Practicum in Portfolio Management
Fina 5132, Fall 2005
Fina 5232, Spring 2006
Instructor: Professor Rex Thompson FB430A
Class: 354MB MW 3:30 to 4:50 (see outline for exact dates)
Background:
The Ann Rife Cox and Nancy Chambers Underwood Investment Funds are investment
portfolios managed solely by Cox School students. Currently, the combined funds have assets of
about $6.5 million, representing one of the largest and oldest student-managed portfolios in the
United States.
Course Objective:
The goal of the course is to give students hands-on money management experience that
culminates at the end of the year in an annual report describing the entire management process as
applied to the Cox Endowment Fund. Six major areas of fund management are covered: (1) the
client interface, (2) an investment outlook for the coming year, (3) asset allocation, (4) the equity
portfolio profile, (5) individual equity security transactions, (6) performance evaluation. The first
term FINA 5132 focuses on getting to know the existing equity portfolio and building the analysis
required for equity sale transactions. FINA 5232 covers the rest of the analysis and the writing of
the annual report.
Research analyst reports and the final annual report are intended to compare favorably with
reports provided by top money managers and street analysts around the world. The class presents
its recommendations and opinions in various forums including a presentation to the Investment
Committee of the Board of Trustees. To view the web page and annual report from past years,
enter through the class number within the Cox School web site.
Texts and Readings:
Background review is covered in any good Investments text. It is presumed that you have access
to one or several such texts. A good choice is either Bodie, Kane and Marcus, Investments (BKM),
or Essentials of Investments (BKME). A course packet of readings is provided. Readings with
asterisk (*) are optional. Check chapter headings as we go and fill in your background proactively
as needed. The outline shows chapters from BKME (2004).
There are limitless popular books on the subject of "running money". Read any good books
lately? Let us know.
Grading: Course grades will be based on contributions in six areas:
Assignments and intermediate stage work
Infrastructure work
Sector Reports/Presentations
Sell/Hold Reports/Presentations
Productive Class Participation
Peer Evaluations
There is flexibility on how each student chooses to get involved and make a contribution. I will try
to accumulate a running point total as the semester unfolds with the scale 100 = A, 90 = A-,
85 = B+, 80 = B. Students who are fully involved shouldn’t have any trouble earning 100. But
students who just sit there, don’t take ownership of anything, don’t show any leadership and don’t
have an impact on the thinking of the class won’t get there.
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Presentations: The course involves real time investment decision-making. In the first term, the
focus is on sectors and equity transactions from the existing portfolio. Each student participates in
a sector presentation and at least one equity sell/hold presentation. The sell/hold presentations are
accompanied by a report that must be distributed to the class either during the class period before
the presentation or through WebCT and email at least two days in advance. This allows the rest of
the class time to review the material. The other presentations can be given with summary sheets
handed out during the presentations. In the Spring term, external presentations made by the class to
the Investments Committee of the SMU Board of Trustees and the members of the Women's
Financial Series are our opportunity to showcase our analysis. These are accompanied by an annual
report that describes the entire investment process.
Attendance: Attendance is crucial to the success of the course. Given the importance of
classroom discussion, it is imperative that all students contribute their ideas. Attendance is
counted, informally, as part of class participation.
Professional Standards: Because the class manages a real investment portfolio, we are
accepting fiduciary responsibility for the portfolio entrusted to us. We are all expected to conduct
ourselves with the highest level of professional and ethical standards. Assume that our discussions
are confidential unless clearly indicated otherwise.
Motions: Policy decisions such as buy and sell orders are decided by a majority vote of the
students in attendance, exclusive of the individuals making the recommendation.
Have Fun: In our efforts to propose and implement a meaningful investment strategy, we need a
constant set of checks and balances involving the participation of everyone. We will have to smile
at our own mistakes and be constructive in our comments about the analysis of others. Moreover,
many of our decisions will revolve around judgment calls that are inherently qualitative and
subjective. We need everyone’s point of view to reach consensus. As quoted in the preface to an
older version of Bodie, Kane and Marcus, Essentials of Investments (BKME) "Knowledge comes
from taking things apart, but wisdom comes from putting things together." In this course we
attempt the latter.
This course will follow University policies for Disability Accommodations, Religious
Observance and Excused Absences for University Extracurricular Activities.
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Date
Topic and Assignment (* = optional or background; *** = assignment or presentation due)
Mon. Aug. 22 Introduction and overview of course
Analyst assignments to sectors
Sources of information about financial markets
Background on student managed portfolios
Readings
1.0 Our management team
1.1 The current portfolio/Annual Report: Spring 2005
1.2 Sources of information On Line and at the BIC/Library
1.3 S&P Industry Sectors vs. Cox Portfolio
1.4 Student Portfolio Management
10.1 AIMR code of ethics and professional conduct
Mon. Aug. 29 Our code of conduct
*** salient aspects of the AIMR code
Getting to know our Sectors: building a sector report
Collecting Stock Information
2.1 Sector Outline
2.2 Example Sector Report: Tech Software
Wed Sep. 7
CLASS MEETS WED. LABOR DAY WEEK
Salient issues in applying financial theory to stock valuation
Breaking down an analyst report
Readings
3.1 Valuation Issues – a synopsis and review
3.2 An Analyst Report Scorecard
4.1 Introducing an equity quant. workbook: HDI
Mon. Sep. 12 Applying Stock Valuation Tools on the Existing Portfolio
Profiling a stock, a sector and a portfolio
Comparable Company Analysis
Earnings Forecast and Discounted Cash Flow Analysis
Readings
BKME: Equity analysis Ch. 11.7, 12, 13
3.3 Some sample analyst reports
3.4 Wharton’s Fundamental Equity Analysis Primer
4.2 Comp/profile sheet examples from the quant. workbook
Mon. Sep. 19 Valuing the industrial composite for baseline assumptions
Toward best practice
*** A preliminary profile sheet due
4.3 Valuing the VL Industrial Composite: DCF from the quant workbook
4.4 More examples from DCF worksheets of the quant. workbook
4.5 Best Practice talking points
Wed. Sep. 21 Sector office hours
Mon. Sep. 26 ***Sector Reports and Short Presentations Due (I. A. and B.)
Wed. Sep. 28 ***Sector Presentations Cont’d.
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Mon Oct. 3 Stock Tools Review/Q and A
(Comparables, Ratios, Earnings Forecast, DCF, Analyst Report, Slides, Primary Research)
*** First draft of Quant workbook due
Mon Oct. 10 FALL BREAK
Wed. Oct. 12 Relighting the fire.
Mon. Oct. 17 Perspectives on stock selection
Readings
BKME: Anomalies of the EMH Ch. 19
5.1 Principal investment styles
5.2 Value vs. Growth Investing ...
5.3 Contrarian Investment
5.4 Overview of the anomalies literature
Mon. Oct.. 24 Gearing up for sale recommendations / Discussion of Primary Research
Mon. Oct. 31 Guest Speaker - Equity Analyst, Gretchen Teagarden
Mon. Nov 6
(Sectors 1&2)***Hold/Sell Presentations and Reports Due (II. A. B.)
Mon. Nov. 13 (Sectors 3&4)***Hold/Sell Presentations and Reports Due – (II. A. B
Mon. Nov. 20 (Sectors 5&6)***Hold/Sell Presentations and Reports Due – (II. A. B.)
Mon. Nov. 27 Gearing up for Spring
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Course outline for Fina 5232
This outline is a continuation of the fall outline for Fina 5132
Mon Jan. 23 Building an Investment Outlook for 2006
Value Line, Standard and Poor’s, and Other "Outlooks"
Readings
BKM: Macroeconomic and Industry Analysis Ch. 17
6.0 Components of an economic outlook and an investment outlook
6.1 Outlook Information Template
6.2 The year 2005 in review: WSJ
6.3 Broad economic and investment outlooks
6.4 Outlooks with a clear investment focus
Mon. Jan. 30 Building a client relationship
10.1 AIMR code of ethics and standards of professional conduct
10.2 AIMR Endowment Policy
10.3 Perspectives on endowment objectives
10.4 SMU Investment Objectives and Policies
Wed. Feb. 1 [Guest: Bill Akmentins, CFA, Treasurer’s Office SMU]
Mon. Feb. 6
Meeting the client: [Guest: Liz Williams, Treasurer SMU]
Mon. Feb. 13 Class discussion of economic predictions and data
Mon. Feb. 20 Long Term Asset Allocation Strategy:
Applying Efficient Frontier Analysis
A basic spreadsheet with historical data: Frontier
Readings
7.0 Contents of a thorough asset allocation recommendation
7.1 Some current opinions
7.2 The record of allocation recommendations
10.4 SMU University guidelines
7.3 Allocations of pensions and endowments
7.4 Using the Frontier software
*7.5 What happens when inputs are measured with error
7.6 Homework assignment on Asset Allocation
Mon. Feb. 27 Discussion of Asset Allocation recommendation for 2006.
***Allocation HW Due
*8.1 An overview of fixed income management
Mon. Mar. 6 Performance Measurement
Assignment: Performance for 2005
Readings
BKM: Performance measurement Ch. 24
*9.1 Historical performance of managed money
*9.2 Industry Performance Presentation Standards
9.3 5 yr historical performance data and HW
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Mon. Mar. 13 Discussion of performance HW and assigning of performance write-up.
*** First draft of client letter, outlook and asset allocation
***Performance HW due
Mon Mar. 13 SPRING BREAK
Mon. Mar. 20 ***Begin equity transactions
Wed. Mar. 22 ***Equity transactions continued
Mon. Mar. 27 ***Equity transactions continued
Wed. Mar. 29 ***Equity transactions continued
Mon. Apr. 3
***Equity transactions continued
Mon. Apr. 10 Final transactions and loose ends
***Near final drafts of sections in the annual report
***Near final Portfolio Profile
Mon. Apr. 17 Final preparation of final documents for Investment Committee
WFS Dry Run (Participants Only)
Thurs. Apr. 20 WFS (Participants only required to attend – all invited)
Mon.Apr.24 Final presentation dry run/critique and final comments
Tues. Apr. 25 Presentation to investment committee 4:00-5:00pm
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