Monday, December 27, 2010

The AIM Small Cap Equity Fund – Some Stocks of Industrial and Productivity-Enhancing Firms for 2011

The students in the Applied Investment Management (AIM) program at Marquette University are responsible for managing three investment portfolios with a market value of about $1.8 million. According to AIM Director, Dr. David Krause, “The student-managed AIM funds provide valuable, real-time applied learning in investment analysis and portfolio management. The AIM students gain real world experience related to the topics and theories that are presented in the curriculum. These student-managed funds serve as a capstone to the finance and accounting courses the students take during their junior and senior years at Marquette. It is truly one of the best forms of applied learning I’ve seen.” 
The first of the three AIM portfolios - the small cap equity fund - was created in September 2005 with the intent to provide a means to blend academic rigor with real-world investment management experience. Marquette University’s Board of Trustees started the program with a $500,000 transfer of funds from the endowment. The small cap fund is entirely equity based and operated in a ‘sector neutral’ manner. Dr. Krause stated, “The fund is required to meet the same basic performance guidelines as other managed equity accounts in the University's investment pool. In keeping with these objectives, the student-managers seek to achieve the highest level of return while maintaining a risk profile similar to the Russell 2000 index. Most of the stocks in the fund have a market value of less than $1 billion.”   

The AIM students manage the small cap stock portfolio across a broad set of industries, investing in well-managed, profitable businesses without unnecessarily exposing the University’s assets to economic or industry risks. “The fund is not managed according to any particular style (i.e. growth, value, momentum, etc.) and as a result is driven by pure stock selection,” said Krause. “Each AIM student is assigned a sector and is responsible for monitoring the performance of the stocks in their respective industry. They develop a top-down view of their industry and the economy before beginning their company-specific analysis.”

Each of the AIM students work within one of 12 economic sectors: Business Services, Consumer Goods, Consumer Services, Energy, Financial Services, Hardware, Health Care, Industrial Materials, Media, Software, Telecommunications, and Utilities. Dr. Krause stated, “Student-managers serve as both sector analysts and portfolio managers, providing basic industry research, presenting investment ideas and evaluating the ideas of the other AIM students. Each analyst presents their investment thesis at an AIM Investment Advisory meeting where the students must defend their recommendations. Usually the next day a majority vote from the AIM students must be received before any stock can be added or removed from the fund.” Stocks are valued using a variety of techniques including: discounted cash flow analysis, economic profit, and multiples analysis.

“The students actively manage the small cap fund by investing in the equities of individual companies from diversified industries,” noted Dr. Krause. “Since we are sector neutral, value is added to the fund as a result of the student-managers' stock selection abilities. Passive holdings in the Russell 2000 ETF are used to provide liquidity and minimize the tracking error associated with any cash holdings. Since the inception of the fund we have held over 250 different small cap names. The small cap fund is especially enjoyable for me because I am able to learn about many new companies each semester.”

AIM director, Dr. David Krause said, “While the economic forecast over the next several years looks to be anemic – probably in the range of 2.5% GDP growth – and relative U.S. consumer spending is likely to drop to a pre-2000 level, the AIM students are more optimistic about the U.S. economy than most economists. They have a 2011 U.S. GDP growth rate of about 3% in the first half of 2011 and nearly 4% in the second half. Given their somewhat optimistic view of the U.S. economy they have identified some interesting equity opportunities in the industrial sector and with ‘productivity-enhancing’ firms.”

Krause continued, “The students have been finding some attractively priced firms with economic moats and global expansion opportunities. They have found some solid, high-quality companies that have few, if any, analysts following them that are relatively cheap on an absolute basis with strong free cash-flows. Some of the favorite stocks held in the student-managed AIM small cap fund are in the industrial and business services segments that cater to assisting other firms enhance productivity,” Krause said. “The major forces driving these stocks, according to the student-analysts, include the continuing inventory rebuild cycle, an emphasis on utilizing more technology, and the continuing trend towards increased business outsourcing.” 

Below are some of the stocks the AIM student analysts are currently holding that meeting the criteria described above. For a complete write-up of all of the stocks in the AIM funds, go to: AIM Student Equity Write-Ups

(Click on the box to enlarge)

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