Portfolio Management

 

Portfolio Objective
The performance objective of the Undergraduate Student Investment Fund (Fund) is to generate superior returns from a diversified portfolio, with a risk profile similar to the S&P 500 Index.

 

Portfolio Structure
Two-thirds of the Fund is actively invested in the ten sectors of the S&P 500, and the remainder of the Fund is invested in a completion fund. While the Fund employs a sector-neutral principle, it can under- or over-weigh the benchmark sector by 20%. The combination of an active portfolio and a completion fund helps minimize the tracking error of the Fund with respect to the S&P 500 Index.

 

2/3 of the Fund: Active S&P 500 Sector Management
Stocks in the S&P 500 have been categorized into 10 sectors according to the Standard and Poor’s industry classification of the S&P 500 stocks. The fund’s assets under management are then allocated to each sector proportional to the sector’s capitalization in the S&P 500. Within each sector, of the Fund’s “investable sub-universe,” two to four managers from the USIF team are assigned to be sector specialists/managers. In turn, the sector specialists/managers propose weights for the companies in their sector investment sub-universe.

Sector specialists/managers go before the USIF managers to pitch their investment recommendations and a 60% vote is required for all trades to be implemented. The resulting portfolio is a large cap, domestic equity fund with returns and volatility that closely tracks the S&P 500 index.

 

1/3 of the Fund: Passive Completion Fund
Once the active portfolio has been built, the remaining one-third of the Fund is invested in passively managed instruments with the purpose of lowering the tracking error of the Fund with respect to the S&P 500 index. The Fama-French three factor model (market, size and value-growth) is used to characterize the risk profile of the Fund and of the S&P 500 index. The Completion Fund holds exchange-traded funds and other financial instruments to compensate for any aggregate excess or deficit risk exposures stemming from the active portfolio decisions (specifically, the sector analysts’ security selection decisions).

 

S&P 500 Sector Teams
Each of the S&P industry teams consists of two to five analysts who are in charge of one of the ten S&P industry sectors. These analysts are in charge of close monitoring of sector and company trends, presenting buy/sell recommendations to the fund managers and investing their capitalization-weighted share of the Fund’s capital. The industry sectors include: Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials, Telecommunications and Utilities.

 

Resources for USIF Managers
The Capital Markets Training Room is located on the second floor of Bridge Hall and has all the elements of a state-of-the-art trading room with information screens, monitors, extensive software packages and research capabilities in real-time.  These teaching/research tools and resources aide students in managing their funds.  In addition to Barra (Portfolio Optimization and Performance Attribution) and Capital IQ and Morningstar, we also have three Bloomberg terminals. With Scott Johnston’s (MBA ’69) assistance, we have received a generous gift from William O’Neil of its (WONDA) Database for the students.

 

The USIF 2014 Annual Report  (selected pages) click here.

 

 

 

 

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