Portfolio Management Project of It Student by wip19452

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									2005 Fall, Fin 412                                                                                         T/TH 11:00-12:15

                           Team Project for FIN 412 Portfolio Management                               (Version: 9/1/2005)



“Investment Proposal for UIC Student-Managed Fund”

I. Overview
The University of Illinois Foundation (UIF)1 has $770 million in investments and a $225 million
endowment fund which are currently under management of a few professional asset management firms
and allocated across various asset classes, such as US Equities, International Equities (including Emerging
Market Equities), Hedge Funds, Private Equities, and Real Estate. The investment income on the fund is
used to support a proportion of operating and academic activities on all three campuses of the University
of Illinois. The combined pool of the endowment fund returned 16.4% in 2004 and 2.9% in 20032,
compared with S&P 500 index’s annual return of 9.0% in 2004 and 26.4% in 2003.

Our goal is to propose a UIC student-managed fund with an initial value of $500,000 as a proportion of
UIF and/or being raised from other prospective fund contributors. The fund will facilitate the Finance
program’s academic purpose of training students to apply theory to security analysis and portfolio
management in the real world. Thus, it will be solely managed by students (i.e. making investment
decisions and trading real-time financial securities) and overseen by a fund advisory board composed of
faculty members and external investment professionals. To appeal to the fund advisory board, students
are required to develop a comprehensive investment policy statement for the student-managed fund that
conforms to current UIC Endowment Fund investment restrictions, formulate investment strategies, and
present and defend the investment proposal to the fund’s advisory board.


II. Objectives of the Team Project
The primary objective of the “Investment Proposal for UIC Student-Managed Fund” (hereafter, “The
Proposal”) is for students to link theoretical and practical aspects of money management through
involving students in a real-time investment process where students can gain hands-on experience in
security analysis and portfolio management. Students will first identify risk and return objectives of the
fund, develop an Investment Policy Statement (IPS), and formulate asset allocation strategies. Then they
will build a model portfolio and present simulated fund performance to the student-managed fund
advisory board (hereafter, “The Board”) and prospective fund contributors. Students will be divided into
four teams. Each team can develop its own investment style and strategies, but should always conform to
the pre-specified investment objectives and constraints of the fund (listed in [V] Guidelines on the student-
managed fund section). All teams should fulfill the requirements of written reports and investment
presentations to the Board on Dec 8th 2005 to receive a grade for FIN 412 course.




1
    For details, see UIF Financial highlights at http://www.uif.uillinois.edu/pages/ContentPage.aspx?cid=040102
2
    For news details, see http://www.foundationendowment.com/default.asp?page=1&SID=513021&ISS=16220&source=referral

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III. Team Structure
Basic characteristics: number of teams: 4; Team size: 11-12 students; Class size: 47 students
Specialization and collaboration: every member in a team is a portfolio manager and analyst. On the
security analysis level, each member should cover 2 or 3 stocks, analyze the fundamentals of the
companies, provide buy/sell recommendations, and closely follow the industry and firm-wide events.
On the fund management level, a member should work with other team members and exercise his/her
judgment to make asset/sector allocation decisions that are consistent with the investment objectives and
constraints. The team should apply quantitative measures and tools learned in class to portfolio risk
management. The team should also establish a mechanism and/or designate personnel to monitor and
rebalance the model portfolio when necessary. A voting rule (e.g. 2/3-majority vote) on whether the
fund must make trades due to changes in investment recommendations (e.g. from buy to sell) should be
added to assist the portfolio management process.


Suggestions:
• To take advantage of “economies of scale” in research efforts, each member can pick one economic
  sector or industry to specialize in (the Global Industry Classification Standard, or “GICS” is adopted).
  For example, one analyst can specialize in the energy sector, the consumer staples sector, the
  semiconductor industry, the pharmaceutical industry, the banking industry, or the wireless
  telecommunications industry. Next, pick two or three companies that belong to the selected sector or
  industry.
• It is not necessary to include all the stocks covered by the team members in the model portfolio.
  Portfolio managers should strive to add value through an active portfolio management process. Teams
  are strongly encouraged to develop their unique active management strategies which can be based on
  fundamental and/or quantitative/statistical analyses. When active management is impossible to create
  positive alpha for the portfolio, fund managers should adopt passive/indexing strategies while
  minimizing transaction costs.
• Before trading real-time securities to implement the portfolio strategy, each team should decide how to
  allocate the initial fund value of $500,000 into stocks and cash. The team can adopt either a value-
  weighted or an equal-weighted method to construct the model portfolio. Guidelines on sector/industry
  allocation (e.g. deviation from the benchmark) must be met.
• If an indexing or an enhanced-indexing strategy is adopted, in addition to individual stocks, you may
  also analyze and invest in Exchange-Traded Funds (ETFs).
• The team should check historical returns and risk characteristics of stocks covered by the team and
  perform correlation analysis. Select the least perfectly correlated stocks to achieve portfolio
  diversification benefits, when appropriate.
• Avoid the temptation to put off your research. It is impossible to create quality reports overnight or in
  one weekend. The appropriate strategy is to set aside time each week to work on your research and
  investment recommendations.



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IV. Assignment Schedule

  Due dates          Submission            Assignments                          Required components
     09/20           By each         Investment policy              Return and risk objectives, constraints, asset
                     team,           statement (IPS) for the        class and sector allocation plans, list of
                     posting(s) on   Student-managed Fund           analysts, individual job description, and
                     Blackboard                                     stocks covered by each analyst.
                     discussion
                     board
     09/27           Not             Trading preparation            Prepare trade orders, specify acquiring prices
                     necessary                                      or price ranges, shares being acquired
     09/29           Not             Trading starts                 Upload initial positions onto OTIS real-time
                     necessary                                      trading and portfolio system. Record
                                                                    executed prices
                                                                    http://wharton.pearsoncmg.com/otis/


     10/04           By each         Investment                     List of the industry and stocks that you are
                     analyst, hard   recommendations                following, weights of each stocks in your
                     copy, within                                   team’s portfolio, investment
                     3 pages                                        recommendations and reasons, target exit
                                                                    prices, recent 3- and 5-year return and risk
                                                                    characteristics, and correlations of the stocks.
     11/08           By each         Economic report                List of economic factors most relevant to
                     team,                                          portfolio and individual sector performance.
                     posting(s) on                                  Forecast capital market conditions on 3-month
                     Blackboard                                     and 1-year time frames. Justify current sector
                     discussion                                     allocation decisions.
                     board
     11/29           By each         Investment strategy            1. Investment strategies – active/passive
                     team,           and fund performance           indexing, top-down/bottom-up, style,
                     posting(s) on   report                         global/specialized, quantitative/subjective,
                     Blackboard                                     (currency, unleveraged/leveraged,
                     discussion                                     derivatives usage), and risk management.
                     board                                          2. Portfolio’s absolute return and risk, relative
                                                                    performance against a benchmark, style
                                                                    analysis, and attribution analysis.
     12/08           By each         FINAL REPORT                   An integrated report with IPS, investment
                     team, formal                                   strategies, and fund performance. (# of
                     report, both                                   pages not limited).
                     digital and     Note: this is also the final
                     printed         presentation date
                     copies




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V. Guidelines on the Student-managed Fund (applied to all proposals)

•      Total (initial) asset base: USD $500,000
•      Portfolio spending rate: 5%; expected risk-free rate: 4%; expected inflation rate: 3%
•      Official investment guidelines, provided by Ms. Laura Vossman, JD, CFA, Director of Foundation
       Investments).


                 Summary of UIF Endowment Pool Equity Manager Guidelines3
            •    Investment objective = long-term capital appreciation.
            •    Account shall be at least 90% invested in equities.
            •    The portfolio shall be diversified over a broad cross section of economic sectors
                 and industries. No more than 5% of the account may be held in securities of any
                 one company.
            •    The investment manager is to presume no need for liquidity other than that
                 provided to it from time to time by the Treasurer’s office.
            •    The primary investment objective is to exceed, net of fees, the rate of return of
                 the applicable benchmark over three- to five-year periods.
            •    U.S. Equity Benchmark = Wilshire 5000
            •    Non-U.S. Equity Benchmark = Morgan Stanley Capital International All-
                 Country World Ex-U.S. (ACWI)
            •    The portfolio should also compare favorably with the applicable benchmark on
                 a risk-adjusted basis over reasonable measurement periods, and should exceed
                 the median performance of the manager’s peer group.


•      Other suggested investment constraints
            o    Time horizon: infinity (i.e., the fund is not expected to go into liquidation)
            o    Tax consideration: portfolio incomes and realized capital gains are tax-exempt
            o    Legal and regulatory factors: the endowment fund is subject to UMIFA regulations. Consult
                 the University Counsel when in doubt.
            o    Unique circumstances: the fund has the following investment restrictions
                 § Geographical areas: the fund shall not invest more than 30% of total assets in non-US
                    securities (including ADRs) valued at cost.
                 § Asset classes: the fund must maintain at least a 90% equity mix (as stated in the official
                    investment guidelines). The rest shall be invested in cash, money market funds, or fixed-
                    income index funds. The fund shall not invest in alternative investments, such as hedge
                    funds, commodity futures, private equities, real estate, or distressed bonds.


3
    For detailed information on UIF’s asset allocation structure, see http://www.uif.uillinois.edu/pages/ContentPage.aspx?cid=020202.

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              § Companies: the companies in which the fund invests must be reporting public companies
                   for at least three years. The equities must trade on an organized exchange in the United
                   States or other countries.
              § Portfolio turnover: Each investment is expected to be held in the portfolio for 6-18 months.
              § Benchmark tracking error: the fund’s returns shall not deviate by more than 10% from the
                   benchmark’s (e.g. Wilshire 5000 or S&P 500 Index) returns, as measured by standard
                   deviation.
              § Sector allocation: the fund’s economic sector weightings shall not be 50% higher or lower
                   than the sector weightings of the benchmark.
              § Concentration risk: the fund shall not invest more than 5% in a single security (as stated in
                   the official investment guidelines)
              § Currency risk: the fund shall not invest in assets denominated in emerging market
                   currencies.
              § Credit risk: the fund shall not invest in lower than investment grade fixed-income
                   securities
              § Liquidity risk: the fund shall not invest in thinly traded assets. For example, a stock must
                   have a minimum average daily trading volume of 100,000 shares in order to be invested by
                   the fund.
              § Margin trading: margin trading is subject to prior approval of the fund advisory board
              § Short selling: short-sale is subject to prior approval of the fund advisory board
              § Futures/Options trading: futures and/or options strategies are subject to prior approval of
                   the fund advisory board.
              § Withdrawal of funds: funds shall not be withdrawn without prior approval of the fund
                   advisory board.


VI. Appendix: List of Team Members

           Team #                               Analysts/Portfolio Managers
               1         Omoruyi(O), Steve Choi, Christine, Liyu, Yongtian, Jose, Timothy Nierman,
                         Suleiman, Kelly, Nathaniel, and Eunice.
               2         Derek, Andrew, Alejandro(Alex), Jivko, My, Todd, Matthew Merkle, David,
                         Lisa, Gigi, Zhan, and Kunal.
               3         James, Tracy, Nathan, Sebastian, Jaroslaw(Jerry), Steve Miszczyszyn, Payal,
                         Dustin, Jorge, Daniel, Amanda, and Ruben.
               4         Josue(Josh), Abdul, Timothy Beltran(Tim), Shantal, Matthew Landek(Matt),
                         Garn, Vrinda, Hector, Rosalia, Karel, and Cesar.




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