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IC INSIGHT

Published by the Georgia Tech Student Foundation Investments Committee STATE OF THE PORTFOLIO Michael Hudson Performance: At the start of the year, even most bulls would not have predicted that equity markets would be up over 20% by the middle of October. Our portfolio has ridden the wave up about 19.1% this year just behind the S&P 500 at 22.3%, but well above our blended benchmark. Increased equity allocation coupled with improving security selection over the past year continue to contribute more to performance than sector allocation. However, we have benefited from decreasing the allocation of Technology (currently 7%) and REITs (7.5%), and have already begun shifting that capital to Healthcare and Industrials. Changes: Most significantly, the 5% allocation to gold (IAU) was removed based on a by-law requiring automatic sell at 20% loss since purchase. In September, the

Energy Sector: ENERGY EXPORTS MAY BE UNSUSTAINABLE Corey Nettles Data from the Energy Information Administration (EIA) shows monthly exports of US petroleum products rose to an all-time high of 3.892 million barrels per day (bpd), more than double the exports of January 2010, a mere 34 months ago. These increases have been euphorically reported in media as evidence of “The Great American

Investments Decisions Group voted to sell our entire positions in Priceline (PCLN) and Apple (AAPL). The vote on PCLN was driven by valuation concerns including a market capitalization ($54B) of a travel services firm that is above most of the world’s largest airlines. As discussed in the last newsletter, AAPL was removed on our belief that that the firm no longer operates with the small firm culture and innovation that it needs to continue to radicalize markets. In the past couple weeks, we entered into a 3% position in IBB and 2% allocation to ICE. The large-cap weighted biotechnology ETF, IBB, reflects our long-term view on the rapid growth and cash flow generation of the industry, but our risk aversion to single names in the industry. Lastly, successful M&A and strong margins were key factors in our purchase of the Intercontinental Exchange (ICE). Energy Boom” and “The Shale Gas Revolution”. Companies like Sempra, Cheniere, and Dominion are setting up new export facilities to ship this vast inventory to energy starved global trading partners. A deeper look at supply, however, would lead a more cautious investor to temper this euphoria. Fracking, an injection of fluid and lubricants, and horizontal drilling have been at the heart of this recent increase. Fracked wells seem to behave differently from

October 23, 2013 [Edition 1, Volume 2]

THE PROBLEM WITH GOLD Jon LeBoutillier The committee recently sold its entire position of iShares Gold Trust (Ticker: IAU), which previously represented 5% of total assets. Gold has seen a very volatile 2013, with an annualized volatility of nearly 24%, which is more than 2x that of the S&P 500 this year. Furthermore, its historically negative correlation to equities has been reversed over the past six months, and correlations across asset classes have been higher over the year, thus reducing our incentive to hold our gold position. Gold was originally added to the portfolio as a hedge against asset bubbles, but activity by fundamental market participants, such as miners, jewelers, and refineries, has been outsized by central banks, which, according to the World Gold Council, collectively own 18 percent of all mined gold, and in aggregate, central banks have been increasing their gold holdings substantially over the last two years. Central banks’ policy decisions have thus had an increasing effect on the price of gold – all while domestic equity performance has… (Continued on Page 2)


IC INSIGHT – Published by the Georgia Tech Student Foundation Investments Committee tradition wells. Traditional wells experience a 40-50% drop in output over 2 years, with a lifespan of approximately 20 years. Fracked wells experience a drop of 60-70% in one year and seem exhausted in 3-5 years. Chesapeake saw output of its Serenity 1-3H well go from 1,200 bpd in 2009 to <100 in 2013.

Reasoning: Departure from GOLD Following the Investments Committee’s departure from IAU (see: State of the Portfolio), I reflected on the conversations the committee had in recent weeks. A common question came to light among these discussions: why do we hold gold? Typically thought of as a portfolio hedge, it had been anything but. The volatility in recent months often left us scratching our heads. Following a sharp mid-April decline, gold prices began to climb into May, as physical demand in China and India drove the market back from $1350. But the volatility did not tail off there. A June decline to a 2 1/2

…become increasingly dependent on decisions by the Federal Reserve. Gold’s fundamental contribution to the portfolio is being overshadowed by market dynamics, and as such, we believe there are better opportunities with more

As reports of US reserves are made from initial outputs extrapolated like tradition wells, these reductions should cause

year low took the wind right out of gold’s price momentum, and this time the gold bugs were slow to

Kevin Hopkins

THE PROBLEM WITH GOLD (CONTINUED)

The Robert Heuer well in North Dakota, celebrated for its 2358 bpd output, experienced a 69% output drop in one year.

skepticism in the market. Shell announced a 2.1 billion writedown on fracked well assets, due to poor performance. This may be an early warning sign of things to come.

are slow to go after large capital expenditure projects. Factor in stagnant futures volume over the last two years, and an industrywide lack of confidence is evident. Looking forward, heavy dependence on imports in China and India to turn around poor performance cannot effectively stabilize gold in the future. Given the lack of clarity we have with gold’s behavior, we will consider investing again if we see signs of fundamental movement. That, of course, is a big ‘if’.

FIGURE 1: GOLD (COMEX) MONTHLY COMMODITY FUTURES PRICE CHART

crawl back. Following any FOMC announcement, movement in either direction often leaves me scratching my head. According to Bloomberg, gold mining firms attractive risk-reward profiles in our Alternative Investments sector, which has typically housed our portfolio hedges.

0.8 0.4 0 -0.4 -0.8 Feb-13

Mar-13

May-13

Jul-13

Sep-13

FIGURE 2: GLD/SPY 30-DAY TRAILING CORRELATION (2013)

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IC INSIGHT – Published by the Georgia Tech Student Foundation Investments Committee

CURRENT IC PORTFOLIO [AS OF 23RD OCTOBER, 2013] TICKER AAN ACN AMT ATVI BOND BUD CVS DIS EFA EXR GOOG HD HYS IBB ICE KFNPR KRFT MA MCK MGA MO NBL NGG QCOM RLI ROP RYN UA UTX WFC XLV XOM Cash

QUANTITY (#) 733 399 355 1,220 283 185 311 312 2,814 418 20 330 376 148 102 690 150 30 234 300 516 498 429 390 231 152 491 250 250 465 900 364 44,023

PRICE ($) 28.36 71.6 74.73 17.76 105.61 98.07 59.06 66.44 64.35 47.06 882.01 75.18 105.61 200.57 194.12 23.959 52.11 686.39 137.95 84.61 35.33 68.31 60.13 68.17 89.25 129.72 56.87 80.56 105.8 41.54 51.27 86.79 1.00

POSITION VALUE ($) 20787.88 28568.40 26529.15 21667.20 29887.63 18142.95 18367.66 20729.28 181080.90 19671.08 17640.20 24809.40 39709.36 29684.36 19800.24 16531.71 7816.50 20591.70 32280.30 25383.00 18230.28 34018.38 25795.77 26586.30 20616.75 19717.44 27923.17 20140.00 26450.00 19316.10 46143.00 31591.56 -

PER SHARE COST ($) 28.69 29.61 72.62 14.83 109.30 94.25 57.84 57.62 63.33 47.41 553.27 61.41 105.00 200.59 194.07 25.98 50.97 377.84 66.76 56.75 24.43 47.70 50.04 54.83 71.75 97.91 44.13 34.13 92.74 35.23 36.20 68.80 -

BOUGHT EFA HYS EXR IBB ICE

COST BASIS ($) 21029.02 11,813.36 25780.95 18098.53 30931.60 17436.21 17989.04 17978.15 178216.35 19817.60 11,065.33 20265.63 39480.43 29687.86 19795.44 17927.25 7645.95 11,335.06 15,622.22 17024.25 12,606.50 23,756.35 21,467.66 21,383.31 16,574.16 14,881.79 21,670.04 8,532.12 23183.88 16382.62 32,579.14 25,044.21 -

PROFIT/LOSS MTD (%) 2.28 (0.39) 7.36 3.31 0.57 3.99 4.94 4.29 3.18 1.64 13.11 (2.15) 1.15 (4.81) 1.68 (3.22) 1.98 5.91 7.22 1.69 3.77 6.43 4.47 1.90 9.00 (1.16) 2.17 1.56 0.22 2.72 2.05 1.43 -

PROFIT/LOSS BTD (%) (1.15) 141.83 2.90 19.72 (3.38) 4.05 2.10 15.30 1.61 (0.74) 59.42 22.42 0.58 (0.01) 0.02 (7.78) 2.23 81.66 106.63 49.10 44.61 43.20 20.16 24.33 24.39 32.49 28.86 136.05 14.09 17.91 41.63 26.14 -

SOLD IAU WIP BOND JNK VTR DLR AAPL PCLN

FIGURE 3: CHANGES TO THE IC PORTFOLIO SINCE SEPTEMBER 18TH, 2013 (PREVIOUS NEWSLETTER)

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IC Insight Edition 1 Volume 2