Lessons from Nearly Three Decades of CSUN’s

Undergraduate Managed Portfolios

G. Michael Phillips, Ph.D. Center for Financial Planning and Investment

David Nazarian College of Business and Economics CSU Northridge

CSUN students began investing in 1993

• The undergraduate portfolio was among the first 40 student managed investment funds established in the U.S. (There are currently reported to be at least 314 colleges and universities with graduate or undergraduate student managed funds)

• The median amount of capital managed by students at U.S. institutions with student managed funds were reported to be about $350k in 2007, and estimated to currently be about $500k

• The “average” was reported to be about $1mm in 2007 and estimated to currently be about $1.4mm.

• The CSUN student managed portfolios totaled about $2mm in 2007 and are currently about $6.4mm

The student portfolio class conducted its initial trades in spring, 1993 • Support for the class was originally approved in fall, 1992

• The class was first taught using a finance “advanced topics” number (Fin 437) and continued that way until becoming a two semester sequence with Fin 491A-BH and Fin 491B-BH

• The founding professor was Dr. William P. Jennings who continued teaching the class until becoming Dean of the College in 2006

• From 2006 to 2010, the course was taught by Dr. Vicentiu Covrig

• From 2010 to present, Fin 437 and Fin 491-A has been taught by Dr. Michael Phillips (with Dr. Jennings filling in during a sabbatical semester)

• From fall, 2015 to present, Fin 491-B has been taught by Dr. James Chong (with Dr. Inga Chira filling in during a sabbatical semester)

From 2011 – 2013 the portfolio competed in (and students attended) the RISE international student portfolio competition

There were between 50 and 100 schools competing each year. CSUN’s portfolio produced documented risk adjusted annual returns for the previous calendar year:

• 2011 – top 3

• 2012 - top 3

• 2013 – winning portfolio

CSUN Student Portfolio Timeline

4/1993 TUC provides initial $500,000 for UG “Dividend Stocks” Portfolio

12/2007 $500,000 transferred from UG-Div to fund new MBA portfolio

(Combined Portfolios = $1,890,546)

Fall, 2015 Finance and Investment Laboratory Launched

12/2015 TUC provides initial $250,000 for UG “SRI/ESG/CRO” Portfolio

CSUN Foundation provides initial $1,000,000 for UG “ETF” Portfolio

(Combined Portfolios = $4,597,347)

8/28/2018 25th Anniversary Year

(Combined Portfolios = $6,461,916)

9/1/2018 DADco Sponsors $50,000 “Competition Portfolio”

(Combined portfolios > $6,500,000)

Account Balances, 2/2020

• UG-Div $3,667,138.72 (“house money”)

• UG-SRI $ 377,384.39 ($250,000 initial investment)

• UG-ETF $1,419,969.27 ($1,000,000 initial investment)

• MBA $1,750,596.35 ($500,000 initial investment, from UG-DIV)

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• UG-Competition $50,000 (resets each year, funds held by sponsor)

Evolution of classroom investment methods 1993 – 2010 “Stock Pitch”

• Students individually analyzed the existing portfolio and recommended changes which were voted on by the class

• Prevailing changes were implemented each semester

• Students would propose stocks to sell and independently propose stocks to buy

• The portfolio was maintained with about 25 securities and approximately equally weighted

• For the most part, the buylist was the S&P 500

• (this is essentially the method still used by the MBA portfolio)

Evolution of classroom investment methods 2010 - now “Dividend Portfolio”

• In 2010 the Department of Finance, Real Estate, and Insurance began discussions eventually resulting in renaming to the “Department of Finance, Financial Planning, and Insurance”

• The undergraduate student portfolio changed to a “portfolio approach” rather than a “stock picking approach”, more consistent with wealth management and endowment funds

• The portfolio class also began incorporating a structured quantitative methodology for stock evaluation, buylist construction, and portfolio creation

Finance and Investment Laboratory, p1

• In fall, 2015, a college computer lab was permanently assigned to the Department of Finance, Financial Planning, and Insurance as a “hands-on” investment laboratory and classroom

• While equivalent to a “trading room”, since we focus on endowment funds and wealth management rather than trading, we refer to this as an “Investment Lab”

Investment Lab, p2

• The lab is comprised of 8 Bloomberg stations and 40 additional computer stations

• All 48 stations are integrated with the instructor’s station so that screens can be projected or shared with all other student monitors

• Each station is equipped with office software, statistics software, browsing software, and various presentation creation software

• Each also has “MoneyGuidePro” financial planning software

• The 8 Bloomberg stations also have Bloomberg keyboards to facilitate Bloomberg Market Concepts certification training and use of the Bloomberg facilities for student projects

Investment Lab, p3

Site licensed data products include:

• YCharts

• Calcbench

In addition, students are provided access to

• MacroRisk.com

• AllocationTools.com

The Undergraduate Dividend Portfolio Methodology (part 1) • Stock universe is nationally traded (NYSE, AMEX, NASDAQ) dividend-paying stocks

with at least three years of trading history

• Using Pat Dorsey’s “The Five Rules for Successful Stock Investing” (Wiley, 2004), identify rules for fundamental analysis

• Using Calcbench and YCharts Excel add-ins, implement “ten-minute test” to screen for dividend history, earnings quality, key ratios (From 2010-2015, we used Mergent and “free” sources. With the opening of the finance lab, Calcbench was integrated as a replacement in fall, 2015.)

• Using MacroRisk, screen for economic risk, downmarket beta, attribution stability, acceptable idiosyncratic value at risk, and momentum

The Undergraduate Dividend Portfolio Methodology (part 2) • Similar analysis is applied to the existing portfolio to determine if

there are any current holdings which do not meet both fundamental and macroeconomic investment criteria

• A buylist is identified containing those assets which might be considered for purchase

• A selling list is identified containing the first assets which will be sold

The Undergraduate Dividend Portfolio Methodology (part 3) • Portfolio optimization (low economic volatility) is conducted with a

maximum of 20% or identified selling stocks being removed from the portfolio and replaced from the buylist

• New assets are each restricted to <= 5% of portfolio value

• The resulting portfolio is NOT equally weighted

Key skills and topics developed in class

• Financial statement analysis and benchmarking

• Advanced spreadsheet techniques

• Risk measurement and analysis

• Portfolio construction and optimization

• As an interdisciplinary class, students with majors in accounting, marketing, statistics, management, business law, and economics work with finance majors to reinforce how business core courses inform the company analysis and decision-making process (The Dorsey book is particularly good at relating this disparate information)

The Undergraduate ESG/SRI Portfolio Methodology (part 1) • In 2014, Pres. Dianne Harrison requested that we explore the possible

impacts of managing campus investments using various ESG/SRI criteria

• The student portfolio class began exploring various data sources and strategies and paper traded an ESG/SRI portfolio beginning in spring, 2014

• In fall, 2015, the University Corporation authorized an additional $250,000 as initial funding for a “real money” test portfolio to implement a model ESG/SRI portfolio managed by the students

The Undergraduate ESG/SRI Portfolio Methodology (part 2) • The portfolio follows these exclusionary rules. The ESG portfolio can’t

hold stocks in companies with primary revenues from • Hand guns

• Gambling

• Smoking (tobacco or other)

• Private prisons

• Sex or “exploitive” businesses

• Prior to this school year, alcoholic beverages • These are now permitted following the Chancellor’s permitting sale of alcoholic

beverages at campus athletic events

The Undergraduate ESG/SRI Portfolio Methodology (part 3) • For a universe, two were considered

• The first was the group of the top 100 holdings reported by aggregate invested dollars using Bloomberg’s reports on ESG/SRI mutual funds and ETFs. This was largely indistinguishable from the top 100 firms in the S&P 500

• The second was the “Corporate Responsibility Organization” annual list of 100 top corporate citizens. The CRO list provides transparent rankings and methodology and a somewhat different mix of firms than the top 100 by invested assets

• Other lists are available but generally at prices beyond our department’s annual budget, let alone our budget for data

• Pragmatism led to our selecting the CRO list

The Undergraduate ESG/SRI Portfolio Methodology (part 4) • The buylist and optimization methods are the same as for the

dividend portfolio

Key skills and topics developed in class

• Understanding of ESG/SRI criteria

• Familiarity with leading investment alternatives in the space

• Familiarity with criteria used by Corporate Responsibility Organization for constructing their “top 100” list

• Fiduciary responsibility and fiduciary standards

• Interpretation of Investment Policy Statements regarding ESG/SRI topics

The Undergraduate ETF Portfolio Methodology (part 1) • In fall, 2015, the University Foundation decided to fund a $1,000,000

undergraduate managed portfolio consisting of asset class ETFs

• To manage this portfolio, a second section of the portfolio class (491B-BH) was created. This allows for a year-long portfolio management sequence based on “real money” experiences

• The 491B-BH class teaches students advanced quantitative tools including backtesting methodologies, returns attribution analysis, market efficiency testing, and other advanced performance and benchmarking techniques

The Undergraduate ETF Portfolio Methodology (part 2) • The ETF portfolio universe is comprised of these nine funds:

• SPY (S&P 500)

• IJH (S&P Mid-cap 400)

• IJR (S&P Small-cap 600)

• IEF (7-10 year U.S. Treasuries)

• LQD (Investment grade corporate bonds)

• GSG (Commodity index)

• RWR (REIT)

• EFA (EAFE)

• VWO (Emerging markets)

The Undergraduate ETF Portfolio Methodology (part 3) • The portfolio is constrained so that no ETF is given more than 30%

weight, and so there are at least 4 funds in the portfolio

• (If an ETF falls by 4% or more, that position is liquidated and invested in SPLV)

• Each semester the portfolio is reoptimized so that its “Eta Profile” most closely matches the current state of the U.S. economy

Key skills and topics developed in class

• Familiarity with ETFs, funds, and indexes

• Returns attribution process

• Backtesting methodologies

• Performance assessment

• Advanced spreadsheet methods

• Applications of regression modeling techniques

• Economic sectors and asset classes

• Application of economic sensitivities and APT-type methods

• Portfolio optimization methods

Total Return of UG/DIV portfolio vs SPY, various periods

Note the improved results from 2015 on

• In fall, 2015, the Investment Lab was opened

• This provided uniform data sets for students to use

• This allowed for in-class demonstrations and more “hands-on” discussion of spreadsheets, data services, and detailed examples

• Coincident with the use of the lab, the student portfolios demonstrated a significant increase in actual and risk-adjusted returns

• This “natural experiment” suggests that consistent data and the ability to provide detailed classroom instruction enhance student abilities to manage funds

UG Dividend & UG ETF Funds vs SPY 12/1/2015 – 2/6/2020

UG Dividend & UG ESG/SRI Fund vs SPY 12/1/2015 – 2/6/2020

UG Dividend & UG ESG/SRI Fund vs ESGHX (Gabelli ESG Fund) 12/1/2015 – 2/6/2020

The portfolio performance from 12/2015 onwards provides an interesting strategy test • The dividend-based portfolio outperformed the S&P total return

• The ESG portfolio, using essentially identical methods, underperformed the S&P total return but was closer in terms of return to risk

• The ETF portfolio, with concentrated fund positions and large positions in bonds, had lower returns but also some reduction in risk

• Still the dividend portfolio dominated in actual as well as risk-adjusted returns

So, how to get better returns?

The students follow a three step process.

1. Fundamental Analysis to identify assets with strong financials and positive earnings growth potential (see Dorsey’s book)

2. Identify stocks which meet “five risks” testing (from MacroRisk.com)

3. Portfolio is constructed using optimization software to determine actual number of shares purchased and sold for each potential holding

Fundamental Screening – 7 criteria

• Return on Equity at least 10% for each of past five years

• Revenue Growth at least 5% for each of past five years

• Operating Margin (return on sales) at least 5%

• Debt to Equity 1.25x or less

• 10 Yr Avg Free Cash Flow is non-negative

• Dividends Paid at least $0.02/share in most recent year

• Market Cap at least $1billion

Risk Screening – 6 criteria (Traditional measures)

• Down-market Beta no greater than 1.0

• Price/52-wk high Price at least 90%

(MacroRisk measures, see “The Economy Matters” reports)

• MacroRisk Level no greater than 350 (on a 0 – 1000 scale)

• Economic Climate at least 3 stars

• Eta® Confidence at least 9 (corresponding to 90% R-squared)

• Eta® Value at Risk no greater than 20% exposure

Optimization

• “Black Swan” optimization – attempt to construct portfolio in such a way that economic risks are offsetting, resulting in a portfolio that is reasonably immune to economic fluctuations

• Limit portfolio to have no more than 5% in any particular holding

• This optimization works well for rebalancing on 3 month to 18 month basis.

• (Alternative optimization includes “equal risk contribution” portfolio in which each stock contributes an equal amount to the overall portfolio variance.)

• (For longer holding periods, 12 months on, Equal Weighting also works)

Or, a simple version (without proprietary software and databases) Use S&P 500 Buylist, rebalance annually (say, 2/14 each year)

• Find stocks which are trading near their 12 month highs (p/hp > .95)

• Find stocks with downside beta no greater than 1.0

• Find stocks with 3-year alpha (CAPM) > 0

• Select highest 30 stocks on return to lower semideviation (Sortino ratio)

• Create equally weighted portfolio

“Find good dividend stocks with low market risk. Don’t swing for the fences.”

Sharpe Ratio: .98 (portfolio) vs .89 (SPY) Sortino Ratio: .91 (portfolio) vs .85 (SPY)

Additional observations:

• ESG investing causes lower returns (keeping all other criteria the same)

• Low Volatility investing in high quality stocks can provide solid returns, and lower volatility is associated with higher returns

• Alternatively, multi-asset ETF portfolio investing sacrifices return for safety (with greater bond components providing lower returns)

Questions?