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Undergraduate Student Managed Fund December 2010 IAB Presentation

Interim Report

Investment Advisory Board

December 1, 2010

Undergraduate Student Managed Fund December 2010 IAB Presentation

Presentation Overview

I.
Undergraduate Managers

II.
Investment Objective and Philosophy

III.
Investment Strategy

IV.
Investment Process

V.
Economic Outlook

VI.
Portfolio Overview



Undergraduate Student Managed Fund December 2010 IAB Presentation

Undergraduate Managers

Officers:


Jonathon Jenson, Lead Manager


Geoffrey
Jou
, Portfolio Manager


Brandon Singer, Treasurer

Managers:


Eric Barnhart


Emily Donohue


Gregory
Fabso


Michael Ford


Benjamin
Hochron


Alexander
Hul


Joseph Santoro







Undergraduate Student Managed Fund December 2010 IAB Presentation

Investment Objective & Philosophy

Objective:


Outperform the S&P 500 Index


Philosophy:



Bottom
-
up approach looking for value stocks to invest in for a
three to five year time horizon

Undergraduate Student Managed Fund December 2010 IAB Presentation

Investment Strategy

Identify companies with
:


Undervalued stock
price (30%)


Strong
b
usiness
m
odels


C
ompetitive advantage


Consistent earnings


Conservative balance sheet


Quality management


Growth Potential


Undergraduate Student Managed Fund December 2010 IAB Presentation

Industry Groups

Energy, Telecom, and
Utilities


Eric Barnhart


Ben
Hochron


Mike Ford

Healthcare, Consumer
Staples, Consumer
Discretionary


Emily Donohue


Joe Santoro

Financials and
Technology


Geoffrey
Jou


Jon Jenson


Brandon Singer

Industrials and
Materials


Alex
Hul


Greg
Fabso

Undergraduate Student Managed Fund December 2010 IAB Presentation

Investment Process

Managers
evaluate companies in their industries looking for investments that meet SMF
criteria

When a potential investment is found, it is further analyzed by group members covering
the industry

A presentation is given to all managers thoroughly analyzing risks involved in the
investment

The managers will further scrutinize the investment considering given information

Vote (7 of 10 required)

Discuss Capital Allocation

Vote (7 of 10 required)

NO

NO

Need more Information

Undergraduate Student Managed Fund December 2010 IAB Presentation

Valuation Process



10 year Outlook


Discounted Cash Flow Excel Model

Undergraduate Student Managed Fund December 2010 IAB Presentation

Economic Outlook


Quantitative Easing II



Inflation Fears



Currency Problems



World Issues



Undergraduate Student Managed Fund December 2010 IAB Presentation

Unemployment Rate

Undergraduate Student Managed Fund December 2010 IAB Presentation

Economic Outlook: Conclusions


Look for companies with:


Exposure to emerging markets


Strong Balance sheets


Minimal Interest Rate risk


Commodities exposure

Undergraduate Student Managed Fund December 2010 IAB Presentation

Portfolio Approach


Seek to take positions at 5% or 7% depending on strength and
growth of company



5% position:

Core companies

Strong fundamentals



7% position:

Higher upside

Trading at a substantial discount to intrinsic value


Undergraduate Student Managed Fund December 2010 IAB Presentation

Portfolio Breakdown

Undergraduate Student Managed Fund December 2010 IAB Presentation

Equity Portfolio Breakdown

Noble Corp

19%

Medtronic, Inc

14%

Microsoft Corp

14%

Lockheed Martin
Corp

19%

Pepsico, Inc

20%

America Movil

14%

November 30, 2010

Undergraduate Student Managed Fund December 2010 IAB Presentation

Individual Stock Performance

Undergraduate Student Managed Fund December 2010 IAB Presentation

Portfolio Performance


Undergraduate SMF portfolio has
outperformed

the
SPY by
3.08% (308 BPS)

Undergraduate Student Managed Fund December 2010 IAB Presentation

Risk Management



Position Overview


Monitor positions weekly


Look at economic factors and company/industry news that may
change investment strategy



Stop Loss


3
0% on all positions


Undergraduate Student Managed Fund December 2010 IAB Presentation

Going Forward


Search for undervalued companies and allocate capital
into un
-
invested sectors



Monitor portfolio



Reach the goal of investing in 12
-
15 positions



Stay alert for economic developments

Undergraduate Student Managed Fund December 2010 IAB Presentation

Lessons Learned



Teamwork



Responsibility



Research



Alternate Perspectives

Undergraduate Student Managed Fund December 2010 IAB Presentation

Acknowledgements


Pat
Terrion


Dr.
Chinmoy

Ghosh


Investment Advisory Board


IAB Advisors


UConn Foundation


Appendix

Sector Overviews

Positions

Undergraduate Student Managed Fund December 2010 IAB Presentation

Energy


Interest rates are kept at historic lows and money is pumped into the system energy prices
will continue to inflate.


Emerging markets such as China and India continue to grow and will create strong oil
demand


Reserves that are harder and more expensive to extract become more economically
feasible with higher oil prices


Oil and gas equipment and service providers will greatly benefit



The increased demand for their services will give them pricing power allowing for
significant profits.


Due to the recent oil spill in the Gulf of Mexico many drilling companies can be bought
at a significant discount to what they are worth.



Current Holdings: NE


Undergraduate Student Managed Fund December 2010 IAB Presentation

Healthcare


Industries include facilities, managed care, pharmaceuticals, and products and supplies


Effected by economic downturn and uncertainty of impact of healthcare reform


Pricing pressure and heightened regulations caused by healthcare reform likely to be more than
offset by rise in number of people insured and decline in uncompensated care


High level of uninsured has lowered revenues across industries


Facilities: highlighted by near all
-
time low levels of
capex
, rising uncompensated care


Managed care: highly volatile due to uncertainty regarding healthcare reform


Pharmaceuticals: high growth in emerging markets


Medical device market


Extremely favorable demographics, including rising age of population and prevalence of
obesity


Volume growth held down by low levels of hospital
capex
, should rebound as economy
recovers


Current Holdings: MDT


Undergraduate Student Managed Fund December 2010 IAB Presentation

Technology


Technological innovation is a key driver for economic growth and sustainability
of consumer demand.


Continues to evolve through the innovation and novelty of cloud computing,
data storage, and information technology services The success of technological
devices is heavily correlated with the volume and


Pace of PC sales which has grown 7.6% during the third quarter of 2010
compared to the prior year.


Less volatile in the current slowed economic climate relative to the technology
bubble in the early 2000s.


The Emerging markets have provided opportunities for application software and
information technology to expand its customer base.


Current Holdings: MSFT

Undergraduate Student Managed Fund December 2010 IAB Presentation

Consumer Discretionary


Non essential goods and services


Pro
-
Cyclical


Concern because of stagnant unemployment at 9.6% and
weakening GDP and sector growth


Retail sales rose 1.2% in October


highest they’ve risen since
march


fourth month in a row they’ve risen


Increases in retailer profit due largely to cost cutting initiatives


Good holiday season outlook


Current Holdings: None

Undergraduate Student Managed Fund December 2010 IAB Presentation

Industrials


Pro
-
cyclical
and has increasingly grown more reliant
on
emerging
markets


The Federal Reserve is keeping interest rates artificially low to promote
investment and economic expansion


-
Plan
will face significant difficulties


Industrial
stocks will be among the most
vulnerable if the economy weakens
further


Growth
in countries like China and India will continue as those countries become
more developed and their citizens convert to a higher standard of living


More
development will lead to greater demand for the products in this sector.


D
efense
sub
-
sector has been an attractive area for value investors



Current Holdings: LMT


Undergraduate Student Managed Fund December 2010 IAB Presentation

Consumer Staples


Subsectors:


Food and Beverage


Personal and Household Products


Historically consistent demand for consumer staples


Important for companies to focus on improving demand and
controlling costs


Importance of adapting to changing consumer tastes


We are seeking stable companies which have a loyal customer
base and are able to adapt


Current Holdings: PEP


Undergraduate Student Managed Fund December 2010 IAB Presentation

Basic Materials


Will
be affected by inflation and global economic growth


Long
-
term
prospects for this sector remain strong


-
Inflation
in China and the sovereign debt crisis in Europe raise questions about short
-
term


results


US auto and construction industries have historically been large purchasers of
materials


-
These
industries have been severely effected in the economic downturn and we think that


US
demand will be slow to return to pre
-
recession levels


Sector
has seen a significant run
-
up in late summer and early fall in anticipation
of
QE2


Companies
in the basic materials sector are price
-
taking firms with
undifferentiated
products


-
Susceptible
to
competition


Current Holdings: None

Undergraduate Student Managed Fund December 2010 IAB Presentation

Financials


Financial markets appear to have recovered from the lows of 2008 and 2009:


Mortgage loan delinquents have trended downward


Credit spreads have narrowed substantially


Equity markets have rebounded significantly since March 2009


However…


Commercial real estate impairments continue to be problematic


New regulatory issues pertaining to the financial industry creates future uncertainties


Extended periods of low interest rates could pose challenges to insurers



As of now, the Undergrad SMF has
not
invested in any financial firms because of our limited ability to
understand exposure to risky assets and true value of certain assets on balance sheet



As of now, we have reviewed the following companies:


Property and Casualty Insurers: Progressive Corp, Fairfax Financial, Berkshire Hathaway


Comments
: Exhibit disciplined underwriting, strong investment return, and sound management


Life Insurers: MetLife, Prudential, Sun Life Financial


Comments
: International presence, attractive products, strong hedging programs
in place to help reduce capital market exposures

Current Holdings: None

Undergraduate Student Managed Fund December 2010 IAB Presentation

Utilities


The energy and gas utilities have been growing slowly over the past few years with growth coming
from mergers and acquisitions.


Sales, operating and net income declined since 2006 due to the overall downturn in the market, but
the sector has been experiencing a slight rebound in 2010.


The federal stimulus package has been supporting renewable energy and smart grid projects,
resulting in a record expansion of wind power capacity.


We expect overall demand to increase in the future as deregulation, technology and the resulting
demand from customer choice will gradually lead to a more competitive market.


Despite the challenges of bad debt expenses and high unemployment, residential and commercial
customer growth usually remains positive throughout the entire economic cycle, helped by population
growth.


A return to continued historically high energy and natural gas prices could hurt utility companies.


The regulatory environment is a key factor that determines the utilities' ability to make new
investments, earn a fair return, and sets the level at which the company will finance externally.


Current Holdings
:
None


Undergraduate Student Managed Fund December 2010 IAB Presentation

Telecom


High investment in networks to keep up with the changing technology


Strong consumer demand for faster and more data
-
oriented products.


Heavy competition for customers


High debt in capital structure


Strong growth in emerging markets


Mobile phone business unit often subsidizes land line development


Current Holdings: AMX


Position Overviews

Undergraduate Student Managed Fund December 2010 IAB Presentation

Noble Corp (NE)


Active expansion of worldwide offshore drilling capabilities through acquisitions and
deployment of assets in important geological areas. The Leviathan and Tamar prospect have
spurred hopes of a gas Klondike in the Eastern Mediterranean. NE owns approximately 40%
of each.


Maintains safety record that consistently outperforms the offshore drilling industry sector.


Liquidity and financial strength may create potential acquisition opportunities.


We saw the drilling ban in the Gulf of Mexico being unsustainable and knew Noble would
benefit from the lifting of the ban.


Intrinsic Value: $58
-
$62


Undergraduate Student Managed Fund December 2010 IAB Presentation

Microsoft (MSFT)


Largest independent maker of software


About 90% of the world’s PC’s run on Windows Operating System


Strong increases in revenue during 2010


Expansion of Windows 7 Operating System


Consistently investing in R&D: 2010, 2009, and 2008, internal R&D was $8.7 billion, $9.0 billion,
and $8.2

billion respectively


Cloud Computing


Expansion of their Entertainment & Devices business segment


Windows 7 Smart Phone


Kinect

for Xbox 360


Undergraduate Student Managed Fund December 2010 IAB Presentation

Lockheed Martin (LMT)


Lockheed Martin is one of the largest defense contractors in the world serving the U.S.
Government as its primary customer.


Four key businesses are in Aeronautics, Electronic Systems, Information Systems and
Global Services, and Space Systems.


F
-
35 Joint Strike Fighter is the future combat aircraft for the U.S. military and other
foreign nations.


Defense spending has increased dramatically over the past decade because of
Iraq/Afghan wars, global terrorism, and cyber threats but has slowed recently



Share buyback program and seven years in a row of raising dividend at least 10%


Undergraduate Student Managed Fund December 2010 IAB Presentation

America
Movil

(AMX)


America
Movil

is the leading provider of telecommunications services in Latin America, and the 4
th

largest in the world in terms of equity subscribers.


An integrated wireless and wire line company offering various communication services, data
services, and bundled packages.


60% of their revenues come from wireless services, 38% wire line, and 2% from the integrated
cable service
PayTV
.


Currently have about 267 million subscribers in 19 countries


Own America’s largest prepaid phone service, the
TracFone



The recent acquisition of
Carso

Global Telecom enhances their network and puts them in great
position to expand rapidly in Latin America over the next few years.


Being the leader in the emerging economy will be the catalyst to their future success and stock
appreciation.


Undergraduate Student Managed Fund December 2010 IAB Presentation

Pepsi Co (PEP)


Global manufacturer, distributer, marketer of food and beverages


Has 19 mega brands that generate over $1 B of revenue each year


Mountain Dew, Lay’s, Gatorade, Tropicana


2009 Sales: 52% US, 48% outside


63% Food Sales, 37% Beverage sales


Large Distribution Network


Large R & D focus allows PEP to adapt to consumer preferences


Acquired bottlers


Future volume growth in emerging markets


Undergraduate Student Managed Fund December 2010 IAB Presentation

Medtronic (MDT)


Largest medical device maker in terms of market capitalization


Six operating segments include CRDM, Spinal, Cardiovascular, and others


CRDM is the largest, includes 48% market share of ICD’s


$15.8 billion in revenue in 2010


$3.16 EPS, P/E of approximately 10.60


Recent acquisitions and high R&D allow for continued innovation in highly competitive
market


Settled recent lawsuits for $268 Million, depressing profits