2019-2020 Portfolio Practicum Report

Portfolio Practicum Report

2019–2020

business.creighton.edu

Anthony R. Hendrickson, PhD

Dean, Heider College of Business Professor, Business Intelligence and Analytics For nearly three decades, the Heider College of Business’ top finance students have invested a portion of University endowment funds through the Portfolio Practicum course. The program is a tremendous learning opportunity for our students, and I am exceptionally proud of our student managers. Investing is never simple. Nor is it straightforward. During these turbulent financial times, it is even more difficult. Still, our students met this challenge, guiding the CUSP Fund to its 2019 year-end value of $8.4 million—84 times higher than its initial 1992 value of $100,000.

Please join me in congratulating the faculty and students for their great success with the Fund.

We wish them the very best in their future finance careers.

PROGRAM HISTORY 28 years ago, the Portfolio Practicum program began with $ 100,000 of University endowment monies. Since then, the Creighton University Student Portfolio (CUSP) Fund has swelled to $8.4 million, and it continues to be a premier experiential learning opportunity for the Heider College of Business’ top finance students.

Creighton’s Portfolio Practicum was born from struggle. Heider College of Business finance professor, Robert Johnson, PhD, CFA®, CAIA, established the program in 1992 as a direct result of his personal experience seeking employment as a college graduate. Says Johnson: “I repeatedly heard during interviews that investment management firms wanted people with some practical money management experience.” Johnson thus established

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the Portfolio Practicum course to give students the industry experience many prospective employers deemed necessary.

At the time, it was the country’s only two-course sequence program in which undergraduate students managed actual money. Since then, Creighton’s Portfolio Practicum has served as the model for numerous other university curriculums and ranks in the nation’s top 20 student-run investment programs. It has enjoyed a remarkable history, with speaking appearances by Warren Buffett and beating benchmarks on a regular basis.

With over a quarter of a century of preparing its students for successful finance careers, Portfolio Practicum has achieved Johnson’s dream of giving graduates a competitive edge in the job market.

Gerald R. Jensen, PhD, CFA

®

Finance Professor, Department of Economics and Finance 2019 was another successful year for the Creighton University Student Portfolio (CUSP) Fund as both the value of the Fund and student knowledge advanced substantially during the year. Fund holdings provided high moments, as we watched Lam Research appreciate by over 125%, as well as low moments, as we witnessed Callon Petroleum fall by 26%. Managing the CUSP Fund, with its many challenges, offered a tremendous practical application of the investment management tools and techniques that the students compiled from our class sessions and their previous courses.

During the year, 20 of Creighton’s top finance majors worked diligently in a concerted effort to meet their fiduciary duty to the Creighton endowment by applying a value-based approach to manage the CUSP Fund. Unfortunately, 2019 was the third consecutive year in which the value premium (the return difference between value and growth stocks) was significantly negative, coming in at -12.14% for the year. In spite of this tremendous headwind, the students were able to maintain their value investing approach and produce a return of 29.4%, falling only slightly short (-1.8%) of matching the performance of our benchmark, the Russell 1000.

It has been a real pleasure working with this year’s group of students to advance their investment knowledge and skills. When I recommend students for acceptance in the course, my main criterion is that they have a passion for investment management. Without that passion, the many hours spent performing intensive quantitative and qualitative analyses would become real drudgery. It was obvious from their engagement in the course and quality of their contributions that the passion for investment management burned bright in this class of CUSP Fund student managers.

Michael L. Green, MBA

Portfolio Practicum Instructor President and Owner, EverGreen Capital Management

The Creighton University Student Portfolio (CUSP) Fund is completing its 28th year. Our first students are nearing or turning 50 about now, and they may well be into the peak of their professional careers. I have had the pleasure of being a part of the Portfolio Practicum class for the past nine years, and it’s been a pleasure to see previous student managers come back to deliver presentations to subsequent Portfolio Practicum classes.

This year’s class has been presented with another unique opportunity to manage the portfolio during one the more interesting times in our history. The onset of the coronavirus epidemic is showing the students how exogenous events can impact financial markets just as much as those born from financial or economic circumstances. It’s a rare opportunity and one that demonstrates the value of the Portfolio Practicum class: students see how the decisions they make can be affected by unforeseen circumstances and events.

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Portfolio Practicum Students Nate Bailey

Jacob Grill

Majors: Finance and Economics

Major: Finance Hometown: Lino Lakes, MN Internships: Verizon Media (Sunnyvale, CA), Pacific Life (Omaha)

Hometown: Springfield, MO Internships: Jupiter Capital, Inc. (Kansas City, MO), Lockton Companies (Omaha)

Michael Carr

Adam Hanna

Majors: Finance and Business Intelligence and Analytics

Majors: Finance and Business Intelligence and Analytics Hometown: Omaha Internships: Broadmoor (Omaha), Lincoln Financial (Omaha), Callahan Financial Planning (Omaha), Mutual of Omaha (Omaha)

Hometown: St. Paul, MN Internships: TD Ameritrade (Omaha), Tenaska Marketing Ventures (Omaha)

Employment: Mutual of Omaha (Omaha)

Jonathan Chinn

Brady Happe

Majors: Finance and Economics

Majors: Finance and Communication Studies

Hometown: Rush City, MN Internships: Union Pacific Railroad (Omaha), Cambridge Advisors (Omaha)

Hometown: Eden Prairie, MN

Employment: First National Bank of Omaha (Omaha)

Employment: Chartwell Financial Advisory (Minneapolis)

Christian Diaz

Caleb Labude

Majors: Finance and Accounting

Majors: Finance and Accounting

Hometown: Manitowoc, WI

Hometown: Woodstock, IL

Internships: Mutual of Omaha (Omaha), Goldman Sachs (Salt Lake City)

Internships: Office of the Treasurer (Chicago), First Data (Omaha)

Employment: Goldman Sachs (Salt Lake City)

Adam Eich

Anna Lillis

Majors: Finance and Business Intelligence and Analytics

Majors: Finance and Marketing

Hometown: Omaha

Internships: Gallup, Inc. (Omaha), TD Ameritrade (Omaha), Verizon Media (Omaha)

Internships: First National Bank of Omaha (Omaha), Mutual of Omaha (Omaha) Employment: Goldman Sachs (Salt Lake City)

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Internships: Staples Inc. (Boston), Focus Financial (Minneapolis)

Hometown: Leawood, KS

Lucas Love

Cale Pleak

Majors: Finance and Marketing

Majors: Finance and Economics

Hometown: Kansas City, MO

Hometown: Omaha

Internships: Rivers Capital Management, LLC (Omaha), American Century Investments (Kansas City, MO)

Internships: CIBC (Chicago), Skyline Advisors (Omaha), RIC Closely Held Businesses (Omaha), Banyan Medical Systems (Omaha)

Employment: Silicon Valley Bank (Denver)

Employment: CIBC (Chicago)

Jared Marr

Connor Sheridan

Majors: Finance and Economics

Majors: Finance and Economics

Hometown: Kearney, NE

Hometown: Shawnee, KS

Internships: Union Pacific (Omaha), Invest Nebraska (Lincoln, NE), McCarthy Capital (Omaha)

Internships: Tenaska Marketing Ventures (Omaha), Wells Fargo (Omaha), Mesirow Financial (Chicago)

Tyler Messenger

Matthew Sherlock

Majors: Finance and Accounting

Major: Finance

Hometown: Council Bluffs, IA

Hometown: Chicago, IL

Internships: CliftonLarsonAllen (Minneapolis), Lutz Financial (Omaha), Barstool Sports (New York City)

Internships: Kirkland and Ellis (Chicago), Skylands Capital (Milwaukee), Northern Trust (Chicago)

Employment: CliftonLarsonAllen (Minneapolis)

Zachary Miske

Jacob Smuda

Majors: Finance and Economics

Majors: Finance and Accounting

Hometown: Wibaux, MT

Hometown: Palos Park, IL

Internships: Self-Employed (Wibaux, MT), State Farm (Omaha)

Internships: York Solutions (Chicago), RSM, LLP (Chicago) Employment: RSM, LLP (Chicago)

Zach Munger

Elias Weber

Major: Finance

Major: Finance

Hometown: Plymouth, MN

Hometown: St. Paul, MN

Internships: Morrie’s Automotive Group (Minnetonka, MN), Valmont Industries (Omaha)

Internships: H.B. Fuller (St. Paul, MN), UBS Group AG (Minneapolis)

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A Year in Review Matthew Sherlock | Tyler Messenger The year began with several challenges for the student managers of the Creighton University Student Portfolio (CUSP) Fund. The CUSP Fund is managed by 20 student managers who cover 11 sectors, with the Russell 1000 as the benchmark. In 2019, the CUSP managers maintained a value and quality tilt due to uncertainty regarding trade issues and fears of an impending recession. However, 2019 was very favorable for U.S. equities, with the S&P 500 posting 26 all-time high closing price levels. For the year, the CUSP Fund underperformed the benchmark by 1.83%; however, sectors such as Health Care and Information Technology contributed very positively to the Fund’s alpha.

The 2019-2020 student managers began preparing for class in March of 2019, with manager interviews and the assignment of a sector to analyze. Preparation continued into the summer as students read the Fisher Investments book relevant for their assigned sector. The Fisher book helped to outline each student’s assigned sector and the investment features within the sector. In addition to the readings, students completed a Bloomberg and Excel benchmark spreadsheet that became the basis of the quantitative analyses used throughout the course.

In order to make appropriate trade decisions, the student managers began the investment process by reading the investment policy statements of the Creighton Endowment and CUSP Fund. The students then commenced conducting research within their respective sectors to identify attractive investment opportunities.

When it came time to choose companies to benchmark, the student managers conducted thorough research and carefully analyzed sectors. The process began with Bloomberg equity screens, which emphasized key quantitative drivers consistent with well-performing stocks. Next, the managers conducted qualitative and quantitative relative value analyses to identify alternative stocks within each assigned sector for potential inclusion in the CUSP Fund. Finally, student managers conducted comprehensive quantitative benchmark reports to select companies that they believed were worthy of further qualitative research. After completing a final SWOT presentation on the qualitative aspects of proposed companies, managers voted on trade recommendations for prospective stocks.

Looking back, the CUSP Fund’s overweight position in Health Care and Information Technology proved to be successful this year, providing a combined total alpha attribution of 3.38%. In addition, the Fund’s position in LAM Research saw significant success, and the acquisition of Skyworks Solutions added a nice performance boost to the Information Technology sector. However, the Fund’s overweight position in Industrials, which was heavily weighted toward Boeing, stunted portfolio performance, in contrast to this sector’s positive contribution to the Fund’s performance last year.

Overall, the CUSP Fund’s 2019 calendar-year performance was exceptional but fell slightly short of benchmark performance. This can be attributed to the Fund tilting toward value stocks with quality features. As interest rates fell in 2019, investors regained confidence in the market, ultimately driving equity prices higher, particularly for some of the more speculative equities. With the presidential election approaching in 2020, investors will likely remain cautious, which is the stance assumed by the CUSP Fund at year end. Overall, the CUSP Fund managers remain optimistic on the continued success of the portfolio heading into the new decade.

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Communication Services Giants Remain Strong Investments Lucas Love | Zachary Miske

Facebook and Alphabet were two of the best communication services companies to own throughout the past decade. Since Facebook’s IPO in 2012 at $38.23, its share price has increased over 500% to a current price of nearly $200. Alphabet has risen over 300% since the beginning of 2010 until the end of 2019.

The student managers believe the ’20s will bring more success for these giants. Both companies have diversified and innovated within the digital advertising space. The market environment will likely see a shifting landscape in the future due to legislation or antitrust actions. However, adaptability has been a strength for both Facebook and Alphabet since inception. Given market conditions and current company standings, the CUSP Fund managers believe Facebook and Alphabet will continue to succeed.

The product portfolio of the two firms is a driver of growth for the foreseeable future. Facebook offers a cornucopia of products, ranging from its flagship social media platforms of Facebook and Instagram to more niche offerings, such as the virtual reality firm Oculus and the messaging application WhatsApp. With over 2.3 billion users of these products, Facebook has the opportunity to cross-promote and sell to a growing market of internet-connected users, as the total of digital users globally accounts for 47% of the worldwide population. Alphabet is also increasingly diversified in its product offerings. The firm owns companies in a complex web of technology industries, such as FitBit in wearables, Android in operating software, and GoogleFiber in optic broadband service operations. Further integration of these products into the Alphabet ecosystem allows for increased user base and retention.

Facebook and Alphabet have also fostered the growth of digital advertising and become leaders in advertising as a result. The Google search engine controls over a third of the global digital marketing sector. The digital advertising revolution is reaching

new markets rapidly, with influence in these newer markets growing closer to domestic levels. The advantages possessed

by Facebook and Alphabet are increasingly durable as well as infinitely scalable. In 2017, over 60% of the domestic market for digital marketing was controlled by Facebook and Alphabet.

The global digital marketing industry lacks participants that are capable of competing with Facebook and Alphabet at the same time that digital advertising has become the most important means of advertising for many firms. Therefore, firms seeking sales growth in emerging markets will utilize global companies with expertise in digital media as the main source of marketing.

Thus, global growth opportunities point to a future of success for these two firms.

Finally, the ability and willingness of Facebook and Alphabet to strategically acquire firms in their pursuit of growth highlights the firms’ attractive future growth prospects. Alphabet has acquired over 200 companies since its inception in 1998 under the Google moniker. One of the most heralded of these acquisitions, YouTube, was acquired for over $1.65 billion in 2006.

YouTube has over 2 billion monthly users, nearly one-third of internet users, all of whom are consumers of Alphabet’s digital advertising business. The acquisition of YouTube characterizes the ability of Alphabet to effectively acquire businesses and integrate them into its enterprise. Having acquired over 80 firms since inception, Facebook utilizes acquisitions to further enhance its product offerings and abilities. With the acquisition of Instagram in 2012 for $1 billion, Facebook was able to build a 30-millionuser platform on Instagram into over 600 million users to date.

Strategic acquisitions, such as the Instagram purchase, remain an important growth factor for the continued success of Facebook into the new decade.

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2019 CUSP Fund Trading Activity PURCHASES:

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Michael Carr | Nate Bailey

Company

Rationale

Facebook Inc. (FB)

Facebook, one of the “Big Four” technology companies, operates as a social media and technology company. Its strong growth and profitability metrics are extremely attractive in relation to its relatively low price multiples. Over the last three years, Facebook has produced 46% growth in revenues and 52% growth in cash from operations, while its PE-to-growth (PEG) ratio of 3.30 suggests this strong growth is offered at a discount. These factors compelled the team to take a position in the company.

Cracker Barrel Old Country Store Inc. (CBRL)

Cracker Barrel is an American chain of Southern country-themed restaurants and merchandise stores in the Consumer Discretionary sector. Qualitative analysis of the firm suggests it is an appealing prospect when considering demographic trends in the U.S. Popular amongst older generations, the team decided that a position in the firm could capitalize on a retiring workforce with more discretionary income.

The firm has produced strong cash flow measures, shown by its 23% CFO-to-assets and 10% CFO growth in the last year.

Amazon.com, Inc. (AMZN)

The team decided to take a position in the technology conglomerate Amazon after thorough analysis of the company’s quantitative and qualitative characteristics.

The managers believe the firm’s tremendous growth prospects, expanding margins and below peak price multiples support the idea that Amazon is a firm to own for the future.

Royal Caribbean Cruises Ltd. (RCL)

Royal Caribbean Cruises is the world’s second largest cruise line operator in the world. Royal Caribbean has seen steady growth in its cash flows. CUSP managers decided to take a position in the company to capitalize on the increasing popularity of cruises and the trend for millennials to choose experiences over things.

A.O. Smith Corp.

(AOS)

A.O. Smith manufactures residential water heaters, as well as large-scale commercial heating systems. While 57% of the company’s sales come from the U.S., the team’s qualitative analysis suggests China is a rapidly emerging market for the firm’s products. As China’s demographics change and consumers begin to move to more urban areas, we expect the demand for water heaters to steadily increase. A.O. Smith also generated 22% free cash flow from its asset investments in the last year.

Belden Inc. (BDC)

Belden designs, manufactures and markets cable, connectivity and networking products. The firm offers a variety of cable ranging from copper to fiber optic and composite cables. Its products are used primarily in industrial, enterprise, broadcast and consumer electronic applications. Along with its attractive valuation, a uniquely attractive quality of Belden is its position to capitalize on 5G roll-out, which will require significantly more cable than 4G. Since it competes in a capital-intensive market, Belden has made strategic acquisitions to diversify its portfolio of products and services.

PURCHASES CONTINUED: Company

Rationale

Cognizant Technology Solutions Corp.

(CTSH)

Cognizant is a customer IT consulting and technology services firm. It focuses on systems development, data warehousing, consulting and business intelligence.

The firm is well diversified within four industry-based segments: financial services; health care; products and resources; and communication, media and technology.

Cognizant has also generated strong sales and CFO growth over the past 10 years; however, growth represents only 21% of the firm’s valuation.

Oracle Corp.

(ORCL)

Oracle is a supplier of software and services for enterprise information management. Through its offering of databases, cloud services and application development, Oracle operates in over 80 countries internationally. Oracle controls the highest market share of database management services at over 40%. Factors that supported a purchase included its strong profitability metrics and high operating margins relative to competitors.

Skyworks Solutions Inc. (SWKS)

Skyworks is a wireless semiconductor company that designs and manufactures semiconductors for use in radio frequency and mobile communications systems.

One of Skyworks’ major partners is Apple, who it is currently working with to prepare for the gradual 5G release. The team decided to take a position in Skyworks, as it felt the company had situated itself in a favorable position through its diversified portfolio of products and strategic relationships with firms like Apple and Intel.

UnitedHealth Group Inc. (UNH)

UnitedHealth Group is one of the largest health care providers in America. The company offers health care-related products and insurance services. The firm has realized a significant improvement in net profit margin and asset efficiency over recent years.

MGM Growth Properties LLC (MGP)

MGM Growth Properties (MGP) is a real estate investment trust that invests in large-scale entertainment destinations and resorts. The team felt MGP’s consistent growth metrics, along with its low price multiples, classified the firm as attractively priced. MGP is one of three positions the Fund holds in the Real Estate sector.

Evercore Inc. (EVR)

Allison Transmission Holdings Inc. (ALSN)

Evercore is a global independent investment banking advisory firm whose services include advising clients on mergers and acquisitions, divestures, restructurings, financings, public offerings and other strategies. The team saw Evercore’s strong growth prospects and high dividend yield, nearing 4%, to be attractive features of the company, as the CUSP Fund is not taxed on dividend income.

Allison Transmission is an American manufacturer of commercial duty automatic transmissions and hybrid propulsion systems. Its products are used in a variety of applications, including on-highway trucks, buses, off-highway equipment and defense vehicles. The team felt that Allison’s financial stability, strong profitability and low relative valuation make it a great value investment and a perfect fit for the CUSP Fund.

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2019 CUSP Fund Trading Activity continued SALES:

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Company

Rationale

Gentex Corp.

(GNTX)

After holding Gentex through 2018, we elected to exit our position due to the firm’s limited product mix and the firm’s sub-par performance. Following a troubling drop in performance leading into the new year, we decided there were stronger positions in the Industrial sector and chose to sell Gentex in favor of those options.

Hain Celestial Group Inc. (HAIN)

Hain Celestial Group is an American food company whose focuses range from foods to personal care products. The company’s performance was diminishing following an announcement in 2018 from CEO Irwin Simon that he was stepping down; the team decided to sell our position.

Affiliated Managers Group Inc. (AMG)

The team exited our position in Affiliated Managers Group after considering the company’s recent performance as well as its comparisons to other firms in Financials. Following a difficult start to 2019, and after assessing the firm’s dwindling asset base, the position was exited.

Transocean Ltd. (RIG)

At the end of 2019, the team decided to exit our position in Transocean. Although the offshore drilling company has a significant breadth of operations, it has a lack of potential in terms of future growth. We therefore decided to exit our position in favor of more appealing options.

Capital One Financial Corp.

(COF)

With significant exposure to the Financial sector, the team elected to sell our position in Capital One in favor of purchases of Cracker Barrel and Facebook.

The team decided that the Fed’s shift to a decreasing interest rate environment warranted a reduced exposure to the Financials sector, and Capital One was deemed to be our weakest Financials holding.

Cambrex Corp.

(CBM)

Cambrex Corporation, a leading small molecule company providing drug products and analytical services, had proved to be a strong investment by the portfolio.

Following Cambrex acquisitions in 2018 and 2019, Cambrex itself announced it would be acquired by an international investment firm, and the team decided to reallocate the funds elsewhere.

Cadence Design Systems Inc. (CDNS)

Cadence, an electronic design and automation software engineering firm, performed exceptionally while held by the Fund. After its strong price appreciation during 2019, the team felt the stock was fully valued, so we sold our holdings in favor of taking a position in Cognizant Tech Solutions, another technology company the team felt had better prospects.

Graphic Packaging Holding Co. (GPK)

After assessment of the portfolio’s overallocation in the Materials sector, we decided to reduce our Material’s exposure by selling our weakest holding in the sector, Graphic Packaging. The team recognized that Graphic Packaging’s stock had appreciated to near full valuation and, in turn, saw Belden as a position offering more opportunities for long-term appreciation.

CUSP Fund Investment Style Jared Marr | Elias Weber

As shown in the bar graph, the CUSP Fund invests in equities with price multiples lower than our benchmark, the Russell 1000. This observation corresponds with the Fund’s value tilt.

Our approach to value investing involves finding companies that have fallen out of favor but still maintain strong fundamental metrics. Since the United States is witnessing the longest bull market in history, value investing has fallen out of favor. The CUSP managers, however, remain confident that, in the long run, investing based on fundamentals will result in the highest possible returns agnostic of market characteristics.

The top-down process of determining new equity investments begins with deciding, at a macro level, relative industry weights, which determines the Fund’s sector exposure. Within each sector, assigned student analysts funnel companies through a broad screening process. The next step involves an in-depth look at the firms’ financial metrics. Value stocks trade at a discount to their counterparts, indicated by lower price multiples. Companies that trade at reduced prices tend to have justified discounts due to company-specific disadvantages. In order to determine true value investments, analysts highlight companies with strong cash flows, efficiency and financial risk metrics. The companies that pass this screen move on to a qualitative assessment involving a SWOT and Porter’s Five Forces analysis. The qualitative assessment is essential to account for the aspects that financial measures do not capture.

It is only after gaining a full image of company operations that the CUSP Fund team determines if a stock merits inclusion in the portfolio.

CUSP managers generally favor equities with higher dividend yields compared to the benchmark. In 2019, the Fund’s dividend yield of 1.86% exceeded the Russell 1000 yield of 1.78%. Targeting higher dividend equities is advantageous since the CUSP Fund receives favorable tax treatment on dividend income. The CUSP Fund is an investing entity for Creighton University’s endowment fund, which provides the Fund beneficial tax treatment on investment income. Therefore, tilting the Fund toward higher dividend equities offers us a relative tax advantage. Beyond the tax-advantage, historical evidence shows that firms paying higher dividends tend to have greater returns and less risk than those with low or no dividend, regardless of the sector or market cap.

The CUSP Fund ensures its value-oriented investment style by managing certain price multiples relative to the benchmark.

Price-to-earnings, price-to-cash flow, price-to-sales and price-to-book are all well below the benchmark averages, which supports our value tilt. Our investment approach focuses particular attention on firms that are able to generate sizable and consistent cash flows yet are selling at a discount relative to competitors. The Fund’s price-to-cash flow ratio is 10.75 versus a value of 15.36 for the Russell 1000, a difference of over 40%. As illustrated in the graph, all four price multiples and the dividend yield support the Fund’s value tilt, which we believe is the optimal approach for long-term investment success.

Relative Value Measures 22.27

18.29

CUSP Fund Russell 1000

15.36

10.75

5.86 4.13 2.76

Price-toEarnings Ratio

Price-toCash Flow Ratio

Price-toSales Ratio

3.52

Price-toBook Ratio

1.86 1.78 Dividend Yield

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Performance Attribution Christian Diaz | Caleb Labude The CUSP Fund’s investment policy statement identifies the Fund’s benchmark as the Russell 1000. Our portfolio attribution analysis evaluates the Fund’s performance relative to the benchmark. The total attribution, the CUSP Fund’s alpha, is separated into sector allocation and security selection effects.

The allocation effect shows how underweighting or overweighting sectors impacted the CUSP Fund’s relative performance, while the security selection effect highlights the CUSP managers’ stock-selection skills.

The table below reports the Fund’s 2019 attribution analysis relative to the Russell 1000. Both the CUSP Fund and the benchmark had extremely positive returns, 29.43% and 31.26%, respectively. The astounding market performance in 2019 was reflected in most sectors, which benefited both growth-oriented and value-oriented portfolios. For 2019, the CUSP Fund trailed the benchmark with an alpha of -1.83%.

The most notable sectors that impacted the Fund’s alpha positively were the Information Technology (IT), Health Care and Communication Services sectors. The IT sector generated a return of 51.82%, which contributed 1.27% to alpha. Health Care provided a total return of 35.83% and contributed the largest component to Fund alpha at 2.11%.

The largest negative contributions to alpha came from the Industrials and Consumer Discretionary sectors at -2.00% and -1.95%, respectively. These results were largely driven by

the extremely poor performance of retailers Ulta Beauty and Capri Holdings and the manufacturer, Boeing.

Overall, sector allocation contributed 0.52% to Fund alpha, but stock selection contributed -2.35%, resulting in the Fund’s total alpha of -1.83%. Overweighting Information Technology and underweighting Energy proved to be effective, as both sectors produced strong allocation effects. Despite the positive decision to underweight the Energy sector, the sector contributed negatively to alpha (-0.14%) due to the extremely poor performance of two of the stock holdings, Transocean and Callon Petroleum. Finally, the decision to forego a position in the Utility sector contributed favorably to Fund alpha in the amount of 0.12%.

Stock selection was extremely favorable for the Health Care and Information Technology sectors, at 2.08% and 0.57%, respectively. The Health Care sector had the largest selection effect with only one company producing negative returns, Pfizer. The Information Technology sector benefited from the Fund’s decision to overweight chip-related stocks. The two other sectors with positive stock selection effects were Communication Services and Consumer Staples, at 0.19 and 0.13%, respectively.

Unfortunately, stock selection for Consumer Discretionary, Financials and Industrials produced very disappointing results, which overwhelmed the positive stock selection effect sectors.

Due to our retail holdings, the selection effect for Consumer Discretionary was the lowest at -1.91%, with Boeing’s performance driving the Industrials sector contribution to a similar level, -1.87%.

2019 CUSP Fund Performance Attribution Sector

Total Portfolio

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CUSP Return

Benchmark Return

Difference

Total Attribution

Allocation Effect

Selection Effect

29.43%

31.26%

-1.83%

-1.83%

0.52%

-2.35%

Consumer Discretionary

13.95%

28.71%

-14.75%

-1.95%

-0.04%

-1.91%

Consumer Staples

25.28%

24.69%

0.59%

0.04%

-0.09%

0.13%

Energy

-3.34%

10.41%

-13.75%

-0.14%

0.34%

-0.49%

Financials

25.72%

31.23%

-5.51%

-0.77%

-0.05%

-0.72%

Health Care

35.83%

21.05%

14.78%

2.11%

0.04%

2.08%

Industrials

14.44%

30.33%

-15.89%

-2.00%

-0.13%

-1.87%

Information Technology

51.82%

49.22%

2.60%

1.27%

0.70%

0.57%

Materials

22.94%

24.84%

-1.90%

-0.28%

-0.12%

-0.16%

Real Estate

17.39%

28.94%

-11.55%

-0.40%

-0.02%

-0.37%

Telecom Services

35.02%

31.69%

3.33%

0.16%

-0.03%

0.19%

Utilities

0.00%

27.56%

-27.56%

0.12%

0.12%

0.00%

Trade Deals Provide a Global Sigh of Relief Adam Hanna | Adam Eich

The détente with China and updated NAFTA agreement have served to stabilize global supply chains and strengthen the U.S.’s position in the international trade market. The Phase 1 deal calls for China to begin purchasing $200 billion of American goods and services on top of its existing $170 billion of imports. The deal seeks to open the Chinese marketplace for U.S. companies by lowering structural barriers. The agreement includes China’s pledge to end pressured technology transfers and competitive currency devaluations while expanding U.S. access to China’s financial services industry. Enforcement now becomes the focus, as Chinese officials have already asked the U.S. to show leniency towards the $200 billion purchase commitment as the spread of the coronavirus has weakened China’s economy.

The CUSP Fund is well diversified across the technology sector with holdings such as Apple, Skyworks Solutions and Micron Technology, which stand to experience significant growth should they gain greater access to the Chinese market.

U.S.-based producers of consumer goods, such as CUSP holdings AO Smith, Molson Coors, Ulta Beauty and PepsiCo, stand to gain from introducing Western products to China’s growing middle class. We also see potential for the Fund’s health care holdings as ResMed stands to benefit from increased access to China, especially as concerns around respiratory health care in China are at an all-time high with the spread of the coronavirus.

We see the USMCA deal as a win for firms across various industries, ranging from automobiles to technology. The revised NAFTA agreement requires automakers to make 75% of a vehicle’s parts in North America and 40–45% of any tariff-free vehicle to come from a factory that pays a minimum of $16 per hour, which will either increase production in the U.S. or force manufacturers in Mexico to raise wages. We see these provisions as safeguards for U.S. manufacturing jobs, which will decrease the uncertainty surrounding the global auto industry and allow companies to better plan for future investments.

Allison Transmissions, a CUSP holding, is the world’s largest manufacturer of fully automatic transmissions for commercial vehicles and is a leader in hybrid-propulsion systems for city buses. Toyota, also a CUSP holding, has significant investments in the U.S. auto industry, shipping nearly 116,000 U.S.-made vehicles to 32 countries in 2018. As trade tensions cool, this increases the value of Allison Transmissions’ and Toyota’s U.S. investments and allows the firms to adopt a long-term vision for future investments.

The deal also provides social media companies such as Facebook, a CUSP holding, immunity from lawsuits related to user content posted on its platforms. In addition, the agreement blocks countries from imposing tariffs or taxing cross-border data transfers, a major win for two CUSP holdings: Amazon.com, Inc. and Alphabet Inc.

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Market Cap Analysis Zack Munger | Brady Happe

The CUSP Fund’s investment strategy is to select a mix of large-cap and small-cap domestic equities that are expected to outperform the benchmark, the Russell 1000. At 2019 year-end, the Fund’s holdings mimicked the variation of market caps for the Russell 1000, with a range from $1.89 billion (Callon Petroleum Company) to $1.30 trillion (Apple).

In comparison, the Russell 1000 holdings ranged from a low of $2.40 billion to $1.30 trillion.

As seen in the bar graph, CUSP Fund’s market cap closely resembles that of the Russell 1000. However, the CUSP Fund’s holdings are skewed toward higher market cap securities; thus, the median market cap for CUSP is $ 27.99 billion compared to the Russell 1000’s median of $10.50 billion. While the CUSP Fund holds a higher proportion of mega stocks relative to the Russell 1000, the mean market cap indicates it has less overall weight allocated to mega stocks. The CUSP Fund’s mean market cap value is $176.63 billion, compared to $198.30 billion for the Russell 1000.

Our team’s investment strategy targets financially stable companies that are dispersed across the market cap spectrum. For example, our exposure to equities like Apple (market cap of $1.3 trillion) and Amazon (market cap of $922.9 billion) align with our focus on larger companies that comprise the backbone of our investment strategy.

In contrast, companies such as Fabrinet (market cap of $ 2.4 billion) and Belden (market cap of $2.5 billion) align with our strategy to target smaller companies with solid growth potential. Our strategy is fiscally responsible but does not limit our team’s ability to take risks associated with financially sound small-cap firms that offer strong growth prospects.

Overall, the CUSP Fund holds 53 different equities, with a relatively higher proportion of large-cap equities. Over 37%

14

CUSP Fund and Benchmark Market Cap Attributes 1,304.76

High

114.2

1,304.76

2.40

Low

1.89

10.50

Median

27.99

198.30

Average

Russell 1000 CUSP Fund

176.63

0

300

600

900

1200

1500

of CUSP holdings are over $100 billion, and 14 companies have market caps exceeding $200 billion, with two companies having market caps greater than $1 trillion. The CUSP Fund, however, is diversely positioned with just over 30% of its holdings having market caps below $10 billion, and six of those companies have market caps below $5 billion.

Market Overvaluation?

Not So Fast…

Cale Pleak | Jonathan Chinn

As this record-long bull market has stretched on, many investing personalities and news outlets have referred to the market as “overvalued.” In fact, even Omaha’s own Warren Buffett, a renowned value investor, has been hesitant to invest his $112 billion cash stockpile, citing “sky-high” stock prices in his 2019 annual letter.1 Many investors refer to the price-to-earnings ratios of large cap indices as evidence of the alleged “overvaluation.” However, investors in general are not paying attention to the justified price-to-earnings ratio, which incorporates interest rates and growth and may offer justification for the lofty market valuations.

The justified price-to-earnings ratio is based on the Gordon model, which estimates a stock’s value by dividing next period’s dividend by the difference in the company’s cost of equity and the projected dividend growth rate. For the justified price-to-earnings ratio, the Gordon model is modified slightly by dividing the left- and right-hand side by company earnings. Therefore, instead of using next period’s dividend, next period’s dividend payout ratio is used. The justified price-to-earnings ratio is then compared against the actual price-to-earnings ratio to determine proper valuation.

Using market data for the S&P 500 and Russell 1000 provided from Bloomberg and Damodaran Online, we derive justified price-to-earnings ratios. In 2019, the dividend payout ratio for the S&P 500 was 50.80%, and Yardeni Research forecasted S&P 500 revenue growth at 4.6% for 2020. Based on an extraordinarily low annual average 5-year US T-bond rate of 1.95%, along with Damodaran’s 2019 implied market risk premium of 5.06%, the cost of equity capital is estimated at 7.01%. Thus, the justified price-to-earnings ratio for the S&P 500 is estimated at 22.02 compared to the year-end 2019 price-to-earnings ratio of 21.39. This implies the market is approximately valued correctly, or maybe even slightly undervalued at year-end.

the Russell 1000 index is 22.26. Here, the justified price-toearnings is roughly in line with the actual price-to-earnings ratio.

It seems that the proclaimed overvaluation is not as significant as the investing media implies. A low-interest, high-growth environment is sustaining justifiable elevated market valuations.

While the justified price-to-earnings ratio is a useful tool, it is based on a relatively simple valuation model. Therefore, the justified P/E can only inform so much about relative market valuations; however, the model does explain market valuations that seem lofty by historical standards.

1. cnbc.com/2019/11/29/buffett-sitting-on-128-billion-raisesquestions-on-market-valuation.html

P/E and Justified P/E for S&P 500 (2015–2019)

S&P 500 P/E S&P J. P/E

30.16

25.22

18.78

20.70

20.54

21.82

21.39 22.02

16.62

11.61

The Russell 1000 is the benchmark index for the CUSP Fund. Using the same estimated cost of equity and Yardeniforecasted revenue growth for the S&P 500, along with the Russell 1000’s own dividend payout ratio, the 2019 justified price-to-earnings ratio is 22.37 for the Russell 1000. For comparison, the year-end 2019 price-to-earnings ratio for

2015

2016

2017

2018

2019 15

Sector Allocation

Real Estate: 3% Materials: 4%

Communication Services: 7% Consumer Discretionary: 12%

Information Technology: 25%

Anna Lillis | Connor Sheridan

During 2019, the CUSP Fund reported the most notable overweight positions in three sectors: Information Technology (IT), Industrials and Materials. Information Technology is most noticeably overweight, reflecting the favorable metrics the student managers identified for this sector. In 2019, this sector alone produced a return of 51.82% and accounted for 12.13% of the CUSP Fund’s total return. The Fund’s next most prominent overweight positions were in Industrials and Materials.

Supporting our overweight position in Industrials is the belief that there are opportunities in the Industrials sector given the prospects for increased infrastructure spending and continued economic expansion. During 2019, the Fund reduced its position in Materials, ending the year with a neutral position in the sector.

On the other end of the spectrum, during 2019 the CUSP Fund maintained underweight positions in Communication Services, Energy and Utilities. The underweight positions in Energy and Utilities are based on the view that, relative to other sectors, these sectors hold less promise for future growth. Our position in Communication Services started the year considerably underweight; however, we added a position in Facebook during 2019 that resulted in the Fund ending 2019 with essentially a neutral position in the sector. Our holdings in the sector performed extremely well during 2019, producing a return of 35.02% and contributing 2.45% to the Fund’s total return. We feel confident in our neutral position in Communication Services, particularly since we believe we hold the leaders in this sector: Alphabet, Facebook, Disney and AT&T.

Sector

16

Consumer Staples: 6%

Sector Allocation

Energy: 3%

Financials: 13% Industrials: 11% Health Care: 15%

Relative to 2018, during 2019 the CUSP Fund reported the largest increase in weights in IT and Communication Services; the largest decreases occurred for Consumer Staples, Health Care and Materials. Consumer Staples started 2019 with a 7.0% weight and ended the year with a 5.2% weight. Likewise, the weight of the Fund’s Health Care holdings fell by approximately 1.5%.

Finally, as noted previously, our holdings in Materials dropped by approximately 2.0%. The student managers believe these changes were warranted by growth prospects for these sectors.

Furthermore, the managers considered the strong political support for efforts aimed at reigning in medical expenses.

Entering 2020, we believe the Fund’s holdings, particularly those in IT and Communication Services, position us well to capitalize on trends in artificial intelligence, cloud computing, big data, streaming services and 5G expansion. Furthermore, the Fund’s holdings in Industrials and Consumer Discretionary are positioned to capitalize on continued economic expansion and increased infrastructure spending.

CUSP Fund

Benchmark

CUSP Over (Under) Weight

Communication Services

7.37%

9.85%

-2.47%

Consumer Discretionary

11.47%

10.25%

1.23%

Consumer Staples

6.16%

6.73%

-0.58%

Energy

2.91%

4.62%

-1.71%

Financials

13.04%

13.28%

-0.24%

Health Care

14.54%

13.83%

0.71%

Industrials

11.09%

9.65%

1.44%

Information Technology

25.09%

21.70%

3.39%

Materials

4.21%

2.84%

1.37%

Real Estate

3.41%

3.77%

-0.36%

Utilities

0.00%

3.19%

-3.19%

CUSP Fund Value at Risk (VaR) Jacob Smuda | Jacob Grill The concept of Value at Risk, better known as VaR, is one rooted in statistics and probabilities. The measure is used by banks and investment managers to assess the risk of individual assets and portfolios. For our purposes, VaR is a great tool to assess the risk of the CUSP Fund.

There are three different approaches used to derive VaR. One method takes historical returns, orders them from best to worst, and assumes that the returns will repeat themselves in the future. Another popular way to find VaR is to use the variance-covariance method. This method assumes stock returns are normally distributed and uses a portfolio’s expected return and standard deviation.

The final approach, Monte Carlo simulation, creates a model that predicts future returns and runs multiple hypothetical scenarios to assess potential loss situations.

CUSP Fund VaR Real Estate: 3.32%

Materials: 2.84%

Communication Services: 9.22%

Consumer Discretionary: 12.47% Information Technology: 28.25%

Consumer Staples: 5.17% Energy: 2.03%

Financials: 10.49%

The VaR model relies on three inputs to formulate a conclusion regarding portfolio risk. The inputs consist of a confidence level, time interval and loss amount. Based on the Monte Carlo approach, the CUSP Fund has a 5%, one-month VaR of 6.5%. This reads as a 5% chance that the portfolio will experience a loss of at least 6.5% in value next month. Our portfolio is constructed with VaR in mind, as we select established companies to represent the greatest proportion of portfolio value. Our approach is to identify undervalued equities while also emphasizing equities that will retain value in the case of an economic downturn or black swan event.

at 14.09%. The top contributing security to the Health Care VaR is ResMed due to its limited product line and our heavy allocation to the stock. The Consumer Discretionary sector’s 5%, one-month VaR is 12.47%, with McDonald’s and Royal Caribbean Cruises being the top contributors.

As shown in the pie chart, the CUSP Fund’s Information Technology sector has the most value at risk. This sector has a 5%, one-month VaR of 28.25%, with Apple and Visa being the top two contributors to the VaR. The Health Care sector has the second highest VaR in the CUSP Fund

VaR has proven to be extremely effective as part of a holistic approach to portfolio risk management. While traditional measures of valuation bring you to conclusions on projected gains in best case scenarios, it is useful to consider the possibility of downside that the VaR model reveals.

Industrials: 11.89%

Health Care: 14.09%

17

2019 CUSP Fund Year-End Holdings Sector

Communication Services

Consumer Discretionary

Consumer Staples

Energy

Financials

a

18

Holding

ALPHABET INC-CL C AT&T INC

Ticker

GOOG

Market Value ($)

CUSP Weight (%)

772,797

9.24

213,923

2.56

Closing Price ($)

Price Changea

1,337.02

53.35%

T

117,240

1.40

39.08

11.01%

WALT DISNEY CO

DIS

285,644

3.42

144.63

48.51%

FACEBOOK INC-CLASS A

FB

155,990

1.87

205.25

3.86

1,044,737

12.50

AMAZON.COM INC

AMZN

138,588

1.66

1,847.84

-3.78%

CAPRI HOLDINGS LTD

CPRI

94,994

1.14

38.15

-42.65%

CRACKER BARREL OLD COUNTRY

CBRL

150,665

1.80

153.74

0.43%

MCDONALD’S CORP

MCD

197,610

2.36

197.61

231.07%

ROYAL CARIBBEAN CRUISES LTD

RCL

173,563

2.08

133.51

15.50%

TOYOTA MOTOR CORP-SPON ADR

TM

160,216

1.92

140.54

24.79%

ULTA BEAUTY INC

ULTA

129,101

1.54

253.14

26.85%

433,174

5.18

MOLSON COORS BREWING CO-B

TAP

92,708

1.11

53.90

-26.10%

PEPSICO INC

PEP

204,322

2.44

136.67

97.34%

PHILIP MORRIS INTERNATIONAL

PM

136,144

1.63

85.09

12.48%

169,993

2.03

CALLON PETROLEUM CO

CPE

37,432

0.45

4.83

-62.18%

CHEVRON CORP

CVX

132,561

1.59

120.51

6.87%

879,235

10.52

BANK OF AMERICA CORP

BAC

200,754

2.40

35.22

46.54%

BRK/B

117,780

1.41

226.50

206.72%

EVERCORE INC-A

EVR

119,616

1.43

74.76

-20.78%

FIFTH THIRD BANCORP

FITB

253,605

3.03

30.74

55.00%

PRUDENTIAL FINANCIAL IN

PRU

187,480

2.24

93.74

5.23%

BERKSHIRE HATHAWAY INC-CL B

Represents the total price change relative to purchase price

Sector

Holding

CERNER CORP

Health Care

MEDTRONIC PLC

Market Value ($)

CUSP Weight (%)

1,180,662

14.12

CERN

211,363

MDT

226,900

Ticker

2.71

113.45

47.43%

158,679

1.90

39.18

22.52%

402,922

4.82

154.97

169.45%

UNITEDHEALTH GROUP INC

UNH

180,798

2.16

293.9

19.82%

996,173

11.91

AYI

124,200

1.49

138.00

-16.41%

ALLISON TRANSMISSION HOLDING

ALSN

111,136

1.33

48.32

2.64%

AMERCO

UHAL

163,482

1.96

375.82

17.12%

BA

228,032

2.73

325.76

164.64%

FEDEX CORP

FDX

78,629

0.94

151.21

-21.66%

SMITH (A.O) CORP

AOS

123,864

1.48

47.64

-2.14%

40.20

27.68%

293.65

153.79%

BELDEN INC

TRTN

166,830

2.00

2,367,451

28.32

AAPL

293,650

3.51

BDC

126,500

1.51

55.00

0.25%

CHECK POINT SOFTWARE TECH

CHKP

193,625

2.32

110.96

24.50%

COGNIZANT TECH SOLUTIONS-A

CTSH

136,444

1.63

62.02

1.66%

CORNING INC

GLW

98,974

1.18

29.11

-8.18%

FN

175,068

2.09

64.84

74.36%

IPG PHOTONICS CORP

IPGP

120,284

1.44

144.92

74.63%

LAM RESEARCH CORP

LRCX

154,972

1.85

292.40

92.03%

FABRINET

MICRON TECHNOLOGY INC

MU

204,364

2.44

53.78

72.18%

MICROSOFT CORP

MSFT

211,318

2.53

157.70

41.34%

MKS INSTRUMENTS

MKSI

123,211

1.47

110.01

44.86%

ORACLE CORP

ORCL

132,450

1.58

52.98

-3.89%

SKYWORKS SOLUTIONS INC

SWKS

169,232

2.02

120.88

21.89%

V

227,359

2.72

187.90

253.94%

VISA INC-CLASS A SHARES

238,180

2.85

ALBERMARLE CORP

ALB

105,908

1.27

73.04

-30.20%

LYONDELLBASELL INDU-CL A

LYB

132,272

1.58

94.48

-10.25%

278,305

3.33

MGM GROWTH PROPERTIES LLC-A STORE CAPITAL CORP VENTAS INC

a

40.60%

PFE

APPLE INC

Real Estate

73.39

RMD

TRITON INTERNATIONAL LTD

Materials

2.53

PFIZER INC

BOEING CO/THE

Information Technology

Price Changea

RESMED INC

ACUITY BRANDS INC

Industrials

Closing Price ($)

MGP

86,716

1.04

30.97

-4.73%

STORE

106,134

1.27

37.24

51.68%

VTR

85,455

1.02

57.74

22.55%

Represents the total price change relative to purchase price

a - Represents change in price from original purchase price.

19

The Heider College of Business joins the Portfolio Practicum class in thanking our alumni, friends and business partners for their support. We look forward to working with you as we continue our mission of educating business leaders in the Jesuit tradition and positively impacting the world.

402.280.2700 | business.creighton.edu