SMF Report _02-20-03_

Document Sample
SMF Report _02-20-03_ Powered By Docstoc
					February 20, 2003

Dear Foundation Members,

Once again, we would like to thank the Foundation for the opportunity to manage the fund. It
has allowed us to apply academic knowledge to realistic portfolio management scenarios.

The MBA Managers of the Student Managed Fund are excited to update the University of
Connecticut Alumni Foundation on our performance since the fund’s inception on September
30, 2002. The sluggish economy caused us to take a guarded approach to investing. Given the
economic uncertainty, however, we continued to look for opportunities in the market by
placing special attention to not only the company’s financials but especially their environment,
future outlook, and business model.

Recently, the concerns about a war with Iraq overshadowed the expected recovery of the
financial market and added another uncertainty factor to our investing approach, especially
with regard to the equity holdings. We started the necessary steps to minimize these effects by
changing our portfolio allocation, which is further discussed in this report.

The report presents our reviewed investment philosophy, forward expectations and portfolio
performance. We also provide updates on the portfolio allocation, our selection criteria, our
holdings, and our returns.

We would like to thank you again for providing us with this outstanding experience.


The M.B.A. 2002-2003 Managers

1. Outlook and Investment Approach

We have adjusted our investment approach based on the current geopolitical situation. In light

of the impending war with Iraq, we are quite bearish on the stock market. The war may send

the oil prices high and stop the global recovery of the economy. Thus, we have recently

decided to change our portfolio allocation to 30% equity, 60% fixed income, and 10 % cash

(this is not yet reflected in the numbers presented on this report since they are based on the

statements as of January 31, 2003). We expect the interest rates to remain at their current

levels of 1.25% for now. Therefore, the additional investment in fixed income would be a safer


The economy is continuing to struggle although the U.S. gross domestic product growth has

resumed. The business recovery remains narrowly focused, incorporating only the housing

sector. Capital spending, by comparison, is still weak; industrial production is slipping; and the

employment outlook is troubled. All of this suggests a weak first quarter, with growth of, at

most, 2%. The corporate earnings picture currently mirrors that of the U.S. economy at large.

That is, the gains are uneven and selective, with a number of industrial sectors posting weak

results, as demand continues to lag. Overall, we have probably seen the low point in the profit

cycle, as cost cutting and greater efficiencies are helping to partially offset sluggish demand. A

firming in demand, which should follow a gradual strengthening in the economy later this

year, will be needed before earnings really start to increase strongly.

Another issue of our concern is the weakening dollar. It fell about 15 percent against the euro

and 10 percent against the yen in 2002. A modestly weaker dollar could be good for the global

                   UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                   2

economy. It would help shrink the U.S. trade gap. However, outright collapse in the dollar

could be highly destabilizing to global financial markets.

The stock market, too, is moving in irregular fashion. The more reasonable level of valuations,

which is encouraging the bulls, is not enough; it seems, to fully counter the bears who point to

soft economic data and a troubled global backdrop to justify their lingering pessimism. This

tug of war may persist until the economy starts to firm up and overseas tensions begin to ease.

2. Performance

As of January 31, 2003, the total return of the fund since inception is 3.84%, a growth in total

assets from $199,675.86 to $207,349.37.

Initial allocation at inception (10-01-02):

                           Allocation        Allotted Amount
Equity1                        62.26%              $124,314.69
Fixed Income2                  37.73%               $75,347.17
Cash                            0.01%                   $14.00
Total                           100%               $199,675.86

Current allocation (01-31-03)3:

                           Allocation        Allotted Amount
Equity                         65.24%              $135,274.05
Fixed Income                   31.75%               $65,839.52
Cash                            3.01%                $6,235.80
Total                           100%               $207,349.37

  Vanguard Inter Term Bond Index (Fixed Income)
  Vanguard 500 Index Fund (Equity)
  As of February 10, 2003, we decided to change our portfolio allocation to reflect our concerns with the current
  geo-political situation and its impact on the long-term performance of the stock market. The new allocation is:
  30% Equity, 60% Fixed Income, and 10% Cash. During the month of February, we also intend to revise our
  current stock holdings to reflect the change in strategy (Please refer to 1. Outlook and Investment Approach for
  further details).
  Includes $101,815.06 invested in Vanguard 500 Index Fund

                       UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                                  3

Comparison of our equity returns to the S&P 500:

Date                                 S&P 500           MBA Equity
Sep. 30, 2002                          $815.28           $124,314.69
Jan. 31, 2003                          $855.70           $135,274.05
Return                                  4.96%                 8.82%
Beta                                      1.00                 0.954
Treynor                                 2.05%                 6.10%

The rate of return in our equity holdings since inception has been 8.82% compared to that of

the S&P 500 of 4.96%. According to the CAPM, our required rate of return is 4.87% (based on

a risk-free rate of 3.00%). Therefore, our equity portfolio has an added value of 3.95%-points

over the required rate of return for the S&P 500.

                                            MBA Equity Value Added Risk Adjusted


                   Equity Return



                                                    4.87%                4.87%

                                                    S&P 500            MBA Equity

                                             Market Required Return    Value Added

3. SMF Stock allocation vs. S&P 500

The allocation among industry sectors of the SMF portfolio differs significantly from the S&P

500 allocation in two dimensions:

          The managers did not recreate the S&P 500

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                            4

              The allocation as of 2/10/20035 is an adjustment to the current geopolitical situation

Differences in the designated allocation vs. S&P 500 can be attributed to the decision taken by

the SMF managers with respect to their expectations of the overall economy and stock market

behavior, and the chosen strategy.

In general, the expectations of the overall economy were driven by analysis of the market

condition and trends. The prevailing expectations were influenced by economic conditions of

slowing growth and great uncertainty about future improvements (emphasized by different

economic indicators), as well as additional risk factors such as political thread of expected war

in the Gulf. The consensus SMF managers’ expectation was one of a slow economy with lots

of uncertainties and, in general, a volatile and mostly declining stock market. The strategy has

changed to an even more conservative approach: identify, and increase portfolio shares of,

stocks that are less influenced by the economic cycles, and thus expected to have stable prices

and/or outperform the market in a downturn. Such sectors were Health Care, Energy,

Consumer Staples (Food, beverage and Tobacco; part of Consumer Discretionary

(Entertainment; Hotels, Restaurants and Leisure; Media).

Finally, other stocks within the Industrials sector and Information Technology sector had

reduced shares in the portfolio as compared to S&P 500, while Telecommunications and

Utilities sectors were still excluded.

     As of February 10, 2003, we decided to change our portfolio allocation to reflect our concerns with the current
    geo-political situation and its impact on the long-term performance of the stock market. The new allocation is:
    30% Equity, 60% Fixed Income, and 10% Cash. During the month of February, we also intend to revise our
    current stock holdings to reflect the change in strategy (Please refer to 1. Outlook and Investment Approach for
    further details).

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                                  5

The largest differences from S&P 500 allocation we decided upon were in the Materials sector:

change of 7.2% (invested more due to our expectations to perform well in a downturn);

Consumer Staples: change of 5.6% (also due to our expectations to outperform other industries

in downturn); and Financials: change of -5.6% (due to our decision not to attribute too large of

a share in any single sector).

The final decision on a stock is decided by many factors with emphasis on identification of

company-related risks, intrinsic value calculated from different models, company’s long-term

strategy and investments, management effectiveness, competitors’ positions, historical and

projected growth rate, financial soundness of organization, etc. The overall decision is based

on a holistic approach considering all the elements by soliciting several online tools, such as

Value Line, Moneycentral, Quicken, and Yahoo to identify the top stocks in each sector.

                                     As of 1/31/03     As of 1/31/03
            Sectors                   S&P 500          SMF Stocks       Difference
Consumer Discretionary                      13.4%             10.0%           -3.4%
Consumer Staples                             9.4%             15.0%            5.6%
Energy                                       6.0%             10.0%            4.0%
Financials                                  20.6%             15.0%           -5.6%
Health Care                                 15.3%             15.0%           -0.3%
Industrials*                                11.3%             15.0%            3.7%
Information Technology                      14.4%             10.0%           -4.4%
Materials                                    2.8%             10.0%            7.2%
Telecommunication Services                   4.0%                            -4.0%
Utilities                                    2.8%                            -2.8%
                                  Invested so far
Consumer Discretionary                      13.4%             24.2%           10.8%
Consumer Staples                             9.4%             20.7%           11.4%
Energy                                       6.0%             14.4%            8.4%
Financials                                  20.6%              0.0%          -20.6%
Health Care                                 15.3%             26.7%           11.5%
Industrials                                 11.3%              0.0%          -11.3%
Information Technology                      14.4%              0.0%          -14.4%
Materials                                    2.8%             14.0%           11.2%
*Specific SMF allocation decision for Industrials: 10% Aerospace/Defense; 5% Other

                    UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                  6

                Difference From S&P 500 Allocation
                                                                                                  Consumer Discretionary
8.0%                                                             7.2%
                    5.6%                                                                          Consumer Staples
                           4.0%                   3.7%                                            Energy
                                                                                                  Health Care
                                                                                                  Information Technology
-4.0%       -3.4%                                                                                 Materials
-6.0%                                                                                             Telecommunication Services
-8.0%                                                                                             Utilities

                        2.8%               S&P 500 Sector Allocation*
                   4.0%                                                      Consumer Discretionary
                                             13.4%                           Consumer Staples
                                                          9.4%               Financials

                                                                             Health Care

                                                            6.0%             Industrials

    11.3%                                                                    Information Technology


                                                                             Telecommunication Services
                  15.3%                                                      Utilities

                                             SMF Stock Allocation Decision*
                  10.0%               10.0%

        10.0%                                                                       Consumer Discretionary
                                                     15.0%                          Consumer Staples
  15.0%                                                                             Health Care
                                                         10.0%                      Industrials
                                                                                    Information Technology
                15.0%                       15.0%

* As of 01/31/03.

                           UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                                        7

4. Allocation of Capital among Sectors

To better balance the risk and return of the stock portfolio, we choose eight sectors based on

industry research and analysis of both macro and micro economic situations. Risk and long-

term growth potential served as basic principles in the selection process. Although the

Information Technology sector has been experiencing a tough time over the last two years and

seems more risky than others, we choose to include it for its long term potential and the

believe that businesses will eventually have to start replacing their aging technology


Holdings as of 1/31/2003
                                               No.                                   % of total
                                Ticker       Shares     Price ($)     Value ($)      portfolio
                              JOUT                400      12.00           4,800          2.31%
 Consumer Discretionary
                              GPI                 150      24.86           3,729          1.80%
 Consumer Staples             WWY                 100      55.52           5,552          2.68%
 Energy                       XOM                 145      34.15        4,951.75          2.39%
                              PFE           150.6303       30.36        4,573.14          2.20%
 Health Care
                              WLP                  70      72.68        5,087.60          2.45%
 Materials                    IFF                 150      31.77        4,765.50          2.30%
 Industrials                                                                               
 IT                                                                                        
 Financials                                                                                
 Vanguard 500 Index Fund      VFINX         1,288.472      79.02      101,815.06          49.1%
 Fixed Income                 VBIIX         6,176.315      10.66       65,839.52         31.75%
 Cash                         SWMXX         6,235.800           1       6,235.80          3.01%
 Total                                                                207,349.37       100.00%

5. Stock Selection Criteria

Our investment methodology is to achieve superior risk-adjusted returns. The highly volatile

market offered us a great challenge in finding the right stock that matches our strategy of value

                    UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                 8

and long-term growth investing. We were able to evaluate both categories effectively because

of our extensive use of fundamental analysis. Stocks were also selected due to their growth

potential and low volatility. By investing in these issues and holding them, we aim to minimize

transaction costs while maximizing the possibility of enjoying the long-term returns generated

from the business.

The primary steps we applied in selecting a stock are to identify a “short list” of recommended

stocks from Value Line. The following are the key factors used in selecting equity securities:

   1. Solid financials

   2. Strong management

   3. No significant company and/or industry specific risks identified

   4. Earnings growth

   5. Attractive valuation relative to the index

We also use the dividend discount model (DDM) and a P/E-multiple model (NAIC software)

that includes an upside-downside ratio and a “Buy/Hold/Sell” recommendation to value the


Buy Criteria

             Good growth rates

             Low price to cash flow ratio.

             Low price to book value.

             Above average yield.

             Upside-downside ratio of at least 2.

                       UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                              9

Sell Criteria

              A stock reaches its price objective.

              The industry-sector weighting in the portfolio exceeds predetermined limits.

              The risk/reward profile deteriorates.

              The firm's fundamental expectations fail to materialize.

6. Fixed Income Selection Criteria

In our investment strategy for fixed income, we maximize total return within the framework of

capital preservation and minimum risk while aiming for above-average income and total return

levels. The effects of a steep yield curve, declining financial assets and commodity prices, and

the declining federal interest rates made us select a conservative bond fund. Based on the fact

that bonds are not liquid and not always available we decided that to invest in a Mutual Fund

that has as objective Fixed Income investments. We also wanted to derive greater money-

market returns from our investments and wanted a fund that had a short duration, preferably

between three and six years. Once the required criteria determined, we reviewed the bond

funds available to us in the Charles Schwab account. We also developed a model for bond

valuation. The model is designed to find out the change in Value for a bond mutual fund based

on the change in the Interest rates.6

    Delta P/P = - D/(1+y) * Delta y
    or Delta P = - D/(1+y) * P * Delta y
       - Delta P is the change in Price P
       - For P we used NAV of the fund
       - D is the fund Duration – obtained from
       - Y is the YTM – obtained from
       - Delta y is the change in the interest rate. We used the percent change between the current and the
         forecasted Fed rate.

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                         10

The parameters that we established were:

      Preservation of capital

      Income generation

      Funds that seek to track the performance of government index funds

Our choices included Vanguard Short-term Bond Index, Fidelity Intermediate Bond Fund,

Strong Government Investment Fund, etc. Selecting from the lot, we found that Vanguard

Intermediate Term Bond Fund (VBIIX) provided the best quality distribution for our criteria,

the moderate duration, and good returns (adjusted for fees) as shown in the table below.

VBIIX has the higher yield and its objective is:

“The Fund seeks to employ an index investment approach by holding a sample of bonds that

seek to track the performance of the Lehman Brothers 5-10 year Government/Credit Index.

This Index includes U.S. Government, investment-grade corporate, and international dollar-

denominated bonds with maturities between 5 and 10 years.”

                                  VBIIX          VFICX        STVSX           VFITX
   Beta:                              1.25         1.15         1.06            1.38
    Total Assets (in millions):    $2,166.08    $2,218.18    $2,263.38       $2,099.79
    Inception:                    03/01/1994   11/01/1993   10/29/1986      10/28/1991
   Duration                           5.83         5.22         4.40            5.82
    30-Day SEC Yield                10.44%       9.90%         3.67%          4.11%
    Tax Equivalent Yield              N/A          N/A          N/A             N/A
    Average Maturity                7.9 yrs.      7 yrs.      5.2 yrs.        8.1 yrs.
    Portfolio Turnover:              135%         118%        552.2%            33%
    Manager:                      Since 1994   Since 1993   Since 1998      Since 1991
    Index Fund:                       Yes          No            No              No
   Annual Operating Expenses         0.21%        0.21%        0.90%           0.29%
   12b-1 Fee                           No          No            No              No
   Transaction fee                    Yes          Yes           No              Yes

Fixed Income Selection Criteria:

      Does the fund objective meet our criteria? The VBIIX fund is managed to preserve

       capital and current income.

                    UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                             11

          How does the fund compare to its peers? The VBIIX fund outperformed almost funds in

           the long-term, particularly in previous recessions.

          What is the track record of the fund manager and what are the expense ratios? This fund

           has a small expense ratio of 0.21% and manager’s tenure is nine years.

          What is the risk and volatility of the fund? VBIIX is ranked as very low-risk fund. It has

           a Sharpe ratio of 1.47 and a standard deviation of 5.02 and average duration of 5.83


For the time being we decided to stay invested in the Vanguard Intermediate Term Bond Fund

(VBIIX) but are considering to possibly transfer the fixed income holding into a fund of a

lower duration to decrease the percentage volatility in case of increasing interest rates7.

7. Qualitative Analysis

We perform a qualitative stock analysis on three levels: First, we identify a stock. Second, we

evaluate the stock with respect to valuation models (Dividend Discount Model, Multistage

Growth Model, P/E Model, SSG). Third, we perform a detailed analysis of intangible

information to reveal possible risk factors and opportunities by collecting information on:

       1. Industry Outlook

       2. Business summary, market, customers, and products

       3. Competition within and outside the industry

       4. The position of the company within the industry

       5. The company's market share and its trend overtime
    p.488 Investments, 5th edition, Bodie, Kane, Marcus,2002, Mc Graw-Hill
     P/P = - D* y (with D* = modified Duration)

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                               12

   6. The product trend and product substitutes

   7. Diversification

   8. Research and Development activities

   9. Management effectiveness in terms of the stability of growth

   10. Future outlook in terms of new products and markets

   11. Global presence

   12. Recommendations and ratings from various analysts

   13. Current important news

   14. Insider Trading Information

   15. Effects of Stock addition to the entire portfolio

   16. Risks that the company and its industry face

The team collects this information from the earlier mentioned sources like Yahoo! Finance,

MSN Money Central, Quicken, Value Line, Reuters, Multex Investor, Wall Street Journal,

industry news from various news sources, company's own website, and the web sites of

various organizations linked to the Industry.

8. Portfolio Risk

We pay close attention to every stock’s safety ranking and Beta, every company’s debt/equity ratio,

times interest earned ratio, and free cash flow to total assets when we observe our portfolio risk.

Safety & Beta

The table below is a summary of our equity holdings. Both the safety and the beta are taken from the

Value Line Investment Survey.

                    UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                               13

                                       Safety & Beta (VL)
Stock                                     Ticker    Safety     Beta    Investment ($)     Weight
Pfizer Inc.                              PFE             1     0.95           4,573.14     3.38%
Wrigley Wm Jr Co.                        WWY             1     0.75           5,552.00     4.10%
Exxon Mobil                              XOM             1      0.8           4,951.75     3.66%
Group 1 Automotive                       GPI             3        1           3,729.00     2.76%
International Flavors & Fragrances       IFF             2      0.8           4,765.50     3.52%
Johnson Outdoors                         JOUT            3     0.65           4,800.00     3.55%
Wellpoint Health Networks                WLP             3      0.8           5.087.60     3.76%
    Subtotal                                                                 33,458.99    24.73%
Fund                                      Ticker     Safety    Beta    Investment ($)     Weight
Vanguard 500 index fund                  VFINX          NA      1.0        101,815.06     75.27%
    Subtotal                                                               101,815.06     75.27%
Total                                                                      135,274.05      100%
Portfolio Beta                                                                              0.954

Debt/Equity Ratio

                                       Debt/Equity Ratio
Stock                                     Ticker     Company           Industry      S&P 500
Pfizer Inc.                              PFE               0.16             0.26          1.16
Wrigley Wm Jr Co.                        WWY               0.00             0.44          1.16
Exxon Mobil                              XOM               0.10             0.19          1.16
Group 1 Automotive                       GPI               0.02              0.4          1.16
International Flavors & Fragrances       IFF               1.83             0.71          1.16
Johnson Outdoors                         JOUT              0.65             0.34          1.16
Wellpoint Health Networks                WLP               0.31             0.27          1.16
Source: Moneycentral

The debt/equity ratio shows how much a firm has borrowed as a percentage of its stock equity and

indicates the extent to which a company is financing its assets with debt, a more risky source of

capital than equity. A ratio greater than one means that assets are mainly financed with debt, less

than one means equity provides the majority of the financing.

Some stocks in our portfolio appear to have high debt/equity ratio; however, their times interest

earned (discussed below) do not reflect an inability to repay their debts.

                       UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                            14

Times Interest Earned8

                                            Times Interest Earned
Stock                                            Ticker      Company             Industry       S&P 500
Pfizer Inc.                                     PFE                47.9               18.9            2.0
Wrigley Wm Jr Co.                               WWY               NA 9                10.7            2.0
Exxon Mobil                                     XOM                62.3               13.0            2.0
Group 1 Automotive                              GPI                 4.9                3.7            2.0
International Flavors & Fragrances              IFF                 7.0                1.9            2.0
Johnson Outdoors                                JOUT                7.1                4.4            2.0
Wellpoint Health Networks                       WLP                17.6                9.9            2.0
Source: Moneycentral

The Times Interest Earned is a measurement of the number of times a company could make its

interest payments with its earnings before interest and taxes; the lower the ratio, the higher the

company’s debt burden. The stocks in our portfolio have high times interest earned ratio, which

means that the companies are able to meet their interest payments.

Free Cash Flow to Total Assets

                                                              Free Cash        Assets         Free Cash
Stock                                            Ticker        Flow ($         ($ Mil)          Flow
                                                                Mil)                         Total Assets
Pfizer Inc.                                     PFE               4,345.0      39,153.0             0.1110
Wrigley Wm Jr Co.                               WWY                  40.8        1,765.6            0.0231
Exxon Mobil                                     XOM               6,452.0       143,174             0.0451
Group 1 Automotive                              GPI                  55.1        1,054.4            0.0523
International Flavors & Fragrances              IFF                  71.9        2,268.1            0.0317
Johnson Outdoors                                JOUT                  5.1          244.9            0.0208
Wellpoint Health Networks                       WLP                 151.6        7,472.1            0.0203
Source: Moneycentral (last year companies’ annual reports)

While analyzing a stock, we study the firm’s balance sheet, income statements, and cash flow

statements. The cash flow statement shows exactly how a company generated its cash and how it

was used. Cash flow helps in assessing the company's ability to generate cash internally, to repay
    Times Interest Earned=Earnings before interest & taxes/ Interest charges
    WWY does not have any debt.

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                   15

debts, to reinvest and to pay dividends. The most conservative measure of a company's financial

health, cash flow is much less vulnerable to manipulation than earnings. All of stocks in our

portfolio have positive free cash flow.

9. Portfolio’s Best and Worst Performers

Best Performers

                                          Purchase    Actual Price ($)               S&P500      Overperform/
 Stock                    Date bought     price ($)    As of 01/31/03     Return     Return      Underperform
                                                                                                  (% points)
 Johnson Outdoors           11/20/2002         9.43             $12.00    27.24%         4.96%         22.28%
 Wrigley                    10/22/2002        53.16             $55.52     4.44%         4.96%          -0.52%

The stocks listed above are our portfolio “winners” since inception as of September 30, 2002.

Johnson Outdoors (consumer discretionary sector) overperformed the S&P500 by 22.28%-points.

Johnson Outdoors reached its upside review price of $11.80 (see 10. Sell disciplines) and therefore

is scheduled for review to decide whether to sell the stock and take the gains or to continue to hold

the position with a different limit sell order than the one accepted at the beginning.

Wrigley (consumer staples sector) on the other side underperformed the market by 0.5%-

points. We believe that Wrigley’s underperformance is not significant and is due the daily

market volatility and therefore stay positive on Wrigley’s intermediate and long-term potential.

Worst Performers

                                          Purchase    Actual Price ($)               S&P500      Overperform/
 Stock                    Date bought     price ($)    As of 01/31/03     Return     Return      Underperform
                                                                                                  (% points)
 Amor Holdings*             11/20/2002        16.36             $14.35   -26.23%         4.96%         -31.19%
 General Dynamics*          11/13/2002        79.71             $66.14   -17.02%         4.96%         -21.98%
 Wellpoint Health
 Networks                   11/13/2002        76.65             $72.68     -5.18%        4.96%          -10.14%
* sold on 01/23/2002

                       UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                              16

The worst performer of our current holdings is: Wellpoint Health Networks which

underperformed the market by 10.14% since our shares of Amor Holdings and General

Dynamics (both from the defense sector ) were liquidated on January 23, 2003 .

10. Sell Disciplines

Our fundamental sell strategy, which is to limit the downside risk while allowing for a larger

upside return, has not changed since the last report. However, we reviewed the downside risk

control for our holdings. Initially we established risk control depending on company or

industry, ranging from -15% to -20%. (December 11, 2002).

Due to the imminent fears of war with Iraq, we believe that the market will not only exhibit

great volatility but also be negatively impacted for a longer period. Therefore, we decided to

reduce the downside risk by establishing stop loss prices of -15% of purchase price for newly

purchased stocks (see Group 1 Automotive and Diebold10 ) We decided to watch the market

diligently for further developments and, if necessary, to adjust the stop losses to -15% for all

equity holdings. This is along our strategy of preserving the value and stringent risk control in

the uncertain economic and political situation in order to protect our portfolio from massive


Up to this point in time, Armor Holding and General Dynamics fell below their stop-loss price

and consequently were sold (see table).

     Diebold Incorporated (DBD) was purchased on 01/29/03, but due to the pending transaction status it is not
     included in the account value as of 01/31/03.

                         UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                                            17

Johnson Outdoor is the only equity holding that has reached it upside review price of $11.80

and therefore will be reviewed shortly. The overall upside review price range stayed

unchanged between 15% and +30%, respectively (see table).

                          Purchase       Stop-Loss            Upside Review Price
Company                   Price ($)       Price ($)   (%)             ($)               (%)
Armor Holdings *              16.36          13.00     -21%          20.00             +22%
Pfizer                        31.77           26.8     -20%          43.54             +30%
Dynamics*                        79.71      64.00     -20%          100.00             +25%
Wellpoint                        76.65      62.00     -20%           96.00             +25%
Wrigley                          53.16      45.00     -15%           60.89             +15%
Exxon Mobil                      34.93      27.88     -20%           45.40             +30%
Int. Flavors&
Fragances                        32.98         28     -15%           40.00             +21%
Johnson Outdoors                  9.43          8      -15%          11.80             +25%
Group 1                          25.00      21.25     -15%           32.50             +30%
Diebold                          38.25      33.15     -15%           46.80             +20%
* Stocks fell below stop-loss price

                       UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS                            18

Shared By: