Student Investment Management
(SIM) Program
Fiscal 2007 Performance Review
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

– Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
Sample Stock Report – Adam
 SIM Fiscal YTD Performance – Jeremy

Objectives
1. To achieve a total return in excess of the
Standard and Poor’s (S&P) 500 Index
2. To preserve and maintain the real
purchasing power of the fund
3. To enhance the educational experience
of the students
Investment Philosophy

The Market is frequently inefficient in the short run

Inefficiencies can be identified through fundamental
analysis
Qualitative
 Quantitative


Relative Valuation


Mean Reversion
Diversification as a means to manage risk
Investment Process
Class Structure - 3 sections:
I.
Modeling and Valuation techniques
II.
Sector Analysis = Top-Down Approach
–
–
III.
Current Macro Environment
Dan Roberts, Senior Economist, STRS
Stock Analysis = Bottom Up Approach
–
–
Discounted Cash Flow Models
Relative Value Methods (StockVal Software)
Investment Process – Cont.
Class Structure (cont.):
New Addition – Chris Henneforth, CFA

–
–
–
–
Level Partners, Partner
Cantor Fitzgerald, Associate in Debt Capital
Markets
Ohio State FCOB MBA, June 2004
Ohio State FCOB Graduate, June 1998 BSBA
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
–
Sample Stock Report – Adam
 SIM Fiscal YTD Performance – Jeremy

SIM Website
Complete redesign of the SIM website
 Ensure consistency with the Fisher brand
 Inclusion of dynamic content aimed at encouraging
the user to spend more time on the site
 Create a powerful marketing tool for the SIM
program

SIM Website
Future Steps…
The maintenance of the SIM website will be
handed over to m2 consulting starting next
academic year
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
–
Sample Stock Report – Adam
 SIM Fiscal YTD Performance – Jeremy

New York Visit

SIM New York Trip (April 26th-April 27th)
– 26 MBA and Undergraduate Students Attended the Trip
– Coach - COO Keith Monda Ohio State Grad.
– JP Morgan
– Lehman Brothers
– Alumni Meet and Greet at Brasserie 8 1/2
New York
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
–
Sample Stock Report – Adam
 SIM Fiscal YTD Performance – Jeremy

R.I.S.E. – Redefining Investment Strategy Education
R.I.S.E.

3 Day Investment Forum held at University of Dayton
– Day 1 Keynote Speakers / Panels

5 Panel discussions: Economy, Markets, Federal Reserve,
Corporate Governance, and Public Policy.
– Speakers Included:
• Jan Hatzius Chief US Economist, Goldman Sachs
• Peter Coors, CEO of Coors Brewing
• Patrick Dorsey, Director of Stock Analysis Morninstar
• Paul Atkins of the Securities and Exchange Commission
– Day 2 Break-Out Sessions

Interactive sessions run by industry professionals ranging from Private Equity to
“A day in a life of an equity analyst”
– Day 3 Networking and Career Search Strategies
R.I.S.E.

Fisher Participants were subsidized by SIM
– 11 Fisher Students Attended (1,600 students total from over 160
Universities)

Key Takeaways
– Industry Perspective

Panelist had different views, great to hear them debate.
– China – Fear or Opportunity between Economists

Break-Out Session
– P/E carried interest is a long term gain (a wow moment for me)
– Interactive – Students drove the discussion, able to ask questions that
interest you.
– Networking Opportunity

I spoke with and got business cards from a dozen people in my chosen field from
across the country
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
–
Sample Stock Report (Valero) – Adam
 SIM Fiscal YTD Performance – Jeremy

Adam Grimes
Presents
Valero Energy
Sector Returns vs. Price of Oil

Conventional wisdom says Energy sector companies
make more money when oil prices are high.

But… is this true? And does this equal higher stock
prices?

Created an equal-weighted annual log change index
of the Energy sector dating back to 1988.
Yes… A strong correlation exists
Scatterplot of Equal-weighted Energy Index / Crude Oil Price
60
y = 0.8454x - 7.3859
R2 = 0.8189
Equal weighted index
50
40
30
20
10
Correlation = 0.905
0
$10
$20
$30
$40
$50
Crude Oil $/bbl (Nominal)
$60
$70
$80
The Oil Price Model: Thesis
“It’s all about oil.”
 Goal was to make a limited-scale (large models have
thousands of moving parts) supply/demand
regression model for oil price.
 A complicated task:

– relevant data not readily available.
– increased supply does not always mean lower price (because
at some times and price ranges, supply is the dependent
variable).

If possible, would provide an “apples to apples”
baseline across the sector.
World Demand

Current (2006) world use is 86.8 million barrels/day.
 Projected to grow about 2.1% per year.
– Much of the new demand is from China and India. (China is
the second largest world consumer of oil, and responsible for
40% of the world demand growth in the past four years.)

Depletion of working fields is 4 mmb/d annually (and
accelerating).

Total new additions of 27.5 mmb/d are needed to
meet demand to 2010.
Supply



Realistic estimates for new additions are 6-8 mmb/d.
Even the most optimistic forecasts (CERA) are for 11.5
mmb/d additions.
Demand forecasts are 27.5 mmb/d…
The Oil Price Model: Assumptions





Central America will continue supply growth linearly.
Asia will continue to have problems getting its oil to world
supply.
Africa will do very well increasing supply.
Middle East will increase ~3%/year, but will flood market
after 2010.
Demand not seriously constrained by higher prices
(some roll-off above $80/bbl). Once prices fall, demand
is robust.
The Oil Price Model: Output
Crude Oil (WTI $/bbl) Price Forecast
Historical
Projected
$120
$100
$80
$60
$40
$20
EIA High
Regression
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
$0
Valero Energy Corporation (NYSE:VLO)


Largest independent US refiner. Capacity of 3.3 mbd
(crude throughput) is 19% of total US capacity.
High proportion of capacity is heavy/sour capable. This
has allowed them to capture the spread between
sweet/sour crude.
– Most new reserves are sour. Is this a sustainable competitive
advantage?


Extensive retail network allows them to capture retail
margins which are less volatile than refining margins.
“Ideal” level of integration into pipelines and distribution
networks.
Valero Energy Corporation


Management has demonstrated excellence in
managing growth through organic projects and timely
acquisitions.
Refining margins should remain strong through 2010
– Little to no excess capacity. No new refineries
expected soon.
– Has also shown fiscal discipline by being willing to
walk away from projects.
VLO: Modeling Assumptions

Revenue: used Oil Price Model
(R2=.9586, p-value < 7*10-16)
 CoGS: depends on refining margins (which in themselves
depend on the price of oil), but presence of retail operations
smooth out fluctuations in margins.
 CapEx: tracks revenues closely (based on historical data for
VLO and examination of peer group). Will be no large
CapEx outlay for new refineries. Expenditures will continue
as in the past for upgrading refineries to heavy/sour and to
comply with EPA restrictions.
 Capital Structure: less borrowing in “good years”.
 Margins are very volatile through 2010. Refinery margins
increase above historical highs (not above current 2006
numbers) for the supply-constrained periods. Margins get hit
hard when new supply comes on-line after 2010.
 9.51% discount rate. 5% terminal growth rate.
VLO: DCF Case Analysis
Indexed Case Inputs (last historical year=100%)
50%
Revenue Index (Blue)
CoGS Index (Red)
140%
40%
120%
30%
100%
80%
20%
60%
10%
40%
0%
20%
0%
1999
2001
2003
2005
2007
2009
2011
2013
Revenue 5 year CAGR (green)
160%
-10%
2015
Margin and EPS Analysis
Gross Margin
12.0%
10.0%
8.0%
Operating
Margin
6.0%
EBT Margin
4.0%
Net Margin
2.0%
0.0%
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
VLO: DCF Summary
Summary Valuation
Market
DCF
Stock Price
$67.19
$92.34
Diluted Shares
588.0
588.0
Equity Market Value
39,508
54,297
Net Debt
(389)
(389)
Enterprise Value
39,119
53,908
Value per Share
11.x 15.1x Proj EPS
Enterprise Value Multiple
6.2x
8.5x EBITDA
Implied Upside in DCF
37.4%
VLO: Sensitivity Analysis
Sensitivity of Implied Upside/Downside to Discount Rate and
Terminal Growth Rate
250%
150%
100%
50%
0%
6.0%
5.3%
-50%
4.0%
12.3%
11.5%
10.8%
Discount Rate
10.0%
9.3%
4.7%
8.5%
7.8%
Implied Upside/Downside
200%
Terminal Growth
Rate
VLO: Summary of Strengths and Risks
Strengths
 Largest independent US
refiner.
 Large capacity for sour
crude. Expanding that
capacity.
 Good financials.
 Strong management.
 Performance will be
tightly correlated to
energy prices.
Risks
 Operational risks: fires,
shutdowns.
 Regulator risks: EPA.
 Highly volatile earnings.
 Performance will be
tightly correlated to
energy prices.
VLO: Summary Recommendation




Buy a large position. This is the major directional play for
the sector.
Not for the faint of heart. Possibility of 4-6 month pull back
and expect a wild ride!
Potential for large gains outweigh the risks.
Position size will be determined by sector weighting.
Outline
Objectives, Philosophy, Process – Jeremy
 Program Enhancements

Website – Ramya
– New York Trip – Autumn
– RISE Conference – Brad
–
Sample Stock Report – Adam
 SIM Fiscal YTD Performance – Jeremy

Performance of the SIM Program
2007 Press Coverage:
Ohio State's Student Investment Portfolio: A picture of perfect timing
Business First - March 9, 2007 by Brent LaLonde
Money management class keeps Ohio State endowment funds safe
Business First - January 5, 2007 by Doug Buchanan
They Give It the Old College Try: Funds Let Students Invest Millions
The Wall Street Journal- July 14, 2006 by Diya Gullapalli
Performance of the SIM Program
2007 Presentations:
Neil Legacy Luncheon
Presented by SIM Program – May 5, 2007
Fifth Third Bank
Presented by Prof. Andrew Karolyi - March 14, 2007
The Ohio State University Alumni Leaders Conference
Presented by Prof. Andrew Karolyi, Jeremy Sell and Adam Grimes - October 6, 2006
Performance of the Fund
Fiscal YTD*
SIM
1-year
S&P-500
SIM
S&P-500
Annualized Total Returns
Gross of Fees
26.00%
Net of Fees
25.53%
18.49%
22.07%
15.24%
21.46%
Measures of Risk
Standard Deviation
Beta
Tracking Error (σε)
R2
7.95%
5.90%
9.32%
1.26
1.26
2.82%
2.55%
0.875
0.925
Sharpe Ratio
3.27
Information Ratio
2.67
2.68
Portfolio Turnover
74%**
74%
*Period ending April 30, 2007
**w/o Spring 2007 trades
3.13
2.37
7.13%
2.14
Performance of the Fund
3-year
5-year
SIM
S&P500
Gross of Fees
13.75%
12.25%
Net of Fees
13.18%
Since
Inception
10-year
SIM
S&P500
10.23%
8.54%
SIM
S&P500
SIM
S&P500
9.21%
8.05%
10.58%
11.42%
Annualized Total Returns
9.68%
8.67%
10.03%
Measures of Risk
Standard Deviation
Beta
Tracking Error (σε)
R2
8.12%
7.11%
12.18%
12.03%
17.51%
15.28%
16.47%
1.08
0.96
1.07
1.08
2.56%
3.74%
6.38%
7.64%
0.901
0.906
0.867
0.785
Sharpe Ratio
1.69
Information Ratio
0.59
Portfolio Turnover
73%
1.72
0.84
0.71
0.45
Calculated based on period ending April 30, 2007
0.53
0.18
0.53
0.64
-0.11
13.53%
0.84
ay
-0
Se 2
p0
Ja 2
n03
M
ay
-0
Se 3
p0
Ja 3
n04
M
ay
-0
Se 4
p0
Ja 4
n05
M
ay
-0
Se 5
p0
Ja 5
nM 06
ay
-0
Se 6
p0
Ja 6
n07
M
20,000
18,000
16,000
14,000
12,000
Thousands
Performance of the Fund – Cont.
SIM Total Value > $25 Million
26,000
24,000
22,000
Performance of the Fund – Fiscal YTD
Monthly Returns Comparison
5.0%
4.1%
4.0%
4.6%
3.7%
3.6%
3.5%
3.1%
Total Return (Gross)
3.0%
1.8%
2.0%
1.3%
1.2%
1.0%
0.0%
-1.0%
SIM Returns
-2.0%
S&P 500
-3.0%
-3.2%
-4.0%
Jul
0.64%
Aug
Sep
Oct
Nov
Dec
1.19%
1.55%
0.43%
1.23%
0.38%
9 out of 10!
Jan
2.01%
Feb
-1.27%
Mar
Apr
0.07%
0.14%
Performance of the Fund – Fiscal YTD
Sector Attribution Analysis – Q1
GIC
Overweight:
• Information Technology - 2.35%
• Health Care - 1.50%
Underweight:
• Utilities - (2.30%)
• Consumer Discretionary - (1.50%)
• Materials - (1.30%)
* Purchased 11/30/2006
Jun-Sept
S&P
Difference
10.72%
4.72%
6.00%
4.97%
5.09%
-0.12%
Energy
-5.75%
-2.14%
-3.61%
Financials
10.50%
7.30%
3.20%
Health Care
12.61%
9.76%
2.85%
Industrials
4.45%
-0.59%
5.04%
Info Tech
19.65%
8.33%
11.32%
Materials
-0.13%
-1.13%
1.00%
Telecom
6.44%
9.63%
-3.19%
Utilities
5.99%
5.21%
0.78%
Grand Total
8.90%
5.17%
3.73%
Cons Discr
Cons Staples
Performance of the Fund – Fiscal YTD
Sector Attribution Analysis – Q2
GIC
Overweight:
• Health Care – 5.42%
•Telecom – 2.50%
Underweight:
• Utilities - (2.20%)
• Consumer Staples – (2.10)
• Consumer Discretionary - (2.00%)
Sept-Dec
S&P
Difference
Cons Discr
4.00%
9.82%
-5.82%
Cons Staples
3.53%
2.94%
0.59%
Energy
5.00%
10.73%
-5.73%
15.68%
6.33%
9.35%
Health Care
2.60%
0.99%
1.61%
Industrials
6.52%
5.34%
1.18%
Info Tech
11.92%
5.95%
5.97%
Materials
8.22%
10.74%
-2.52%
Telecom
9.55%
7.82%
1.73%
Utilities
18.04%
8.28%
9.76%
8.59%
6.17%
2.42%
Financials
Grand Total
* Purchased 11/30/2006
Performance of the Fund – Fiscal YTD
Sector Attribution Analysis – Q3
GIC
Dec-Mar
S&P
Difference
Cons Discr
2.10%
-0.99%
3.09%
Cons Staples
2.70%
1.59%
1.11%
Energy
11.68%
1.72%
9.96%
Financials
-3.85%
-3.44%
-0.41%
Health Care
6.10%
0.62%
5.48%
• Consumer Discretionary - (2.75%)
Industrials
2.04%
0.58%
1.46%
• Consumer Staples – (2.50)
Info Tech
-6.18%
-1.10%
-5.08%
Materials
-0.12%
8.38%
-8.50%
Telecom
2.94%
6.36%
-3.42%
Utilities
0.05%
8.43%
-8.38%
Grand Total
0.99%
0.18%
0.81%
Overweight:
• Health Care – 5.00%
•Telecom – 4.00%
Underweight:
• Utilities - (2.10%)
* Purchased 11/30/2006
Performance of the Fund – Fiscal YTD
Stock Attribution Analysis
Ticker Gain/(Loss)
Dollar
Contribution
Return
COF
(136,518)
(0.028)
-12.0%
BMR
(116,846)
(0.024)
-11.5%
VLO
(35,342)
(0.007)
-3.1%
WMT
(30,232)
(0.006)
-8.2%
HD
(28,794)
(0.006)
-4.5%
HAL
(28,215)
(0.005)
-5.2%
DEL
(26,192)
(0.005)
-7.0%
AT
(24,208)
(0.005)
-10.0%
DNA
(17,832)
(0.003)
-3.1%
OSK
(10,710)
(0.002)
-5.3%
Performance of the Fund – Fiscal YTD
Stock Attribution Analysis
Dollar
Ticker Gain/(Loss) Contribution
Return
MA
843,994
0.163
132.7%
INFY
443,486
0.086
137.0%
MSFT
332,185
0.064
28.5%
SYK
330,583
0.064
54.2%
MER
270,777
0.052
30.9%
AMX
261,149
0.050
57.9%
XOM
241,700
0.047
27.6%
HPQ
213,384
0.041
33.0%
ABB*
210,962
0.041
26.1%
TEVA*
165,470
0.032
19.4%
* Purchased 11/30/2006
* Purchased 11/30/2006
30-Apr-07
16-Apr-07
02-Apr-07
80
19-Mar-07
100
05-Mar-07
19-Feb-07
05-Feb-07
22-Jan-07
08-Jan-07
25-Dec-06
11-Dec-06
120
27-Nov-06
13-Nov-06
30-Oct-06
16-Oct-06
02-Oct-06
18-Sep-06
40
04-Sep-06
B $47.00
$600,000
21-Aug-06
07-Aug-06
24-Jul-06
10-Jul-06
60
26-Jun-06
12-Jun-06
Performance of the Fund – Fiscal YTD
Stock Attribution Analysis
Mastercard
140
S $101.52
$750,000
S $102.22
$900,000
B $54.07
$300,000
20
0
Performance of the Fund – Fiscal YTD
Stock Attribution Analysis
Mastercard
Closed $140
on 5/23
160
140
S $101.52
$750,000
120
100
S $102.22
$900,000
80
B $47.00
$600,000
60
B $54.07
$300,000
40
20
* Purchased 11/30/2006
12-May-07
12-Apr-07
12-Mar-07
12-Feb-07
12-Jan-07
12-Dec-06
12-Nov-06
12-Oct-06
12-Sep-06
12-Aug-06
12-Jul-06
12-Jun-06
0
Current Position: Portfolio Summary
PORTFOLIO METRICS
SIM
S&P
30-Jun-06 30-Apr-07 30-Apr-07
Average P/E
16.54
18.21
Average P/BV
3.72
3.81
109,626
89,124
26,501
0.98
1.04
1.22%
1.00
1.83%
Avg. Mkt. Cap. (in $ mln.)
Portfolio Beta
Dividend Yield
*Period ending April 30, 2007
18.19
Current Position: Stock Allocation
Top Ten Holding by Market Value*
Ticker
Total
%
Microsoft
$1,694,604
6.75%
Reinsurance Group of America
$1,283,586
5.11%
Infosys Technologies ADR
$1,251,165
4.98%
ABB LTD ADR
$1,203,588
4.79%
TEVA Pharmaceutical ADR
$1,195,272
4.76%
Merrill Lynch & Co.
$1,182,013
4.71%
Johnson & Johnson
$1,117,428
4.45%
Goldman Sachs
$1,027,467
4.09%
L-3 Communications Corp.
$944,265
3.76%
Altria Group Inc
$937,312
3.73%
Grand Total
*Period ending April 30, 2007
$11,836,700 47.15%
Current Position: Stock Allocation
International Holdings by Market Value*
Total
Ticker
%
Infosys Technologies ADR
$1,251,165
4.98%
ABB LTD ADR
$1,203,588
4.79%
TEVA Pharmaceutical ADR
$1,195,272
4.76%
American Movil SA
$835,227
3.33%
Schlumberger LTD
$738,300
2.94%
Suez Sponsored ADR
$222,690
0.89%
Huaneng Power Intl ADR
$117,711
0.47%
$5,563,953
22.16%
Grand Total
% Intl Qtr End
16.24% Jun-2006
13.99% Sep-2006
16.86% Dec-2006
*Period ending April 30, 2007
Current Position: Sector Allocation
•Overweight: Healthcare, Telecom
•Underweight: Consumer Discr, Consumer Staples, Energy
0.0%
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
5.0%
10.0%
15.0%
S&P 500 Weight
SIM Weight
20.0%
25.0%
Future Ambitions
• R.I.S.E. – Full class participation
• Investment Policy Statement for the SIM Fund
• Sector, Mkt Cap, Int’l Exposure Constraints
• Derivatives Use, IPO’s, ETF
• Resource Improvements
• Dedicated Bloomberg Terminals
• Attribution & Risk Management Software
• Dynamic website
Thank You!
Questions?