern Methodist University has granted the undergraduate practicum in allowing us to manage the ARC Fund. From the Association for Investment Management Research’s Standards of Professional Conduct, we have adapted the following ethical guidelines:

(1) Members shall know and abide by rules and laws of any governmental agency or regulatory organization, including the SMU Honor Code, which oversees our activity as financial advisors. No group member will engage in any professional misconduct including, but not limited to, dishonesty, fraud, and deceit.

(2) Members shall derive all investment recommendations based on careful consideration of the clients’ financial objectives. We believe our success depends on nurturing a reciprocal relationship with the client; therefore the class will collectively endorse all research and subsequent voting in order to ensure that our decisions will be representative of the clients’ best interest.

(3) Members shall always act independently of personal investments. We believe all class members should abstain from voting on any recommendation or portfolio adjustment that directly conflicts with their personal asset holdings.

(4) Members shall, at all times, exercise due diligence for the protection and preservation of the Fund against all reasonably foreseeable contingencies and/or losses. We will employ the same duty of care when deciding which proposals to recommend.

Moreover, we have dedicated ourselves to the maintenance of our integrity and the fiduciary responsibility with which we have been entrusted. Respectfully, The ARC Fund Management Group

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Economic Outlook

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Economic Outlook I. 2002 Year in Review The U.S. stock market declined over 20% during 2002, marking its third straight annual decline and the longest losing streak in sixty-one years. The decline was market-wide with losses in the S&P 500 of 23.4%, the Dow Jones of 16.8%, the NASDAQ of 31.5%, and the EAFE of 15.6%. The combination of increasing world instability, a prolonged corporate profit recession, and uncertainties surrounding valid earnings reports and the conduct of corporate executives, were the primary factors keeping stocks depressed. Throughout the year, skeptical and volatile trading pervaded the market. Many investors continued to exit the equity markets in search of safer investments. Several valuation methods, including discounted cash flows and dividend growth, suggest that stock prices accurately reflect both the earnings struggle and unfavorable growth circumstances. The strong spot for the market continued to be fixed income securities, real estate, and gold; these three areas were the most significant bright side of the market in 2002. Treasury prices rose as investors sought steady returns. At year-end, the ten-year note was yielding 3.8% and the 30-year bond was yielding 4.78%. The high market volatility and investor uncertainty that characterized 2002 can be explained by various trends that emerged during the year. Accounting Fraud Many of 2002’s headlines were filled with stories concerning unethical accounting practices. Companies such as WorldCom, Tyco, and Enron highlighted the need for increased honesty and clarity in earnings reports and balance sheets. These scandals intensified investors’ uncertainty. However, recent legislation—such as the Sarbanes-Oxley Act, which will heighten executive responsibility and increase the regulation of corporate governance boards and earnings—should play a role in diminishing investors’ mistrust of financial reporting. One example: under new laws, corporate executives are now required to vouch personally for the accuracy of their financial statements or face tough felony charges for misrepresentation. Corporate Earnings The period between January and April was characterized by disappointing earnings reports. Across the markets, earnings were lower than expected, aggravating investor uncertainty. Contributing factors included declines in the Consumer Confidence Index, a leading market indicator that typically precipitates declines in consumer spending. A drop in consumer spending would further derail current projected improvements in corporate earnings. Although some poor 2002 earnings could be attributed to weak macroeconomic conditions and events that led to widespread uncertainty, many corporations are still recovering from questionable business investments and irrational decisions made during the bull market of the late 1990s. Oil Prices Oil prices hit a two-year high in 2002. The rise in oil prices, an important economic factor, caused a trickle-down effect in input costs for producers, further narrowing margins and causing

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price increases for many consumers as well. The possibility of war with Iraq, combined with ongoing political and economic instability in major petroleum-producing countries in Latin America, caused oil prices to peak at $31.20 per barrel in 2002 and reach as high as $38 per barrel in the first quarter of 2003—a considerable rise from $21.01 per barrel in January of 2002. With the current U.S. occupation of Iraq, the movement of oil prices may depend on world reactions and responses.

YEAR 2002 IN REVIEW

Statistic Performance Dow Jones Industrial Average -15.00%

Wilshire 5000 -20.86% S&P 500 -22.11%

Russell 2000 -20.48% S&P/Barra 500 Growth -23.58% S&P/Barra 500 Value -20.86% Russell 2000 Growth -30.27%

Russell 200 Value -11.42% MSCI World ex U.S. -15.50%

MSCI EAFE -15.64% MSCI Emerging Markets Free -6.00%

LB Aggregate Bond 10.27% LB LT Government 16.99%

LB LT Credit 11.95% CSFB Hi-Yield Corporate 3.11%

B U.S. Domestic 3 Month T Bill 1.70% SB Non- U.S. 7-10 Yr Govnt 23.82%

Gold 26.14% NAREIT-All 5.22%

Domestic Economy Real GDP 2.40% Inflation 1.70% Unemployment 5.90%

II. Domestic Economic Outlook for 2003 2002 2003 Projection Nominal GDP 4.10% 5.80% Real GDP (BEA) 2.40% 3.40% Inflation (CBO) 1.70% 2.40% Unemployment (CBO) 5.90% 6.00% Spending (UBS) 2.00% 3.30% 10-year Treasury (Yahoo) 3.82% 5.50% The stock market has never suffered four straight years of losses, but many analysts believe that this trend will continue. However, expectations of further market declines are mixed with the optimism that 2003 could bring a reduction in market uncertainty. If earnings reports and various economic indicators, such as new unemployment numbers and a revised Consumer Price

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Index (CPI), are positive, they could represent the beginning of an economic recovery. The CPI is a precursor for inflation. Currently, real GDP is expected to increase in 2003 by 3.4% along with a steady level of unemployment. While investor confidence has decreased in the aftermath of the rupture of the technology bubble in the late 1990s, investors’ expected returns could stabilize if market indicators demonstrate an improvement in current economic conditions. Many presidential, governmental, and Federal Reserve decisions on the horizon will play a large role in our economy’s success in 2003. War in Iraq The ongoing concern of war with Iraq has created much uncertainty in the marketplace. Due to these concerns, many investors have moved out of the U.S. stock and bond markets, contributing to the gradual depreciation of the dollar. Many investors are awaiting positive information about the Gulf War before making any large investment moves. Interest Rates The Fed Funds rate was lowered to 1.25% in January of 2003. There is widespread consensus that, without inflation risks, the Fed will not lower rates again. While rates are expected to remain stable for the first half of this year, many analysts believe the Fed will raise the discount rate during the third and fourth quarters. The Fed, since its February meeting, has maintained a positive bias as its expansionary movement of the discount interest rate has kept the growth in money supply in line with productivity. This action seems to have curbed deflationary concerns, which had arisen due to low inflation and rising inventory levels. Dividend Tax/Income Tax Cuts President Bush’s proposed tax cuts did not create much of a response from Wall Street when they were initially proposed. Tax cuts would be beneficial to consumers and spending, however many analysts say the dividend tax cut, specifically, would not play a significant role in the recovery. According to a study released by Bear Stearns, only 11 of 30 members of the Dow Jones 30 could make tax-free payouts this year under the proposal. While the U.S. does have the second highest dividend tax rate in the world, the dividend tax cut proposal seems to have stalled for the moment. President Bush’s overall proposal is focused on cutting all tax rates in order to increase investment and spending throughout the economy. The attractiveness of accelerating and implementing several new tax cuts seems reasonable and could jump-start a renewed interest in the U.S. equity markets. Capital Expenditures After a year of relatively low capital expenditure, an increase in this category during 2003 will point our economy in the right direction. The more capital investments made in 2003, the greater investors’ confidence in the economy. Major capital expenditures could foreshadow greater-than-expected growth in the U.S. economy in 2003.

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III. Sectors to Watch in 2003 Defense and Aerospace Sector The defense and aerospace industry will be an important sector to watch in 2003. Although profits rose for the aerospace industry in 2002, the industry is still struggling in a post September 11th environment. Prevailing estimates suggest that it will take another two years for the commercial airline industry to complete the restructuring that is currently taking place. A 13% surplus of airliners in the world fleet, the highest in history, underscores the importance of restructuring. Not only is the commercial airline industry in a state of disarray, so is government aviation. After the February 2003 space shuttle Columbia disaster, the future of the NASA space program is in question. Last year space sales decreased to $31 billion. Possible war with Iraq has helped to boost the sector by increasing the United States’ military buildup. There are estimates that the U.S. Department of Defense will increase research and development spending by 5.9% over the next four years. The increase of sales to the Defense Department will hopefully help offset the reductions that are taking place in other parts of this sector. The Aerospace Industry Association expects a $9 billion decrease in aerospace industry sales, to $138 billion, in 2003. Energy and Oil Sector Energy is another important sector as evidenced by the notes on oil prices. Domestically, U.S. drilling is expected to increase 3% in 2003. This increase is largely driven by an increase in demand for natural gas. The utility industry has increased capital expenditure to an all-time high over the last few years. This trend is expected to continue through the end of 2003 and then expected to slow down. Many companies that cancelled projects in 2002 are ready to resume them in 2003. There are at least 870 projects, with an aggregate value of $104 billion, tentatively scheduled to begin in 2003. Healthcare Sector The healthcare and insurance sector has seen a sharp increase in information technology (IT) demand. As a result of the Healthcare Insurance Portability and Accountability Act (HIPAA) of 1996, companies are in a crunch to reach the April 2003 deadline. HIPAA was created to set standard methods for recording and sharing electronic patient and financial data. Failure to comply with this deadline will result in companies paying a hefty fine of up to $250,000. Some insurance agencies are also feeling the push for personal security, but most of this push is from the individual consumer. The healthcare industry has already started to see an increase in hiring in 2003.

IV. World Outlook 2003

In its latest review, the Organization for Economic Cooperation and Development said the world's 30 largest economies are expected to grow an average of 2.2% in 2003, compared with 1.5% in 2002. The new figures are a downward revision from the group's June report, which had projected a 3% growth in 2003.

The International Monetary Fund (IMF) also cut expectations for global growth in its latest World Economic Outlook to 3.7% due to increased global uncertainty since the middle of 2002. The IMF says there is significant risk that a market recovery could be more subdued than

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expected, but this is primarily dependent on further declines in the United States and Europe equity markets.

Economists cite a war with Iraq, a jump in oil prices, and a possible plunge in the value of the dollar as other threats to the health of the world economy.

Europe Europe’s economic performance is dominated by developments in Germany, France, and Italy, which together account for almost three-quarters of the total European GDP. All three countries have seen tentative recoveries stall during the second half of 2002, and all have seen both structural and cyclical deteriorations in their budgetary positions. Looking further ahead, budgetary reform remains a priority but will be difficult to achieve. An aging world population will exert considerable pressure on both public finances and economic growth potential. Long-term governmental reform policies will need to address these issues to avoid a further downturn in market growth rates.

The United Kingdom’s economic growth averaged 0.7% in the latter half of 2002. This growth resulted from low interest rates, low unemployment, and continued strength of the housing market, which kept up consumer spending. However, recent indicators show that business confidence, investment, and industrial production have weakened. Also, there is evidence that the United Kingdom’s trade deficit widened.

Growth in Europe is expected to average around 2.5% in 2003, with consumer spending moderately growing and government spending remaining strong. However, there is concern about high household debt and possible corrections in house prices.

Interest rates across Europe are expected to remain low and stable over the next few months because inflation is expected to remain at or below the Bank of England's 2.5% target level over the next year.

Asia

In Asia, most economies are expected to remain sluggish in the first part of 2003 with a growth forecast of 5.6%. China is expected to lead the way with a 7.2% growth forecast for real GDP. Most Asian nations, however, are dependent on stronger U.S. demand for their exports. In other words, they will depend on the U.S. to lead in a global recovery.

In 2001, the Chinese economy was hit by deteriorating international conditions, but in the past two years growth has regained momentum and is forecasted to accelerate through 2003 if world demand recovers and government investment continues to rise.

Accession to the World Trade Organization (WTO), which occurred in December 2001, should continue to bring economic benefits to China as trade barriers are lowered. Eventually private consumption is expected to accelerate, in response to increased product availability brought by free trade.

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Asset Allocation

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Asset Class Mean ReturnRisk Free Rate 1.50% Russell S&P LB LT EAFE NAREITRussell 2000 10.99% 19.90%S&P 500 11.25% 0.802 15.67%LB LT Gvt/ Corp Credit 8.10% 0.169 0.265 10.13%MSCI EAFE 8.45% 0.700 0.700 0.168 17.29%NAREIT 9.41% 0.642 0.515 0.293 0.331 12.85%

Correlations in Blue (Std. Dev in Green)

Asset Allocation Arriving at an asset allocation involves the consideration of broad asset classes, their expected risk and return characteristics, and how those characteristics impact the goals of the portfolio. Since historical data for all these indexes begins at different periods, we chose a common period for consistency. Initially, we calculated returns, correlations, and standard deviations for the broad asset classes beginning in January 1979 and ending December 2002. The returns yielded are: Over the period from 1973 to 2002 the average inflation rate was 4.9%. The CBO forecast for inflation in 2003 is 2.4%. The difference between the historical inflation rate of 4.9% and the CBO forecasted inflation rate of 2.4% for 2003 is 2.5%. We subtracted this 2.5% from the expected returns for each specific index to give us a more realistic assumption of what to expect given the uncertainties in the economy today. The revised expected returns we determined are shown in the table below under the column “Mean Return.”

In addition, we believe that future market conditions will show a much closer correlation between the MSCI EAFE and both the Russell 2000 and the S&P 500. As a result, the correlation between the Russell 2000 and the MSCI EAFE was increased from 0.498 to 0.700. To further justify lowering the mean returns for the indices we must take into consideration the common time period we used for the optimization. By starting in 1979 we completely ignore the bearish market of the 1970’s. If these returns were taken into consideration our mean returns would look much more similar to the numbers we calculated by subtracting the 2.5%. Finally, with the decline of interest rates, we believe a more accurate measure of the risk-free rate is 1.5%. The new data used to calculate the efficient frontier portfolio as follows:

Asset Class Mean ReturnRisk Free Rate 6.45% Russell S&P LB LT EAFE NAREITRussell 2000 13.49% 19.90%S&P 500 13.75% 0.802 15.67%LB LT Gvt/ Corp Credit 10.56% 0.169 0.265 10.13%MSCI EAFE 10.95% 0.498 0.559 0.168 17.29%NAREIT 11.91% 0.642 0.515 0.293 0.331 12.85%

Correlations in Blue (Std. Dev in Green)

Asset Class Mean ReturnRisk Free Rate 1.50% Russell S&P LB LT EAFE NAREITRussell 2000 8.50% 19.90%S&P 500 8.00% 0.802 15.67%LB LT Gvt/ Corp Credit 4.20% 0.169 0.265 10.13%MSCI EAFE 7.80% 0.700 0.700 0.168 17.29%NAREIT 7.60% 0.642 0.515 0.293 0.331 12.85%

Correlations in Blue (Std. Dev in Green)

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Asset Class WeightS&P 500 40.30%MSCI EAFE 10.00%Russell 2000 5.00%LB Govt/Corp 44.70%

Mean 6.30%Sdt Deviation 10.60%Sharpe 0.453Risk Free 1.5MRP 6.50%

Asset Allocation

Risk/Return Characteristics

The war concerns, an increasing unemployment rate, and declining interest rates, along with all the other factors discussed in the economic outlook, reflect that the adjusted mean returns above are still overly aggressive for current market environments. Given the highly volatile market conditions, we have taken a more conservative approach to asset allocation. In an effort to preserve the purchasing power of the endowment, we believe that a target return of 9% will be prone to an excessive amount of risk. More conservative assumptions regarding equity and fixed income returns, along with a target return that yields a more conservative allocation, are reflected in the following optimization. Given an expected year of uncertainty and volatility our assumptions will be a bit less aggressive. These assumptions are primarily indicative of the expected returns in the next 2 years where indices are not expected to see any further gains. The results of the optimization (table above) gave us a considerable amount invested in the international market. Although we felt somewhat uncomfortable in the international market given the current uncertainties, we appreciate the recommendations of the optimization exercise and, for diversification, limited our international investment to 10% of the portfolio. We also felt that the information available to us would give us the largest competitive advantage in the domestic equity market. As a result the EAFE was constrained in the next optimization to give us the optimal combination under our umbrella of domestic equities. These results yielded the following efficient frontier and a portfolio we felt comfortable pursuing. The below portfolio puts 5% of our fund invested in the Russell 2000 to account for the small cap Cymer, Inc. and Oakley holdings. The following is a portfolio we believe will give an optimal combination of risk and return given our current economic conditions.

Efficient Frontier

U-2

u-min

U-1

1.5%

u-tangent

C-2

c-min

c-tangent

C-1

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%Standard Deviation (Annualized)

Av

era

ge

Re

turn

(A

nn

u

Efficient Frontier Tangent Constrained Frontier

Tangent Line is through c-tangent

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Equity Profile

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Equity Profile Value, Growth, and Risk Contained in this report are selected financial characteristics of the whole equity portfolio that can be analyzed using a number of value, growth, and risk characteristics. All of our data, including the financial characteristics of individual stocks and equity sectors, can be found on our portfolio’s web page. Our selected financial characteristics represent stock prices as of the close of trading on April 21, 2003. In our portfolio this year, we have taken a value-oriented position in conjunction with strong growth opportunities. We believe that we have found inexpensive companies relative to their business fundamentals. Thus, we anticipate that these firms will eventually trade at higher prices based on these tangibles.

Selected Financial Characteristics Anne Rife Market Source

Value Characteristics P/E 2003 22.65 23.09 S&P 500 as reported Relative P/E .99 1.0 Market Price/Book 1.85 4.33 S&P Average Market Capitalization (Billions)

43.854 (Wtd.) 12.553 (Median)

84.889 13.688

Avg. in S&P 500 Avg. in S&P Global 1200

PEG on ’03 P/E 1.84 2.886 S&P 500 as reported P/E over S&P Avg. LT EPS growth (Source: Bloomberg)

Growth and Return Characteristics Projected ROE 2003 17.389% 17.95% S&P 500 Projected Avg. as

reported EPS growth LT 15.524% 10.72% S&P 500 Projected Avg. DIV. Yield 1.34% 2.24% S&P 500 Projected Avg. VL Timeliness 2.75 3 Value Line Average Risk Characteristics Beta 1.039 1.0 Market LT Debt/Equity (MV)

.64

.20 .164 S&P 500

Portfolio without Delta and Bear Stearns

VL Safety 2.53 3.0 Value Line Average Value Characteristics As seen in our average Price/Earnings ratio (2003) being slightly lower in comparison to the S&P 500, we are only paying slightly less per one dollar of earnings compared to average cost. However, it is important to note that our portfolio would have an even lower Price/Earnings ratio excluding Delta Airlines, with a Price/Earnings ratio of 15.22. This indicates that our portfolio would have an even more value-oriented position than presented. We attribute the disparity to the estimated negative $6.08 EPS for Delta Airlines in 2003. However, our bet is that Delta’s fundamentals are sufficiently robust to withstand the current geopolitical environment. Since our relative Price/Earnings ratio is also lower than the market, we have sought value across all industries. Another indication of our value-oriented position is our portfolio’s PEG ratio, which divides the Price/Earnings ratio by long-term earnings per share growth. This ratio explains how much we are willing to pay for growth. Our PEG ratio is lower in comparison to the market, so we are definitely paying less for long-term growth.

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Defining stocks with a market capitalization of $1 billion to $5 billion as mid cap and above $5 billion as large cap, our portfolio has a large cap bias: 70% of our stocks are large cap, 24% are mid cap and the remaining 6% are small cap. Our portfolio has a median market capitalization of $12.553 billion and a weighted average market capitalization of $43.854 billion. However, compared to the S&P 500 and S&P Global 1200, our median, which shows that 50% of our portfolio is under $12.553 billion, explains that we have accumulated stocks that are much smaller than the average large cap in market. Growth and Return Characteristics We also believe that our portfolio has a high growth potential, as seen in the selected growth measurements of Return on Equity, long-term earnings per share growth, and Valueline’s measurement of timeliness. Our portfolio’s projected Return on Equity is relatively comparable to the market. This indicates that the portfolio is receiving an average return on equity in comparison to the average shareholder in the S&P 500. Again, it is important to note that if Delta were omitted from the portfolio, Return on Equity would be 19.3%, a more realistic growth measurement. The long-term EPS growth for our portfolio is above the S&P 500’s average firm. This indicates that we have accumulated stocks that are growing their earnings faster than the market. This is also supported by the fact that our dividend yield, which divides a firm’s annual dividend by its current market price, is much lower than the market’s dividend yield. Mature companies tend to have higher dividend yields, while growth companies retain more earnings to sustain future growth. Growth companies tend to have higher capital appreciation, so we expect that our portfolio will also receive the same appreciation given its dividend policy. Another indicator of our portfolio’s growth is its timeliness. Our portfolio has a timeliness of 2.75, compared to Valueline’s average of 3.0. This means that our portfolio is expected to have a higher equity return as compared to the market over the next 6-12 months. Risk Characteristics Our beta is slightly higher than unity, making the portfolio somewhat more volatile than the market. This is also represented in our long-term debt/equity being above the S&P 500 average, if the highly leveraged Delta and Bear Stearns stocks were omitted from the portfolio. Our bet is that Delta will survive the current economic downturn and after recovering will have a more manageable debt/equity ratio. Also, Bear Stearns supports a high debt/equity level, which is typical in the financial industry. Our bet is a strong recovery play, and we expect it will prosper early in the economic turnaround. As a whole, firms within the portfolio appear to be able to support higher than average levels of debt, and expected growth in equity will support current debt/equity levels. It is important to note, however, that our Valueline safety measure indicates that we still have taken on less risk than the average stock followed by Value Line. Lastly, our average interest coverage ratio of 12 indicates that, overall, the companies in the portfolio are viable and able to meet their debt obligations with earnings. Our interest coverage is only slightly below that of the S&P, which is 13.

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Consumer22%

Energy12%

Financials24%

Health Care11%

Industrials14%

Telecom & IT17%

Cash0%

Fixed Income

45%Equity55%

Sector Exposure

Current Portfolio and Sector Allocations

Exhibit 1 Portfolio Allocation

Exhibit 2 Equity Allocation by Sector

Exhibit 1 shows the division of portfolio assets between cash, bonds, and equity. An equity position of 55% is very conservative and in-line with our expectations for 2003. Given the highly volatile market conditions, the class decided to focus on the 5.1% expenditure rate stated by the Investment Committee rather than a target return of 9% that would expose us to excessive risk. No allocation was made to cash because sufficient liquidity was achieved with our 45% allocation to fixed income. The fixed income portion of the portfolio is discussed in greater detail later in the document. Approximately $1.029 million was allocated to the equity portion of the portfolio. As stated in the Economic Outlook, there are several macroeconomic conditions that have increased widespread uncertainty in the equity market. Conditions such as the ongoing tensions in the Middle East related to Iraq, the US-North Korea conflict, and mixed earnings continue to dampen investor confidence. The equity portion was not over-weighted or under-weighted in any sector by more than 1% (see exhibit 3). This is consistent with our conservative outlook for 2003.

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Exhibit 3 S&P 500 Weights Comparison

S&P 1200 Sector Weights Portfolio v. S&P Allocation

Consumer22%

Energy11%

Financials23%

Health Care12%

Industrials14%

Telecom & IT

18%

-0.08

-0.37

-0.69

0.92

0.05

0.18

-1.00 -0.50 0.00 0.50 1.00 1.50

Consumer

Energy

Financials

Health Care

Industrials

Telecom & IT

Sectors % of Equity S&P 1200 WeightsConsumer 22.09 22.01%Energy 11.56 11.19%Financials 23.41 22.72%Health Care 11.44 12.36%Industrials 14.04 14.09%Telecom & IT 17.46 17.64%

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Sector Overviews

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Consumer Sector The consumer sector has become much more of a gamble than in the past. The sector is divided into two groups: consumer staples (non-cyclicals) and consumer discretionary (cyclicals). Consumers’ behavior and preferences are becoming much more difficult to anticipate than in previous years. With an unsteady economic climate, cyclicals are no longer as predictable as once thought. Consumer growth is at a twelve-year low (2%), and merchants are finding it more difficult to cut costs to counteract the negative effects of slow growth. Companies in the sector are re-strategizing, restructuring, and rethinking many of the outlooks they had for the future, causing lower estimated earnings for many firms. With travel down and airlines still recovering post-September 11th, many travel-related services are suffering from this slowdown, especially from business travelers. Some professional services have started to give away business to keep customer retention high. Even with all of the turmoil in the market, now might be an opportune time to bolster our position in the sector because many of the stocks have already been beaten down. Energy Sector Predominant trends within the energy sector, such as deregulation and increased prices due to the war in Iraq, are continuing to dominate national oil companies. The biggest names—Exxon Mobil, British Petroleum, and Royal Dutch Shell—have so far been the only firms able to succeed with any scale at capitalizing on advanced technology exploration efforts both onshore and offshore. Firms have started to consolidate to cover the high costs of finding new reserves, creating a competitive environment of a few, very powerful corporations. Utility companies, however, are still numerous and striving to keep up with deregulation. In the short-run, while other companies suffer heightened energy costs, our equity holdings benefit from increased revenues. Certainly once stabilization of critical foreign markets occurs, such as Venezuela and Iraq, the OPEC price peg of $22-28 per barrel for crude oil will be achieved once again. Thus, a long-run price drop is expected. Independent producers and exploration technology advances for offshore drilling have increased total reserves for non-OPEC countries. These facts, along with a new wave of alternative energy sources and conservation movements, will lessen OPEC’s absolute power as a cartel in the long term. Fears about a lengthy war in Iraq have heightened volatility within the markets, but the effect on oil companies varies depending on the services they provide. Those that build the necessary infrastructure for drilling on land seem poised to gain in contracts for Iraq’s reconstruction. However, others fear a fall in oil prices once Iraq’s oil reserves are truly tapped, which would cause a plummet in revenues. Financials Sector At the beginning of 2003, the financial sector of the portfolio included a diverse set of holdings, with exposure to insurance, banking, and diversified financial industries. As we analyzed our holdings to try and weed out the least promising companies, we considered a few important trends: political volatility, bad debt write-offs, potential Internet and technology-driven growth, and the possibility that a real estate bubble is about to burst. As we looked to strengthen our position in the financial sector, we wanted to invest in companies that keep underwriting standards tight, will not be susceptible to stricter governmental regulation, and strive to use the

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Internet and technology to improve efficiency and market share. The companies we will sell this year will be companies with unimpressive management (UnumProvident) and vulnerability to bad credit risks (AmeriCredit). Likewise, we will buy companies that are heavily invested in technology, have excellent management, and are diversified both within the industry and at the sector level. Healthcare Sector The overall outlook for the healthcare sector is positive. There are three broad business categories, or industries, within the sector, which give a better insight into the positive and negative aspects contributing to the overall strength of the sector. The healthcare facilities/providers industry seemed to thrive in recent months due to its success in cutting costs and operating more efficiently. Although great improvement has been made in these areas, recent investigations into the practices of providers have not allowed the sector to soar as expected. In order to take efficiency to the next level, providers will be expected to make sizeable investments in information systems, which will counteract a cost cutting strategy. Also, cutbacks prescribed in the 1997 Balanced Budget Act dictate that, starting in 1998, providers are to be reimbursed on per-day cost caps, not on the total cost of care, adding an even larger burden. Finally, competition from the not-for-profit providers seems to continue to affect those companies that are available for investment, such as Province Healthcare, and as a result we sold Province Healthcare because we do not seek to be invested in this industry for the coming year. We should point out that companies that cater to providers of services are seen as a favorable investment due to the inability of the facilities and providers to exclude them from their business cycle—for this reason we decided to hold Stericycle and Quest Diagnostics. The condition of the managed care industry seems to quite similar. Although healthy price increases should help the industry as it seeks to provide an alternative to fee-for service plans, many employers have increased the co-pay requirements. A continuation of rate hikes is expected to deter people from the sector by allowing them to opt for no medical plan at all. Due to circumstances similar to those of healthcare facilities, as well as the correlation observed between the two, we choose not to have a weighting on this industry for the following year. Finally, we move to our most favorable industry within the sector. Pharmaceuticals are expected to enjoy growth from both the generic and highly specialized drug treatments developed by biotechnology firms. We expect generic sales to exhibit above-average growth over the coming years because prices are increasing throughout the sector. On the flip side of this growth are the biotech companies that develop cutting-edge treatments for cancer, arthritis, and hepatitis. Amgen, a company we decided to hold, sold three of the five best-selling drugs in 2001, generating sales of over one billion dollars. Further, human genome projects and the increasing demand for cutting-edge medication are expected to fuel growth in the industry; therefore, our bet is to stay vested in it. Although we have great expectations for the performance of our holdings, we believe that a conservative approach, based on our comprehensive analysis of the sector, would be better for the overall strength of the portfolio. As a result, we choose to be equally weighted to healthcare, as is the S&P 500.

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Industrials & Materials Sector The year 2003 began with a strong outlook for mining and defense within the Industrials sector. Mining capacity levels remained strong at 85% capacity utilization. New orders for defense-related goods were up 28% in the first two months of the year. The industrials sector of our portfolio has significant exposure to the defense sector, which, excluding a holding in Delta Airlines, has outperformed the S&P 500. Mining is expected to hold steady for the year, and an increase in demand for materials is expected as the economy begins to rebound. Defense spending may drop off in the latter part of the year as the US-Iraq war comes to an end. Airlines are expected to have continued volatility due to the constant threat of terrorism, the war with Iraq, and the recent outbreak of severe acute respiratory syndrome (SARS). Information Technology Sector For the most part, we anticipate that technology spending will continue its post-bubble “wait and see” attitude. Apprehension amid war, accounting woes, and weak earnings still plague the sector. Nevertheless, we remain cautiously optimistic that anemic capital technology spending will soon pick up. While some feel that technology spending is suppressed because of significant over-investment in the 1990s, the only evidence we see of such a claim is primarily limited to telecommunication. Once investors and corporations alike feel comfortable with both earnings and the overall geopolitical situation, technology spending should increase, providing a well-needed boost for all markets. Indeed, the past two years have been extremely difficult for the sector, but we feel this has been somewhat beneficial. The 1990s certainly provided the ideal environment for new companies to experience tremendous opportunity upon entry. As spending subsided, only those with strong balance sheets were able to survive. Fewer firms and consolidation will bless those still standing with an abundance of opportunity when tech spending resumes. Even a dismal geopolitical situation can prove positive. Spending for Homeland Security and the Department of Defense have helped to provide a lift in these difficult times. Both departments continue to sink a substantial amount of money into high-tech defense and modern security technologies. All the while, reconstruction in Iraq will be a hot spot, as technology will work to lay the foundation of democracy and improve infrastructure.

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Transactions

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Summary Sell Information

Re-Balancing Transactions Two of our sell transactions were based on the desire to eliminate nominal holdings with no financial consequences to the portfolio. We chose to sell all stocks that had a market value below $5,000 – consisting of Travelers A & B classes and Williams Holdings, Inc. For portfolio diversification purposes we trimmed several large holdings that represented more than 5% of the total equity portion of the portfolio. These were: Stat Oil, Novartis, Harley Davidson, and Stericycle. Also, for sector re-balancing purposes we trimmed our holdings of AIG and CitiGroup to reduce our financials sector exposure.

Name Quantity Amount Amount Net Amount TradeNovartis AG (NVS) 1,300 $39.64 $51,532.00 $51,464.58 4/22/03

Stericycle Inc. (SRCL) 1,400 $37.25 $52,154.00 $52,151.55 4/22/03Citigroup Inc. (C) 300 $39.60 $11,880.99 $11,865.43 4/22/03

American International Group Inc. (AIG) 300 $56.88 $17,064.00 $17,048.20 4/22/03Harley Davidson Inc. (HDI) 100 $42.22 $4,222.00 $4,216.80 4/15/03American Intl Group (AIG) 400 $53.39 $21,356.00 $21,335.00 4/10/03

Citigroup Inc.(C) 700 $37.10 $25,970.00 $25,933.78 4/10/03Electronic Data Systems Corp. (EDS) 1,000 $17.48 $17,481.00 $17,430.18 4/8/03

Statoil ASA (STO) 3,000 $7.74 $23,207.10 $23,056.01 4/3/03Province Healthcare (PRV) 1,350 $8.22 $11,092.95 $11,025.17 3/25/03

Verizon Comm. (VZ) 460 $36.25 $16,675.00 $16,651.49 3/20/03Four Seasons Hotels Inc. (FS) 1,500 $28.43 $42,640.05 $42,563.76 3/20/03

Americredit Corp. (ACF) 2,150 $2.54 $5,461.00 $5,353.33 3/18/03UNUMProvident (UNM) 2,500 $12.50 $31,250.00 $31,124.05 3/6/03Bellsouth Corp. (BLS) 600 $20.95 $12,570.00 $12,539.62 3/6/03

BJ Svcs 500 $33.51 $16,755.00 $16,729.49 3/5/03W illiams Cos Inc. 1,000 $3.76 $3,760.00 $3,709.88 3/5/03

Travelers PPTY Class A (TAPA) 95 $15.60 $1,482.00 $1,477.20 2/21/03Travelers PPTY Class B (TAPB) 195 $15.62 $3,045.90 $3,036.05 2/12/03

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Consumer Sector Sells

Four Seasons Hotels, Inc. “Checking out of FS and the Hotel Industry”

The short-term prospects of the hotel industry, not just for Four Seasons, do not look healthy. The world economy shows no signs of rebounding any time soon, and the threat now posed by terrorism and war in Iraq will continue to have a negative impact on world business and leisure travel. Four Season’s profitability is based on factors that it cannot control: world travel, terrorism, insurance rates and energy costs. The company expects to take a greater loss in 2003 than it did in 2002 on hotels that it owns and manages, and the costs of employee benefits are also on the rise. The company is currently conducting a massive expansion of its international operations. In the past two years, it has opened 10 new hotels and resorts worldwide and expects to open an additional six this year. By 2006, the company plans to add another 15 resorts. In sum, it will open 31 new hotels and resorts over a six-year period. Four Seasons’ planned growth involves rather aggressive expansion in light of the current world economy, as the company will go from approximately 54 properties in 2003 to 75 by 2006. The expansion will increase the company’s costs dramatically and add very little to the bottom line in the short term. The company may be forced to write-down these properties as it did this past year with its hotel in Australia. Additionally, to justify the company’s current stock price of $26, the company would have to generate $100 million in cash flow annually. In 2002, cash flow was negative, and in the past three years the company has only averaged about $30 million in positive cash flow. Given all these factors, we recommended a sell on Four Seasons. Energy Sector Sells

BJS Services, Inc. “BJS Pumps up the Volume – Time to Sell”

BJS provides worldwide pressure pumping and oilfield services, both onshore and offshore, with 2002 net revenues totaling $1.87 billion. BJS’ stock is trading at 41 times earnings, which, when compared to the industry average of 26 times earnings, seems over-inflated in light of the current volatility in oil prices and world events. Another important indicator for BJS is its PEG ratio, which is 2.83—nearly $1 per share more than the average industry PEG of 1.85. This seems slightly out of sync with its 2.36% ROE and 1.54% ROA, which are lower than industry averages of 4.7% and 3.8% respectively. Undoubtedly, BJS has positive future growth potential, but after performing discounted cash flow analysis and discovering that the company would have to maintain supernormal growth of 15% for five years and then sustain perpetual growth of 8.5%, the current intrinsic value seems unreasonable given market conditions. The fact that this stock costs more for growth, while actual ROE and ROA are low compared to the industry, suggests potential problems maintaining high supernormal and normal growth rates in the future, particularly in a volatile industry. Another important factor in the sale of BJS is the current high price of oil, which encourages oilfield exploration and development. However, while oil is currently $35 per barrel, OPEC’s stated target range is $22-28—a drop that will cause a significant change in the quantity demanded of BJS’ services in the secondary market as both exploration and development decrease due to the lower price. These projections and market conditions are currently causing the stock price and related earnings ratios to project an unrealistic intrinsic value based on earnings, growth, and stability.

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Williams, Inc. “The Energy has Run Out”

Williams Inc. is involved in a range of energy products and services, including the movement, management, and marketing of natural gas, liquid hydrocarbons, petroleum, and electricity. Its major business is Williams Energy Service—a national energy provider and petroleum player—which operates facilities in the Southwest. Since the California energy crisis, Williams Inc. has been embroiled in lawsuits filed by the state of California alleging improper pricing of electricity and intentional idling of plants. Williams Inc., along with two other primary energy providers, is being sued for improper pricing. In addition to the lawsuits against them, Williams is hampered by extraordinarily high levels of debt, demonstrated by its long-term debt-per-share ratio of 23.8 as compared to the industry average of 14.38. Other ratios, including its net profit margin of -20.24% and -$1.96 cash flow-per-share, show profitability and liquidity problems when compared to the industry’s average net profit margin of 1.79% and $2.21 average cash flow-per-share. These significant factors, in addition to our desire to liquidate smaller holdings for the sake of simplification, led to the sale of Williams Inc. Financials Sector Sells

AmeriCredit Corporation “A Bad Credit Risk Bonanza Gone Bust”

AmeriCredit is the corporate reincarnation of UrCarCo Used Car Lots, which in the 1980s offered auto financing for customers with bad credit. High credit losses from poor underwriting eventually forced UrCarCo to restructure and change both its business model and its name. In 1992, AmeriCredit emerged from the UrCarCo wreckage to engage in the business of asset-backed securitization of high-risk car loans. In simple terms, AmeriCredit buys consumer finance loans from automobile dealers, then places those loans in special purpose trusts which issue bonds that are secured by the loans in the trusts. Cash flow from the loans is retained in restricted accounts until the cash reserves reach a certain amount. Now, in 2003, it seems that AmeriCredit is mired in the same credit loss conundrum of its predecessor. As a result of extending credit to excessively risky and unworthy customers, AmeriCredit is faced with operations difficulties and liquidity crises resulting from increased default rates caused by the continued weakness in the economy, lower-than-expected recovery proceeds caused by depressed used car values, and the expectation that current economic conditions will continue for the foreseeable future. Based on discussions with AmeriCredit about earnings quality, profitability, liquidity, and long-term forecasts, S&P, Moody’s and Fitch have all downgraded AmeriCredit’s senior notes from lower-medium to low speculative (junk) grade. Also, Financial Security Assurance, Inc., a company that guarantees payment on AmeriCredit’s asset-backed securitization transactions, recently suggested it probably will not continue a business partnership with AmeriCredit due to AmeriCredit’s falling creditworthiness. A comparable company valuation analysis for AmeriCredit is unreliable, since the company engages in questionable accounting practices that misrepresent bottom line net income and top line revenue. Discounted cash flow analysis, which prices the stock at $1.77 per share, provides the most accurate valuation analysis, since the suspicious “non-cash items” from credit losses shake out in the determination of free cash flows. However, given the negatives issues discussed above and AmeriCredit’s possible bankruptcy, even $1.77 seems too generous.

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UnumProvident Corporation “Don’t Renew Our Policy”

UnumProvident Corporation provides group disability and special risk insurance. Specifically, the company offers disability insurance, as well as group life insurance, long-term care insurance, and payroll-deducted voluntary benefits offered to employees at worksites. We decided to sell UnumProvident for several reasons. First, UnumProvident’s credit rating recently suffered a decrease and is likely to drop again. In February and March of 2003, all major rating agencies downgraded Unum’s debt level. Standard and Poor’s downgraded UnumProvident’s bonds from A– to BBB+ and, in March, downgraded it again from BBB+ to BBB. Fitch also downgraded UnumProvident’s stock from A+ to A. Additionally, UnumProvident increased the percentage of risky assets in its investment portfolio. In 2002, UnumProvident increased its investment in mortgage-backed securities by 40% to $5.6 billion, thereby increasing its exposure to mortgage defaults. UnumProvident further increased its credit risk by boosting junk bonds to about 10.5% of its bond portfolio. Internally, UnumProvident’s management has performed poorly, which has had an adverse effect on the corporation. UnumProvident’s uninspiring leadership can be seen in many recent events. As of March 2003, UnumProvident had multiple lawsuits filed against them, including seven class-action suits alleging that a series of materially false and misleading statements made by management to the market caused the company's financial results to be inflated. Also, UnumProvident has been reprimanded by some states for fraudulent claims practices, and in January, a California court ruled that UnumProvident acted with malice and fraud when it denied disability indemnification to a doctor and awarded the doctor $31.7 million. All of these different factors led to the conclusion to sell. Healthcare Sector Sells

Province Healthcare Company “Let’s Sell this Sickly Company”

Province Healthcare Company owns and operates acute care hospitals located in non-urban markets. The company also targets hospitals for acquisition in the non-urban communities that they serve. Although the company seeks such investments, its return on assets and equity are much lower, than close competitors such as Community Health Systems, HCA and HMA Incorporated. Further, the company was overall much less efficient than the industry, sector, and broad market. Through its acquisition strategy the company has accumulated $319.4 million in goodwill, which has not shown sufficient returns. Therefore, Province will eventually have to write down this goodwill, affecting earnings then the stock price. To add to the company’s woes, it is believed that this company will not be able to overcome its profitability, efficiency, and client and employee retention problems in the short run. In the long run the company has larger goodwill accumulation than the book value of its capital expenditures, which will eventually have to be written off. For the reasons above, along with other issues affecting the firm not mentioned in this summary, we decided that Province Healthcare is not the best company to hold in the healthcare facilities industry much less the healthcare sector.

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Information Technology Sector Sells

BellSouth Corporation

“Its Time to Ring the Bell” BellSouth provides voice and data services to nine southeastern states. Its voice services reach approximately 24.6 million residential and business phone lines, and its data operations provide Internet access to over one million customers. The company also owns 40% of Cingular (a nationwide wireless company serving 22 million customers), publishes phone directories, and has a number of telecommunications investments in Latin America. The coming year has a grim outlook for this Baby Bell. While things do not necessarily look detrimental to the company’s long-term standing, we believe the emergence of a true telecommunications “winner” to be several years away. Several reasons are behind the sell recommendation. First, the majority of BellSouth’s revenue still comes from local phone service, which has very small growth potential and intense competition. Retail phone lines have fallen over 5% in the preceding year, and increasing competition in the local phone business is threatening its cash cow. Second, the company’s current equipment is outdated, and there are no plans to upgrade soon. Changing technology could render the firm’s network far less valuable. Over the past few years, capital expenditures have been nearly 30% of fixed-line revenues. While BellSouth would require significant capital to upgrade its networks, it has cut expenditures to current levels of around 15%, indicating that it may not be able to sustain a competitive position in the industry. Lastly, industry trends are hurting, and there is no relief in sight. Declining long distance rates, continued access-line losses from wireless substitution, and poor enterprise spending, all reinforce the current belief that BellSouth possesses, at most, very little growth potential in the near future. BellSouth’s competitors, like BellSouth, have plenty of free cash flow to make the necessary payments on debt and to invest in new technology, but there remains uncertainty about who will be able to stay competitive in an ever-changing market. This sector, including BellSouth, will be stagnant for the near future. With the portfolio’s three-year horizon and the class’ desire for a 55% equity stake, the risk of this name, given its stagnant growth, is too high. Therefore, the class presented and executed a sell recommendation for BellSouth.

Electronic Data Systems Corporation

“EDS: Ross Left and We’re Leaving Too!” EDS has fallen on hard times. Shares recently tanked as a result of slumping new business bookings, contract renegotiations, and an ongoing formal SEC probe. The company has taken sufficient steps to address these issues, most notably shuffling management, but we remain apprehensive. There are too many red flags not to take action at this point. The SEC probe, as well as other fuzzy accounting schemes, remains a serious concern. All of this comes at a time when the competition is turning up the heat. IBM, the industry leader, continues to steal multi-million dollar deals. Outsourcing threats from India are forcing EDS to scramble for direction. The airline industry, in which EDS has a considerable stake, is a powder keg of problems. Indeed, EDS is battling a perfect storm of issues. While the valuation numbers look enticing, we believe that our interest and our clients’ money should be placed elsewhere within the industry.

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Verizon Communications, Inc. “Verizon’s Cloudy Horizon”

Verizon’s sell recommendation was based primarily on FCC uncertainty, which has made the entire communication services industry more speculative than it may be worth. Apparently Capitol Hill and the FCC are currently trying to ensure the long-term survival of both AT&T and WorldCom, even at the expense of Verizon and Bell South. Usually, Republican dominance in Washington results in greater business deregulation (more laissez-faire policies), but the FCC’s recent decision on February 20, 2003—in support of continuing to regulate the Baby Bells—is expected to reduce Verizon’s capital expenditures budget, which will hinder Verizon’s future three to five year growth rate. Signals such as an above-average price/earnings multiple of 21.16, a bullish five-year growth rate of only 6%, a huge payout ratio of 92%, and a meager 1% increase in 2002-2003 revenue—despite radical cost cutting measures—only add uncertainty to Verizon’s nebulous future. Also, five-year growth estimates for dividends and earnings per share of 0.39% and –2.41, respectively, point in the same direction. Therefore, Verizon’s future is uncertain, but not optimistic. Unfortunately, Wall Street venture capital has indirectly caused much of the telecommunication sector’s demise. Too much capital was raised too quickly in order to pay for the capital-intensive property, plants, and equipment required for a communication services company. As a result, many of these communication services companies are carrying large amounts of debt, but they are adding very little revenue due to extreme competition, economic slowdown, and an ever-changing industry.

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Summary Buy Information

Name QuantityPer Unit Amount

Gross Amount Net Amount Trade

Microsoft Corporation

(MSFT) 1,200 $25.09 $30,108.00 $30,168.00 4/17/03Best Buy Co., Inc. (BBY) 1,000 $31.42 $31,420.00 $31,470.00 4/15/03

Microsoft Corporation

(MSFT) 1,200 $24.43 $29,316.00 $29,376.00 4/15/03The Bear Stearns

Companies (BSC) 1,000 $67.09 $67,090.00 $67,140.00 4/10/03

Wells Fargo & Company

(WFC) 900 $47.50 $42,750.00 $42,795.00 4/8/03FPL Group,

Inc. 500 $58.50 $29,250.00 $29,275.00 4/3/03

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Best Buy Company, Inc. NYSE: BBY Consumer Discretionary: Services: Retail (Technology) 1,000 Shares | Current Price: $30.18 | Impact: $30,180 Bond Rating: BBB-

Analysts: Brian Busby: 469.951.9231 bbusby@mail.smu.edu Scott Krouse: 214.563.7045 skrouse@mail.smu.edu Share Price (04/10/03) $30.18 52 week range $16.99 - $53.15

BUY Recommendation April 14th, 2003

Best Buy is a good buy for us! • Well Positioned:

In the hopes of a recovering economy and potential post-war economic boost, Best Buy is positioned to capitalize on expected prosperity far better than any of it’s competitors. It’s real-estate exposure, solid reputation, and evolving product line have placed it in a position to outperform the closest competition.

• Shifting Product Sales Mix: Recognizing the change in their retail environment from low-margin CD’s and movies to higher-margin digital products, Best Buy is ahead of the pack in redesigning it’s stores and sales focus. With the inevitable growth and built in obsolescence of products like HDTV, computer hardware and software, digital camcorders, and cellular technology, Best Buy is a company that is set to prosper in the near future.

• People will buy TV’s again: Best Buy’s product mix includes relatively inexpensive discretionary products. When the market does begin to recover, whether it be soon or in a year, these are the first products that people will resume buying. Best Buy’s beta of 2.19 indicates that when times do improve this company will benefit two-fold.

COMPANY SNAPSHOT: Best Buy Company, Inc. is a specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The Company operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. The Company operates three segments: Best Buy, Musicland and International. Best Buy is primarily a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. The Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada.

Source: WSJ.com

Key Numbers & Ratios: BBY Industry Shares Outstanding 321.73 Market Cap. (mill) 9,709.66 Beta 2.19 1.86 Earnings: EPS (FY 2002) $1.83 EPS (FY 2003 est.) $2.12 1yr growth rate (%) 15.00 4.60 5yr growth rate (%) 17.60 15.00 Valuation: Price/Book 3.92 3.53 Price/Sales 0.44 0.54 P/E Ratio 16.49 16.08 PEG 0.94 1.07 Operations: ROA (TTM) 8.13 8.14 ROE (TTM) 24.34 24.07 ROI (TTM) 16.83 15.20 Inventory Turnover 5.92 4.90 Financial Strength: Current Ratio 1.30 1.56 Debt/Equity 0.30 0.40

Sources: WSJ.com, Multex

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Florida Power & Light Group, Inc. Debt Rating: A- March 30, 2003 Recommendation: Buy 500 shares @ $58.70= $29,350 cost

McCall Dorr Mccll1@aol.com Meghan Dawson meghandawson@hotmail.com

High Dividend Makes FPL Shine

The Importance of a High Dividend Return Utilities have always offered significant dividend returns, which in previous years were unfavored due to irrational exuberance focused on capital gains and growth in stock price. In the current market where there is relatively no reinvestment risk due to low interest rates, stocks with reliably high dividend yields offer immediate access to returns. While in recent history many investors have downplayed or disregarded the “Bird-in-Hand” theory, this is the time to trust in actual returns.

Selected Financial Data Industry Averages Stock Price (2/23/2003) $58.70 Shares Outstanding 183.0 m Market Cap (2/23/2003) $10,740 m Sales $8,311.0 m Sales per share $45.41/share $33.06/share Income $473.0 m Net profit margin 8.40% 2.02% EPS $4.02 $0.59 5 year growth rate 5.90% 5.7% Dividend/Share $2.40 $1.10 52-week low $45.00 52-week high $65.31 P/E 14.60 33.32 P/B 1.72 1.19 36 mo. Div growth 3.7% (4.7%) ROE 10.9% 4.00% ROA 3.50% 0.90% Leverage Ratio 3.10 4.54 Total Debt/Equity 1.27 1.86 Beta 0.04 (0.10)

Highlights • High annual dividend of $2.40 with a yield of 4.10% is a guaranteed source of returns for

the Endowment. Their March 17th dividend marked the “225th consecutive quarterly dividend paid over the past 57 years.” -CNBC

• FPL Group, Inc. has a current P/E of 14.60 vs. the industry average of 33.32 makes FPL a “cheap” utility acquisition. Their 2003/04 price targets are $71.10 and $74.90 respectively, which corresponds with their discount dividend model and DCF, is higher than their current price of $57.80. On the conservative side, this leaves us with a 2003 profit potential of $6200.

• Their smaller than average LT growth rate of 5.9% is low, considering the construction of a fuel peaking unit in Queens, NYC as well as a controlling acquisition of the Seabrook nuclear plant in New Hampshire. Both are expected to boost revenues. –Yahoo Finance News (11-1-02 & 1-31-03).

• FPL Group, Inc.’s diversification as an integrated energy generator and provider as well as a fiber optics developer has created a fluid company with a long history of consistent growth and stability.

Company Profile

For a Florida company without any oranges, FPL Group produces a lot of juice. The holding company has operations across the US focused on independent power production, but with a small interest in telecommunications. Florida Power & Light (FPL) core energy business has a growing presence in 21 states including both nuclear and fossil-fueled power plants. FPL Group also includes a small subsidiary called FPL Energy Marketing and Trading, which buys and sells power, natural gas, and other energy commodities.

Source: Multex Investor

What Does Unfavored Mean? Unfavored means irrational selling influenced by popular opinion and not based on supporting evidence. The unfavored nature of utilities and FPL in particular is demonstrated by the recent two buys made by insiders with no sells in contrast with the large exodus of institution investors who sold significantly more than they bought over the same time period. This can be attributed to such factors as a backlash against the Enron scandal and a high cost of oil. However, with recent legislation enacted against corporate fraud and a return to OPEC’s control of oil prices these factors are expected to diminish.

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Anne Rife Cox Endowment Fund Spring 2003 Past 5-Year Performance

BUY RECOMMENDATION Firm: Bear Stearns Companies, Inc. NYSE Ticker: BSC Sector: Financial Services (Investment Bank) Moody’s Debt Rating: A2? Analyst: Cameron W. George Analyst: Pierce L. Lowrey

Contact at camgeorge@aol.com Contact at pierce_lowrey@hotmail.com

Relevant Performance Data (On April 2, 2003)

Market Price: $69.48 Shares Outstanding: 96.2 M Market Capitalization: $6.68 B 52-Week Low: $50.50 52-Week High: $70.00 Price/Earnings: 9.37 Industry Price/Earnings: 15.70 Price/Book: 1.16 Industry Price/Book: 2.16 Price/Sales: 1.38 Industry Price/Sales: 1.84 EPS Estimate: $6.33 Beta: 1.47 Industry Beta: 1.75

Corporate Profile “The Bear Stearns Companies Inc. is an investment banking, securities and derivatives trading, clearance and brokerage firm serving corporations, governments, institutional and individual investors worldwide. The Company is a holding firm that operates through its subsidiaries, principally Bear, Stearns & Co. Inc., Bear Stearns Securities Corp. (BSSC), Bear Stearns International Limited and Bear Stearns Bank plc. The Company is primarily engaged in business as a securities broker/dealer operating in three principal segments: capital markets, global clearing services and wealth management. Certain capital markets products are distributed by the wealth management and global clearing services distribution networks with the related revenues of such intersegment services allocated to the respective segments.”

Graph Source: Yahoo! Finance

Performance Data Source: Multex Profile Source: Yahoo! Finance

BSC Performance Relative to Merrill Lynch, Dow, NASDAQ, and S&P 500

Key Competitors and Approximate Market Caps

Closest competitor: Merrill Lynch ($35 B) Others: Morgan Stanley ($46 B), Goldman Sachs ($34 B), CSFB ($21 B)

This Bear Never Hibernates Summary Findings and Other Highlights

I. Diversification: We inherited the financial services sector to find that the previous class had placed bets on certain sub-sectors. We would like to refine the sector as we make our own bets, so we have sold off portions of the sector and replaced them with the intention of diversifying our holdings. As part of the process, we need to buy an investment bank to enhance our diversification strategy.

II. Industry scandals: Many recent scandals involving investment banks have left us with few viable options for a solid growth opportunity. We eschewed banks that had been numbed by fines and disciplinary actions, and focused on Bear Stearns, the 223rd largest firm of the Fortune 500.

III. Higher debt rating: Fitch, among other agencies, recently upgraded Bear Stearns’ debt rating to A+, citing that “liquidity, funding, and capital are prudently managed.”

IV. High bear market performance: Bear Stearns has performed exceptionally well during the economic downturn, increasing net income by 42% in 2002 and outstripping all of its major competitors in capital gains over the same time period.

V. Private client strategy: In an effort to bolster its private client group, Bear Stearns very recently hired one of the industry’s most successful brokers to its New York office. Richard Saperstein brings with him more than $5.5 billion in assets under management and rich opportunities for Bear Stearns to expand its access to high-net-worth clients.

VI. Valuation: We used a flow-to-equity method because the cash flows from Bear Stearns’ significant debt activities have an unjust and inaccurate impact on the firm’s free cash flows. Additionally, free cash flow valuation is difficult because of an uncertain cost of debt. Our bet: We expect M&A and equity issuance activities to pick up in the near future as companies seek growth opportunities through mergers and acquisitions and rebalance

Wells Fargo & Company NYSE Ticker: WFC Debt Rating A+

April 2, 2003

Lucas Barton (713) 906–3891 lucasbarton81@yahoo.com John Harvin (832) 651–5299 johnandrewharvin@yahoo.com

Company Profile Wells Fargo & Company is a diversified financial services company organized as a bank holding and financial holding company. Wells Fargo has three operating segments: Community Banking, Wholesale Banking and Wells Fargo Financial. Source: Multex

Selected Financial Data Wells Fargo Shares Outstanding 1,680,064,000 Market Cap. $76,787,000,000 EPS (ttm) $3.16 LT Growth Rate 12.29% Wells Fargo Comparables* Industry S&P 500 P/E 12.86 10.46 14.85 22.55 P/B 2.61 1.71 1.99 4.27 P/S 4.18 2.84 3.28 2.96 ROE 18.90% 14.08% 15.44% 18.53% Beta 0.81 - 0.95 1.00 PEG 1.06 0.99 1.07 1.38

*Comparable data caluculated with March 19, 2003 values (see pg. 11 )Source: Bloomberg and Multex

• Last year, Wells’ business mix and risk profile hasoutperformed competitors and, with a continueddiversity in earnings, Wells will outgrow competitors.

• Wells is constantly improving its mastery of the cross-sell. By constantly implementing the methods of its’best performing banks nationwide, Wells has increasedits cross-sell ratio to 4+ per household and can boost anewly-acquired banks’ ratio within 3-5 years.

• Wells has historically employed stronger underwritingstandards than its competitors and continues to do so inefforts to keep credit quality high.

• Wells’ strong mortgage services will allow it to realizesolid revenue in early 2003. Then, as mortgage servicesbegin to decline, Wells will continue to create morerevenue than competitors.

• Our Bet: Wells Fargo will lead the post-war marketrebound and generate quality earnings and solid growthin the long-term through excellent management, masteryof the cross-sell, and tremendous business execution.

The Wells Fargo Wagon is Acomin’ Down the Street and We Need to Get On! Recommendation: Buy

Price (April 1, 2003) $46.30 Price Target $67.20 52-Week Low $41.50 52-Week High $54.84

DCF Valuation $70.95 Div. Disc. Valuation $62.70 Comparable P/B Valuation $30.73 Comparable P/E Valuation $38.11 Comparable P/S Valuation $31.82 Comparable PEG Valuation $43.81

SSttoocckk PPrriiccee OOvveerr tthhee LLaasstt 1122 MMoonntthhss

SSoouurrccee:: YYaahhoooo!! FFiinnaannccee

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Microsoft Nasdaq Symbol: MSFT April 12, 2003 Computer Software Industry Patrick Van Ooteghem Where do we want to go today? Microsoft! Kathleen Riggs Andy Sutton Recommendation: Buy 600 shares @ 25.09 = $15,054

Stock Price (4/4/03) $25.09 Shares Outstanding 10,359 M Market Cap. (4/8/03) $259 B EPS $0.94 EPS(2003) $1.00 ST growth rate 16 % 52-week low $ 20.71 52-week high $ 29.48 P/E 25.8 P/E(2003) 25 P/B 4.73 P/Sales 8.81 P/CF 25.49 PEG 1.57 ROE 17.84% ROA 13.87% Beta 1.75 Total Cash $ 43.3 B Source: Yahoo, Hoovers, & CNBC

Company Profile Microsoft Corporation develops, manufactures, licenses & supports a range of software products, including scalable operating systems, server applications, worker productivity applications and software development tools. They have recently ventured into the console video game market with the “Xbox.” One day Microsoft will rule the world. Source: Multex

Highlights:

• Excellent Management! Microsoft’s executives are the best in the industry.Their ROE is 90% greater than the sector and their ROA beats the sector’saverage by an amazing 250%. Clearly, they are managing capital and otherassets with shareholder value in mind.

• Core Products Still Strong: Windows and Office made almost $4 B profit lastyear. Because these programs have become standard among PC users,Microsoft’s near-monopoly (Whoops—forget we used that word!) ensures thatthe profitable trend will continue for quite some time.

• Expanding into Digital Technology: R & D Spending reached $5.2B last yearto focus on opportunities ahead, including Smart Monitors, Tablet PCs, andCordless Displays. MSFT has also become a leader in the Pocket PC and videogame market.

• Legal Problems in Recycle Bin: MSFT is fully committed to carrying outresponsibilities required by settlement, and pressures in USA seem to be wearingoff.

• Despite A Challenging Economic Climate, Revenues for the Year Increasedby $3.07 BILLION, and Operating Income Grew By $190 Million. Revenuefrom enterprise software beat the highly competitive server market by a widemargin. The strong demand for Windows XP & other software has proven veryprofitable. Consumer Businesses saw a dramatic rise in sales with the launch ofthe XBOX video game system and a strong growth in MSN subscriptions. It isbecoming the most popular server on the internet, numbering 270 Million users.

Industry Overview:

The Systems Software Industry Outlook is slightly bullish. However, we are more bullish on Microsoft following a federal judge’s approval of its 2001 settlement with the Justice Department, increasing software sales and an expansion into other technological markets. Overall, the near term prospects for the industry as a whole are less optimistic than for Microsoft because of a continuing IT spending slowdown. Year to date, the Systems software index has increased by 3.7%, versus a 1.3% rise of the S&P.

We expect single digit sales growth of PC software in 2003, led by the Windows line of products. Unfortunately, it will be nothing compared to the spending and growth in the late ‘90s but will be an improvement from the last few years. For the longer term, we believe that evolving Internet and Intranets are creating an increasing demand for software applications and systems.

Although growth is smaller in Mainframe software, vendors are using their mainframe skills to develop and promote products which help manage, administer, and support client/server systems. As technology is improving, one has reason to take a slightly optimistic outlook for sales.

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Entire Equity Holdings as of May 2003

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Fixed Income

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Fixed Income Where we were: the 2002 Fixed Income Portfolio The previous portfolio class made highly diversified fixed income plays based on how they expected the bond market to perform. The holdings were evenly spread across sectors, maturities, and credit qualities as the class sought to neutralize their position relative to the Lehman Aggregate. Interest rates were extremely low at the time, but the economy was still in poor shape, making it difficult to assess whether or not interest rates would rise or fall. The bond allocation was split mainly between Treasury (27%), mortgage (27%), and financials (27%), with most of the remaining in agency debt (13%). The key objective to this portfolio was diversification of unsystematic risk, and accordingly the previous class chose a laddered spread of maturities for the bonds. The 1- to 3-year, 3- to 5-year, and 5- to 10-year ranges each received about 30% of the allocation, while maturities over 10 years were at 13%. The 2002 portfolio class transferred significant funds out of low-grade bonds into high credit quality bonds, with AAA+ and AAA absorbing 68% of the portfolio. They achieved this position through purchases of agency and treasury debt in Fanny Mae and the Ginnie Mae 30-year mortgage pool, in addition to adding a 9-year Treasury note. Overall, the 2002 class sought to reduce risk by spreading their bets across the board and increasing the credit quality of the portfolio. The strategy of neutralizing the portfolio with the Lehman Aggregate achieved respectable returns last year relative to equity returns, but for 2003, we have decided to make some strategic alterations. Where we want to be: Objectives of the 2003 Portfolio In evaluating our position for 2003, we concluded that a “bullet” portfolio would yield greater returns by accepting reasonable risk, given the current bond market and low interest rates. Our bets focused on two major areas: duration and convexity. The yields on shorter maturity securities were deemed unacceptably low, considering this year’s 45% allocation to fixed income. Empirical evidence shows that a concentration of maturity yields a better return relative to risk in the current market (See chart below).

C onvexity

$6,000.00

$7,000.00

$8,000.00

$9,000.00

$10,000.00

$11,000.00

$12,000.00

0 0.02 0.04 0.06 0.08 0.1 0.12

Interest rates

Barbell

Bullet

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We calculated the “barbell” by using 2- and 8-year Treasury strips, while we used a 5-year Treasury strip to calculate the “bullet.”

The Lehman Aggregate posts an average duration of 4.5 years. However, we decided to target a shorter 4-year duration, with the bet that interest rates are more likely to rise than fall in 2003. A rise would cause a decrease in bond values in proportion to portfolio duration. In addition to adjusting the maturity, we concentrated the fixed income holdings around a 4-year maturity in order to decrease the convexity of the portfolio. The negative aspects of concentrating securities around a 4-year maturity would only take effect after an approximate 6% increase in interest rates. We believed concentration to be a sound strategy, since we view such a dramatic interest rate hike as unlikely. While the Lehman Aggregate has approximately a 30-30-30 allocation in maturities across the 1- to 3-year, 3- to 5-year, and 5- to 10-year buckets, the 2003 portfolio has 58.9% in the 3- to 5-year group. To reach this position, we made purchases that fell into this mid-range of duration, while we reduced our holdings in any extremely low duration securities that we did not expect would provide significant returns. Strategies to Achieve Our Goals In order to achieve our goal of an average 4-year maturity on our securities in a bullet portfolio, we liquidated our lowest duration securities—Wells Fargo and the 2.5-year Treasury security strips—and purchased $286,000 in 5-year Treasury security strips and $50,000 in bonds from the Inter-American Development Bank (IADB). The 5-year Treasury has a five-year duration, and the IADB bonds have a 4.876-year duration. The IADB bond was classified, for our purposes, as 50% financials and 50% foreign, because the IADB is a globally-owned bank. With these two transactions we increased our portfolio’s Treasury exposure from 27.3% to 49.3%. Also, we increased our financials to 15.45% and foreign exposure to 3.1%. Combined, these transactions bring our fixed income portfolio’s AAA+ and AAA ratings to 70.84% and sub-grade bonds to 29.2%. This allocation is roughly in-line with the Lehman Aggregate and represents a neutral credit bet. We believe these actions to be realistic and positive adjustments, considering the current bond market and what we foresee will happen to interest rates in the near future. Exhibits 1 and 2, respectively, show a graphical representation of the 2002 positions and our updated 2003 positions in comparison to the Lehman Aggregate. Profile of the Inter-American Development Bank We decided to purchase bonds from the Inter-American Development Bank (IADB), the oldest and largest regional, multilateral development institution, which helps to accelerate economic and social development in Latin America and the Caribbean. This bond possesses several key exposures we were seeking in our fixed income portfolio. First, IADB would give our portfolio international exposure that was previously nonexistent. Stability was not a great concern because IADB is highly rated at AAA and owned by 46 member countries: 26 borrowing member countries in Latin America and the Caribbean, and 20 non-borrowing countries, including the United States, Japan, Canada, and 16 European countries. Also, our portfolio was underweighted in the financial sector after we sold Wells Fargo. Therefore, the purchase of IDAB raised our financials exposure to 15.45%, which exceeds the Lehman Aggregate by 8.15%. This is part of an ongoing strategy that targets financials as among the most reliable debt sectors. Finally, IDAB has a maturity of 5 years, duration of 4.86 years, and yield of 3.552%, which complement our bullet portfolio strategy and desired returns.

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Desired dollar exposure $731,001 (changes are highlighted in grey)

Sector Exposure Proposed % Lehman AggregateTREASURY 27.3% 22.0% 100K each 2.5 and 10 yr T-note

AGENCY 13.5% 12.0% 100 K FNMA 4 yr

MORTGAGE 27.2% 35.4% 200 K 5 yr GNMA CMO

ABS 1.7%INDUSTRIAL 3.6% 10.7% Southwest

FINANCE 27.7% 7.3% Wells, Ford

UTILITY 2.0%Foreign 8.8%Cash 0.6%Total Fixed Income 100.0% 100.0%

MaturityCASH 0.6% 0.0%1 TO 3 YEARS 27.8% 28.7% Wells + 2.5 yr T-strip

3 TO 5 YEARS 27.1% 31.8% Ford + 100K FNMA

5 TO 10 YEARS 30.8% 16.1% Southwest + CMO

Greater than 10 13.7% 11.8% 10 yr T-note

Total Fixed Income 100.0%

CreditAAA+ (GVT) 54.5% 69.3% CMO + Treasuries

AAA 13.5% 5.7% 100 K FNMA 4 yr

AA3 14.2% 5.0% (Wells Fargo)

A3 13.6% 10.9% (Ford)

BAA1 3.6% 9.2% (Southwest)

Sub-Grade 0.0% 0.0%CASH 0.6% 0.0%Total Fixed Income 100.0%

Comparison of 2002 Cox Portfolio with Lehman Aggregate

Exhibit 1

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Exhibit 2

Desired dollar exposure $800,000 (changes are highlighed in grey)

Sector Exposure 2003 Portfolio Lehman Aggregate 12/31/02TREASURY 49.3% 21.3% 9 yr T-note, 5 yr T-strip

AGENCY 13.3% 12.9% FNMA

MORTGAGE 15.3% 34.9% GNMA

ABS/CMBS 4.3%INDUSTRIAL 3.6% 9.2% Southwest

FINANCE 15.4% 7.3% (50%) IADB, Ford Motor Credit Co.

UTILITY 1.8%Foreign 3.1% 8.3% (50%) IADB

CashTotal Fixed Income 100.0% 100.0%

MaturityCASH 0.7% 0.0%1 TO 3 YEARS 27.6% 28.7% GNMA, Ford Motor Credit Co.

3 TO 5 YEARS 58.9% 31.8% FNMA, Southwest, IADB, 5 yr T-strip

5 TO 10 YEARS 13.6% 24.6% 9 yr T-note

Greater than 10 0.0% 14.9%Total Fixed Income 100.0% 100.0%

CreditAAA+ (GVT) 64.6% 69.60% GNMA, 9 yr T-note, 5 yr t-strip

AAA 6.3% 6.21% IADB

AA3 13.3% 5.28% FNMA

A3 3.6% 9.92% Southwest

BAA1 12.3% 8.99% FORD

Sub-Grade 0.0%CASH 0.0%Total Fixed Income 100.0% 100.00%

Comparison of 2003 Cox Portfolio with Lehman Aggregate

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Performance Summary

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Portfolio Performance When evaluating the performance of the Anne Rife Cox Portfolio, the University has designated a Blended Benchmark of 82.5% Russell 2000 and 17.5% Lehman Brothers’ Government Credit Index. The portfolio class, however, feels that a broader, more inclusive, measure is needed. Thus, an Equity/FI Benchmark consisting of 90% Wilshire 5000 and 10% Lehman Brothers’ Aggregate Index is used to calculate a more accurate performance measure. Over the past one, three, and five years, the Cox Portfolio has consistently outperformed the Equity/FI Benchmark (see Figure 1, Figure 2). Although recent negative returns reflect the current economic slowdown, the Anne Rife Cox Portfolio has succeeded in minimizing losses, when compared to both the Equity/FI Benchmark and the Wilshire 5000.

Figure 1 In 1997, the Cox Portfolio was heavily exposed to foreign markets. When the foreign markets bottomed out, the portfolio was also hit hard. Residual foreign investment risk decreased the 1998 portfolio returns. Overweighting the technology/telecom sector resulted in an abnormally high return for 1999. Year 2000 began the current economic downturn and the Cox Portfolio has consistently lost less than the Blended Benchmark.

Figure 2 Annual Cox Returns vs. Benchmark

-20

-10

0

10

20

30

1998 1999 2000 2001 2002

Ann

ualiz

ed R

etur

n in

%

Cox

Blended Benchmark

To further examine the Cox Portfolio’s performance, we ran a regression analysis using the monthly returns of the Cox Portfolio and the Equity/FI Benchmark for the past five years. The result is a risk-adjusted measure of the difference between the two funds, termed alpha. As you can see, the Cox Portfolio has outperformed the Equity/FI Benchmark by 2.07% over the past five years. Figure 3 shows the alpha for the Cox Portfolio versus variously constructed Equity/FI Benchmarks.

Anne Rife Cox Portfolio

Equity/FI Benchmark

Difference b/w Cox

Wilshire 5000

Difference b/w Cox

T-Bills

One Year

(15.42%) (18.25%) 2.83% (21.38%) 5.96% 1.62%

Three Years

(9.00%) (11.30%) 2.30% (13.63%) 4.63% 3.70%

Five Years

3.87% 1.66% 2.21% 1.02% 2.85% 4.09%

Equity/FI Benchmark

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Figure 3 Final Thoughts Prior to recent years, the Cox Portfolio had been around 100% equity. With the economic slowdown of late, fixed income has increased in weight to around 30% and, this year, the class selected a 55% equity, 45% fixed income mix. Given the increased exposure to fixed income, it would be wise for the Equity/FI Benchmark to increase its fixed income percentage above 10%. This increase would allow for an even more accurate measure of the Cox Portfolio’s performance. It is comforting that the Cox Portfolio’s performance has not suffered under the class’ control; however, we must not forget that the primary purpose of the Portfolio Practicum class is applying academic knowledge to real-world investment decisions. The performance of this primary goals is likely immeasurable.

Cox versus (Equity/Fixed Income): Alpha 100/0 Equity/FI Benchmark 2.37% 90/10 Equity/FI Benchmark 2.07% 80/20 Equity/FI Benchmark 1.69% 70/30 Equity/FI Benchmark 1.21%

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Online Documentation

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The New Course Web Page: <http://people.smu.edu/undergrad_practicum> This year the University assigned the class a new website on the SMU server—one with additional storage capacity to accommodate the extensive amount of research and reports that would need to be archived at present and in the future. The class took this opportunity to redesign the website and implement a new format and several new features. The goal was to create a website that would maintain the same format and feel from year to year while allowing our successors the ability to update information and add new research to the archives. The new website has 4 main areas:

(1) An Archive for annual reports and analyst reports; (2) A section describing the performance of the fund and listing the current holdings (both equity holdings and fixed income holdings); (3) A “Class Toolkit” section which provides useful valuation models, spreadsheets for tracking the portfolio’s holdings, and spreadsheets for calculating the characteristics of the fund; and (4) A section providing contact information for the class, and a listing of the members of the class of 2002-2003.

Below is a preview of what to expect upon visiting the new website: