Cfaof Annual Report 2007-2008

Chartered Financial Analyst Society of Orange County Foundation (CFAOCF)

CFAOCF Investment Portfolio 2007 Annual Report Prepared by:

Student Managed Investment Fund (SMIF) CALIFORNIA STATE UNIVERSITY, LONG BEACH

March 14, 2008

2007 CFAOCF Annual Report

Table of Contents

Introduction

1

Economic Review

2

Company Spotlight

Apple Inc.

3

Garmin Ltd.

4

Microsoft Corp.

5

Kimberly-Clark Corp.

6

2007 CFAOCF Annual Report Energen Corp.

7

Baker Hughes Inc.

8

NutriSystem Inc.

9

Performance Summary

10—11

Learning Experience

12

Acknowledgements

13

2007 CFAOCF Annual Report

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INTRODUCTION California State University Long Beach (CSULB) has been serving the Los Angeles and Orange County communities since its establishment in 1949. The university’s College of Business Administration Finance Department offers 16 of its top students the opportunity to participate in a year-long honors Student Managed Investment Fund program.

The CSULB Student Managed Investment Fund program was created in 1995 by one of its current directors, Dr. Lowell R. Runyon. The program’s focus has been to enhance each member’s academic experience by providing them with the eswsential tools for their post graduate life. Such tools, could not be acquired without having a real life portfolio management experience. Since its inception, the students have been granted the opportunity to manage a $50,000.00 portfolio which soon grew to $100,00.00 portfolio provided by the California State University Long Beach (CSULB) College of Business’s Finance Committee. Through the years, the program has experienced several breakthroughs such as the addition of its co-

director Dr. Peter Ammermann, procurement of the Bloomberg Professional Service (i.e., a “Bloomberg machine”) for use by the SMIF students in conducting their analysis, and involvement with the CFAOCF RFP Competition. The management of the fund spanned a full fiscal year which resulted in two management teams contributing to the fund. The annual report reflects the transition from the 2006-2007 SMIF team to the 2007-2008 SMIF team, compiles the year, and presents the results of the fund’s holdings.

2007 CFAOCF Annual Report

Fed Funds rate to remain at 4.50% from the 4th quarter of 2007 to the 4th quarter of 2008, The SMIF program had forecasted a citing inflationary concerns as the main risk. domestic GDP growth of less than 3% for Inflationary concerns have diminished as 2007. The actual GDP figure came in at recessionary concerns are now the primary 2.2%, lower than expectations primarily due economic risk. Rate cuts are expected to to the subprime issues. The market outlook continue in 2008 as the rate should dip below was more favorable, forecasting a 7.4% price 2.0% in the 3rd quarter. appreciation in the S&P 500 for the year 2007. The basis of this appreciation was the The price of oil has risen dramatically over strong performance in 2006, moderate GDP the past few months, while briefly spiking growth, and the low energy prices, but once over $100/barrel at the end of 2007. Initial again the subprime concerns have caused a forecasts had oil trading in the mid $70 range much lower price appreciation than originally at the end of 2007, while the actual trading range was in closer to the lower-mid $90 projected. range. The concerns in the subprime housing market that first became prevalent in the Forecasted unemployment rates in the 3rd and 4th quarter of 2007 were supposed to be beginning of 2007 and have expanded 4.6% for both quarters. The actual rates beyond subprime mortgages, this broader crisis is now called the credit crunch. The were 4.7% and 4.8% respectively. This trend rate of subprime mortgage delinquencies and originated in housing and has moved to other foreclosures rose, causing exposure fear industries due to a decrease in corporate throughout the global financial markets. The profitability. liquidity of these mortgage backed securities The forecast for GDP in 2007 was initially decreased and massive write downs projected to be below 3%. The actual GDP followed. A wider liquidity problem figure was 2.2%. It should be noted that the developed as banks reduced short term 4th quarter growth was 0.6%. The low GDP lending to one another. combined with the increasing unemployment The equity markets showed an increase in figures are making concerns of entering a volatility and investor demand for quality recession increase. Preliminary forecasts increased, resulting in the decrease of showed the GDP reaching its low point of government bond yields. 2.2% in the 4th quarter of 2007, now it appears GDP measures will get much lower In an effort to reduce the effects of this credit than that with revised projection of 0.15% in crisis the Fed as well as other central banks the 1st quarter of 2008. in the world injected capital into the financial markets along with reducing the Fed Funds Rate from 5.25% to 4.25%. ECONOMIC REVIEW

The SMIF team had initially forecasted the

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2007 CFAOCF Annual Report

COMPANY SPOTLIGHT

APPLE INC. 1 Infinite Loop Cupertino, CA 95014 408-996.1010 (Phone) www.apple.com Apple Inc. Profile Apple (AAPL) incorporated on January 3, 1977, designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The company is most well known for its signature music player, the iPod and personal laptop computer, the Mac Book. Apple also launched a new internet MP3 download service, iTunes which ties in with iPod music player. These products were responsible for Apple’s phenomenal growth which sent the stock from $89.49 to a 52-week high of 202.96. Although the stocks were stopped out from a market sell off last summer at

$116.57, the SMIF team was able to capture a net gain of $1489.00 which translates into a holding period return of about 30%.

2007 CFAOCF Annual Report

5th Floor, Harbour Place P.O. Box 30464 SMB 103 South Church Street George Town, CYM 345-946.5203 (Phone) www.garmin.com Garmin Ltd. Profile Garmin (GRMN) is a provider of navigation, communications and information devices, most of which are enabled by global positioning system (GPS) technology. The Company designs, develops, manufactures and markets a diverse family of hand-held, portable and fixedmount, GPSenabled products and other navigation, communications and information products. The SMIF team had its biggest gains through its holdings in Garmin. The news of Garmin acquiring GPS Gesellschaft fur Professionelle Satellitennavigation mbH (GPS GmbH), the exclusive distributor of Garmin's consumer products in Germany. News of Garmin’s FY 2007 financial outlook created further gains for the stock which sent

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it to a 52-week high of 125.68. The SMIF team purchased 90 shares at a price of $55.95 on March 14, 2007 and was later stopped out at a price of $88.06. Garmin was stopped out on August 16, 2007 during a rigorous sell-off of the technology sector. Apple, another holding in the CFAOCF portfolio, was stopped out under the same circumstances.

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2007 CFAOCF Annual Report

One Microsoft Way Redmond, WA 98052 425-882.8080 (Phone) www.microsoft.com Microsoft Corp. Profile Microsoft Corporation (MSFT) develops, manufactures, licenses and supports a range of software products for computing devices.Microsoft updated some of its product line in 2007. On January 30 2007, the company released its Vista Operating System. This was the first upgrade to its operating system since Windows XP was released in October of 2001. The company released Office 2007 on January 30, 2007; which was a major upgrade from previous version. On November 13 2007, Microsoft released the Zune 2 MP3 Player; which was an upgrade from the previous Zune Player. The Zune 2 was developed to compete with Apple’s iPod. Later in 2007, Microsoft acquired aQuantive, Inc. an online ad firm in order to compete with Google. With the success of Microsoft’s X-Box and the news of

the upgrades as they were in development, SMIF purchased 212 shares at $22.46 on July 7, 2007. Microsoft hit 3 successive 52week highs starting on October 31 2007 at $37; followed by $37.49, and $37.50. In 2007, SMIF had an unrealized gain of 21.09%.

2007 CFAOCF Annual Report

123 Robert South Kerr Ave MT-2796 Oklahoma City, OK 73125 972-281.1200 (Phone) www.kimberly-clark.com Kimberly-Clark Corp. Profile Kimberly Clark (KMB) is a large cap value company in the household and personal products industry. KMB specializes in paper and synthetic healthcare products such as diapers, bath tissue and paper towel. The company has had an increase in the overall sales, but has shown effects of the cost of raw materials increasing. Private labels continue to exhibit pressure in the market, products such as diapers tend to move towards commodity-like tendencies. The market as a whole showed a correction in the beginning of March 2007. The KMB position was sold posting a 2.03% holding period return for 2007, which was on pace with the benchmark.

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2007 CFAOCF Annual Report

and central Alabama.

605 Richard Arrington Jr. Boulevard North Birmingham, AL 35203 205-326.2700 (Phone) www.energen.com Energen Corp. Profile Energen Corporation (EGN) is a Birmingham, Alabama-based company. It is a diversified energy company with growing oil and gas acquisition and development. The Company has a strong and stable natural gas utility. Energen is listed on the New York Stock Exchange - ticker symbol: EGN - and its market capitalization is approximately $4.3 billion. While Alagasco's natural gas utility provides Energen with significant strength and stability, it is Energen's oil and gas acquisition and development company, Energen Resources Corporation, which has been driving the Company's long-term growth since 1995. Energen’s regulated business, Alabama Gas Corporation (Alagasco), is the largest distributor of natural gas in Alabama. With roots spanning more than 150 years, Alagasco serves approximately 455,000 homes, businesses and industries in north

The SMIF team purchased 130 shares at $37.62 on April 20, 2006 for a total amount of $4,890.60 for the CFAOCF portfolio. On June 26, 2007 Energen stock significantly dropped due to the announcement of its new CEO James McManus, while Energen’s old CEO Michael Warren will continue to hold his spot as Chairmen until he retires later in the year. On June 26, 2007 Energen was stopped out at $54.44, SIMF’s total return since Energen’s purchase was 17.42% or $1,054.35.

2007 CFAOCF Annual Report

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return for Baker Hughes since was 10.57%

2929 Allen Parkway Suite 2100 Houston, TX 77019 713-439.8600 (Phone) www.bakerhughes.com Baker Hughes Inc. Profile Baker Hughes (BHI) supplies reservoircentered products, services, and systems to the worldwide oil and gas industry. The company provides products and service for oil and gas exploration, drilling, completion and production. The SMIF team purchased 72 shares at price of $69.28. On July, Baker Hughes reported a decline of 75% in its secondquarter, profits in absence of a gain from an asset sale recorded in the prior year. Baker Hughes total rig count decreased 1.3% in the 2ned quarter of 07. The decline was mainly in Canada and offshore. In Canada, Baker Hughes had 51% less rigs during the 2nd quarter of 07 than a year earlier. The August sell off caused Baker Hughes holdings to be stopped out at the price of $76.34. SMIF’s

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2007 CFAOCF Annual Report

300 Welsh Road, Building 1 Suite 100 Horsham, PA 19044 215-706.5300 (Phone) www.nutrisystem.com NutriSystem Inc. Profile NutriSystem (NTRI) is an online weight loss community. The NutriSystem was purchased because of the success of its website’s weight management program that incorporates personal counseling, individual diet, and exercise plans. NutriSystem was purchased 100 shares at a price of $49.49. In June, NutriSystem competitor GlaxoSmith Kline introduced its nonprescription drug Alli Pill. Since the introduction of Alli Pill, NutriSystem stock has been on the decline. In July, NutriSystem stock fell 18% after its Q2 profits failed to meet analyst’s estimates. The missed estimates were due to GlaxoSmithKline new diet drug and NutriSystem rising marketing costs. On July 14, 2007 it was stopped out at $57.06, while capturing returns of 15.29%.

2007 CFAOCF Annual Report

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PERFORMANCE

TOP PERCENTAGE GAINERS

At the end of 2007, the portfolio returned 11.69% over its holding period. The equity portion returned 22.20% return since purchase. The biggest gainer came from the purchase of Garmin, which yielded returns of 57%, while the least returns came from Kimberly-Clark Corp., which yielded returns of 3.5%. None of the position suffered any loses. Fixed income compromised of Fidelity money market fund. The fixed income yielded 5.37% returns.

GRMN

Garmin Inc.

57%

AAPL

Apple Inc.

30%

MSFT

Microsoft

19.25%

The benchmark used to evaluate the performance of the portfolio included 70% of the S&P 500 index and 30% of the NBBITR. During the course of the 2007, the weighted S&P returned 2.5% and the weighted NBBITR returned 1.43%, which resulted in a benchmark return of 3.93%. Despite the housing market bust, the credit crunch, and record energy prices, the team outperformed the equity benchmark by 18.63% and the fixed income benchmark by .6%.

Total Return Benchmark:

▲3.93%

( 70% S&P 500, 30% NBBITR)

Total Return Portfolio:

▲ 11.69%

4/4/2007

Baker Hughes (BHI)

Return on Benchmark of NBBITR and S&P500

Return on Portfolio

3.93%

$217.45

22.69%

10.57%

15.30%

58.73%

30.26%

3.58%

17.42%

ROI

$114,190. 49

$217.45

1.85%

5.37%

$45,946.2 7 $8,398.07 22.20%

$102,238. 23 11.69%

$527.04

$757.00

$7,547.20 $1,411.92

$5,496.48

$5,706.00

$7,925.40 $2,957.40

Total Portfolio

212

72

100

90

$33,050.1 1

$35.60

$76.34

$57.06

$88.06

$202.96 $6,411.35 $1,489.40

$5,782.64

$7,077.20 $1,052.35

Amount Gain/Loss

$11,769.7 6

$275.81

$37,824.0 1

12/31/200 7

8/3/2007

7/25/2007

8/16/2007

55

86

130

Shares

CASH

$86.92

$18.72

$6,222.20

$4,988.16

$4,949.00

$67.50

$116.57

$67.24

$54.44

Price

$73,593.1 8 $3,752.57

212

72

100

$5,035.50

8/16/2007

3/8/2007

6/26/2007

Date

$69,840.6 1 $3,752.57

$29.35

$69.28

$49.49

90

$87.72

$14.95

Div & Inter.

SALE

Fidelity Money Market (SPRXX)

FIXED INCOME

TOTAL

Microsoft Corp. (MSFT)

Unrealized Gain 12/29/200 6

3/28/2007

Nutrisystem Inc.(NTRI)

$55.95

3/14/2007

Garmin Ltd. (GRMN)

$4,921.95

$89.49

3/14/2007

Apple, Inc. (AAPL)

55

$5,667.40

86

Energen Corp. (EGN) $65.90

Amount ($)

$6,039.80

Shares

130

Price

$46.46

Date

12/29/200 6 12/29/200 Kimberly-Clark Corp. (KMB) 6

Realized Gain

EQUITIES

PURCHASE

2007 SUMMARY REPORT

CFAOC INVESTMENT PORTFOLIO

2007 CFAOCF Annual Report

were able to develop an asset allocation that they felt would beat the market. After deciding the The Student Manage Investment Fund (SMIF) is asset allocation, the different SMIF teams were a great opportunity for Finance students able to start choosing stocks to present to the concentrating in investments to gain an invaluable class that they thought would best fit the real-world experience in portfolio management. CFAOCF portfolio. This helped the student’s This year, the sixteen students that make up the analytical and presentational skills. SMIF class were given the opportunity to manage a $100,000 portfolio provided by the Certified The learning experience that the SMIF students Financial Analyst Society of Orange County were able to obtain by managing $100,000 for the (CFAOCF). While the assets were under CFAOCF is one of the most rewarding and management, the members followed a top-down unmatched experiences in the College of approach, building upon their knowledge acquired Business at California State University, Long in previous classes. The program also provided Beach. students the opportunity to hone their presentation skills, as presentations were a vital part of the class. The most valuable learning experience was found through the students working as teams and collaborating as a whole class to make financial decisions. LEARNING EXPERIENCES

The students in the SIMF 2007-08 classes had to create and present a request for proposal to the CFAOCF in order to manage the $100,000 portfolio for a following year. The students from the pervious year’s SMIF class were also granted the opportunity to manage $100,000 portfolio. Since the portfolio is managed by the students for a calendar year, the 2007-08 class had to take over management of the pervious year’s class portfolio. This gave the students a unique learning experience, to have to adapt a preexisting portfolio, to their own management style. The top-down approach utilized by SMIF began with analyzing the many different variables that affect the economy. The hardest part in using this approach was to see which variables were most important. The students also had to continuously rework their outlooks as the climate of the economy changed. Next the SMIF students used their economic outlook to predict which sector and industries would be the most favorable for the holding period of the portfolio. Utilizing different resources such as, Value Line, Morning Star, Standard & Poor’s, and Bloomberg, the students

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2007 CFAOCF Annual Report

ACKNOWLEDGEMENTS The Student Managed Investment Fund that the CFA Society of Orange County has funded allows students to gain an unbelievable experience in the portfolio management field. The real life experience, teamwork skills, and networking that each student will take away from this experience will be forever invaluable. The support and funding of such a program shows the commitment of the Society to the help shape the future of the community’s future finance professionals. The SMIF Group would like to give special thanks to the CFA Society of Orange County for giving us the opportunity to be a part of the Student Managed Fund. The SMIF Team would also like to give special thanks and appreciation to Dr. Lowell Runyon and Dr. Peter Ammermann who are the other key components to making the SMIF group possible. Both advisors have dedicated their time to weekly meetings and events. The time spent and dedication is appreciated because it has allowed for the SMIF group to have designated time to meet and make decisions for the portfolio as a whole. The professors have setup the SMIF group to be guided rather than taught, which has allowed for a unique environment and is commended. The SMIF group would like to express its ultimate gratitude to Dr. Lowell Runyon and Dr. Peter Ammermann because without them the SMIF group would not be possible.

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