Arnone–Lerer Student Managed Fund Performance Review Fall, 2007

ArnoneLerer Student Managed FundPerformance ReviewFall, 2007

Arnone - Lerer Fund Overview Founding of the FundIn memory of Eugene Arnone & Lawrence LererMaria A. Stumpf and Stephen A. Stumpf

Socially Responsible FundVillanovas Augustinian principles US Catholic Bishops Statement on Socially Responsible Investing

Student-Managed Fund (SMF) Based on the donors commitment to experiential learning

The StaffDr. David Nawrocki Professor James JablonskiMBA StudentsUndergraduate StudentsIn conjunction with MSF and equity society teams

How We InvestTop-Down Investment approachStudents teams working around a specific functionClassroom discussionTeams are cross-functional and fund specific

The Investment ProcessMarketing and Public RelationsInvestment Policy & ComplianceBusiness CycleEconomic AnalysisSocially Responsible Investing (SRI)Security AnalysisPortfolio AnalysisTechnical AnalysisPerformance Reporting

Results Thus FarInitial Investment (Fully Invested)Re-assessment and re-run processRe-Investment

Marketing and Public RelationsJennifer Coppolino

The Marketing Team

A liaison between the fund and the outside world Ongoing Process

How We Do ItMaintain Team RelationshipsVSB PR and Marketing GroupUpdate Website

Future InitiativesIncrease AwarenessRecruitMaintain Websitehttp://www.students.villanova.edu/smfStudent-run investment funds are taking off as a teaching tool. The Wall Street Journal article featuring Villanova

Investment Policy & ComplianceJoshua Coleman

Investment Policy StatementSetsFund objectivesInvestment objectives and guidelinesReporting and performance requirements

Reviewed thoroughly

Approved by Investment CommitteeComprised of members of the class and facultyApproved by the University Investment Committee

Restrictions on InvestmentGeneral RestrictionsDaily volume: >500,000 shares in 20-day windowPrice: >$10Minimum market capitalization: $1.0 billion

Position-Based Restrictions Max initial investment (one security): 5%Security increase 40% in value: Rebalance Portfolio (5%)Securities of the same industry: 12.5% portfolio total valueCash positions must not exceed: 10% of the total portfolio

Continuous ProcessConstant re-assessmentShifts in economic life cycleLiquidated or re-balancedEmerging issues of social responsibilityPerformance consistent with goals/benchmarks

All decisions regarding the portfolio are proposed and voted on by the Investment Committee.

Business Cycle and Economic AnalysisAlex Zozos and Clarissa Sereda

The ProcessSources A Time to be Rich Dr. Lacey H. HuntQ-Insight Conference CallPeripheral materialsFederal Reserve Bank, WSJ, Periodicals

Reviewed all available indicatorsUse specific factors to determine current phase

Evidence brought to class for discussion

The Cycle5-Stage Business CycleEase-offPlungeRevival 1AccelerationMaturation

Phase: 6-18 monthsNot Market TimingData signals cycle transition

First Assessment - 9/18/2007Plunge Phase Red Flag Indicator: Interest Rate Peak

Negative Trends in Major IndicatorsGovernment SpendingHousing StartsNon-Farm Payroll

Class discussion & Investment Committee vote

Revised Assessment - 10/11/2007Reevaluation of phaseA number of factors indicate RevivalInvestment Committee disagrees via class vote

Outcome: Remain in Plunge phaseCurrent market volatilitySpeed of informationForward-looking Federal Reserve

Economic SummaryRed Flag: Interest Rate PeakCrude-oil prices riseThe Fed continues to lower interest ratesHousing market continues to struggleCredit quality falls, defaults on the rise

Socially Responsible InvestingMichael Brandao

Socially Responsible InvestingEmbodying our core valuesThe Mission of the Funds FoundersVillanova University Catholic Bishops Statement

Reward socially responsible companies

In conjunction with economic analysis

Suitable returns are possible

How to Assess SRIVote social responsibilityAdjust and analyze each stock differentlyOpen minded and socially conscious

IWFinancial SRI online toolInitial cut-off: 60Cut off of 55 (0-100 scale)Lowest Stock: 56 (Vulcan Materials, KLATencor)

Some firms not socially responsible despite passing threshold criteria

IWFinancial

Security AnalysisPatrick Murray

We evaluated companies within given sectors- Seek undervalued stocks

Evaluation of models to find areas for improvement while increasing understanding of outputs

Utilized Villanovas resources through Market Insight, Bloomberg, and ReutersSecurity Analysis

First Assessment (2+ weeks)- Valuation models from previous years- Did not return enough companies to pass on - Some stocks did not meet IPS

Updates made to model, process re-runSecurity Analysis

Second Assessment (24 hours)- Modifications of evaluation model gave us increased efficiency and quality of results- All stocks were found to meet IPS- More diversification by inclusion of different sectors

Results- 75 companies believe to be undervalued at their current price to pass on to Technical Analysis Team

Security Analysis

Security Analysis

Security Analysis

Security Analysis

Portfolio AnalysisYulia Barnakova

PMSP SoftwarePortfolio optimizerCorrelation of securitiesEfficient FrontierNawrocki Lower Partial Moment Heuristic

Industry returns Historic Plunge performanceOverride of individual returns

Constrained optimizationCRSP DataSecurity/Industry/Sector

Optimization ProcessCorrelation Matrix

Efficient Frontier

Optimization: Nawrocki LPM

Portfolio Allocation by SectorConsumer Discretionary 25%Consumer Staples 5.0%Financials 9.2%Health Care 22.7%Industrials 11.0%Information Technology 25%Materials 2.1%

Stocks in Optimized Portfolio

IndustrialsCINTASRYDER SYSTEM INCTELETECH HLDGS

Consumer StaplesNBTY INC

MaterialsVULCAN MATERIALS

Risk Comparison

Chart3

0.59760.3982

0.06040.0728

Arnone-Lerer

KLD

%

Risk Comparison

Sheet1

Arnone-LererKLD

Risk0.59760.3982

Reward/Risk0.06040.0728

Arnone-LererKLD

Annual Return12.7110.74

Skewness0.21880.2141

Sheet1

Arnone-Lerer

KLD

%

Risk Comparison

Sheet2

Annual Return

Annual Return (%)

Annual Return Comparison

Sheet3

Chart2

12.71

10.74

Annual Return

Annual Return (%)

Annual Return Comparison

Sheet1

Arnone-LererKLD

Risk0.59760.3982

Reward/Risk0.06040.0728

Arnone-LererKLD

Annual Return12.7110.74

Skewness0.21880.2141

Sheet1

Arnone-Lerer

KLD

%

Risk Comparison

Sheet2

Annual Return

Annual Return (%)

Annual Return Comparison

Sheet3

Chart4

0.2188

0.2141

Skewness

Skewness

Skewness Comparison

Sheet1

Arnone-LererKLD

Risk0.59760.3982

Reward/Risk0.06040.0728

Arnone-LererKLD

Annual Return12.7110.74

Skewness0.21880.2141

Sheet1

Arnone-Lerer

KLD

%

Risk Comparison

Sheet2

Annual Return

Annual Return (%)

Annual Return Comparison

Sheet3

Skewness

Skewness

Skewness Comparison

Technical AnalysisKevin Okolie

Technical AnalysisDetermine best time to enter and exit positionsAnalyze both short and long term trends

The ProcessDivide securities amongst the analysts.Using common toolsRSI, Trend Lines, and Moving Averages Advice of ProfessorsIn-Class discussions

Technical AnalysisWhat we foundSome securities were fundamentally but not technically sound not enough profit potential to invest

Dropped 12 stocks from portfolio Will monitor for potential future entry

RPrice - $47.12Stop Loss - $41.75Target - $55.60

CAKEPrice - $23.08Stop Loss - $20.50Target - $26.00 Shouldnt Buy, not enough growth potential.

Stop LossesDetermine support and resistance levels Is risk to return ratio is reasonable?Set stop loss and profit target accordingly

Performance ReportingJoseph Negri

General Fund PerformanceReturnsWeek: 3.33%Month: 3.33%Quarterly: 0.32%Year to Date: 13.14%Investment: 0.86%Inception:47.90%

Chart4

-0.0297817102

-0.0357488247

-0.0583946936

-0.0239164897

0.0085783214

Arnone

Performance Since Investment

Weekly Values since inception

4/15/06coleman new investment date11/24/06mid cap as of Monday's close (4/9)

Security3/24/043/27/044/3/044/10/044/17/044/24/045/1/045/8/045/15/045/22/045/29/046/5/046/12/046/19/046/26/047/3/047/10/047/17/047/24/047/31/048/7/048/14/048/21/048/28/049/4/049/11/049/18/049/25/0410/2/0410/9/0410/16/0410/23/0410/30/0411/6/0411/13/0411/20/0411/27/0412/4/0412/11/0412/18/0412/25/041/1/051/8/051/15/051/22/051/29/052/5/052/12/052/19/052/26/053/5/053/12/053/19/053/26/054/2/054/9/054/16/054/23/054/30/055/7/055/14/055/21/055/28/056/4/056/11/056/18/056/25/057/2/057/9/057/16/057/23/057/30/058/6/058/13/058/20/058/27/059/3/059/10/059/17/059/24/0510/1/0510/8/0510/15/0510/22/0510/29/0511/5/0511/12/0511/19/0511/26/0512/3/0512/10/0512/17/0512/24/0512/31/051/7/061/14/061/21/061/28/061/31/062/4/062/11/062/18/062/25/062/28/063/4/063/11/063/18/063/25/064/1/064/8/064/15/064/22/064/29/065/5/065/12/065/19/065/26/065/31/066/2/066/9/066/16/066/23/066/30/067/7/067/14/06