Page
I. Student Management Team ………………………………….. 3
II. Letter from Managing Director ………………………………. 4
III. Letter from Student Director …….…………………………… 5
IV. Discussion
Fund Purpose & Organization ……………………………. 6
Fund Operations & Objectives ……………………………. 7
Investment Strategy & Return ……………………………. 8
The Year in Review ………………………………………. 9
Summary of Transactions ………………………………… 10
Sector Holdings …………………………………………… 12
VI. Financial Statements
Schedule of Investments ………………………………….. 13
Income Statement …………………………………………. 15
VII. Investment Outlook …………………………………………… 16
VIII. Acknowledgements …………………………………………… 20
/Marygrace Wilce
Student Director, Pacer Investment Fund
Manager,Financial Reporting, Prudential Trust CompanyB.S. Accounting – Bloomsburg University, 1988
/Michael Kondrat
Securities Manager, Pacer Investment Fund
PP&E Accountant, Marywood UniversityB.B.A. Accounting – Marywood University, 2012
/
Megan Gardner
Allocations Manager, Pacer Investment Fund
Financial Services Team Leader, Kraft Foods, Inc.B.B.A. Finance and Management – Marywood University, 2010
/Kimberly Sarro
Senior Investment Analyst, Pacer Investment Fund
Investment Set-up and Support Associate, Prudential RetirementB.S. Finance and Management – West Chester University
/
Sara Stellatella
Senior Investment Analyst, Pacer Investment Fund
Executive Secretary, Tobyhanna Army DepotB.S. Exercise Science – East Stroudsburg University, 2008
Dear Pacer Fund Constituents,
“Run, Forrest, Run!”… For most, those words from the famous American epic, “Forrest Gump”, likely create distinct images in each of our minds – perhaps of a boy in leg braces suddenly breaking free from a bunch of harassing bullies or perhaps of an individual who one day, “for no particular reason”, decided “to go for a little run” and “just kept on going.”
As I now reflect upon the stock market over the past year, it is that latter image which seems to almost perfectly describe the performance. It just seemed to start out of nowhere, and it just kept on going. Near the end of 2012, the economy was still sluggishly plodding forward as it recovered from a deep recession, and then, for no particular reason, the market just decided to go for a little run – well, actually a big run, the biggest since the late 1990s.
It is because of this kind of volatile swing that I have always touted to my students the importance of maintaining a long-run focus. Overreacting to the latest economic events and trying to “time” market fluctuations often results in unnecessary loss realizations and missed opportunities for gains. While such market instability can be unsettling, it does offer important educational experiences that test the knowledge, skills, and fortitude of investors.
Consequently, it is from this perspective that we must view the performance of these student managers. As shown below, the Fund witnessed sizable returns – which would be more than acceptable on a regular basis. But, just like those trying to keep pace with Forrest as he ran across the country, ultimately the Fund faltered slightly at the end of the year and fell short of the benchmarks (although the Fund displayed greater stability and less fluctuation).
Pacer Investment Fund vs. Benchmark Returns
2013 Annual Return
/Std Dev of Returns
Pacer Fund / 26.6% / 2.24%S&P 500 / 29.6% / 2.37%
Russell 3000 / 33.3% / 2.84%
Sincerely,
Art Comstock, Ph.D.
Managing Director, Pacer Investment Fund
Dear Pacer Investment Fund Constituents,
2013, what a great year for the US stock market! It posted its largest gains since the 1990s. The Dow is up 26.5% - its best return since 1995 and the S&P500 closed the year at 29.6%, which has not been achieved since 1997. We are now in a bull market that is approaching its 5th year. While 2013 started out with an improving economy in its favor and unprecedented stimulus from the Fed, the market endured the challenges of the possible fiscal cliff, the Boston marathon bombings, as well as the government shut down, and it managed to end the year on a high note. The Pacer Fund also had a great year and reported a 26.6% return in 2013 compared to last year’s return of 11.3%.
The managers of the Pacer Fund started the year looking to trim the holdings of each sector and followed through with more timely execution of selling losing securities. The managers stuck to their core philosophy of long-term growth and investment in fundamentally sound companies. As the Fund managers gained experience and confidence during the year, they continued this active investment style throughout 2013 and made purchases to better position the portfolio for the long-run. Sector holdings were evaluated on a quarterly basis with a strong focus on protecting the gains of the Fund by incorporating the use of stop-loss orders.
Looking to 2014, Pacer Fund managers are very optimistic. Coming off record highs in 2013, the economy continues to show signs of strength. There is improving consumer sentiment in the market and investor confidence is high. Domestically, unemployment is on a decline while the housing market is on an upswing. The global economy also seems poised to improve as Europe has come out of its recession, and while it is still in a fragile state, continued growth is expected. 2014 has the potential for a strong global economy. Continuing forward, the managers will seek investments with solid fundamentals while taking advantage of undervalued securities when compared to their true net worth.
The Fund managers and I would like to extend thanks to all of the individuals who have supported the Pacer Investment Fund throughout the years. The opportunity of being able to actively participate in fund management combined with classroom learning results in an incredible experience for all students involved. Our continued development in money management along with the experience we have gained will translate into positive results in both our professional and personal lives.
Sincerely,
Marygrace Wilce
Student Director, Pacer Investment Fund
Fund Purpose
The purpose of the Pacer Investment Fund is to provide students in the Business & Managerial Science Programs with an opportunity to gain experience in the management of an investment portfolio. The Fund is a student-managed fund created to enable students to gain exposure to the structure and operations of the financial services industry and to gain real-world experience in the management of an investment portfolio. The educational mission of the Fund is to offer students a thorough grounding in the modern process of analyzing the investment merits of individual securities, and of managing investment portfolios. The graduate concentration in Finance and Investments and the undergraduate Financial Planning major at Marywood University are designed by faculty to provide information on relevant financial theory and practice – including the qualitative and quantitative aspects of investment management. Student managers of the Pacer Investment Fund regularly meet with faculty and investment professionals, and they are required to file reports, make formal presentations, monitor and evaluate investment performance, and prepare periodic reports.
Fund Organizational Chart
Fund Operations
The management team of the Pacer Investment Fund consists of the Student Director, Allocations Manager, Securities Manager, and several Senior Investment Analysts grouped by industry sector. Within each sector, teams of undergraduate students perform security analysis in an effort to assist the decision-making process of the managers.
After reviewing the research, the Senior Investment Analysts make their recommendations to the Securities Manager who decides which securities have the most investment merit. The Allocations Manager evaluates the portfolio and makes recommendations to the Student Director regarding the proportional allocation of assets within the Fund. Upon receiving input from the Securities Manager and the Allocations Manager, the Student Director takes the final investment decisions to the Managing Director (and the Board of Managers). The Student Director also oversees the development of the financial statements and presentations.
The Investment Advisory Board consists of faculty members and industry professionals, and it is responsible for reviewing the fund’s financial and academic performance. They provide feedback and advice to the student teams and managers and are available for any questions the students may have.
The Board of Managers consists of three members: the Director of the Finance Program (currently Dr. Art Comstock), the Dean of the College of Liberal Arts & Sciences (currently Dr. Fran Zauhar), and the Vice President of Business Affairs (currently Mr. Joe Garvey). Their responsibilities are to review any decisions for approval or changes suggested by the student teams and managers and to provide general oversight of the Fund. The Managing Director (currently Dr. Comstock) is in charge of formulating the investment policies and strategies of the Fund and is the only individual that has the authority to contract for the Fund.
Fund Objectives
During our inaugural year, the Fund initiated the investment goal of “capital preservation with moderate growth.” In order to measure the success of achieving this goal, the managers established a general investment objective of an annual return within a range of +/-3% relative to the S&P500 return with a risk level similar to that of the overall market.
In order to build upon early successes and seek some higher potential returns, that goal was slightly altered in 2008 to “capital preservation with moderately aggressive growth”, and a somewhat higher level of risk was accepted in order to possibly achieve greater growth. However, in the more volatile recent years, stability was placed at a premium, successfully limiting losses in 2008 but also limiting some of the recovery gains in 2009. Since 2010, a conscious effort was made to return to the overall objective of “capital preservation with moderately aggressive growth” by adding some smaller, technology-oriented companies and other higher-beta businesses with greater growth potential. In general, this objective has been successfully implemented over the past few years, although the Fund managers consistently review the portfolio holdings in order to ensure compliance with this goal.
Investment Strategies
In order to achieve its objectives, the Pacer Investment Fund generally adheres to three research methods including Technical Analysis, Fundamental Analysis, and the Buffettology Approach.
In utilizing Technical Analysis, the student teams and Fund managers have engaged in several price trend identification models, including momentum and contrarian strategies, moving average, and break-out trading rules. This research represents the least relied upon method in the decision-making process, but the managers have attempted to balance the portfolio with a few securities that are supported by technical models.
More heavily utilized, Fundamental Analysis involves the evaluation of a firm’s financial health and future prospects. The Fund’s objective is to invest in companies that have solid financial fundamentals in the areas of liquidity, asset management, debt management, and profitability, and whose price valuations offer room for growth within the framework of Benjamin Graham.
The investing philosophy of Warren Buffett (i.e., “Buffettology”) is also implemented by the Fund managers for identifying investment potential. Buffett is a value investor who chooses securities based on a set of guiding principles that represent what he considers to be strong “business economics”. These principles, in particular the long-term stability of earnings per share and a high return on equity, have greatly influenced the investment decisions of the managers and will likely continue to do so in the future.
2013 Return Data
Annual Return / Standard DeviationPACER FUND / 26.6% / 2.24%
S&P 500 / 29.6% / 2.37%
RUSSELL 3000 / 33.3% / 2.84%
“Surf’s Up!”
2013 was an exciting year for stock market investors. The Pacer Fund continued the strategy set forth at the end of 2012 – to add companies with a solid track record of sound fundamentals yet also above-average risk (i.e., betas over 1.0). Fund managers analyzed their respective sectors and recommended stocks they believed presented the most opportunity for growth. The overall goal was to continue to position the Fund to outperform the benchmarks.
In Q1, the stock market experienced one of its best first quarters since 1998. Similarly, the Pacer Fund initially experienced a steady increase, inching ahead of the benchmarks. By the end of Q1, however, the “tidal wave” performance of the S&P 500 began to outpace the Fund with a 10% return while the Fund finished Q1 with just an 8.7% return. Moreover, as Q2 began, the powerful wave continued to build in intensity, as the market return skyrocketed and the spread between the Pacer Fund’s return and the benchmark’s return continued to increase.
Consequently, the managers decided to take a deep and reflective look at the Pacer Fund as a whole and reevaluate all of its holdings. In order to decrease the spread, the managers concluded that consolidation within each sector was necessary. Thus, they ranked the future prospects for each of the companies within their respective sectors, selling the lesser-ranked stocks in order to invest more in those that seemed to have the greatest opportunity for growth. The managers also began to more closely track sector performances, with comparisons to sector benchmarks, in order to provide insights about possible allocation shifts.
This process allowed the managers to have a better understanding of how well each sector of the market was performing and in which sectors the Pacer Fund was performing the best (and worse). Reevaluating the sectors allowed the managers to better understand where changes had to be made. As a result, the difference from the S&P return and the Pacer Fund return dropped from 3.4% (as of the beginning of Q2) to 1.2% (as of the end of Q3).
The start of Q4 also brought on a new challenge for the managers. The S&P was experiencing a return of 23.2% return, with the Russell 3000 at 26.9%. As the managers looked for new companies to add to the portfolio before the end of the year, they were regularly faced with the question: “Is the current price of this stock already over-inflated?” Because so many companies throughout the market had seen large price increases, the managers were faced with the decision of whether to believe a company would continue to see an increase in its stock price or if it had reached its peak. One way the managers overcame this issue was increasing the amount of shares in their current top performing stocks. The managers also chose to add a few rare companies that had recently experienced price drops but that they believed would continue to yield strong returns over the long haul.