The Student Managed Fund employs a strategic, rigorous, and thorough approach to managing a $200, 576 portfolio, with a set objective to outperform the S&P500. With readily available access to critical information, faculty guidance, and academic support, we are able to conduct intensive research and analyses for all our decisions and selections to maximize the return on our portfolio.
Currently, we have chosen seven securities valuated at $99,436.25. Before
November’s end, we will acquire two additional equities and increase our invested capital to approximately $130,000. Our selections originate from a bottom-up approach, followed by intrusive examination through a rigorous screening process. The criteria utilized in the selection process promises only selections with the highest returns and conservative risk.
Within the portfolio we are overweight on the consumer discretionary and consumer cyclical industries.
In preparation for a continued appreciation we have employed upside review prices.
Conversely, to protect ourselves from downside depreciation we have employed stop-losses.
To employ downside risk minimization, we placed our stop losses at 15-25% depending on the selection, its volatility and market responsiveness. On the upside, we have opted to continuously monitor the portfolio and new investment opportunities, and hold a review at a
20% appreciation in equity value. Taking on conservative assumptions, we anticipate a volatile and hypersensitive market due to upcoming fiscal year end.
The Student Managed Fund is certain in our selections and perceive them as suitable for a multitude of market conditions. As we continue our rigorous equity screening process and further allocate capital into investment opportunities, we are confident in our decisions and expect to fulfill our portfolio objectives.

TJX
$16,399.50
16%
Total:
$
104,159.25
BUD
$10,552.00
10% EAT
$8,277.50
8%
PFE
$ 21,060.00
20%
HDI
$15,483.00
15%
PAYX
$16,056.00
15%
MO
$16,331.25
16%

Medium Risk
15%
$15,652
Low Risk
$86,933
85%

Companies that are continually successful are the one’s that can consistently maximize shareholder value over extended periods of time. A company that possesses a clear and consistent corporate vision is able to portray its philosophy to all individual managers who share and understand a corporation’s objectives. Hence, as money managers in the undergraduate Student Managed Fund, our mission is derived from the theories of strategic investing. We strive to employ a systematic approach that consists of both quantitative and qualitative elements in identifying stocks that possess above average returns. In doing so, this provides us managers with financial expertise and value-added experience.

The screening process implemented by undergraduate Student Managed Fund managers is employed utilizing a top-down approach. Industries were chosen based on the potential for future success using the Valueline.com website. As a group, we collectively wrote down a list of potential industries based on an analysis of both quantitative and qualitative factors. For example, an industry that appears to have a high ROE and ROIC, atop a potential to succeed in the current market environment, would be considered an area of investment. Next, teams of two were formed and agreed to take a group of five industries for in depth analysis and research. Factors we consider include the stability of the industry, the past growth of this industry, trends within that sector, and future expansion of corporations within the industry. We often found blue chip and internet stocks overvalued and insufficient for providing sufficient returns. If the group responsible for the industry deemed it risky and encountered difficulties valuing the contained corporations it was discarded. If a company is found in an industry that possesses sufficient evidence from historical performance in favor of outperforming the S&P, then that company was taken into further consideration. It is added to the final list of stocks to be looked at during the next meeting. After a corporation is analyzed individually, we met to analyze this company collectively.
SMF portfolio managers initially screen companies’ credentials based on the reports given by the Valueline.com website. Securities are found within industries that possess growth potential based on past performance and future prospects. Managers address securities within their industries to the group to be collectively analyzed, which occurs during our biweekly meetings. Corporations were valued using criteria such as expected growth rate, shareholder equity, long term debt, P/E ratio, common shares outstanding, and earnings per share over a ten year timeframe. Next, each member arrived at current buy price to determine if it was overvalued or undervalued. We then review each stock based not only on its monetary value, but also in terms of its intangible assets, such as the quality of management and current acquisition news. A list is prepared highlighting what stocks we should buy (undervalued) and what stocks we should keep on watch (slightly overvalued).
Managers are then able to perform an intensive, inferential analysis of the historical and

current information contained in disclosed financial statements. Financial strength of a company is determined by how well a company generates cash and the probability of future projections. With all of these valuation methods we weigh relevant information to reach a buy or sell decision.

The criteria we required of our selections were a multidimensional conglomerate of fundamental financial ratios, annual report and financial statement indicators, external and internal risk factors and financial stability of the company.
Fundamental Financial Analysis
Returns are the primary category to measure the financial efficiency of the of the company. In the returns category, we examine ROI, ROE, Growth , and Profit Margins .
We would first look at ROI to determine how effectively the company uses its capital to generate profit. Our numerical range is 15%+ on ROI with future indicators that it will continue to grow. Additionally, ROE is an important measure of how well a company uses reinvested earnings to generate additional earnings and profit. Like ROI, we look for
ROE of 15+ that we believe are going to increase and grow continuously. We try to assess companies that are capital intensive for intense growth as a payoff for high reinvestment, and low generation of excess profits. Capital intensive companies consume FCF to improve or grow the business, however we search for risk minimization by requiring any company that is capital intensive to have room to take on debt when needed, and repay all loans.
For company growth we set our criteria at the 10% minimum mark, which is an assumption based on historical analysis and current performance of the cash flows, earnings, sales, dividends, and book values. Out of those variables, cash flows and earnings are given the most weight. We like to see a minimum growth rate of 8-10%, preferably higher.
However, the growth we look for is contingent upon the size of the company and its earnings’ size.
Lastly, we look for Profit Margins to assess the operational efficiency of the company and continuously look for indicators such as cost cutting, higher efficiency, higher turnover rates, lower inventory which leads to high profit margins. Historical trends of operating margins are important to determine how focused the company has been on reducing costs and increasing efficiency to generate higher net income. This information provides indication of the focus of the company on continuously improving operating processes, thus increasing margins and efficiency in the future to generate higher profits.

Company cash flows is the next critical part in our financial evaluation criteria of a company. The factors we examine are reinvestment activity (ROE, ROI), Share Repurchase,
Dividend Payouts, Revenue/Expense Management, and
Taxes/Trading/Options/Securitization. It remains critical that the company does not maintain negative cash flows for an extended period of time, otherwise it will place itself at high risk for any downside occurrence. Additionally, it will not be able to take advantage of opportunities such as acquisitions or finance activities it will not be in a position to take on debt.
We look for the capability of the company to repurchase its outstanding shares to drive up the price of the stock, and reduce the vulnerability of hostile takeover. The dividend payouts also indicate signs that the company is generating enough FCF to pay out to its shareholders, and is efficient in its current position where it does not need to reinvest all capital back into itself. The Revenue/Expense management criteria brings us back to the efficiency factor, which is again determined by examining cash flows through operating, investing, and financing activities.
Financial Disclosures
The next step in our selection process is determining whether the selection fits our criterion in terms of financial statements, shareholder reports, and annual reports. From these disclosed statements, we can determine the capital structure of a company in addition to its accounting credibility and the general financial health of the company.
Within the capital structure , we focus on the long term debt and equity held .
Additionally, we look for off-balance-sheet debt to determine the companies’ liabilities and risks. Our criterion is to look for companies that do not leverage themselves to marginal levels and have the projected earnings and cash flows to pay back all debt. Additionally, we look for companies to have been able to efficiently pay off long term debt and not carry it on their balance sheet for extended time periods.
Throughout the annual reports and financial statements, we look for non-aggressive accounting practices . We carefully monitor practices such as non-recurring lump sums being put into the balance sheet as earnings or the rebalancing of cash funds into assets to

meet projected earning targets. Additionally, we stay away from companies who are subject to disclosing financials differently to the IRS versus the shareholders.
Our accounting credibility criterion requires us to carefully examine accruals , including revenues and expenses. Important factors include pension liabilities and the projected outflows at maturity of the pension funds. Inventory managements and contingent liabilities are all factors that we examine to select the companies with only the lowest risks and accounting numbers that reflect efficiency.
External and Internal Impact
Our qualitative criteria are based on examining the internal and external factors that will impact the company, thus impacting the value of the equity. For internal factors we examine the management of the company. We find it crucial to seek out independence between the board members and executives of a firm, to keep the maximization of shareholder equity, private incentives, and company objectives separated and properly managed. While examining management, we review all insider trading within the last 2 years and focus in the more recent periods. We typically avoid companies with a high insider trading activities such as selling stock. On the upside however, we do find it favorable when the activity reflects buying by the insiders.
External factors include analysis of the market, including participant perceptions and future outlooks. We look at inflation, interest rates, bond prices, money supply, general indicators of the economy to determine the overall outlook and direction of the selection in the 12-18 month future. As we delve further into market analysis, we examine the specific sector and industry of the company. We look for higher overall averages, returns, cash flows and growth from the company we are selecting in comparison to the industry and sector benchmark. Examining the outlook for the specific industry gives us a better baseline for assumptions in terms of projected growth and sales of the firm and gives us an indicator of the direction of the earnings based on industry outlook which will directly effect future sales.
Focusing in the companies competition , it is crucial to seek out a company which is a leader among its competitors within the industry. Benchmarking the firm against the

industry average and its top 5 competitors is done to evaluate the firm’s ability to stay within the industry, gain market share, and most importantly prosper and generate profit.
Lastly, we examine worst case scenarios and the impact it would have on the company. We only select the firms that we believe will be able to retain stability during extreme downside fluctuations and display resilience to recover from the negative impacts.
Financial Stability
When we consolidate our analyses and retain the companies which fit all our criteria, we then benchmark our selections against each other to determine which will provide us with our 15% required rate of return . Additionally, we then make and overall assessment of the general financial health and stability of each selection, and if the equities display 15% yield , and are financially solid, then we will allocate a decided amount of investment capital into that investment.

The primary models we use are the Earnings Model, DCF model, and P/E multiple model.
Earnings Yield Model
The Earnings Yield Model is used to determine whether the company will have growth in the projected ESP and dividends. Yield gap between the risk free rate. Want earning yields to be better then risk free rate. The calculation for this:
EPS/current price= current yield +dividend yield = yield today
In the Earnings Yield Model we look for the current yield to be higher than that of the long term bond (risk free rate, Treasury note). If the yield is lower, we then look for the projected growth rate to be extremely high and through compounding 5-10 years we establish the yield, rate or return that the security will provide for us based on its projected earnings.
Value Line Model
The Value Line model gives us an estimate of the FV of stock price in 10 years taking into consideration the rate of growth, and amount of long term debt and equity, along with incorporated ESP for an earnings and value of share measurement. In order to establish the value of the stock to us today given the integrated factors, we discount back the FV price of stock using our required rate of return (15%) to achieve a buy price today.
Value Line Model:
McDonald’s
Long Term Debt + Shareholder Equity: $20,700 (million)
Growth Estimate: 5.5 %
Common Shares Outstanding: 1,265 (million).
Average Annual P/E Ratio: 19
Return on Total Capital:
10
9.5%
The FV Price: ($20,700 x 9.5%) x (1.055)^ x 19 P/E = $50.45
1265
(Discount the future price at 15% for n=10)

BUY PRICE TODAY $12.47

Discounted Cash Flow Model
The DCF (discounted cash flow) model is one of our growth rate models. Growth is projected and analyzed to determine the price of the stock depending on what types of growth might be experienced. The DCF model in particular is used to find the present day price of the stock using discounted cash flows. The cash flows are based on educated and conservative estimates to determine the future cash flow 10 years from now. In order to correctly calculate the current stock price we divide the future free cash flows by the estimated 10 year yield. This will provide the group with a relative present value (intrinsic value) for the stock based on its future 10 year potential based on cash flows. The simplest discounted cash flow model is expressed algebraically as:
PV of stock Price = income per share / (required rate of return - growth in income)
This model carries a large weight of significance with it because it values the stock based on the company’s ability to generate excess cash. The Free Cash Flow is not only necessary to sustain the business, but may be crucial when short-term debt is needed for leverage.
Additionally, it puts the company in a strong financial position to be able to grow through
M&A, raise dividend payments, and re-purchase shares.
Valuepro.net (internet DCF model):
Altria Group Inc.
Intrinsic Value in 10 years
Growth Rate
98.72
7%
Risk Free Rate (10 year T-Bill) 5%
WACC 6.66
$98.72/(1.15)^10 = $24.40 buy intrinsic value today

P/E Model
P/E Model: The P/E model will determine the stock price based on its EPS and P/E ratio.
The NAIC Stock Selection Guide is an interactive version of the P/E model. After entering the data into the NAIC Stock Selection Guide the model will perform a regression analysis to determine if the stock should be purchased at its price, along with giving other information .

To manage our upside and downside risk, we have adopted the stop loss and review strategy as the previous managers had used.
We placed our stop loss between 15%-25%, contingent upon the volatility of the stock. For a low risk equity which has high liquidity, and has low standard deviation along with low beta, we put the stop loss at 20%. For a high risk equity which shows significant fluctuations as a result of market movements or standalone volatility (beta & standard deviation), we will exercise our stop loss at 15% to minimize our downside risk.
On the upside, we will review a security when we see 20% growth. Such intense rise in price can be due to market volatility as participants overreact to a surprise in earnings or other positive aspects. Potentially, this can be a good time to assess the security and take a sell decision if appropriate and a price decrease is estimated to occur. We would then monitor the security until the price decreased to our “buy” target level, and we would repurchase it if our evaluation continued to take on the buy decision.
Our current stop losses for our selections are as follows:
PFE: $24.50
BUD : $42.30
TJX : $17.60
HDI : $40.23
EAT : $26.16
MO : $40.00
PAYX : $33.29

The sources of information used range from details and lengthy annual reports, to financial web-sites open to the general public, along with paid services. Our main sources for analyzing financial health are ValueLine.com, Annual Reports, Bloomberg, Wall Street
Journal, and other internet sources such as:
 Nasdaq.com
 Multex.com

ValuePro.com

Yahoo! Finance

Wsj.com
Lastly, company websites are continuously used to monitor the activity of the company.

9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
TJX
8.49%
EAT
7.36% MO
6.64% BUD
5.87%
PFE
3.88%
PAYX
2.43%
HDI
0.29%
In absolute terms all stocks have positive returns giving us a fund yield of 4.71%

SMF vs S&P500
SMF
4.71%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
S&P500
2.65%
Outperfomance
2.06%
Currently the Undergraduate Student Managed Fund is surpassing the S&P 500 benchmark by 2.06%. (11/12/03)
(11/12/03)
Ticker
BUD
EAT
HDI
MO
PAYX
PFE
TJX
Quantity Purchase Price 11/12 Close
200
250
325
49.8
30.72
47.5
52.76
33.11
47.64
325
400
650
47.1
39.17
31.18
50.25
40.14
32.4
725 20.85 22.62
Purchase Price
Net Change
Net Percent Change
Change Total Change
5.61%
7.22%
0.29%
$592.00
$597.50
$45.50
6.27%
2.42%
3.77%
$1,023.75
$388.00
$793.00
7.82% $1,283.25
$99,471.25
$4,688.00
4.71%
Current Value
10,552.00
8,277.50
15,483.00
16,331.25
16,056.00
21,060.00
16,399.50
104,159.25

Part VIII. Where Do We Go From Here?
Upon careful review of selected industries, we faced many challenges finding companies who possess above average returns on capital. With the market rallying up to new annual highs we have dissected industries in which we can seek out companies with above average future growth potential. This was one of the biggest challenges we faced as managers this semester. We anticipate the movement of the overall market will continually present us with new opportunities to become profitable. These opportunities will become apparent from continual market research as well as the monitoring and re-evaluation of current holdings. Future investments will consist of not only seeking out new opportunities within the market, but also optimizing our current capital allocations.
Currently, we have reached out goal in allocating half of our capital in the market and plan to be fully invested by late January. We hope that varying economic conditions will present us with new opportunities to invest. Continual earnings reports as well as economic figures will provide us with a chance to find new sectors and new investment opportunities. We believe the market will be very sensitive to these reports and figures. If there is positive news, the market may be able to sustain the growth it has demonstrated over the past seven months. In the case of poor economic news and a downtrend, it will be the responsibility of the managers to maintain and restructure the portfolio to remain ahead of our benchmark.
As previously indicated, much of the monitoring of the portfolio will be based on the careful observation of our stop losses and upside reviews. In the case of a downside review the managers will have several options. We could sell out of the security in full, sell out of the security and buy more at a lower price, or hold the security in hopes of it appreciating in value. We feel that we have exerted an extended a significant amount of in-depth analyses and research to the companies we have invested in. This leads us to believe that a security that depreciates to our stop loss may need a careful reexamination of qualitative and quantitative factors. If a security climbs to a twenty-percent upside review, we can sell the security and seek other investment opportunities, hold in hopes of further appreciation, or purchase more of this security at a lower price.

Overall, we expect the commitment of the managers and the confidence in our trades to be the determining factor in surpassing the S&P 500. Confident in our individual and collective examination of securities, we have set high expectations for the portion of the fund currently allocated. We plan to continually monitor our performance and adjust to varying market conditions. In order for us to collectively achieve these high standards we will need to consistently exude time and effort. Although our absolute performance will depend largely on the direction of the economy, we plan to make a fervent effort to seek out opportunities where we can continue to add value in hopes of surpassing our benchmark.