Portfolio Management Project

Portfolio Management Project

Group 7:

Roni Arjang

Jeff Fogel

Barrington Edwards

Zabel Momdjian

Finance 437, Section 23057

Spring 2003

Contents

Style of Fund / 3
Description
Investment Objectives
Return Requirements
Risk Tolerance
Constraints / 4
Liquidity
Time Horizon
Tax Considerations
Legal
Unique Circumstances
Economic Analysis / 5
Asset Allocation / 8
Performance / 9
Investment Strategies & Selection / 10
Monitoring & Rebalancing / 11
Conclusions / 14
References / 16
Appendix and Attachments / 16

Style of Fund

Description

The fund seeks to provide reasonable high current income and maximum long-term total return while incurring less market risk than a pure equity fund. Our portfolio combines elements of an aggressive growth fund in order to maximize our profits, and an income or blend fund in order to minimize risk. There is a strong emphasis on capital appreciation because of the time horizon and the risks involved. The key in reducing the unsystematic risk is by creating a diversified portfolio. Therefore, we created a diversified portfolio across several major sectors. As a group of young money hungry investors, we have been seeking to increase our investments immensely by taking many risks within certain limits. We attempted to purchase various investments in order to obtain the highest intrinsic value for our portfolio.

Investment Objectives

1. Return Requirement

Based on the Consumer Price Index over the previous one-year period, there has been 2% in excess of inflation. The total return of our portfolio, which continued to show strong growth within the short time horizon, included dividends, interest, capital appreciation, and overall less transaction costs as well as management fees. The funds annual management fees are approximately 1% of the average net asset value for the entire year. Where as current inflation, as measured by the US Consumer Price Index, is approximately 2%.

2. Risk Tolerance

Considering our short time horizon of only 2 months, it was apparent in order to increase our investments immensely we need to be aggressive and take certain risks. Even though the stock market appeared to be at a volatile stage because of inflation, interest rates, and War, we still decided to pursue various aggressive strategies. As young investors we all had a high level of risk tolerance, however by creating a diversified portfolio we minimized our risks and reduced the level of volatility that could have impacted our portfolio negatively. Due to the immense liquidity needs, our fund required an above average amount of cash and short-term investments. Overall, our level of risk was between medium and high.

Constraints

Liquidity

Because of our company’s risk adverse nature we maintained at least 31% of our assets in cash. There were not any special circumstances that prevented us from investing in any illiquid assets such as Real Estate or Artwork other than the fact that it was out side the scope of this project.

Time horizon

From 6 February 2003 to 11 April 2003, a period over which are only 46 trading sessions, represented our most limiting constraint. Our goal, HPR > 2% for all invested assets within this narrow trading period mandated vigorous asset management such that speculative gain comprised a large part of our strategy. Throughout the time horizon, while our motivation was not to plunge blindly into the market, we favored risky action to no action: better to swing hard at a low fastball than to let it fly past when you’ve only got one chance at bat!

Tax Considerations

Our investment company realizes that any capital gain on any non-exempt asset is subject to federal tax laws. Long-term capital gains on investments held over one year may be taxed between 10%-20%. Short-term capital gains are considered ordinary income and may be taxed at a higher income tax rate. Therefore, while the investor’s best interest to hold profitable securities longer than one year, our time constraint demanded less passivity, with the associated capital gains tax.

Legal and Regulatory

SEC guidelines represent the only conditions under which our management of assets is bound. This means that we will pursue any and all profitable opportunities that are not inconsistent with SEC rules.

Unique Circumstances

On March 20th 2003, the United States declared War on Iraq. In the days leading up to the war, the stock market was apprehensive to the thought of long term investing in the U.S. economy. It all depended on whether or not the War on Iraq would last longer than expected or suffer large fatalities, which would determine if the U.S. economy would spiral into a deep recession. But as the U.S. war started, the market actually rose; the Down Jones Industrial Average jumped 8.43% from the week before and the price on crude Oil dropped from $38 to $29. This was an indication of investors’ expectations that the war would have a favorable outcome. And indeed it did, lasting only a couple of weeks the U.S. economy came out of the Iraq conflict with only minor cuts and bruises.

Economic Analysis

MARKET EVENT ANALYSIS

Two indexes were used in doing the market analysis, these were: The S&P500 Index and NASDAQ.

WEEK 1: 2/06 – 2/07

During the first week S&P500 was at 838.15 points and towards the end of the week it closed at 829.69 points. This means that S&P500 went down –8.46 points. NASDAQ was at 1,301.73 points and then went down to 1,282.47 points at the end of the week, a drop of –19.26 points.

WEEK 2: 2/10 – 2/14

At the beginning of the second week S&P500 closed at 835.97 points, and at the end of the week it went down to 834.89 points, a drop of –1.08 points. NASDAQ closed at 1296.68 points at the beginning of the week and then went up and closed at 1,310.17 points at the end of the second week; a rise of +13.49 points.

WEEK 3: 2/17 – 2/21

During the beginning of the third week the S&P500 closed at 851.17, at the end of the third week it went down and closed at 848.17 points; a decline of -3.00 points. At the beginning of this week NASDAQ closed at 1,346.54 points and then it increased to 1,349.02 points, an increase of +2.48 points.

WEEK 4: 2/24 – 2/28

At the beginning of the forth week the S&P500 closed at 832.58 points, at the end of this week it went up and closed at 841.15 points; a rise of +8.57 points. At the beginning of the week NASDAQ closed at 1,322.38 points and at the end of the week it closed at 1,337.52 points, an increase of +15.14 points.

Anxiety over the possible war weighted on Wall Street. Worries about Iraq have largely eclipsed other economic news in recent weeks, and are expected to keep the market on edge.

WEEK 5: 3/03 – 3/07

During the fifth week the S&P500 closed at 834.81 on the first day of this week, and at the end of the week it closed at 828.89 points; it went down by –5.92 points. At the beginning of the week NASDAQ closed at 1320.29 points and then went down to 1305.29 points at the end of the fifth week; a decline of –15.00 points in one week.

Stocks continue to slip day-by-day because war is on its way with almost 200,000 troops poised to invade Iraq and some intelligence analysts saying the initial attack could come as soon as this weekend. Because of this, consumer confidence is at a 9-year-low, suggesting heightened fear of terrorism. Companies are stalling on business expenditure decisions, and investors are selling stocks.

WEEK 6: 3/10 – 3/14

At the beginning of the sixth week the SAP500 closed at 807.48 points, and then towards the end of the week it went up and closed at 833.27 points; an increase of +25.79 points. During the beginning of this week the NASDAQ closed at 1,278.37 points and then went up and closed at 1,340.33 points at the end of the week; a rise of +61.96 points.

Even though the S&P500 and NASDAQ ended up positive at the end of the week, stocks ended mostly flat after talk from the White House which persuaded investors that a war in Iraq is imminent even without broad international backing. Wall Streets flat finish on Friday was from Thursday’s rally from hopes for a short war in Iraq, or no war at all.

WEEK 7: 3/17 – 3/21

During week seven S&P500 closed at 862.79 points at the beginning of the week, and then it went up to 895.79 point at the end of the week; a rise of +33.00 points. The NASDAQ closed at 1,392.27 point at the beginning of the week, and then went up and closed at 1,421.84 points at the end of the week; NASDAQ went up by +29.57 points.

Shares on Wall Street were set to head lower on Monday in light volume as fears of an imminent US-led war in Iraq kept investors at large. However, as war with Iraq intensified on Friday, stock prices went sharply higher because this seemed to ease doubts about the course of action and allowed investors to begin looking past the war’s eventual end. Stocks rose strongly when it was thought that the war would end swiftly; and, rumors that Saddam was dead sent investors pouring their cash into stocks.

WEEK 8: 3/24 – 3/28

During week number eight, both S&p500 and NASDAQ went down. At the beginning of this week S&P500 closed at 864.23 points, and towards the end of the week it went down and closed at 860.50 points; a decline of –3.73 points. NASDAQ closed at 1,369.78 points at the beginning of the week, and then slightly went down to 1369.60 point at the end; a minimal decline of –0.18 points.

On Monday stocks plunged on fears of long war. Many investors chose to cash in profits following a stunning eight-day rally by Dow and S&P500 index. Dow Jones Industrials gave back more than 300 points following its best week in two decades with its worst day of the year. Gainers included defense companies on expectations of greater demand for their products.

WEEK 9: 3/31 – 4/04

During the ninth week both S&P500 and NASDAQ had increased. At the beginning of the week S&P500 closed at 848.18 points, and at the end of this week it has risen to 878.85 points; an increase of +30.67 points. NASDAQ closed at 1,341.17 points at the beginning of the week, and then went up and closed at 1,383.51 points; a rise of +42.34 points.

A warning from the Iraqi government that it might take nonconventional action against U.S. forces who had seized the capital’s main airport worried stock investors, who largely shrugged off a large drop in March’s payrolls.

WEEK 10: 4/07 – 4/11

During the tenth and last week of trading, both S&P500 and NASDAQ had declined from the previous week. At the beginning of this week S&P500 closed at 879.93 points, and towards the end of the week it went down and closed at 868.30 points; a decline of

-11.63 points. At the beginning of this week, NASDAQ closed at 1,389.51 points and by the end of the week it closed at 1,358.85 points; down by –30.66 points.

Wall Street was set to soar at the opening of Monday, amid perceptions that the U.S.-led war against Iraq is entering its final phase after troops entered central Baghdad.

The market had discounted success in Iraq ahead of time. Initial enthusiasm had waned, and investors were wrestling with the economy’s poor health and consumer confidence. Companies had been hesitant to increase capital spending, which is the cornerstone of economic growth.

At the closing of Friday, investors deemed the worst of the fighting to be over and drew comfort from the upbeat economic news. Even though at this time there was a sharp rise in consumer confidence the stocks were hurt because many dealers had expected an even bigger increase then there was.

Asset Allocation

General Allocation

/

By Class

Asset / Value / Percent
Equity / $217,112.75 / 42.99%
Debt / 28,597.40 / 5.66%
Cash / 259,410.34 / 51.36%
/ Asset / Value / Percent
Stocks (US) / 209,812.75 / 41.54%
Stocks (Foreign) / 7,300.00 / 1.45%
Mutual Fund / 28,597.40 / 5.66%
Cash / 259,410.34 / 51.36%

Allocation by Specific Holdings

Cash / 51.24%
QQQ / 10.20%
MRK / 5.48%
MMM / 5.70%
FNM / 5.48%
MRO / 3.89%
HD / 2.57%
FDX / 2.28%
G / 0.63%
LAB / 1.80%
NDN / 0.84%
NOK / 1.45%
PG / 1.68%
PRULX / 6.76%
100.00%
Allocation by Sector
Sector / Value / Percent
Industry
Conglomerates / $28,708.56 / 5.68%
3M / $28,708.56 / 5.68%
Consumer, Noncyclical / 11,664.59 / 2.31%
Personal&Hosehold Products
Gillette / 3,190.59 / 0.63%
Procter&Gamble / 8,474.00 / 1.68%
Energy / 19,584.00 / 3.88%
Oil and Gas
Marathon Oil / 19,584.00 / 3.88%
Financial / 18,100.00 / 7.26%
Investment Services
LaBranche & Co. / 9,050.00 / 1.79%
Consumer Financial Services
Fannie Mae / 27,604.00 / 5.46%
Technology / 7,300.00 / 1.45%
Communications Equipment
Nokia ADR / 7,300.00 / 1.45%
Health Care / 33,529.10 / 6.64%
Major Drugs
Merck / 33,529.10 / 6.64%
Services
Retail (Specialty)
$.99 Only Stores / 4,210.50 / 0.83%
Retail (Home Improvement)
Home Depot / 12,950.00 / 2.56%
Transportation / 11,492.00 / 2.28%
Air Courier
Fedex Corp. / 11,492.00 / 2.28% / 166,092.75 / 32.88%
Other / 339,027.74 / 67.12%
Mutual Funds
T. Rowe Price US Treasury Long Term / 28,597.40 / 5.66%
Stock Trust (ETP)
Nasdaq-100 / 51,020.00 / 10.10%
Cash / 259,410.34 / 51.36% / 339,027.74 / 67.12%
Total / : / $505,120.49 / 100.00%

Performance