We are saddened by the sudden death of AIM student, Jake Kaufmann, a rising senior

University mourns the death of student Jacob Kaufmann

JULY 25, 2016

A message from Marquette President Michael R. Lovell

Dear Marquette community,

I am deeply saddened as I write to you today. This weekend, we learned that one of our College of Business Administration students, Jacob “Jake” Kaufmann, died unexpectedly. Jake would have started his senior year on campus this fall. While he left our Marquette family far too soon, I ask that we all come together as a community and honor his memory and legacy.

Jake was a gifted scholar who was dual majoring in Accounting and Finance and was active in our Applied Investment Management program. The recipient of Marquette’s Ignatius Scholarship, Jake was fluent in Spanish and enjoyed traveling, scuba diving and mountain biking. He was also a member of Marquette’s water ski and fishing clubs. Jake volunteered with Journey House and was a member of the Financial Management Association and Investment Club.

It is clear that Jake will be deeply missed. Our university leadership team and Jesuit staff are working with Jake’s parents to offer our support and provide every available resource for them. Please keep Jake’s parents, family and friends in your thoughts and prayers during this incredibly difficult time.

I want to reiterate what Keyes Dean of Business Administration Dr. Brian Till shared with the College of Business Administration students last night: These are the times when we need each other the most, so we ask that we all look out for each other.

Please know that the Counseling Center and Campus Ministry are available for students. In addition, the Chapel of the Holy Family in the AMU is available during the day for prayer.

Jake’s family has informed us of the funeral plans. Visitation will begin at 10 a.m. this Saturday, July 30 at St. Anne Catholic Church (9091 Prairie Ridge Blvd, Pleasant Prairie, Wis., 53158). Mass will follow at noon.

We extend our deepest sympathies to Jake’s family and friends for their immeasurable loss.

Sincerely,

Michael R. Lovell
President

AIM Program Summer 2016 Update

Follow this link to view an online version of the Marquette University AIM Program Summer 2016 Update

Are Common Stocks the New Bonds?

Common Stock Yields for the S&P 500 Above the Yield on Newly Issued Corporate Bonds

With the 10 year US Treasury recently hitting an all-time low of 1.3% yield and the S&P 500 dividend yield at 2%, this is an amazingly large inverse spread!

Historically we are witnessing some head-scratching corporate finance relationships. For example, this past Thursday, The Walt Disney Company sold a 30-year corporate bond with a 3% coupon rate and a 10-year bond with a 1.85% interest rate coupon, the lowest long-term borrowing costs in United States corporate history! 

Disney’s common stock (ticker: DIS) is selling at $100 per share and its dividend yield is 1.43%. While this isn’t a negative spread to their dividend, it is none-the-less puzzling because Disney is not a low growth utility company --- there is still plenty of potential stock appreciation for DIS shareholders.

What corporate CFO is not looking to lock in these incredible low corporate borrowing rates and repurchase their firm’s common stock? Is there a better investment that a company can find - its almost an arbitrage opportunity for firms.

Get ready for another large wave of corporate refinancings and increased stock buy-backs. 

And for bond investors seeking yield, take a look within a firm’s capital structure – you might be surprised to find the dividend yield on a firm’s common stock outpacing the corporate bond yield – amazing times! 

Performance of the AIM Fixed Income Funds as of 6_30_2016

The third fund managed by the students in the Applied Investment Management (AIM) program at Marquette University is the Fixed Income Fund. This portfolio consists of a mix of fixed income exchange traded funds (ETFs) and is benchmarked to the Barclays US Aggregate Bond Index. The fund was seeded in January 2006.

AIM Fixed Income Fund vs. Barclays US Aggregate Bond Index

(Cumulative Returns since January 2006)

As the chart above shows, the AIM Fixed Income Fund has slightly exceeded the return generated by the index over the 10+ year holding period - good performance given that the net returns (after transactions costs) are presented.

AIM Fixed Income Fund vs. Barclays US Aggregate Bond Index

(Annual Returns)

The bar chart shows the annual returns of the AIM Fund vs. the Barclays benchmark. Note that the portfolio produced positive returns each year (except in 2013). The AIM Fund generated its best relative performance during the Financial Crisis of 2008.

Trailing Returns of AIM Fixed Income Fund vs. Benchmark

The AIM Fixed Income Fund has surpassed the benchmark by nearly 30 basis points annualized (4.84% vs. 4.58%). The table shows that the recent returns have been below the benchmark as the students maintained a 'short duration' strategy which did not perform well during the period of falling interest rates.

The current top 10 holdings are shown above. All of the AIM Fixed Income Fund holdings low cost are iShares ETFs.

Key Metrics of the AIM Fixed Income Fund

The chart above provides key statistics for the AIM Fund. The average duration of 5.1 years is slightly below the benchmark effective duration of 5.3 years. The maturity breakdown depicts a relative even schedule across time, which during the period of a flattening yield curve also reduced relative returns vs. the benchmark. The AIM Fund is high quality with virtually no non-investment grade holdings.

Mix Comparisons to the Benchmark

The table above shows that the AIM Fixed Income Fund has an underweight to US Treasuries and an overweight to secured fixed income securities. Given the strong performance of government securities this weighting also resulted in performance slightly below the benchmark. As mentioned previously, the portfolio is of high quality.

Risk-Return Chart

The final chart shows the long-term return and standard deviation of the monthly returns for the AIM Fixed Income Fund versus the Barclays US Aggregate Bond Index. The AIM Fund has generated a slightly higher return at the same level of risk as the benchmark.

The AIM students will be returning to campus in late August and will begin to make any needed adjustments to the AIM Funds. By then it will be apparent hopefully that the Federal Reserve Bank's monetary policy will be better known.

Congratulations to Baird for Being Named 'European Corporate Finance House of the Year'

Earlier this year, Baird was named the 2016 "European Corporate Finance House of the Year" at the Private Equity Awards in London, which are among the oldest and most respected accolades given to those who work in the private equity industry and those who advise it.  As part of this honor, Baird was recently featured in a Real Deals story and Q&A that highlights the firm’s strong sector focus, culture of collegiality and impressive track record. “Strong sector focus, a culture of collegiality and an impressive list of deal mandates made Baird a worthy winner.” Read the feature story and Q&A. To learn more about how the award was determined, read Baird’s press release.

Performance of the Marquette University AIM Small Cap Equity Fund as of 6/30/2016

Here is a quick view of the performance of the AIM Small Cap Equity Fund for the period ending on June 30, 2016. The AIM Class of 2017 began their tenure managing the AIM Funds on April 1, 2016; therefore this represents their first quarter performance results.

(Click on chart to enlarge)

As the chart above shows, the AIM Class 2016 had a strong finish to the quarter and generated excess returns. Even with the global challenges posed on markets as a result of Brexit, the fund generated alpha. The following chart shows that over the course of the past year, the AIM Small Cap Fund has struggled (like many active managers) versus the Russell 2000 Index. The same issues that brought challenges to international equities (i.e. negative interest rates, Brexit, energy price volatility, and currency fluctuations), have impacted US equities. Both the benchmark and the AIM Small Cap Fund posted negative returns over the past year.  

The AIM Small Cap Equity Fund out-performed the benchmark (Russell 2000 Index) for the second quarter – posting a positive return of 4.38% versus 3.87% for the benchmark.  

 (Click to enlarge)

The Information Technology, Financials and Materials sectors were the major under-performers; while Energy, Consumer Staples, Industrials, and Health Care were the best over-performing sectors. The small cap space is well known for a high level of volatility and Q2 2016 did not deviate from the norm. Five stocks (Basic Energy, Malibu Boats, Emergent BioSolutions, SuperMicro Computer, and John B. Sanfilippo & Son) experienced losses in the quarter that exceeded -25%. In early July their performance will be re-evaluated and if the stocks remain below -25% relative return they will be sold and the proceeds placed into the Russell 2000 ETF.  The second quarter also witnessed some spectacular performance of stocks in the AIM Equity Fund.  Flotek Industries nearly doubled (+96%), and Exact Sciences +86%, Teladoc +65, and MGP Ingredients +55% had amazing returns.  The following table shows all individual holdings during the quarter by sector and versus the benchmark.

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The table below shows that the portfolio remains relatively sector neutral per the range established within the AIM investment policy statement. The Information Technology, Financials and Materials sectors are under-weight because of the weak relative performance during Q2. The differences in sector weights are shown with and without the ETF individual holdings allocated to their respective sectors. The next portfolio sector adjustments will occur in early September following the students return to campus.

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The next table displays the top 10 holdings as of 6/30/2016. It is noted that no individual holding exceeds a 3.2% portfolio position.

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The following table shows the key characteristics of the AIM Small Cap Fund as of 6/30/2016. For the most part, the AIM Small Cap Fund consists of holdings that are of similar quality as those in the Russell 2000 Index.

(Click to enlarge)

Additional AIM Small Cap Fund characteristics by sector are provided in the next table.

(Click to enlarge)

The next slide is FactSet's style chart for the AIM Small Cap Fund.

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The AIM Small Cap Equity Fund should be well positioned for the remainder of the summer with no significant sector exposure.As soon as the students return to campus they will be presenting new stocks for consideration. Each Friday afternoon there are equity presentations delivered by the AIM students - either in the AIM Room or at area investment companies. 

Every AIM equity write-up since the inception of the program in 2005 can be found on the AIM website at: http://business.marquette.edu/centers-and-programs/aimp-student-equity-write-ups.

Performance of the AIM International Equity Fund as of 6/30/2016

Here is a quick view of the performance of the AIM International Equity Fund for the period ending on June 30, 2016. The AIM Class of 2017 began their tenure managing the AIM Funds on April 1, 2016; therefore this represents their first quarter performance results.

(Click on chart to enlarge)

As the chart above shows, 2016 has been a challenging year to manage international equities (i.e. negative interest rates, Brexit, energy price volatility, and currency fluctuations). Both the benchmark and the AIM Intl Equity Fund posted negative returns over the past year. The past three months have been particularly challenging for all international fund managers. 

The AIM International Equity Fund under-performed the benchmark (Russell Global Ex US Index) for the second quarter – posting a negative return of -1.74% versus +0.22% for the benchmark.  

 (Click to enlarge)

The Health Care, Materials, and Energy sectors were the major under-performers; while Consumer Discretionary was the best over-performing sector. Even though a sell order was placed, Allergan plc in the Health Care sector dropped nearly 20% during the first week of the quarter before the order was executed. BioAmber in the Materials sector dropped 30% during the quarter and has triggered a sell order. Lazard and Associated British Foods (both negatively impacted by the Brexit vote) also triggered sell orders. These three stocks are being replaced on July 1 by ACWX - iShares MSCI ACWI ex US Index ETF in accordance with the AIM investment policy statement.

The following table shows all individual holdings during the quarter by sector and versus the benchmark.

 (Click to enlarge)

The best performers for the quarter were: Sberbank Russia in the Financial Services sector + 34%; Tata Motors in Consumer Discretionary +19%; Vedanta in Materials +43%; and NTT DOCOMO in Telecommunications +18%.

  

The table below shows that the portfolio remains sector neutral per the range established within the AIM investment policy statement. The next portfolio sector adjustments will occur in early September following the students return to campus.

 (Click to enlarge)

Performance of the AIM International Fund during Q2 2016 was negatively impacted by the large under-weight in Japan (a 13% under-allocation) and a nearly 25% over-weight in North America. Additionally, the AIM Fund had a 5% overweight to the United Kingdom during the second quarter which also contributed to the Fund's under-performance. The AIM Intl Equity Fund's exposure to the UK is the largest of any individual country (with a nearly 19% overall allocation).

 (Click to enlarge)

The next table displays the top 10 holdings as of 6/30/2016. It is noted that no individual holding exceeds a 3% portfolio position.

 (Click to enlarge)

The following table shows the key characteristics of the AIM International Fund as of 6/30/2016. For the most part, the AIM Fund is of higher quality than the overall benchmark.

(Click to enlarge)

Additional AIM Intl Fund characteristics by sector are provided in the next table.

(Click to enlarge)

The next slide is FactSet's style chart for the AIM International Fund.

(Click to enlarge)

The AIM International Equity Fund should be well positioned for the remainder of the summer with no significant sector exposure. If the overall equity market in Canada, Mexico and Bermuda (North American holdings) outperform Japanese holdings, then AIM Fund should generate positive alpha.

As soon as the students return to campus they will be presenting new stocks for consideration. Each Friday afternoon there are equity presentations delivered by the AIM students - either in the AIM Room or at area investment companies. 

Every AIM equity write-up since the inception of the program in 2005 can be found on the AIM website at: http://business.marquette.edu/centers-and-programs/aimp-student-equity-write-ups.