h
ANNUAL REPORT
TO THE UNIVERSITY OF CONNECTICUT FOUNDATION
Prepared by Graduate Student Fund Managers
MBA Class of 2003
Storrs, CT
April 24, 2003
Executive Summary
University of Connecticut Student Management Fund – MBA
April 24, 2003
1. Investment Philosophy and Forward Expectations:
Initially
 Uncertain outlook led to conservative approach
 Strong confidence in Health Care and Consumer Staples
 Low confidence with IT and Financials
Now
 Bearish outlook due to war
 Remain confident in Consumer Staples
 Guarded optimism for economic turnaround
2. Portfolio Performance:
 Fund’s overall return since inception is 7.27%,
including initial position in fixed income and cash.
- Current Allocation (04/11/03)
Sep. 30, 2002
Apr. 11, 2003
Return
S&P 500
$815.28
$868.30
6.50%
MBA Portfolio
$199,675.86
$214,194.48
7.27%
64.41% in S&P 500 Index Fund — 28.22% in Equity — 7.37% in Cash
Reasons for high concentration in the S&P 500 Index Fund:
 Inability to find individual stocks satisfying our strict buying criteria due to high volatility and
continuously changing market, economic, and political situation
 Adoption of a conservative approach at the beginning
 Could not fully utilize the funds in the short term after converting them to S&P Fund from Bonds
- Sector Allocation
SMF Sectors Allocation - 04/11/03
 9 sectors – S&P 500 based
 Methodology: emphasis on non-cyclical sectors and
stocks, and diversification.
The biggest sectors represented in our allocation are:
Consumer Staples, Financials, Health Care, and
Industrials.
10.0%
10.0%
10.0%
15.0%
15.0%
10.0%
15.0%
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
15.0%
- Equity Selection
Methodology: Fundamental analysis based on news and recommendations from financial websites, models,
and industry benchmarking. Our risk control philosophy is based on stop-loss and upside price review.
We look for stocks that have:
 Solid financials
 Strong management
 Consistent earnings growth
 Attractive valuation relative to the index
 Higher Return/Risk relative to market
We have invested in 18 stocks. Our current equity holdings (14 stocks) are: Johnson Outdoors, Spartan
Motors, TJX Companies (Consumer Discretionary), Wrigley WM Jr. Co., Sysco, and Pepsi (Consumer
Staples), Exxon (Energy), Pfizer, Wellpoint Health Networks, and Abbott Labs. (Healthcare), Int. Flavors &
Fragrances and MacDermid (Materials), Diebold (IT), and MetLife (Financials).
Four stocks, Armor Holdings and General Dynamics (Aerospace), Group 1 Automotive (Consumer
Discretionary), and Cognizant (IT), have been sold due to stop-loss rigor.
3. Lessons Learned:
Task
Stock selection process
Identify right stock that matches our
value growth investing strategy
Upside review and Sell discipline
Lessons Learned
Holistic approach with emphasis on company’s related risks
Focus on fundamental analysis and on stocks with growth
potential and low volatility
Act in timely manner
Investment Philosophy
The investment philosophy of the Student Managed Fund (SMF) is based on the diversification principle.
Our intent is to accommodate styles and strategies considered reasonable and prudent.
The objective of portfolio managers is to achieve the best possible trade-off between risk and return. A topdown analysis of strategy starts with the broadest choices concerning the make up of the portfolio. For
example, the capital allocation decision is the choice of the proportion of the overall portfolio to place in safe
but low return money market securities versus risky but higher-return securities like stocks. The choice of the
fraction of funds apportioned to risky investments is the first part of the investor's asset allocation decision,
which describes the distribution of risky investments across broad asset classes - stocks, bonds, REIT's,
foreign assets and so on. Finally, the security selection decision describes the choice of which particular
securities to hold within each asset class. Most institutional investors follow a top-down approach.
We started our investment with the top-down approach and spent considerable time at the onset to decide on
the portfolio allocation. Several factors went into that decision such as market conditions, prevailing interest
rates and expectations about the economy and the future interest rates. After deciding on the portfolio
allocation, we decided on the sectors to invest in and the proportion to be allocated to each sector. This
decision was based on the attractiveness of the sectors in light of prevailing market conditions. Within each
sector, the stock selection decision was based on company fundamentals – sound business philosophy, strong
management principles, profits, growth potential, and position in the industry vis-à-vis competitors.
As mentioned earlier, asset allocation decisions are made at a high organizational level for institutional
investors. The UConn foundation, which oversees the SMF, follows the same principles and would like the
SMF portfolio managers to decide on selection of securities as the portfolio allocation decision has already
been accounted for at the top organizational level. In light of these developments, we have sold our
investments in Fixed Income and our decisions, now, are primarily based on sector allocation and stock
selection within the sectors.
Market Outlook
It is hard to make investment decisions in uncertain market with high volatility influenced by still declining
economy and unstable geopolitical situation. While the expected war outcome has influenced the market in
both directions, the successful end of the campaign could overcome the bearish economic outlook for the
most part.
The smooth progress on battlefield has helped stock market recover a lot since March 20. Short-term
expectations are for further rebounding of the stock market. But while market indexes have climbed since the
end of the war, investors are still cautious and companies hold their spending waiting to see the post-war
impact on economy.
Economic indicators were also biased. The unemployment rate in March remained unchanged at 5.8%.
However, this does not mean the job market has stopped the downward movement. According to the Labor
Department, except for construction, almost every major industry saw a drop in payrolls in March. The stable
unemployment rate reflected an increase in the number of Americans who said they were “discouraged over
job prospects” and had stopped looking for work, which meant they were not counted as unemployed under
the Labor Department’s rules.
Consumer confidence lost another 2.3 point to 62.5 in March. The low confidence level was partly due to the
uncertainty of the war. Because consumer spending accounts for over two thirds of American economy
growth, a lingering weak consumer confidence will ultimately lead to a recession.
At the same time, we saw some positive signs on the movement of the interest rate. Although the Federal
Reserve decided to leave interest rates unchanged last month, bond yields, which are set by investor buying
and selling each day in the vast credit markets, rose recently. The increasing bond yield sends out a signal
that investors believe market is at, or at least close to, the bottom point now, which leaves room primarily for
improvement in future.
There are some controversial factors affecting the economy in the long run: the expected low, stable oil price,
and the instable global political situation. To some extent, the effects of these factors will offset each other.
Whether the economy will benefit from the end of the war will depend strongly on who is going to
participate in rebuilding Iraq afterwards. Worsened relationships between Europe and US due to the war in
Iraq might have some significant negative impact in future, if common interests not met in post-war Middle
East.
Looking forward, we see:
 Economy continuing to struggle although the U.S. gross domestic product growth has resumed,
 Timing of the business recovery remains uncertain, and
 The last strong sector, the housing sector, recently has started to slump.
Additional troubling factors are:
 Capital spending is weak
 Industrial production is slipping
 Employment outlook is troubled
All of this suggests a weak first quarter, with growth of, at most, 1.5-2%. 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.
Our Experience and Lessons Learned
Our reflection
We are grateful to be selected to form the group of nine MBA students to manage the Student Managed Fund
(SMF). Exercising the tasks of an analyst and portfolio manager team allowed us to apply academic
knowledge to realistic portfolio management scenarios. We have gained valuable experience in selecting,
analyzing, and valuing stocks, and presenting portfolio performance to the SMF Investment Advisory Board
and the UCONN Foundation. This hands-on experience has honed not only our financial knowledge but also
helped some of us in deciding to specialize in the area of portfolio management.
Our approach
We valued more than 25 companies and closely followed an additional 20 but the sluggish economy caused
us to take a guarded approach, resulting in only 18 purchases so far. We have 14 holdings at the present
moment. Nevertheless, we continuously assessed new opportunities in various markets by performing a
holistic approach. We expanded the company analysis to include industry level indicators, such as business
model and long-term outlook.
The increased concerns about a possible prolonged war in Iraq overshadow the expected recovery of the
financial market and add another uncertainty to our investment approach, particularly regarding the equity
holdings. We have undertaken some steps to minimize these effects by holding a big part of our portfolio in
the S&P index fund. The market it is so volatile that we can’t afford to loose any rally that may come if good
news arises from the front line especially that our performance is compared with the index.
Lessons learned
1. Task: Stock Selection Process


We the based the overall decision on a holistic approach by soliciting several online tools, such
as Value Line, Moneycentral, Quicken, and Yahoo! Finance to identify the top stocks in each
sector.
Our emphasis was to identify the company’s 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.
2. Task: Identifying the right stock that matches our strategy of value and long-term growth investing
 The highly volatile market offered us a great challenge but we focused on fundamental analysis
to select stocks with growth potential and low volatility.
 We concentrated our analysis on the following key factors:
- Solid financials
- Strong management
- Significant company and/or industry specific risks
- Earnings growth
- Valuation relative to the index
 We evaluated the stocks with respect to the following valuation models :
- Dividend Discount Model
- Multistage Growth Model
- P/E Model
- SSG
 We performed a detailed analysis of intangible information to reveal possible risk factors.
3. Task: Upside review of position and capturing of gains
 We lost the opportunity to lock-in some gains. Johnson Outdoors (consumer discretionary sector)
at some point in December over performed the S&P500 by 33.64%-points. Johnson Outdoors
reached its upside review price of $11.80.
 The review should always take place in a timely manner.
4. Task: Sell discipline
 Our fundamental sell strategy is to limit the downside risk while allowing for a larger upside
return. Initially we established risk control depending on company or industry, ranging from 15% to -20% at the discretion of the sector manager. But in the advent of war with Iraq, we
decided to reduce the downside risk by establishing stop loss prices of -15% of purchase price
for all stocks.
 The sell strategy allowed us to protect our portfolio from massive losses. But it should not be
seen as a sole safeguard of the portfolio’s value in uncertain economic and political situation.
 We should have more closely followed every holding so that no sell occurs just because the
stock fell below its stop-loss price.
Final Words
We are very thankful to the Foundation of the University of Connecticut for providing us with this
outstanding experience. We have not only had the opportunity to utilize our classroom knowledge in real life
financial decisions but also gained insight to the functioning of the financial professional world through our
interaction with the Foundation members, Investment Advisory Board, and the guidance of Dr. Chinmoy
Ghosh and Mr. Patrick Terrion. We congratulate the incoming fund managers for 2003/2004 and hope that
they will be able to leverage on our experience.
Performance
Holdings as of 04/11/2003
Sectors
Company
Johnson
Outdoors Inc.
Spartan
Motors Inc.
TJX
Companies
Wrigley WM
Jr Co.
Sysco
Corporation
Consumer
Discretionary
Consumer
Staples
PepsiCo Inc.
Energy
Exxon Mobil
Health Care
Materials
Pfizer Inc.
WellPoint
Health
Abbott
Laboratories
International
Flavors &
Fragrances
MacDermid
Industrials
IT
Financials
Vanguard 500
Index Fund
Cash
Total

Diebold Inc.
Metlife Inc.
No. of
Shares
Date of Purchase
Purchase
Price
Current
Price
Capital
Gain/Loss
% of
Total
Portfolio
400
11/20/02
9.43
9.27
(1.70%)
1.73%
350
02/19/03
10.41
8.20
(21.23%)
1.34%
250
04/01/03
17.20
18.91
9.94%
2.21%
100.4
10/22/02
53.16
57.16
7.52%
2.68%
100
150
145
151.4
02/25/03
04/01/03
11/20/02
10/22/02
27.87
40.20
34.93
31.77
26.66
40.27
34.33
31.51
(4.34%)
0.17%
(1.72%)
(0.82%)
1.25%
2.82%
2.32%
2.23%
70
11/13/02
76.65
76.80
0.20%
2.51%
100
02/25/03
34.16
39.12
14.52%
1.83%
150
11/20/02
32.99
200

75
150
04/08/03

01/29/03
03/04/03
20.62

38.25
25.58
31.61
20.27

36.10
27.62
(4.18%)
(1.70%)

(5.62%)
7.97%
2.21%
1.89%

1.26%
1.94%
10/22/02
82.24
80.51
(2.10%)
64.41%
1
1


VFINX
1,720.09
SWMXX
15,795.13
7.37%
100.00%
Best Performers
Stock
Abbott Laboratories
Wrigley WM Jr Co.
TJX Companies
Exxon Mobil
Metlife Inc.
WellPoint Health
Date
bought
02/25/03
10/22/03
04/01/03
11/20/02
03/04/03
11/13/02
Purchase
price ($)
34.16
53.16
17.20
34.93
25.58
76.65
Price ($)
Holding Period
Return (%)
As of 04/11/03
Stock
S&P500
39.12
57.16
18.91
34.33
27.62
76.80
14.52
7.52
9.94
(1.72)
7.97
0.20
3.55
(2.46)
1.14
(5.02)
5.63
(1.61)
Overperform
(% points)
10.97
9.98
8.80
3.30
2.34
1.81
Worst Performers
Stock
1
Armor Holdings
General Dynamics 1
Group 1 Automotive
Inc. 2
Spartan Motors Inc.
Cognizant
Technology 4
Date
bought
Purchase
price ($)
Price ($)
10/22/02
11/13/02
16.36
79.71
01/28/03
2/19/03
03/10/03
Holding Period
Return (%)
Stock
S&P500
12.96
63.70
(20.78)
(20.09)
(0.32)
0.55
(20.46)
(20.64)
24.85
10.41
21.20
8.20
(14.69)
(21.23)
(4.26)
2.74
(10.43)
(23.97)
22.67 5
19.30
(14.87)
7.94
(22.81)
1
Sold on 01/23/2002.
2
Sold on 03/04/2003.
3
As of 04/11/03.
4
Sold on 04/10/2003.
5
On 04/02/03, Cognizant Technology had a 3 to 1 stock split.
Comparison of S&P 500 and SMF Allocation
Sectors
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials*
Information Technology
Materials
Telecommunication Services
Utilities
Underperform
(% points)
S&P 500
As of 4/11/03
13.40%
9.40%
6.00%
20.60%
15.30%
11.30%
14.40%
2.80%
4.00%
2.80%
SMF Stocks
Invested
Decided
As of 4/11/03
10.00%
15.00%
10.00%
15.00%
15.00%
15.00%
10.00%
10.00%


18.71%
23.90%
8.24%
6.86%
23.26%

4.48%
14.55%


* Specific SMF allocation decision for Industrials: 10% Aerospace/Defense; 5% Other.
Investment
Difference
(% points)
5.31
14.50
2.24
(13.74)
7.96
(11.30)
(9.92)
11.75


Appendix
ABBOTT LABS (NYSE: ABT)
Industry: Pharmaceuticals & Biotechnology
Sector: Healthcare
Beta: 0.85, as of 12/06/2002
Large Cap: $ 67.8 Billion
Current Price: $35.08 as of 02/21/2003
BUY
100 shares (limit buy) @ $34.50 = $3450
Stop loss order: $29 (-15%)
Upside Review: $42 (+20%)
1. Recommendation
 Strong Growth
 Innovative with promising pipeline of drugs
 New acquisitions and strategic alliances
 Different valuation models confirm Abbott’s strong growth potential
 Five different criteria and analyst ratings suggest that the stock is in a buy zone
2. Business Summary
Abbott Laboratories makes health-care products including drugs, diagnostic tests, intravenous solutions,
laboratory and hospital instruments, prepared infant formulas, and nutritional products. Also makes
agricultural and chemical products. Brand names include: Biaxin, Hytrin, Similac, Isomil, Murine, and
Selsun Blue.In the second quarter of 2002, Abbott and Celera Diagnostics, a joint venture between the
Applied Biosystems Group and the Celera Genomics Group of Applera Corporation, entered a long-term
strategic alliance to develop, manufacture and market a broad range of in vitro molecular diagnostic products
for disease detection, disease progression monitoring and therapy selection.
3. Financial Highlights
Company Industry S&P 500
Abbott’s income in the 4th quarter of 2002 Growth Rates %
8.60
0.50
0.40
was 3,342% higher than the same period in Sales (Qtr vs year ago qtr)
the previous year and its sales were 780%
Income (Qtr vs year ago qtr)
80.20
2.40
17.40
higher than the industry average. The same
EPS (Qtr vs year ago qtr)
79.80
2.20
20.80
pattern was noticed for EPS. However,
Abbott’s five-year average of EPS and
Sales (5-Year Avg.)
8.41
11.58
7.47
sales is slightly worse that the industry’s.
EPS (5-Year Avg.)
0.80
6.93
(5.77)
The five-year average dividend is 33%
Dividends (5-Year Avg.)
11.58
8.66
(2.75)
higher than that of the industry. This
shows that the company has experienced high growth in the past year. S&P 500 looks much worse if
compared to Abbott.
Abbott is quite volatile but the same
pattern is vivid for the competitors
Eli Lilly & Company (LLY) and
Astrazenca PLC (AZN).
Since Jan. 2001 Abbott followed the
movement of S&P500 but it has
outperformed that index.
4. Models
Is this a good company? Time Series Analysis: Abbott is a good company, because it has steady, stable and
sustainable pattern of measures over the 10-year period. Both EPS and DPS have a rising trend with an
average of 11 %. ROE has a steady trend with an average of 37%. Based on the tree valuation methods the
company growth rate on average is 15%.
Is this a stock a good value? How the current stock price compares with the fair value. The Abbott stock is
at a good value.
All four valuation models (no growth, multistage growth model – high growth at 15% after five years 5 %
growth, and P/E model) confirm that Abbott has strong growth potential. The models indicate different
opportunities of growth and a different value of the stock. According to those models, the value of the stock
is much higher than the current price, which confirms that the stock has strong growth potential.
In addition to the valuation models, other criteria were taken into consideration in concluding that the stock
is a buy.
Criteria
Recommendation
5 year horizon based on quartiles analysis
Buy
Valuepro.net
Buy
SSG – proprietary software
Buy
Analysts Ratings
Buy
5. SWOT Analysis
Strengths
Weakness
 Valuable brand name
 Innovative
 Strong growth
 Diversified product
portfolio
 Clear distribution
channels
 Abbott is not subject to
significant concentration
risks relating to
customers, products or
geographic locations,
except that three
wholesalers accounted
for 22 percent, 19
percent and 15 percent
of trade accounts
receivable as
of December 31, 2002,
2001 and 2000,
respectively.
 Four Models suggest
the stock is a buy zone
 Heavily regulated
industry - the
development,
manufacture, sale, and
distribution of products
are subject to
comprehensive
government regulation.
 Rising costs and risks
of new product
development
 Costs associated with
trying to comply with
FDA mandated Quality
Systems Regulations
(QSR)
Opportunities
Threats
 Aging US population &
increasing demand
 Prescription drug
reform may lead to
accelerated patent
expiration, because are
mostly sold on
prescription or
recommendation of
physicians
 Homeland Security
development of
diagnostic test
 Strategic business and
technology acquisitions new acquired businesses:
Knoll Pharmaceuticals,
Vysis, Inc,
Biocompatibles
International plc, BASF,
Hokuriku Seiyaku Co.,
Vysis, Inc., (leading
genomic disease
management company)
 In October 2002,
Abbott announced
restructuring plans to
align Abbott's global
manufacturing operations
with its scientific focus
and to achieve greater
operating efficiencies in
its Diagnostics and
International segments.
Implementation has
started in 2002
 Pricing pressure from
generic manufacturers,
peers, HMO
companies, &
government agencies
 Strong competition:
price and search cost
for technological
innovations
 Expiration of patent
protection can affect
the future revenues and
operating income of
Abbott.