MFUNDS97

Mutual Fund Portfolio Management Project 28-334/Dr. Huffman

Project objectives:

The purpose of this project is to allow students to become more involved with the various security markets and to develop and implement an investment strategy. Student will collect and use data from The Wall Street Journal, Value Line Investment Survey, Morningstar, Nasdaq.com, NYSE.com and other sources of their choosing.

Project Description

This is a group project (described below) that requires that a portfolio of securities be selected, tracked and evaluated during the semester. The selection strategy should be conistent with a mutual fund strategy. The project requires a typed report describing the strategy employed, the implementation of the strategy, an evaluation of the portfolio's performance and conclusions about managing a portfolio. Each group will discuss their investment strategy, form a portfolio by allocating $1,000,000 among various securities, revise the portfolio, calculate holding period returns, and compare the group's portfolio returns to the S&P 500 index and one additional index. Students may invest in any publicly traded common stock, preferred stock, bond or treasury security. You may NOT invest in options, futures, warrants, tangible assets, metals, or real estate. Convertibles are acceptable but are not recommended for this project. If you need to do the project as an individual you will need to meet with the instructor

Evaluation is not based on your portfolio return, but is evaluated on the implementation of the assigned (or choosen) strategy and the ability to discuss the portfolio's performance.

Important Dates:

1. Selection of Portfolio using Closing Prices for Tuesday , February 20, 2001
Written Portfolio Initial Report Due: Wednesday, February 28, 2001

2. Revision Date: use closing prices for Friday, March 2, 2001
Update of spreadsheet (only) due Friday, March 9, 2001

3. Prices for revised report use the closing prices for Friday, April 20, 2001
Final Report Due: Wednesday, May 2, 2001

Project Scenario:

The group is a committee formed by an investment concern. The committee's mission is to form and manage a new mutual fund. The committee has the responsibility of allocating an initial $1,000,000 cash investment into a portfolio that is consistent with the mutual fund's investment strategy and the current economic environment. The following steps outline the project:

Description of Project Procedure:

1. The first step of the project is to form the project group consisting of up to four students. Each group is then assigned (or allowed to choose) a strategy that the mutual fund will employ. Most of the mutual funds' strategies that are used in the project are discussed in the text or in a class lecture and/or handout. You will also have to determine your portfolio's target risk level (e.g., aggressive, moderate, conservative) and target style (e.g., large vs. small company and value vs. growth). The investment style is the same as the one found in Morningstar's review of a mutual fund.

2. The second step is to implement the strategy. That is, determine the type of investment vehicle to include in the mutual fund's portfolio; e.g., growth stocks, junk bonds, preferred stocks, etc. You may want to look at Morningstar's or S&P Lipper Mutual Fund's reports for mutual funds with the same strategy (especially the listing of top holdings) to get an idea of the type of firms you may what to include in your portfolio. However, not all funds holdings are consistent with their stated objective. You also need to determine the target composition of the portfolio objective (the percentage of stocks, bonds, cash, other).

You need to research each potential security and provide some of the basic information in the spreadsheet provided (see steps 4 and 5). You are required to indicate the screening variables that will be used to select the securities in your portfolio and the values of those variables. For example, if you want to use the Price/Book ratio to select value stocks you need to indicate that you are selecting stocks that have a value for the price-to-book ratio of less than 4.0. There are several web sites that provide free stock screening you are required to start with a some stock screening tool. The American Association of Individual Investors indicated that the following are the best at screening stocks:

http://www.quicken.com/investments/stocks/search/
http://www.cnbc.com/ or
http://prosearch.cnbc.com/jetson/General_Free_Search.html?
http://www1.zacks.com/cgi-bin/UAW/Login-UAW_F
http://www.wallstreetcity.com/search/search_backtestedprebuilt.asp
http://www.stockpoint.com/leftnav/pages/stockfinderpro.asp?ClientID=SP&UserID=83C31B2DC3CE98710CCB08564C997CD0
http://www.moneycentral.msn.com

3. The third step requires you to select specific securities to be purchased and their respective proportions of the portfolio. I am requiring that each security in your portfolio have VL Timeliness measure and Nasdaq.com Beta. That is, you cannot select companies that do not have a value for timeliness or beta. I suggest doing the screening first then checking to determine if the firms have a beta value in nasdaq.com and then determine if Value Line has a Timeliness value.

Use the closing prices of securities selected from the WSJ as quoted on the selection date. Minimum transactions for all strategies include the following:

A. At least 15 long positions
B. No more than 10% should be invested in any one security
C. Cash that is left over is assumed to earn a money market annual nominal rate of 5 percent (that is, .0137% per day).
4. Step four is to record the required portfolio information for each transaction in the spreadsheet provided (sheet named "Firm Data" of the Excel spreadsheet 334fundp.xls. Enter the number 0 for securities where data is not available or does not apply (you must have values for Timeliness and the Nasdaq.com beta.
Enter the following:
Value Line timeliness rank, Value Line's Beta, Nasdaq.com Beta, WSJ dividend Yield, WSJ PE, VL Book Value per share, calculated Price/Book Ratio (formula that divides current price by VL BV per share), Nasdaq.com shares outstanding (o/s), calculated Market Value of Equity (formula), WSJ quarterly dividend per share, and two additional variables that you select (pick at least two variables from the screen that you used in step 2).
If you are purchasing fixed income securities, record the coupon rate for the dividend yield, and the Bond rating in the S&P Bond rating column all other columns except for the name should be blank.

5. Step five requires that you input your transactions into a spreadsheet. Ignore transactions costs and dividends.

In your spreadsheet file 334fundp.xls in the sheet named "Purchases" include the following (note: some data items require you to enter the correct formula):

Buy date, sell (or end of project) date, type security (stock, bond,other), ticker, company name, buy price price per security, number of security units purchased, total original investment, percent of total portfolio value (initial portfolio weight) sell (end of project) portfolio weight, shares sold (or holding at the end of the project), value of securities when sold (or current value at end of the project) and formula for calculating the holding period return percentage (i.e., capital gain).

The spreadsheet will calculate some aggregate information about the group’s portfolio. That is, include the following: total portfolio value, total in stock, total in bonds, total in cash and other.
The spreadsheet will also calculate include your portfolio's holding period return compared to the S&P 500 and to one other index that you have select that is determined to be a good benchmark for your portfolio.

6. Step six requires that you calculate the value weighted and equally weighted (@average) porfolio values for the all the variables in the sheet named "firm data." Value-weighted means that you multiply each security's weight (% of $1 million in the initial portfolio) times the the variable being analyzed and sum all the results. For example, if you had a portfolio where you invested $400,000 in Stock ACE with a beta of 2.0 and $300,000 in Stock BIG with a beta of .5 and $300,000 was leave in cash which does not have a beta.. The portfolio beta would be 0.95, calculated as 40%*2.0 + 30%*0.5 + 30%*0. Fill in the sheet entitled "Initial Report"from the file 334fundp.xls for the initial period. Turn-in spreadsheet with other items listed in requirement #1 below.

Omit Step 7 ~~7. Step seven~~ vote to remove one member of the group (first round vote). Each individual will identify a person by "secret ballot" that will be "voted off" their group when requirement #1 is due. Individuals voted off their initial groups will form a new group. If there is a tie, the group will be asked to vote again. If the second vote results in a tie, then the all individuals that tied are removed from the group. Requirement #1 for the new group is due at the revision date (October 19, 2000 using the closing prices from October 16, 2000). Requirement #2 for the new group is due on November 2, 2000 using closing prices from October 30, 2000. Will we discuss the possibility of immunity in class for the first round.

8. Step eight involves revising of the initial portfolio. The initial portfolio can be revised as many times as you want (i.e., sell or buy additional securities). Update your spreadsheet for these transactions and include the gain or loss and the increase in cash type securities. Also, include the holding period returns for each security, the portfolio, and the two market indexes. The revised spreadsheet (all 3 sheets) are to be turned after the revision date (see requirement #2 below). Fill in the sheet entitled "Initial Report"from the file 334fundp.xls for the revised period.

If you have a stock split (distribution of additional shares--not a cash dividend), then you will need to adjust the number shares of stock; otherwise, you will be reporting a loss on a stock that you might have a positive return.

If you sell a security, enter 0 in the number of shares. The spreadsheet will continue to show the sold security's holding period return; however, the portfolio weight will indicate a 0.0%.

Omit Step 9
9. . Step nine involes voting to remove one additional member of the group (second round vote). Each individual will identify a person by "secret ballot" that will be "voted off" their group when requirement #2 is due. Individuals voted off in the second round will form a second new group. If there is a tie, the group will be asked to vote again. If the second vote results in a tie, then the all individuals that tied are removed from the group. Requirement #1 for the second new group will be due on November 2, 2000 using closing prices from October 30, 2000. Requirement #2 for the second new group will be due on November 16, 2000 using closing prices as of November 13, 2000. Will we discuss the possibility of immunity in class for the second round.

The final step of this project is to calculate the holding period returns of each security, portfolio, the S&P 500 and the additional market index. Returns are calculated using the closing prices on the Selection day to the Final day of the testing period. You are to also calculated the final weights (percent of the final day's portfolio value) of each security in your portfolio. You are also required to calcuate the portfolio values of all the variables used in the project just like you did in the initial report (see requirement #3 below).

Three Written Requirements for Mutual Fund Project

Requirement 1: Mutual Fund Portfolio Initial Report.

This report requires the group to describe the selected investment strategy and the exact disposition of the $1,000,000. Note: Once a strategy has been selected it cannot be changed. Be sure that your portfolio meets the minimum transaction’s requirement (see Step 3).

Turn In:

1. Portfolio Management Strategy Initial Report with fund objective (handout/e-mail file)
There are your target numbers; your portfolio does not need to match them perfectly.
2. Spreadsheet Generated Reports (three sheets: "Firm Data," "Purchases," and "Initial Report")
(must calculate the market-weighted and equally weighted portfolio values for: beta, PE, Price/Book, Dividend Yield, the two additional variables selected and any other variables that you use and can quantify).
3. ~~Each group member turns in a vote with the name of one group member who they are voting to remove from the group.~~
Requirement 2: Revisions to the Initial Portfolio.
1. Update the spreadsheet using the closing (or sell) prices that reflect the values at the revision date.
2. Spreadsheet Generated Reports (three sheets: "Firm Data," "Purchases," and "Initial Report").
3. Discuss the following questions and turn in your group's answer on a separate sheet of paper
Review the columns that include the current portfolio weights of each security. Did the weights change? Do any of the holding make up more than 10% of the portfolio's total value? Exam the market weighted and equal weighted profolio values for:
beta, PE, Price/Book, Dividend Yield, the two additional variables selected and any other variables that you used in managing your portfolio. Did any of the portfolio values for these variables change significantly?
In the final report you will be comparing the change in these variables from the initial report to the final report
~~3. Each group member turns in a vote with the name of one group member who they are voting to remove from the group.~~

Requirement 3: FINAL REPORT

A required report is to be typewritten following the outline listed below:

I. Discuss the Investment Strategy Selected
    A. Objectives of your mutual fund
        1. Composition Objective (including the allocation of stocks, bonds and cash)
        2. Risk level Objective
        3. Style (value versus growth and large versus small)
        4. Strategy (active or passive)
        5. How did you allocate across securities (equal, value, efficient allocation technique)?
        5. Appropriate benchmark index and why?

    B. Need that such a fund would provide to investors
        1. Who would invest in your fund?
        2. How would you market your fund (i.e., sell fund to investors)?

II. Implementation of Strategy

    A. Type of securities purchased
    B. Composition of assets (cash, stocks, bonds)
    C. Key variables used to select the portfolio
        Compare the use of objective versus subjective screens
    D. Discuss Firm data item values and portfolio value of these data items (e.g., Beta values)
    E. What 3 assets represented the largest amount of the portfolio (i.e., portfolio weights)?
    F. Why portfolio revisions were made?

III. Evaluation of Fund Performance

    A. Did your fund perform as expected? Why? Why not?
        1. Total Market value of portfolio in dollars
        2. Total Holding Period Return
        3. What security had the largest dollar value gain and what security had the largest dollar loss in your portfolio? Why?
        4. What security had the largest positive return and what security had the largest negative return?

    B. How did fund perform relative to S&P 500 and the other index you selected?
    C. What was the impact of the current economic and political environment?
    D. What happened to the weights of individual firms and the mix of stocks/bonds/cash from the initial portfolio to the final portfolio?

IV. Conclusions about Managing an Investment Fund
    A. Development of Investment Strategy during this project
    B. Implementation of Investment Strategy during this project
    C. Market Efficiency
        1. Do mutual funds outperform the market? Why? Why not?
        2. Do stock prices reflect publicly available information?
        3. Are fund managers able to consistently time the market?

Appendixes

Spreadsheet Generated Reports (3)
    A. Initial Report--a comparison of intial, revised and final report values (e.g., composition),
    B. Purchases--Holding period returns for each security and portfolio compared to two indexes,
    C. Firm Data--Market weighted portfolio values for firm variables (e.g., beta etc.) Evaluation of Group Members' Performance (25 percent of project grade) This can change your grade substantially.    Peer members must also provide written statements if there is an uneven distribution of the members contribution to the project.

Guidelines for Written Report for Mutual Fund Project:

1. Consist of 5-8 typewritten pages (double spaced). One paper per group.
2. Tables and Appendixes
3. More is not necessarily better.
4. Do Not use plastic report holders.
5. When you refer to an article or book, put it in a footnote and/or in the bibliography in the correct form (see the syllabus).
6. All papers should have a cover sheet that includes names of group members, the date, and the section number or class time.
7. Each group member turns in a peer evaluation with the names of all group members (I will provide a peer evaluation sheet).