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ANNUAL REPORT 2014-2015 Academic Year
contents UPDATE FROM THE DEAN 1 MEMBERS TRAVEL NATIONWIDE 2 FUND FACTS 3 FUND VALUE 4 CHIEF INVESTMENT OFFICER REPORT
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CHIEF ECONOMIST REPORT 7 IT AND TELECOM SECTOR 9 ENERGY AND UTILITIES SECTOR 11 FIXED INCOME SECTOR 13 FINANCIALS SECTOR 15 HEALTHCARE SECTOR 17 ALTERNATIVES SECTOR 19 CONSUMERS SECTOR 21 INDUSTRIALS AND MATERIALS SECTOR
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green and gold fund
update from the
DEAN
ERIC JACK, Ph.D. DEAN, COLLAT SCHOOL OF BUSINESS As Dean of the Collat School of Business, I want you to know how proud we all are of the many accomplishments of our student-managed Green and Gold Fund. In these remarks, I focus on three areas: direct impact on student scholarships, experiential learning, and successful student outcomes upon graduation. First, this year the fund continued to demonstrate its direct positive impact on student scholarships. As a direct result of the Fund’s successful growth strategies, we were able to withdraw approximately $100,000 that is being used to support scholarships for students across our school. Despite these financial disbursements, the fund balance remains at approximately $525,000. Second, we know that experiential learning is a key distinguishing feature of this student-managed investment fund. So, this year, we are especially proud of our student team that participated in the Chicago Mercantile Exchange Financial Challenge, which is an international competition including 503 teams from 226 universities and 37 countries. Our Green and Gold Fund team placed second in this challenge internationally and first in North America. Finally, as we focus on student retention and positive outcomes upon graduation, we are extremely pleased that 100% of the graduates of the Green and Gold Fund this year are either going on to graduate/PhD studies or have successfully found full-time employment in prestigious corporations such as Regions, Protective Life, GE, and Iberia Bank. So, we salute the accomplishments of our student-managed Green and Gold Fund and we look forward to even more stellar performance and results in the future. green and gold fund
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members travel
NATIONWIDE
CHICAGO, IL
NEW YORK CITY, NY
CHARLOTTE, NC
TUSCALOOSA, AL
NEW YORK CITY, NY
CHICAGO, IL
QUINNIPIAC G.A.M.E. FORUM
CME FINANCIAL CHALLENGE
TUSCALOOSA, AL
CHARLOTTE, NC
(GLOBAL ASSET MANAGEMENT EDUCATION)
CAPSTONE STUDENT INVESTMENT CONFERENCE
(CHICAGO MERCANTILE EXCHANGE)
CITCO COMPANY VISIT
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D FACTS T O T A L
100% 48 12
MEMBERS
green and gold fund
JOB & INTERNSHIP PLACEMENT RATE FOR SPRING 2015 FUND GRADUATES
TERMINALS
W I T H 10 0 % O F F U N D M E M B E R S BLOOMBERG CERTIFIED
2
ND PLACE AMONG 503 TEAMS IN THE WORLDWIDE
CME
FINANCIAL CHALLENGE
TEAM MEMBERS: DANIEL SANABRIA, BRENT DONELSON, AND ROBERT MANN
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FUND VALUE green and gold fund
SECTORS
$
CONSUMER
HEALTHCARE
ENERGY/UTILITIES
ALTERNATIVES
TELECOM/IT
INDUSTRIALS/MATERIALS
FINANCIALS
FIXED INCOME
$71,055
$38,889
$36,300 $50,194
$64,999 $40,540 $57,914
$155,968
$
$
TOTAL FUND VALUE
$547,904
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Chief Investment Officer Report
SHANE THOMPSON, CHIEF INVESTMENT OFFICER shanet@uab.edu The Collat School of Business Green and Gold Fund has made enormous progress since its inception in late 2006. We made it through the Global Financial Crisis with stellar returns, had a new wave of analysts/executives each year, and watched our fund’s value grow in its success and monetary value. The past two years have seen a restructuring of the fund’s oversight and views, and I am very thankful to have been a part of this movement. It has been a chance for students to gain a stronger relationship and educational foundation with key faculty members. Personally, this is what makes the Collat School of Business Green and Gold Fund so great; we have a wonderful faculty, talented students, and the means to achieve results. Our faculty advisor, Dr. Rauterkus, is instrumental in our students’ investing foundation and how to approach portfolio management. He has instilled the technical aspects and assumptions involved in valuations as well as how to pursue certain qualitative information. Based on his encouragement, the fund has put forth a large effort to become more active shareholders by personally voting on numerous proxy statements and attending shareholder meetings were applicable. He has
elevated the expectations for our fund and executives, which is a challenge for all of our members. These expectations will not only benefit our students by showing them what to expect in an analyst role but also benefit our fund in the long run because the holdings will have endured thorough analysis before any transaction occurs. The Green and Gold Fund will be nearing its ten-year anniversary soon, and I am ecstatic to see its continued progression. The landscape of investing has been slowly shifting and has produced a different kind of investing environment. The days of “easy” large returns have passed, which has led to managers under-performing their benchmarks and a large influx of investors indexing for consistent returns. Although a shift is apparent, the Green and Gold Fund has a strong foundation and will continue to teach investing based off methodical valuation techniques. Often these topics can be ambiguous, and the Green and Gold Fund has continued to provide an environment for students to learn about security valuation, portfolio management, and the finance industry. Throughout this year, we have had industry professionals and CFA Charter holders
from Warren Averett Asset Management, Vulcan Value Partners, Iberia Bank, and Regions share their experience and knowledge with our members. To build on this further, select fund members were able to travel to New York City during March 2015 to attend the Quinnipiac G.A.M.E. Conference to network/share the Green and Gold Fund with other students and continue to gain knowledge from exclusive professionals. We have been granted these wonderful opportunities, and it will be exciting to see the increased exposure our students gain further into 2015. The years continuing since the Global Financial Crisis have been quite interesting, and I am sure we will continue to feel the ripple effect. Some factors that have affected our fund are the low interest rate environment, oil supplies and demand, the dollar’s strength, and booming international economies that we have not taken advantage of yet. The current interest rate environment has affected our fixed income yields, and we have seen impacts on our Financial sector holdings based on their portfolios of rate sensitive assets. However, our Chief Economist, Robert Mann, has kept the fund informed based on Federal Reserve meetings, and we have been able to
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restructure our portfolio for a more optimal duration in preparation of interest rate hikes. Everyone is feeling the effects of crude oil prices and the increasing supply/ reserves, and we are not immune to this. We feel our holdings are established companies in this industry and will show their value in the future. There was so much
volatility in the market that it brought difficulty finding companies of value that would also be able to survive the current crude oil price decline. There are many opportunities outside of North America in emerging markets, and we cannot wait for access to that growth through ETFs and, therefore, capitalize on it in the future. As mentioned earlier, our fund underperformed with a return of 4.28% without factoring in our withdrawals. Even though these results are not ideal, we had positive
growth, and we withdrew close to $100,000 from our fund this year to disburse for the 2014 and 2015 Finance Department scholarships. The fact that our returns circulate back to UAB students is what sets our fund apart from others and makes it so rewarding. The framework of the Green and Gold Fund lets the students invest in themselves and other UAB students, which has given our members the motivation to continue improving our portfolio. There has been plenty of growth in other aspects of the Green and Gold Fund besides what I have already mentioned. Our Chief Marketing Officer, Alicja Foksinska, has done a phenomenal job of marketing the Green and Gold Fund across campus, the country, and the entire world. She has redesigned our website to be more user friendly and shared our information via social networking websites. Our Facebook page has seen a 65% increase in views since last year, and each post will reach approximately 4,000 people. These views come from a variety of states and nations including Ecuador, Turkey, and New Zealand to name a few.
Besides spreading information about our fund via social networking sites, we can share our fund through our students who showcase the quality of UAB and themselves. Three of our fund members participated in the CME Financial Challenge, which was a worldwide competition including 503 teams from 226 universities and 37 countries. Our team placed second in this challenge and first out of the universities in the USA. UAB’s team was invited to the CME Group’s Chicago headquarters to receive their award and network with the top three finishers as well as the CME Group’s top management. This was a huge accomplishment, and we are very proud to end the semester on such a superb achievement. It has been a gratifying year as CIO, but it is time for another student to fulfill the position for the next year. Our 2014-2015 Energy & Utilities Portfolio Manager, Ben Philips, will be stepping in as CIO for the 2015-2016 term. Mr. Philips has been a member of the Green and Gold Fund since his freshman year at UAB, and we are very excited to see what ideas Mr. Philips has and in what direction he will take the fund. It has been a privilege to be involved with such a wonderful program that teaches valuable skills to students, and I look forward to the accomplishments our fund and our members achieve in the near future.
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Chief Economist Report
ROBERT MANN, CHIEF ECONOMIST mann09@uab.edu The Green and Gold Fund has been positioning itself to counteract ongoing shifts in the international economic environment and policy changes by both the American and foreign governments during the 2014-2015 academic year. American Economic data from the previous year has been mostly positive. The unemployment rate dropped from 6.1% in August 2014 to 5.5% in March 2015 and a 2.4% increase in real GDP for 2014 compared to a 2.2% increase in 2013. Inflation dropped a considerable amount throughout the year, from 1.75% in August 2014 to -0.1% in March 2015. This drop in inflation rates can be largely attributed to the sharp drop in oil prices that occurred in 2015. Despite this large drop in the overall inflation rate, the CPI without Food and Energy has remained steady and the large drop in the inflation rate
does not seem to be a huge area of concern for US policy makers. As these economic numbers improve, the risk to the Federal Reserve of keeping interest rates low increases, and a large area of interest for the fund is when the Federal Open
Market Committee (FOMC) will decide to raise interest rates. The risk of a Federal Reserve rate hike occurring in the near future has been decreasing. Earlier in the year the Federal Funds Rate Future market was pricing in a rate hike in October
2015, while now the Federal Funds Rate Futures are not pricing in a high probability of a rate hike until December 2015. These new events have been guiding Green and Gold Fund activity in the beginning of 2015, specifically in the Fixed Income sector. While domestic considerations are the main driver of Federal Reserve Policy, concerns over foreign markets may be a large contributing factor to the delay in interest rate hikes. The European Union has recently begun an unprecedented Quantitative Easing program in the Euro Zone to address concerns over deflation and the stagnant Euro Zone economies. Deflation has hit the Euro Zone hard, and with it concerns over what affect deflation will have on the future of the Euro Zone. One of the main objectives of the new policies of the European Central Bank (ECB) is to attempt to free up liquidity green and gold fund
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in the Euro Zone countries in order to raise the willingness to lend by European banks and thus increase the inflation rate back up to a stable level. While the inflation rate in the Euro Zone has been below zero the entire 2015 year, it is likely that this is driven in large part by the unprecedented decrease in oil prices. The inflation rate in the Euro Zone has been improving over the recent months, -0.1% in March compared to -0.5% in January, and there is reason to be optimistic that the Euro Zone countries have at least stabilized and will be improving over the coming year. Perhaps the largest economic development of the 20142015 academic year has been the large drop in Oil Prices. The Brent Crude Oil Price has
dropped from $104 a barrel in August 2014 to $61 a barrel as of close on April 19, 2015, with a low of $52 a barrel at the end of January 2015. These low oil prices are unprecedented and are being largely driven by OPEC, in an attempt to squeeze out international competitors in the short run in order to raise prices in the long run. The nature of this huge decrease in prices is an area for concern because OPEC could raise prices just as quickly as they were lowered, and this might cause an oil price shock to European and American economies that would slow down economic growth. The Green and Gold Fund is staying informed on developments in the oil market in order to make the best decisions regarding investing in the Energy and
Consumer Goods sectors as well as all the other sectors that would be affected by a rapid rise in oil prices. The 2014-2015 academic year has seen improvements in economic conditions domestically that will have an impact on Federal Reserve policy making in the year to come. The European Union has also been extremely active by lowering all three of their major interest rates in the first half of the year and starting their Quantitative Easing program in the second half of the year. In order to make the best decisions regarding current and new investment opportunities, the Green and Gold Fund will remain vigilant regarding these new economic developments in the upcoming 2015-2016 year.
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IT & Telecom Sector Report
BRENT DONELSON, PORTFOLIO MANAGER jbdonelson27@yahoo.com The Information Technology sector has kept pace with the broader market; however, the Telecom sector has under-performed with zero growth from September 2014. The holdings in the sector have remained unchanged throughout the Green and Gold Fund annual year of September 2014 to April 2015. The sector currently holds iShare Global Tech ETF (IXN) and iShares Global Telecom ETF (IXP) as core holdings; and Oracle Corp (ORCL), EMC Corp (EMC), and Apple, Inc. (AAPL) as noncore holdings. EMC has been down for the annual year with sluggish results attributed to FX headwinds. It is believed there is more contributing to EMC sluggish performance than v issues. EMC has continued growth in revenue; however, quicker growing expenses are eroding the bottom line. Return on assets and
free cash flows have continued to decrease. Re-evaluation of EMC’s intrinsic value is necessary to determine if it should be a prolonged holding for the Green and Gold Fund. Oracle has kept pace with the broader market. Revenues con-
tinue to increase; however, the increases are primarily attributed to their software segment as their hardware segment revenues continue to decline. EPS has also had a year over year increase. Although Oracle has performed evenly with the broader market, it is also nec-
essary to re-evaluate their value to determine if they should be a continued holding for the Green and Gold Fund. Apple continues to be a stellar performer out-performing the rest of the sector and the broader market. Revenues, earnings per share, and free cash flows continue their year over year growth. This year’s increase in growth is mainly attributed to iPhone sales. Apple continues to be a holding that has done well in the Green and Gold Fund; however, it is necessary to re-evaluate Apple’s position to determine whether Apple can continue the current growth. Cloud computing and cyber security continue to be major trends in the Technology sector. Cloud computing will mainly see growth due to companies’ continued efforts to cut cost in IT spending while increasing overall security. Security will green and gold fund
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continue to be a major investment by all companies in the foreseeable future due to the continued move of services and data into the digital realm. These areas of interest can be a great opportunity for investment. Based upon a neutral outlook on the Telecommunications industry should continue. With the FCC classification of broadband as a public utility and the pending suits against this ruling by major telecom players, the future outcome will greatly impact the telecom industry’s bottom line. Despite this outlook, there still seems to be potential for undervalued companies within the Telecom sector. The fund will continue to screen for potential new investments with-
in this sector. In the spirit of being more active shareholders, the sector was honored in October to give the first proxy presentation to the entire fund based on Oracle’s most recent proxy statement. The sector gave recommendations on how it should vote regarding the election of the Board of Directors, executive compensation, and other stockholder proposals. The sector felt executive compensation was not properly aligned with company performance. Due to this, it voted AGAINST the new executive compensation proposal and voted FOR the stockholder proposals, which proposed various performance metrics to determine executive compensation. The
fund unanimously agreed to follow the recommendations and vote FOR all proposals except the for new executive compensation proposal. Re-evaluation of the current non-core holding and re-consideration of core holds that correlate closer to the S&P sector performance should be the primary concern of the IT/Telecom sector within the Green and Gold Fund. Secondarily, new holds should be screened, reviewed, and valued for possible inclusion into the sector holdings. Technology was overweight by 1.5% while contributing 11.4% of the total fund. Telecommunications was 1.2% underweight while contributing 0.5% of the total fund. Both sectors need improvements to be rebalanced closer to our target allocation rates. Finally, the sector is continually looking for undervalued securities that may provide better returns that our current holdings. Some of these securities are General Communications (GNCMA), HC2 Holdings (HCHC), Atlantic Tele-Network (ATNI), MKS Instruments (MKSI), Diodes, Inc. (DIOD), and Advanced Energy Industries (AEIS). green and gold fund 10
Energy and Utilities Sector Report
BENJAMIN PHILLIPS, PORTFOLIO MANAGER bwphill@uab.edu This past year, the Energy and Utilities sector has reallocated its holdings from a majority of individual stocks to exchange traded funds. This change was necessary due to risk exposure from the volatility in the crude oil market. We were able to sell Occidental Petroleum, sell Power Shares Oil and Gas, and buy Energy Select Sector SPDR ETF. The primary reasons behind each individual sell and buy were a low growth rate for Occidental, high volatility for Power Shares Oil and Gas, and increased diversification with the purchase of the Energy Select Sector ETF The Energy sector as a whole has declined over this past year with up to a 50% drop in the price of crude oil causing an increasing amount of volatility. The fluctuation in the price of oil has caused uncertainty in
the energy market and major declines in oil company stock prices. Although, in the past two months, the dramatic decline of crude oil to 2010 levels has stopped and has started to stabilize according to the international oil benchmark, Brent Crude.
The decline in crude oil price is due to the oversupply of crude oil in the market caused by a combination of low oil demand and oil producers’ unwillingness to cut production. According
to the International Energy Agency, there has been more oil produced than oil demand for four consecutive quarters, which has caused oil to be stored at an increasing rate. The most watched crude oil storage location, Cushing, is at 77% of its capacity levels; comparative storage levels have not been seen since January 2013. This oil surplus is going to cause a relatively low price of oil for years to come. Our Energy sector core holding, Energy Select Sectors SPDR ETF (XLE), was bought early in February 2015 to replace the Power Shares Oil and Gas ETF. We bought XLE in order to have a core holding that covered the entire Energy sector, which reduced our dependence on one subsector, oil and gas services. XLE is primarily composed of large market cap energy companies that are in the sectors green and gold fund 11
of oil production, oil and gas services, and oil pipelines. In order to diversify our sector, we increased the weight of our energy core holding to 22%. Our next holding, Alerian MLP ETF, is structured as a master limited partnership and is composed primarily of pipeline companies. Since pipelines have reduced direct correlation to the price of crude oil, this holding allows us to reduce the volatility and risk exposure created by oil prices. The return from Alerian primarily comes from dividends, and it has been able to outperform our benchmark, Energy Select Sectors SPDR ETF, this past year. Our third holding, Halliburton, is a large oil and gas services company and can provide high returns, but it has increased risk. It has underperformed our Energy Sector core holding this past year. The cause of
underperformance is that the Oil and Gas Services Sector has had a history of underperforming during decreases in crude oil prices and outperforming during times of oil booms. The cyclical nature of this sector is caused by the fluctuation of capital expenditures by oil producing companies. This
cyclical environment has pressured Halliburton to buy out Baker Hughes in a merger deal in order to consolidate market share. This would be advantageous to the company since it would synergize costs and increase its market share in several areas. Both companies’ shareholders have approved the merger and are awaiting
approval by the Federal Trade Commission. Our final holding, Vanguard Utilities ETF, is our core holding for the Utilities Sector. It has exposure to the entire utilities market. It has had mixed returns this past year with a steady increase in value in the fall, but a decline in the spring. This holding gives us low risk and a high amount of diversification. Our main objective this past year was to reduce our risk exposure by increasing our diversification in weighting the majority (65%) of our holdings in exchange traded funds. Because of the uncertainty in the crude oil market, we implemented this strategy, which has enabled us to be in the position to gain from an increase in crude oil prices, but limit our downside exposure if crude oil prices suddenly decline
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Fixed Income Sector Report
MORGAN MACDOUGALL, PORTFOLIO MANAGER mormac@uab.edu During Spring 2015, we witnessed the start of a Quantitative Easing program in the European Union, geared towards stimulating spending in the European economy. We feel the European Union’s sluggish economy will deter an increase in U.S. interest rates over the short run. Moreover, based on recent FOMC minutes from the Federal Reserve, we believe that the increase in domestic interest rates will be timid in the beginning and regimented in an attempt to avoid any un-
wanted economic downturns. As a result, our sector implemented a barbell strategy pegging the two, three, and nine year maturity ranges in an attempt to increase our returns while still managing our interest rate sensitivity. In order to accomplish this strategy, we analyzed individual, investment grade, and corporate bond issues at each of the maturity ranges. When looking at these bonds, we focused primarily on the z-spread, modified duration, convexity measure, and
yield to maturity in order to gain a concrete understanding of their sensitivity to interest rate fluctuations and the premiums they carried. In order to free up capital to invest in these bond issues, we first reevaluated each of our Exchange Traded Fund holdings in an attempt to determine their performance. We concluded that both the Vanguard Short-Term Investment-Grade Fund (VFSTX) and PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (MINT)
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carried high expense ratios and had consistently underperformed their comparative benchmarks. Because of this, we decided to liquidate our positions in these two ETFs to invest the proceeds in individual bonds. Moreover, to keep our sector in line with the Fund’s Investment Policy Statement, we sold shares in both the Vanguard Short-Term Corporate Bond ETF (VCSH) and SPDR Barclays Short Term Corporate Bond ETF (SCPB) such that they made up less than 5% of the
overall fund. Currently, we are in the process of executing the trades for the individual bonds we decided to invest in. Upon doing so, our sector should realize a yield to maturity of over 3.5%, while maintaining a portfolio modified duration of only 2.89 and a same portfolio composite credit rating of A. This is up from the yield to maturity of 1.24% and portfolio modified duration of 2.13 that the sector had before the reallocation.
Moving forward, the plan for our sector is to continue to evaluate our ETF holdings to ensure there are no redundancies and that the performance is adequate relative to our portfolio needs, as outlined in the Investment Policy. Furthermore, our sector strategy will remain focused on identifying and investing in undervalued bond issues; however, we will adjust our maturity ranges based on the change in interest rates we will face. green and gold fund 14
Financials Sector Report
ROBERT GIVENS, PORTFOLIO MANAGER robertmann1990@gmail.com During the year, our team has had two primary objectives: (1) improve the performance of our portfolio and (2) maximize the operational efficiency of the Financials sector. To accomplish these goals, we have not only improved our ability to identify and replace the underperforming companies in our portfolio but also developed a system that will allow the Financials sector to seamlessly transition from one year to the next. When we began in September 2014, we devised a plan to sell our shares of Altisource Residential Corporation (RESI) and Bank of America (BAC), find replacement companies
for each of these holdings, and reallocate the portfolio to optimize the performance of our sector by the end of April 2015. Our team is very pleased to report that we successfully accomplished each of these objectives within our designated timeframe. To begin, we sold all of our shares in RESI, a Real Estate Investment Trust, for it is less than three years old and, therefore, too risky for our portfolio. Subsequently, we sold all of our shares in BAC. Although BAC, one of the “Big Four” banks in the United States, boasted a holding period return of nearly 200 percent since we purchased its shares in November 2011, the company has consistently underperformed our core holding and several banks such as Wells Fargo. After analyzing numerous companies in various industries, we decided to replace BAC with Discover Financial Services (DFS). Despite its poor performance at the beginning of 2015, DFS has considerable growth opportunities as it continues to expand its
global presence; moreover, the company has a distinct business model that sets it apart from its competitors. To optimize our sector’s performance, our team also reallocated our portfolio to maximize our risk-adjusted return. After performing in-depth portfolio analysis, we decided to increase our position in the Financials Spyder (XLF), our sector’s core holding, to nearly 50% of our sector and decrease our position in both Assured Guaranty and Verisk Analytics to improve diversification. With the addition of DFS, our portfolio is in an excellent position to outperform XLF, which also serves as our sector’s benchmark. In addition to improving the performance of our holdings, our team has worked diligently to improve the efficiency of the Financials sector. After two semesters of trial-and-error, we successfully developed a 5-week training process designed to acclimate new analysts to investing quickly and prepare them for success in both the Green and Gold Fund green and gold fund 15
and their future careers in the finance industry. By the end of these five weeks, the analysts have considerable experience using the knowledge they learn in their classes to critically analyze companies both qualitatively and quantitatively. This improvement will help to minimize the negative effects of turnover, allowing for higher productivity year-over-year. During the upcoming academic year, the Financials Sector will be headed by Amanda Viikinsalo, who has been an integral part of our sector’s success.
Amanda’s exceptional leadership skills, strong understanding of the Financials sector, and passion for investing make her well-suited to continue this growth as she and her team of analysts continue throughout 2015. Along with monitoring our current holdings, they will be able to continue to seek an investment fund that both maintains our sector’s diversification and provides potential for higher returns to complement our core holding. Additionally, we have decided that Assured Guaranty is no longer suitable
for the sector’s portfolio; therefore, finding a replacement company will be one of their main objectives. Thank you to all of our analysts: Amanda Viikinsalo, Austin Yost, Boyang Sun, Chase Lewis, Dallas Cantrell, Matt Bush, Miriam Semaan, and Rafael Rondino. All of these students do tremendous work and deserve high praise for their efforts in the Green and Gold Fund over the past year.
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Healthcare Sector Report
WILL DAVIS, PORTFOLIO MANAGER georgewd@uab.edu The developments in the Healthcare sector over the last year have been interesting to say the least. From the release of transformational new therapeutics, to the battle between pharmaceutical giants over the booming Hepatitis market, the relationships between our holdings have developed more similarly to a soap opera than a traditional industrial organization. During the Fall 2014, we decided that our stake in Abbott Laboratories was no longer a lucrative choice for the fund. Also, since we were still overallocated based on the policy statement guidelines, we also sold half of our holding in AbbVie. Each of these decisions is covered more thoroughly in our Winter 2014 Newsletter. As mentioned in our Winter 2014 Newsletter, the largest debate over the future of the sector rested in the hands of the Hepatitis C market share divisions. After Gilead released their record shattering Hepatitis C treatment, Sovaldi, in 2013, the race was on for other biotech and pharmaceutical firms
to reap some of the profits from a previously untapped resource. During Fall 2015, the sector was actively monitoring both the introduction of Gilead’s new Hep C treatment, Harvoni, into the market as well as several other competitor’s offerings. Of
these competitors’ treatments, the one that we watched most closely was Abbvie’s Viekirax (V PAK). With our two holdings entering into direct competition with one another in an attempt to solidify their most profitable market, it was a daily exercise
to keep track of any new developments in order to see which would emerge victorious. During the course of this new fight for Hep C patients, one of the most interesting developments occurred with both AbbVie and Gilead’s attempts to forge new exclusive deals with several large pharmacy insurance benefit providers. The idea behind exclusive deals between insurer and provider is that drug companies are willing to provide their treatments at lower costs to the insurance company on the condition that they will only provide the company’s drug to their Hep C patients. With AbbVie’s V PAK undercutting both Sovaldi and Harvoni, at $83,319 for a 12week treatment, some insurers were more than happy to strike exclusive deals with the firm. However, in the end, AbbVie’s treatment had a critical flaw against its competitors. The V PAK has a significantly lower cure rate than both Sovaldi and Harvoni. This means that benefit providers were struck with the choice of paying a premium green and gold fund 17
for one of Gilead’s offerings or paying slightly less for a less assured treatment. After several months of vehement change surrounding the stock price of both Gilead and AbbVie (change that has yet to regulate), it has become clear to my sector that AbbVie has been unsuccessful at wrestling a large enough portion of the Hep C market from the incumbent Gilead to account for what lies in store for them. With the patent for AbbVie’s Humira, which accounts for over 60%
of AbbVie’s sales, set to expire in 2015, the extended future looks grim for the company. While AbbVie’s current stock performance is indicative of their increased earnings for the segment of the Hep C market, they were able to claim they are much like a star in supernova, set inevitably to implode. With few profitable drugs in their current pipeline and their powerhouse in Humira set to soon vanish, the Healthcare sector decided to sell our entire stake in AbbVie so that we could capitalize on their current uptick
in price. Looking forward, the sector will be underallocated for the first time in over a year. This leaves us with the opportunity to find new holdings and diversify further from the often volatile biotech and pharma markets. With many established sections of the market rapidly evolving and other virgin markets experiencing growing pains, it may be a good time to find a new investment more removed from the volatility of prescription drugs. green and gold fund 18
Alternatives Sector Report
DANIEL SANABRIA, PORTFOLIO MANAGER dsanabria@thetahedge.com Based on the Investment Policy Statement (IPS) the allocation to alternative assets should fall within 0% - 20% range and a target of 10% of the total value of the fund. The market value of the Alternatives sector currently represents approximately 9.3% of the fund and is within the suggested range indicated by the IPS. Regardless of the negative performance experienced during the last semester, we continue to believe the longer-term outlook for the sector’s holdings is positive. Over the past 10 years, the annualized returns for the S&P 500 equity index have averaged 8.01%. Nevertheless, the standard deviation on total returns using monthly values during this period has been 14.76%. For this reason, it has become particularly important for the Alternatives sector of our portfolio to emphasize investments that will diminish the total risk of the fund as a whole and provide returns in a volatile market. The two pillar objectives of our Alternatives sector over the period between September 1, 2015 and April 20, 2015 have
been to (1) provide exposure to investment vehicles that can deliver positive total returns in rising and falling markets and (2) generate returns that have minimal or no correlation to the S&P 500 index.
returns over the last decade. The Alternatives sector continues to view this investment as a core holding of the fund and does not recommend selling this position for the foreseeable future.
In order to accomplish these two objectives, the Alternatives sector holds positions in the following mutual funds:
As core portfolio holdings, ODMAX and GXG represent part of our strategy to diversify through investments in developing markets. ODMAX invests in equity securities of issuers whose principal activities are in developing countries. On the other hand, GXG provides investment returns corresponding to the Colombia Capped Index. The substantial volatility experienced in oil prices over the last year has particularly affected both of these positions. Colombia is one of the world’s top exporters of the commodity. For this reason GXG has experienced a dramatic decrease in share price as a result of the collapse in oil prices. The Alternatives sector is continuing to monitor the movement in oil prices as well as the correlation of both ODMAX and GXG to the S&P 500.
•Permanent Portfolio (PRPFX) •Oppenheimer Developing Markets (ODMAX) •GlobalX InterBolsa Columbia (GXG) •Virtus Dynamic AlphaSector Fund, (EMNCX) The Permanent Portfolio ETF (PRPFX) invests in foreign securities, gold and silver bullion, and foreign real estate and natural resource companies. PRPFX represents a core holding of the Alternatives sector for its investments in a diversified mix of non-correlated asset classes. Although the performance for the fund during the period is 7.91%, the fund has been able to provide consistently strong
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The EMNCX, Virtus Dynamic AlphaSector Fund is a long-short equity fund utilizing a sector rotation strategy that invests in 9 sectors of the S&P 500. In the last couple of years, the management company operating this fund became one of the largest managers of investment products that actively use exchange-traded funds as investment vehicles. The core mission of the Alternatives sector is to reduce the
overall fund’s risk by actively investing in assets with inverse to low correlation to the rest of the portfolio’s holdings. Based on a correlation study of the returns of the holdings in the Alternatives sector versus those of the S&P 500 index over the last year, we continue to believe our existing positions provide diversification benefits to the overall portfolio. Notwithstanding the above, the
Alternatives sector continues to monitor the correlation of its holdings to the S&P 500 as well as how the movement in oil prices is impacting its holdings. Over the past several months, we have also created a watch list of potential investment vehicles, consisting of currencies and total return strategy funds that will bring exposure to non-correlated returns in all market conditions.
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Consumers Sector Report
AUSTIN YOST, PORTFOLIO MANAGER ayost@uab.edu The sector began exploring alternatives to Ford, creating a watch list of companies and narrowing our search down to Michael Kors (KORS). After further research on Michael Kors, we presented a buy presentation to sell the entire Ford position and purchase a stake in KORS and strengthen our ETF holding. After deliberation with the Porfolio Managers and further analysis of KORS, we have decided to change our guidance on KORS, and moving forward, we hope to sell the Ford position and use the funds to buy the necessary Spyder Discretionary ETF (XLY) to comply with the Investment Policy Statement. As of the latest tracker, the Consumer Discretionary holdings comprised 5.27% (its target is 5.76%) of the total fund and Consumer Staples comprised 6.92% (its target is 5.65%) of the total fund. Taking this into consideration, selling Ford Motor Company will help to lower our discretionary holdings, as long as the proper amount of the XLY ETF is purchased. In the discretionary portfolio,
Dollar General (DG) and Whirlpool have been successfully outperforming their S5COND benchmark. Dollar General is continuing store growth with plans to add 730 stores and relocate/remodel another 875 in 2015. DG had 11,800 stores as of January 30, 2015. Dollar General, on average, is currently recovering the investment of a new store in less than 18 months. Dollar General is facing increasing competition from companies like Dollar Tree, Family Dollar, Target, and Wal-Mart; moreover, it is worth noting that Dollar General lost a takeover bid for Family Dollar to a lower bid from Dollar Tree earlier this year. Also, with the large sale of GE’s appliance division to Electrolux, Electrolux now rivals Whirlpool in the appliances market. Whirlpool is the world’s largest appliance manufacturer with around $20 billion in annual sales, operating many renowned brands, such as KitchenAid and Maytag, in over 170 different countries. However, Whirlpool is facing a new threat—Electrolux—with the acquisition of GE’s appli-
ance division, Electrolux now rivals Whirlpool as a much larger threat in the appliances market, as Electrolux plans to continue selling appliances under GE’s recognizable brand. Ford Motor Company is our second oldest and most underperforming security relative to its S&P 500 consumer discretionary benchmark. Ford will give its quarterly earnings call on Tuesday, April 27, with expected revenue of $33.9 billion. The earnings report will also show whether U.S. sales of the F-150 pickup truck line are increasing or whether Ford is still struggling with a 2014 production changeover. Ford’s greatest opportunities still lie in China’s growing car market as they announced a partnership plan with Hafei, which will include a $1 billion investment in one’s of Hafei’s Chinese plants. Lately, low gas prices have pressured Ford to lay off workers in their production of smaller cars and hire workers in plants producing larger SUV’s and the F-Series as consumers move to higher gas usage vehicles amid temporary low oil prices. green and gold fund 21
In our staples portfolio, our XLP ETF is tracking nicely with its S5CONS standard. While PepsiCo started strong back in September, they have begun underperforming the S5CONS and the XLP ETF. Struggling with constant health concerns surrounding many of their soft drinks, such as aspartame and sucralose in their diet sodas, PepsiCo is continuing investment in their alternative juices, food, and snack product lines. Foreign Exchange rates are affecting PepsiCo as well, which is now likely to bring in lower
earnings than was first estimated. Profits of $1.22 billion last quarter are about in line with what was reported in 2014 Q1, and while foreign exchange rates will affect earnings, PepsiCo is raising prices in foreign markets to compete with track inflation. Lastly, Brunswick is carrying the highest return above the benchmark of all the Staples holdings; moreover, Brunswick specializes in entertainment and leisure products and experiences. We expect their growth to continue with their latest acquisition of Aus-
tralia’s BLA, a marine and boating company with a network of original equipment manufacturers through Australia and New Zealand.
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Industrials & Materials Sector Report
ANDREW MILSTEAD, PORTFOLIO MANAGER milste93@uab.edu The Industrials and Materials sector returned 2.92% from April 2014 to May 2015. The lower than average return is linked to the Industrials sector being fairly valued with only small pockets of excess return. The Industrials and Materials portfolio is currently valued at $40,708.77. The sector is underallocated by $6,680.00 from the sale of General Electric during Winter 2014. The sector is indexed to the Industrial Spyder ETF that constitutes 28.29% of the sector and the Vanguard Materials ETF that makes up 15.45% of the sector, which is the most liquid ETF within
the Materials sector. Heavily weighting these ETFs allows the sector to gain a steady return and lower the risk. Individual securities include UPS, Xylem, and Kaiser Aluminum. UPS has surpassed the fund’s stated three-year investment horizon and its target price stated in the buy presentation in 2011. This security has generated a sufficient return for the sector and should be considered for liquidation to purchase a different undervalued security within the Industrials sector. Xylem is an industrial company
focused on solving problems related to water. The company has experienced flat growth within the past year and has surpassed the fund’s threeyear investment horizon. This security has also exceeded the stated target price within the buy presentation from 2012. This security, like UPS, should be reevaluated and considered for a possible sell to invest into a different undervalued security within the Industrials sector. Kaiser Aluminum was purchased only one year ago and has experienced positive growth from February 2015 – April 2015.
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This security was purchased at the right time when aluminum was undervalued and seen to be a promising investment. Kaiser should be held to produce a higher return for the Materials sector over the next year and then be reevaluated. During Winter 2014, the portfolio experienced no restructuring and was left alone after the purchase of Kaiser Aluminum in April 2014. In February of 2015, the Materials sector
was reallocated to abide by the prospectus core/non-core approach by selling part of Kaiser Aluminum and investing in the Vanguard Materials ETF. We used an asset allocation optimizer from Bloomberg to determine the correct weights that would maximize the Sharpe Ratio and provide the most return for the risk we took on. There are several opportunities for this sector going forward in 2015:
•Properly allocate sector from General Electric sell off •Possible sell of UPS and Xylem •Reinvesting within the Industrials sector from the possible sale of UPS and Xylem The overall return for April 2015 to April 2016 should outperform this year’s return if the above opportunities are realized and undervalued securities are found to replace current holdings that could provide the sector with a greater return. green and gold fund 24
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