Lessons Learned

Portfolio & Hedge Fund Construction

Disclaimer

This is not intended to be a condensed outline of the course, but simply what I took as key takeaways. In some courses there are many areas discussed that aren’t contained in these slides, as they are items I was already familiar with and didn’t feel the need to document or felt they wouldn’t be useful to me in my current career. I think of these as my “cheat sheet” of material that can help me in my current & future roles and are DRAFT…like Google’s Beta are subject to change – Matt Crane

Johnson, Stafford. (2011). Course presented on Portfolio & Hedge Fund Construction. Xavier University, Cincinnati, OH.

Equity Screen – 1

Companies with the potential for consistent earnings and dividend growth without high volatility

• Market Cap: >= $2.0B • P/E (TTM Intraday): =< 20• Book Value Growth (5-Yr avg): >= 5%• EPS Growth: 5-Yr Hist: >= 10%• EPS Growth (Proj 5 Yr): >= 10%• Ret. on Equity (TTM): >= 20%• Beta: =< 1.25• Div. Growth Rate (5-Yr Avg.): >= 5%• Div. Cvg. (EPS Next Yr / IAD): >= 3

Equity Screen – 2

Companies have above-line growth rates but below-line valuations

• Price/Sales Ratio: =< 1.5

• Vol. (90-Day Avg.) : >= 50K

• Price/Book Ratio: =< 2

• EPS Growth (Proj. this yr vs. last yr): >= 15%

Equity Screen – 3Companies that have demonstrated positive earnings growth over the

longer term, medium term and shorter term time spans along with positive projections for the future

• EPS Growth (Last Qtr. vs. Same Qtr. Prior Yr): >= 0%• EPS Growth (Proj. This Qtr. vs. Same Qtr. Prior Yr): >= 0%• EPS Growth (TTM vs. Prior TTM): >= 0%• EPS Growth: 5-Yr Hist.: >= 20%• EPS Growth (Proj. 5 Yr): >= 0%• EPS Gwth. (Proj. This Yr vs. Last Yr): >= 0%• Vol. (90-Day Avg.) : >= 50K• 30-Day Analyst Consensus (Up): >= 0• Pos. Earnings Surprises (Last 90 Days): >= 0%

Equity Screen – 4

Identify large companies that still have the potential for rapid earnings growth

• Market Cap: >= $10.0B • EPS Growth (Proj. 5 Yr): >= 20%• Consensus Rec. (Current): Buy or better

Equity Screen – 5

Identify with the potential for rapid earnings-per-share growth over the next five years.

• PEG Ratio: =< 2• EPS Growth (Proj. 5 Yr): >= 20%• Operating Margin (TTM): >= 20%• Return on Equity (TTM): >= 20%• Debt to Capital: =< 40%• Revenue Growth (Last TTM vs. Prior TTM): >= 15%

Equity Screen – 6

Looks for stocks that have a high ROE and the potential earnings growth likely to help sustain those returns.

• EPS Growth (Next Yr vs. This Yr): >= 15%• EPS Growth (Next 5 Yr): > 15% and < 35%• EPS Growth (This Yr vs. Last Yr): >= 15%• Rtn on Equity (TTM): > 30% and < 60%

Equity Screen – 7

Looks for stocks that the Street has not found but will soon.

• P/E (Est Next Year): <= 15• EPS Growth (Next Yr vs. This Yr): >= to 10%• EPS Growth (Next 5 Yr): > 15% and < 35%• EPS Growth (This Yr vs. Last Yr): >= 10%• Est. Analyst Coverage (This Yr): > 0 and < 3

Equity Screen – 8

Stocks whose earnings growth, sales growth and return on equity rank at the top of the stock market.

• Market Cap: >= $500M• EPS Growth (Last TTM vs. Prior TTM): Highest 20%• EPS Growth (5-Yr Hist): Highest 20%• Rev. Growth (Last TTM vs. Prior TTM): Highest 20%• Ret. on Equity (TTM): Highest 20%• PEG Ratio: =< 2• EPS Growth (Proj. 5 Yr): Highest 20%

Equity Screen – 9

Find strong companies that are trading at discounts to their growth rates.

• Stock Price: >= $5.00 • P/E (This Year - Est.): =< 40• EPS Growth (5-Yr Hist): >= 20%• EPS Growth (Proj. This Yr vs. Last Yr): >= 20%• Vol. (90-Day Avg) : >= 50K• Zacks: Buy• EPS Growth (Proj. 5 Yr): >= 20%• PEG Ratio: Lowest 20% for industry

Equity Screen – 10

Identify companies with the potential for consistent earnings and dividend growth without high volatility.

• Market Cap: >= $2B• P/E (TTM Intraday): =< 20• Book Value Growth (5-Yr Avg.): >= 5%• EPS Growth (5-Yr Hist): >= 10%• EPS Growth (Proj. 5 Yr): >= 10%• Ret. on Equity (TTM): >= 20%• Beta: =< 1.25• Div Growth Rate (5-Yr Avg): >= 5%• Div Cvg. (EPS Next Yr / IAD): >= 3

Creating an Equity Fund in Bloomberg

• Create a Benchmark to compare your fund to (PRTU)• Create a Portfolio (PRTU)

– Allow history– Link to prior Benchmark– Add equities at today’s date, then again at some point in history

(e.g. 1/2/2002)

• Create an index in CIXB to create the history for the portfolio– It runs that as a report (RPT)

• Import that history to the portfolio (PRTU)

Analyze an Equity Fund in Bloomberg

• From Portfolio (PRTU), run historical analysis (HFA)