Osig Annual Report 2008


Published on

Brooke Pollack and I created this document to highlight our accomplishments and to provide our supporters and members with a "prospectus" of sorts.

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Osig Annual Report 2008

  1. 1. 2007-2008 Fiscal Year May 15, 2008 Oregon State Investment Group (OSIG) Key Statistics (10/1/07 to 3/31/08) 10.0% Ending Assets Managed $62,408 5.0% 2007-2008 Fiscal Return (1.52%) 0.0% Benchmark Return (13.36%) -5.0% Outperformed Market By: 11.84% -10.0% Range of Assets Held $59,110 - $66,320 -15.0% Correlation to Benchmark 0.439 OSIG S&P 500 Management Team Style Box President Justin Shanks Large VP, Human Resources Adam Gulledge Mid VP, External Affairs Ryan Good Small VP, Operations & Brooke Pollack Portfolio Manager Value Blend Growth www.oregonstateig.com
  2. 2. 2007-2008 Annual Report Letter From the President May 15, 2008 Dear Members, Alumni and Friends: In the Oregon State Investment Group, a culture of excellence, passion, and dedication is at the heart of everything we do. Coming into a culture of high-achieving students in a competitive university environment, the expectations to perform are high. The 2007-2008 year can be characterized by nothing else than the word “hunger.” The creation of this group has been a dream of mine that has developed over the past four years and has culminated in its present form. Our year began with the excitement of recruiting with our first annual analyst class as a newly formed student organization. With that our year has been marked by many successes that have set the foundation of the group as it is passed down to future generations of Oregon State students. A few of the most notable successes for the year have been: outperforming our S&P 500 Index benchmark by over ten percentage points, competing in the RISE Conference portfolio competition, in June visiting the world‟s top investment banks in New York City, possible taking under management a $1 million dollar portfolio for the OSU Foundation, and creating an organizational structure that ensures the sustainability of our group‟s bright future. The vast amount of progress that we have accomplished in just one short year is a true testament to outstanding quality of men and women that are involved with our organization. As I leave Oregon State and finish my term of leadership in the Investment Group, I will always hold a special place in my heart for this school and organization. I will always remember the passion I see in the eyes of every analyst. I will always remember the dedication our members have towards the never ending pursuit of knowledge in and outside the classroom. Mostly, I will always 2
  3. 3. 2007-2008 Annual Report remember the excellence we spur each other towards, while still keeping an intimate family environment founded upon respect that bonds us together. We are truly uncommon in a common world. Going forward, I see the future of the Oregon State Investment Group not only as being the face of the College of Business and Oregon State University, but also being distinguished on a national level as one of the premier investment groups in the country. Hunger, passion and dedication are the heartbeat of this organization and will propel us towards our future achievements. We will be known for striving for excellence and continual improvement. The Oregon State Investment Group can be summed up by saying, “if we are not growing, we are dying!” Go Beavs! Justin Shanks Founder and President, 2007-08 3
  4. 4. 2007-2008 Annual Report Table of Contents Mission Statement 5 Performance Commentary 19 History 5 OSIG Management Team 20 Group Structure 6 2008-2009 OSIG Management Team 23 Portfolio Strategy 7 OSIG Analysts 23 Decision-Making Process 9 OSIG Events 25 Asset Allocation 9 A Look Forward 28 Portfolio Performance 12 Social Responsibility 31 Risk Metrics 12 Transition to New Leadership 31 Recent Transactions 13 A Bright Future 32 Sector Outlooks 14 Special Thanks 33 4
  5. 5. 2007-2008 Annual Report Mission Statement alumni networks during various OSIG events (see Through our core values of accountability, Events section). collaboration, integrity, and professionalism, the Oregon State Investment Group‟s Mission is to maximize portfolio returns History and provide students the opportunity for experiential learning The Oregon State Investment Group officially began on in portfolio management and in-depth fundamental analysis. October 1, 2007, the start of our first fiscal year. Previously, The Oregon State Investment Group (“OSIG,” “we,” or “the we were known as the Finance Club, but split into two groups group”) has two primary objectives: at the beginning of this school year; one, the Finance Club, a Consistent Portfolio Management: Using a large-cap seminar style class with a guest speaker every week to talk on growth strategy, the OSIG portfolio seeks long-term their specific field of finance, and the other, the Oregon State capital appreciation in excess of benchmark returns by Investment Group, which manages the portfolio. The Finance focusing on fundamental analysis and equity valuation Club, which had been managing money since 2005, did not methods. have close the processes or depth of research that our group has Experiential Education: The Oregon State Investment today, but paved the way for OSIG to exist. Group aims to complement classroom education with OSIG currently manages over $60,000, of which the hands-on investment experience. In addition to original balance came from alumni donations. The OSIG performing in-depth equity analyses of potential management team is responsible for running both the Oregon portfolio companies, members have the opportunity to State Investment Group and the Oregon State Finance Club. establish contacts with the business world through guest Currently, our brokerage account is through Raymond speakers and company visits with the Finance Club, as James, but we are currently switching to E*Trade take well as through interaction with the OSU and OSIG advantage of cheaper transaction costs and also because the Founder, Bernie Newcomb, is an OSU alumnus. 5
  6. 6. 2007-2008 Annual Report Group Structure graduate and take jobs in the finance field. However, it is very Currently, OSIG has 22 members, ranging from important for us to keep a very open learning atmosphere, and freshmen to graduate students. Potential members are involved we encourage friendly debate over any finance-related topic, in a professional interview process in order to make sure that with the goal of having our members learn to create and back the students selected are self-motivated and excited to learn their own opinions, as well as increasing their education of about investments research and management. After investments. successfully recruiting six new analysts for the spring term, we The OSIG structure requires that every first-year plan on recruiting a maximum of 10 analysts to bring the group member is an analyst. Each analyst will report on and present total to 25 members (7 members will be graduating). We feel one stock each term through a detailed report, which is this will be easily achieved based on our increasing exposure expected to take 60-80 hours in the form of research, writing a and reputation around Oregon State University. report, and preparing the financial statements and valuation OSIG maintains a professional setting and attempts to models. Analysts are assigned a sector, with each sector run by imitate an atmosphere that would be found once our students a sector leader. In addition to the stock report, the sector leader also presents a weighting recommendation for their respective sector, which is used to help in sector allocation decisions. Lastly, the management team, which generally consists of five members, is responsible for the overall organization and direction of the group. As we are very early in our life as an organization, the management team is working mostly on developing processes and a structure that will enable this group to continue being the premier student-run organization at Oregon State University. 6
  7. 7. 2007-2008 Annual Report In addition to the student-members, OSIG has two Portfolio Strategy faculty advisors, finance professors Jimmy Yang and Prem OSIG currently manages a large-cap growth equity Mathew. Both are integral parts of the organization and help portfolio with a long-term investment horizon. At the end of not only in organizational matters but act as teachers and the 2007-2008 fiscal year, this portfolio held $62,408 in assets. mentors to all of the group‟s members. OSIG relies on the Using the S&P 500 as a benchmark, we actively knowledge of both professors in order to maintain accuracy of manage this portfolio and aim to produce better returns than the information and develop the group. index, both on an absolute and risk-adjusted basis. We use Here you can see the basic structure of the Oregon State sector allocations within the equity portion of our portfolio to Investment Group: increase exposure in areas that we expect to outperform the market, and vice versa. OSIG uses fundamental valuation models to find companies trading below their implied values. Our models include discounted cash flow, residual income, and relative valuation models. Although we manage a growth portfolio, we use these valuation models as important tools when making investment decisions. OSIG does not short securities or invest in derivatives, fixed income, or real estate securities. Note: The 2007-2008 Fiscal year was shortened due to the new Investment Group formation. The fiscal year will run from April 1 to March 31. This past fiscal year ran from October 1, 2007 to March 31, 2008 . 7
  8. 8. 2007-2008 Annual Report as of March 31, 2008, net of transaction costs Company Ticker Date Bought Shares Purchase Price Current Price Gain/(Loss) Current Balance % of Portfolio IME 30.1% Chesapeake Energy Co. CHK 12/8/2005 79 $ 30.22 $ 46.15 52.71% $ 3,645.85 5.8% FPL Group, Inc. FPL 12/4/2006 40 $ 54.79 $ 62.74 14.51% $ 2,509.60 4.0% 3M MMM 12/8/2005 70 $ 78.24 $ 79.15 1.16% $ 5,540.50 8.9% Sasol, Ltd. SSL 12/4/2006 63 $ 35.86 $ 48.39 34.94% $ 3,048.57 4.9% Waste Management Inc. WMI 12/8/2005 120 $ 29.16 $ 33.56 15.09% $ 4,027.20 6.5% Consumer Goods & Services 14.1% PepsiCo, Inc. PEP 12/8/2005 70 $ 59.76 $ 72.20 20.82% $ 5,054.00 8.1% Yum! Brands YUM 3/13/2007 100 $ 30.84 $ 37.21 20.65% $ 3,721.00 6.0% Financials 12.6% Berkshire Hathaway BRK.B 1/17/2006 1 $ 2,975.00 $ 4,472.90 50.35% $ 4,472.90 7.2% CME Group, Inc. CME 12/3/2007 4 $ 665.64 $ 469.10 -29.53% $ 1,876.40 3.0% Goldman Sachs GS 11/20/2007 9 $ 232.86 $ 165.39 -28.97% $ 1,488.51 2.4% Technology 11.5% Apple, Inc. AAPL 6/6/2006 50 $ 60.82 $ 143.50 135.94% $ 7,175.00 11.5% Healthcare 15.8% Alcon ACL 3/11/2008 18 $ 135.25 $ 142.25 5.18% $ 2,560.50 4.1% Becton, Dickinson & Co. BDX 1/29/2008 40 $ 87.35 $ 85.85 -1.72% $ 3,434.00 5.5% Novo-Nordisk NVO 11/20/2007 56 $ 63.39 $ 69.24 9.23% $ 3,877.44 6.2% Other Holdings 15.8% iShares Emerging Markets ETF EEM 1/27/2006 30 $ 100.87 $ 134.28 33.12% $ 4,028.40 6.5% Cash Holdings $ 5,843.91 9.4% 8
  9. 9. 2007-2008 Annual Report Decision-Making Process discuss the issue as a group to come to a general consensus. Each term, every OSIG analyst researches and presents Additionally, new first-term analysts are assigned update a stock with a buy or hold recommendation. The group votes reports on current holdings, which are used to assist in the after every presentation of a buy-rated stock with majority rule. decision for possible sales of currently-held securities. These If the group votes to buy a new equity security, the portfolio reports also help new analysts learn the valuation models and manager decides what amount to invest in the stock based on report structure with more familiar companies before preparing sector allocations and the presenting analyst‟s a fully independent report and recommendation. recommendation. The management team has veto power over Partial sales are done at the discretion of the Portfolio all transaction decisions, but will only veto a buy Manager for the purposes of maintaining proper asset and recommendation under extreme circumstances, as interpreted sector weightings. Although faculty advisors are not involved by the management team. in the decision making, they oversee the whole process. The sale of securities is done at the discretion of the management team and the corresponding sector leader and Asset Allocation does not require a full group vote, although we will often While considered an equity portfolio, this fund currently holds an exchange-traded fund (ETF), representing 6.7% of assets. Although the portfolio holds this ETF, it was bought prior to the formation of OSIG, and we are neither currently researching nor investing further in ETFs for this portfolio. At the end of the fiscal year, 22.4% of OSIG‟s assets were held in four international equities, enabled by the use of American Depository Receipts (ADRs). We have no target allocation for international exposure, but encourage analysts to 9
  10. 10. 2007-2008 Annual Report look overseas for attractive investment opportunities if they are target allocation and tends to be 5-10% of total assets in order interested. to reserve cash in case of a buy decision for a stock As of March 31, 2008, the OSIG portfolio consisted of presentation during a weekly meeting. If there is no cash or 83.9% equity, 6.7% ETFs, and 9.4% cash. Due to the structure liquidity option, then the weekly presentations that are the of our group, we have not, at any point, been fully invested backbone of OSIG lose importance and may not be taken as during the 2007-2008 fiscal year. The cash position has no seriously by analysts. 10
  11. 11. 2007-2008 Annual Report Within the equity portion of the portfolio, asset Here you can see OSIG‟s equity weightings against the S&P allocation is benchmarked against the S&P 500 Index. For 500 using the 5-sector breakdown (as of close March 31, 2008) basic analysis, OSIG divides its analysts into five sectors: Every term, each sector leader presents a sector outlook and IME (Industrials, Materials, Energy, & Utilities) provides a weighting recommendation for their respective Consumer Goods & Services (Consumer Discretionary sector based on their research and analysis of the sector. These & Consumer Staples) are used to determine the portfolio sector allocations, although Technology (Information Technology & Telecom) they are taken at the discretion of the portfolio manager and Financials management team, as well as in context with the specific Healthcare holdings of each sector. Often, after a sector presentation, we However, for more in depth research, we use the ten-sector will discuss as a group in what sectors we should be over and breakdown that the S&P 500 uses, as shown in the parentheses. underweighted and what changes could be made to allow these restructurings. Fiscal Year Performance 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% OSIG S&P 500 11
  12. 12. 2007-2008 Annual Report Due to our presentation structure, we can only add financial sector, which struggled as a whole during the last weighting to a sector when a stock is presented that the group fiscal year. The following chart shows the best and worst- votes as a “buy.” This makes it hard to consistently maintain performing stocks during the 2007-2008 fiscal year, and does proper weightings, although the portfolio manager may sell a not include dividends, as they are currently not reinvested. portion of any given current holding without conducting a group vote to adjust the sector allocations. This structure also -29.5% creates the problem that we can not make transactions based on -29.0% proper timing, necessarily, but only when the stock is -14.4% presented. This may keep OSIG from buying stocks at the 9.2% ideal time, or at all, as votes are one-time only after each presentation. 10.9% 14.5% Portfolio Performance 24.5% During the 2007-2008 fiscal year, OSIG achieved 31.1% absolute returns of -1.52%, while the S&P 500 returned - 13.36% over the same period. OSIG outperformed the S&P -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 500 by 1184 basis points on an absolute basis. CME GS MMM NVO YUM SSL BRK.B CHK OSIG‟s outperformance of the market was led by its holdings in Chesapeake Energy Corporation (CHK), Berkshire Risk Metrics Hathaway Class “B” Shares (BRK.B), and Sasol Limited While absolute returns are the ultimate goal of the (SSL). The worst performing equities, Chicago Mercantile Oregon State Investment Group, it is important that we Exchange (CME) and Goldman Sachs (GS) came from the minimize risk in doing so. Therefore, OSIG also looks at risk- 12
  13. 13. 2007-2008 Annual Report adjusted returns when interpreting portfolio performance. Here Recent Transactions is a chart looking at some risk factors and risk-adjusted returns During the course of the 2007-2008 fiscal year, OSIG (these numbers are not from our previous fiscal year, but from made 10 portfolio transactions: 5 purchases, 3 sales, and 2 January 1, 2007 to March 31, 2008 due to changes in partial sales. Since OSIG‟s formation in October, we have performance tracking): been restructuring our portfolio in order to better match our 1/1/07 - 3/31/08 OSIG S&P 500 target sector allocations. This has caused a large amount of Absolute Returns 12.28% -6.74% transactions (1.67 transactions/month). We expect that Beta 0.9 1 transactions will not be as frequent for the remaining life of Standard Deviation 4.26% 2.99% this portfolio. Sharpe Ratio 1.75% -3.87% The following are all of the transactions made during Treynor Ratio 8.36% -11.50% the 2007-2008 fiscal year: Jensen's Alpha 17.87% - Date Ticker Type Amount 10/15/07 GS Buy $2,096 As you can see above, not only have our portfolio 11/2/07 BAC Sell $2,650 returns been stellar, but we have done so with a very low risk 11/9/07 JWN Sell $2,598 profile. The combination of high returns along with relatively 11/14/07 NVO Buy $3,550 11/19/07 MSFT Sell $3,478 low beta and standard deviation allowed the OSIG portfolio to 12/3/07 CME Buy $2,663 have great risk-adjusted returns, as shown through the Sharpe 1/29/08 BDX Buy $3,494 Ratio, Treynor Ratio, and Jensen‟s Alpha. 2/13/08 CHK Partial Sale $2,133 2/27/08 SSL Partial Sale $2,550 Additionally, although they have yet to be implemented 3/10/08 ACL Buy $2,435 into the portfolio strategy, we have started to look at other metrics, including correlation and covariance, to improve our overall risk profile and increase portfolio diversification. 13
  14. 14. 2007-2008 Annual Report Sector Outlooks OSIG had no exposure in the Materials sector in 2007 The OSIG Sector Leaders are very important to the and was thus able to avoid the retraction in the Housing success of OSIG. They are responsible for being Materials and Construction markets. Our energy exposure knowledgeable about the OSIG holdings and any current came from Chesapeake Energy Corporation (CHK), a North events in their respective sectors, as well as giving periodic American natural gas producer/distributor, Sasol Ltd. (SSL), a weighting recommendations based on their research. The South African integrated oil and gas supplier, and Florida following are brief sector overviews by the OSIG Sector Power and Lights, LLC (FPL) a Southern US utility provider. Leaders: In 2007, CHK made strong gains on the back of rising natural gas prices, causing its stock to jump 31% during the year. SSL IME – Scott Christianson had a strong year as well, fueled largely by the rise in energy prices at the start of 2007. Its stock price increased from $42 to The Industrials, Materials and Energy (IME) sector had almost $50 and has continued to rise since. FPL also had a a strong showing in 2007, with much of its success coming strong year in 2007, up only 4%, but well outperforming the from the high-performing Energy industry where OSIG has had market. significant exposure. The Industrials industry, in contrast, had OSIG‟s Industrials focus going into the next fiscal year a weaker overall performance, due in large part to higher is tailored to companies who export goods and can benefit from operating costs and staggering consumer demand for the weak US dollar. MMM and other Industrial conglomerates manufactured goods. Our largest Industrials holding, 3M should fair well in the export market despite increased Company (MMM), struggled in the second half of 2007 despite operating costs. WMI is strategically placed to pass on its having two breakout quarters early in the year. Waste increased operating costs to consumers, while providing a Management (WMI) followed a similar trend to MMM, with required service that consumers will be unlikely to go without. small overall changes in its stock price to begin and end the The Materials sector should continue to see significant fiscal year. 14
  15. 15. 2007-2008 Annual Report volatility in the near future with tumultuous commodity values, higher gas and food prices, tighter credit markets and markets. However, certain areas in this industry are more rising jobless claims. All of these factors have combined to attractive than others, such as export-driven producers and create and atmosphere where consumers are looking for ways suppliers. to cut back on spending. The Energy sector should continue to experience heavy At the end of the recent fiscal year, the Consumer pressure from the oil and natural gas markets. Major integrated Goods & Services sector accounted for 17.9% of equity oil producers should see a strong 2008 due to supply pressures holdings, consisting of PepsiCo, Inc, and Yum! Brands, Inc. and continual demand requirements. CHK has multiple Both companies well outperformed the market, by 12.3 and exploration efforts in progress that should prove to be very 24.3 percentage points, respectively, during the year. The profitable in the future. SSL has seen increased adoption of its Fund is slightly underweight in this sector. Further, the Fund is coal to liquid gas products and should continue to see strong marketweight in Consumer Discretionaries and slightly growth as well. FPL is well placed in the market where it can underweight in Consumer Staples. capture continual demand from its customers even in a Looking ahead, we see continued volatility and weakened economy. unpredictable market patterns caused by an ailing economy. In Consumer Discretionaries, the retail industry‟s valuations are Consumer Goods & Services – Michael Beall looking highly attractive. No doubt they are undervalued; it is Over the past year, the Consumer Goods & Services just a question of whether or not the retail market will continue sector has had a rough time, to say the least. In August, 2007 to struggle for a while with wary consumers or if a rebound is when the credit and housing markets started to deteriorate, already taking shape. Consumer Staples is recommended as a consumer confidence started its downward trend, recently marketweight with the Fund‟s benchmark, however it is hitting a 16-year low. A number of factors have played into starting to look relatively unattractive compared to Consumer this sharp decline in consumer confidence: declining home 15
  16. 16. 2007-2008 Annual Report Discretionaries. In general, these companies seem to be sector is down 8.85%, since 4Q 2007, 40 basis points below the becoming expensive. S&P 500. The Oregon State Investment Group portfolio, The Fund should avoid buying or selling a company in currently underweight in technology, has significantly order to match the benchmark‟s sector weightings, seeing as outperformed in this sector. In December, OSIG realized a the goal of the Fund is to outperform the S&P 500, not follow 28% gain on its holding in Microsoft and recently realized a the S&P 500. Over the next year, the Fund should move to be gain of greater than 200% on Apple (in a partial sell-off to overweight in Consumer Discretionaries to take advantage of adjust the weight in the holding). bargain prices. Also, the Consumer Staples sector should The future outlook for the Technology sector is remain either underweight or increase to marketweight, relative optimistic in the long-run; however, continued volatility is to the benchmark, seeing as these companies are becoming foreseen short-term. The Consumer Cyclical sector, as well as expensive and relatively unattractive. Ultimately, the overall economic health, will play a large roll in the recovering investment strategy over the coming year is to find strong, technology sector, as more than 50% of total semiconductor healthy companies that will best weather the current economic consumption is through consumer industries. To minimize storm and provide the most value to shareholders over the volatility, the OSIG portfolio is currently underweight in long-term. Technology and will continue to be until stability is demonstrated in the sector. The 1Q 2008 earnings throughout Technology – Jordan Plemmons the technology sector hinted at the beginning of a turnaround, From the beginning of 4Q 2007, the Technology sector however, according to a recent article by Forbes, “There has felt the full blow of the slowing economy and poor been a bit of a bounce in the technology sector lately, but the performance in the market. In January the technology sector group is far from recovering. U.S. economic concerns are still SPDR, XLK, broke its 50 and 100 day moving averages, plaguing large corporate bankrolls, and [recent] abysmal continuing to trail below them until mid-March. Currently, the 16
  17. 17. 2007-2008 Annual Report earnings indicated that the market is a long way from putting and the cost of borrowing has inevitably gone up. As for our the current credit crisis in the rearview mirror.” holdings, the increased volatility has benefited CME as investors shy away from the stock market, while the market Financials – David Schmunk turmoil has reduced the profit margins for both GS and BRK. The last year has been a trying time for the economy as In the wake of the global crisis spawned from the greed a whole, but the heart of the distress has come from the of the banking industry many are calling for tighter regulation, Financial sector. The collapse of the U.S. housing sector late in increased public disclosure and accountability for the industry, the summer of 2007 and the ensuing liquidity problems have especially for Investment Banking firms. The tighter regulation wrecked havoc on economies worldwide. The problems will likely reduce the profit margins of many firms, but the originating from this situation have had significant impact on increased public disclosure may provide the long awaited the operations of companies in this sector including our insight into the operations of the formerly black-box industry. holdings CME Group (CME), Goldman Sachs (GS) and The process of implementing these controls will probably be Berkshire Hathaway class B shares (BRK.B). slowed by the bureaucratic nature of such changes. As for the The most glaring instance of the effect of the „credit coming months, more write-downs and a high cost of capital crisis‟ on the marketplace is the collapse of the iconic will eat away at any earnings for the remainder of the second investment banking firm Bear Sterns. The uncertainty of the quarter, but in the third quarter Wall Street should turn itself market has showed itself in other events too, such as the around and begin to recognize profits again. Banks worldwide multiple bank runs on E*Trade. The unease is understandable have reported about $300 Billion in losses so far, and while as just about every firm in the banking industry has been there is more to come, the end is now in sight. The OSIG posting record losses as they continue to write off bad debt. As portfolio is currently underweight in the Financial sector and a result, the cash-strapped banks are unable, or unwilling, to should continue to be so until the companies in this industry make loans that would be routine under normal circumstances are once again able to be profitable. 17
  18. 18. 2007-2008 Annual Report Healthcare – Casey Sande for generic drugs. However, it must be noted research predicts During the past fiscal year, the healthcare sector grew that ophthalmologists are less likely to prescribe generic drugs, considerably within the OSIG portfolio. We increased our which should position ACL for continued growth. The sector weighting from 0% to 18.8% of equity holdings. Medical Equipment and Supplies industry, in which BDX Subsequently, as the volatility of the recent market started to operates, has fundamentals that reflect long-term growth become apparent early in the fiscal year, we chose to become drivers that will reach the global market and remains bullish. overweight in the Healthcare sector. This was based on Additionally, the Healthcare sector could also be research expressing strong recommendations for defensive greatly influenced by the 2008 presidential election. portfolio strategies, resulting from the volatility of the overall Democratic nominees tend to support universal healthcare market. This fiscal year, OSIG acquired Novo-Nordisk A.D. coverage, introducing negative impacts on the Major Drugs (NVO), Becton, Dickenson and Company (BDX) and Alcon sector. Overall, the possible changes associated with the (ACL). Since their acquisitions, each of these holdings has upcoming election display strong reasons to explore outperformed the market. opportunities in the generic drug sector, or possibly minimize Looking forward, Biotechnology and Drugs sector our exposure in the healthcare sector after the election. areas involving knees, heart, vaccines and diabetes have a Furthermore, favorable foreign currency exchange rates strong likelihood of growth. Demand for these products is have benefited the industry considerably since the beginning of rising, driven by growing patient volume, which in turn is the fiscal year. Given the dollar‟s weakness against the pound fueled by an aging population. Healthcare Facilities look to be and the euro in recent quarters, some analysts expect the relatively flat over the next year. This is looked to be a result foreign exchange to raise the average top line by approximately of slowing growth in admissions and the length of time spent 3% in 2008. by those admitted in facilities. Similarly, the Major Drug industry looks to lose market-share to the increasing demand 18
  19. 19. 2007-2008 Annual Report Performance Commentary The asset allocation decision is also extremely The Oregon State Investment Group well outperformed important to OSIG‟s portfolio performance, and is driven by its benchmark during the 2007-2008 fiscal year (see Portfolio the work of the Sector Leaders (see Sector Outlooks). It has Performance section). This great performance only goes to been proven that asset allocation is as important, if not more show that the hard work that has been put in by all of OSIG‟s so, that individual stock selection. While we try to disprove members is paying off. Every analyst is motivated to see this this notion through superior selection of individual equities, it group succeed, driving the overall success of our organization. is still very important to our overall performance, as shown OSIG‟s performance can be attributed to its detailed through our active allocation strategy and quarterly sector analysis of every decision that is made, whether it is a group outlook presentations. During the last fiscal year, we took vote for a presented stock or where to free up cash for a advantage of our overexposure in the Energy and Healthcare standing purchase order. We maintain a very well-balanced sectors, which remained strong despite a weak economy, as and well-diversified portfolio for the amount of assets we well as our underexposure in the Financial and Retail sectors, manage. Despite ongoing great presentations, only a small both of which struggled greatly in the last fiscal year. amount of presented stocks are accepted as buys by our After a great first fiscal year for the Oregon State analysts, which goes to show the strict standards that we Investment Group, we look forward to continuing our superior maintain in our decisions. As can be seen in the chart above performance through hard work, detailed analysis, disciplined (see Portfolio Performance section), we do not have any one investment strategies and guidelines, and strict decision- holding driving our returns, but outperform the market by making processes. having a balanced group of well-performing holdings. During the last fiscal year, thirteen of our sixteen holdings outperformed the market. Ten of these thirteen outperformed the S&P 500 Index by over ten percentage points. 19
  20. 20. 2007-2008 Annual Report OSIG Management Team and two brothers Bob and Josh. Justin believes the two most The Oregon State Investment Group was founded by, important aspects of his life are his faith and family. and is currently managed by Justin Shanks, Brooke Pollack, Justin is the founder and President of the Oregon State Adam Gulledge, and Ryan Good. Investment Group, along with being President of the Finance Club for the past two years. Justin is also a student leader with Navigators Christian Ministry on campus, participant in the Big Brother Big Sister Program and member of Sigma Phi Epsilon Fraternity. After graduation Justin plans to move to New York in search of an Investment Banking position for a bulge bracket firm specifically within the Financial Sector, Mergers & Acquisitions department. Justin Shanks, President Justin was born in Spokane, Washington and at the age of one moved to Beaverton, Oregon, where he lived until going to college at Oregon State. He attended Southridge High School in Beaverton and throughout those years was heavily involved in both his Football and Baseball teams. His family consists of his Father Dan, Mother Alice, Step Mother Karen 20
  21. 21. 2007-2008 Annual Report Justin enjoys most outdoor activities including: Brooke joined the Finance Club in 2006. During his camping, mountaineering, hiking, rock climbing and any form time in Finance Club, Brooke served as sector leader for the of extreme sport (especially skydiving). He also enjoys Energy and Consumer Goods & Services sectors, during which competing in Sprint and Olympic Triathlons, salsa and time he analyzed Energen, Target, and SORL Auto Parts. ballroom dancing, discussing theology with friends, and Brooke is still now working in the Financials sector, and most reading. recently analyzed American Capital Strategies. During the past summer, Brooke worked for Riverlake Brooke Pollack, Vice President of Operations & Portfolio Partners, a small-middle market Private Equity Firm in Manager Portland. His responsibilities included performing initial Brooke was born in San Francisco, CA living in the bay analysis on inbound buyout opportunities and industry research area until his family moved to Portland in 1995, where he has and analysis in multiple sectors, including the investment lived since. After graduating from LaSalle High School in banking, construction and tradeshow markets. After Milwaukie, Brooke attended the University of Puget Sound in graduating this June, Brooke hopes to work for an asset Tacoma, WA. After five semesters, he transferred to Oregon management firm to gain experience and eventually start his State University, where he is currently a senior. own hedge or mutual fund. He is currently searching for a job in the Portland area and will be sitting for the Level 1 CFA exam in June. Outside of the Oregon State Investment Group, Brooke enjoys playing sports, especially tennis. He is also an avid musician, mainly in jazz, in which he plays music during his free time. Additionally, Brooke enjoys longboarding, traveling everywhere possible, and spending time with his fiancé, Charli. 21
  22. 22. 2007-2008 Annual Report Outside of class Adam enjoys paintball, snowboarding, Adam Gulledge, Vice President of Human Resources golf, racquetball, hiking and an assortment of other outdoor Adam Gulledge was born in Hillsboro then moved to activities. He's a big fan of The Economist and The Wall Street the Portland area in 1993. Adam graduated from Milwaukie Journal. He is a big fan of The Office and follows college High School in 2005 and in the fall came to Oregon State football almost religiously. Adam is also an active member of University. He is currently a junior studying Business the Austin Entrepreneurial Program at Oregon State University. Administration with a minor is Psychology. Gulledge came to the Oregon State Investment Group in the winter of 2005 as a Ryan Good, Vice President of External Affairs, President of the Technology Sector Analyst. In the spring of 2006 he became Finance Club the Healthcare Sector Leader. He is currently the President Ryan Good joined the Oregon State Investment Group Elect of the Oregon State Investment Group. Last year, he in the spring of 2007 and has quickly risen to the positions of started his own Online Auction Service specializing high-end Treasurer and Vice President of External Affairs. He also holds antiques and vintage collectibles. He is now working on setting the title of President of the Oregon State Finance Club, and has up his own investment fund, AGE Investments. held multiple jobs while in school, including an internship at 22
  23. 23. 2007-2008 Annual Report First Investors Corporation in Beaverton, Oregon. This year he will be interning with Fisher Investments and studying OSIG Analysts abroad in Hong Kong, PRC. He plans to use the skills that he is Every member from the President to the newest analyst acquiring and building upon as an analyst and officer in the is crucial in the success of the Oregon State Investment Group. Investment Group to excel into an entry level position in Without the effort of every individual in OSIG, this investment banking after his graduation in 2009. organization would be nowhere near where it is today. Here is every current analyst of OSIG and the sector that each operates 2008-2009 OSIG Management Team in: In anticipation of a great 2008-2009 fiscal year, next year‟s OSIG Management Team has been chosen and will be as follows: Adam Gulledge* – President Ryan Good* – Vice President of External Affairs Ian McCormick – Vice President of Human Resources Michael Beall – Senior Portfolio Manager Jay Levesque – Junior Portfolio Manager * - denotes returning management team member 23
  24. 24. 2007-2008 Annual Report IME: Healthcare: *Scott Christianson - Sector Leader *Casey Sande - Sector Leader Ian McCormick *Dan Sellars Ryan Good Denny Vo Lars Nielson Adam Gulledge Ryan Horton Evan Gremillion Technology: Clayton Smith Jordan Plemmons - Sector Leader Tim Louden Consumer Goods & Services: *Christine Royer Michael Beall - Sector Leader Kirsten Mahoney Jay Levesque *Jaclyn Stenberg * - denotes graduating member Brandon Beall Financials: David Schmunk - Sector Leader *Brooke Pollack *Justin Shanks 24
  25. 25. 2007-2008 Annual Report OSIG Events Powell about Cisco‟s business, getting his valuable opinions on This year, the Oregon State Investment Group has had the state of his company as well as his thoughts on our the opportunity to extend its education outside of the classroom presentation and what we might improve on with future and our weekly meetings by hosting events, attending valuations. While it was slightly nerve-racking, it was even conferences, and setting up company visits that have allowed more exciting to present to Mr. Powell on his own company, us to piece together what the “real” world of finance looks like. and it was an invaluable learning experience for all those involved. Dennis Powell Visit On October 1, 2007 we welcomed Dennis Powell, the RV Kuhns former CFO of Cisco Systems, to sit in on one of our stock At RV Kuhns, we were able to learn about the work presentations. To get the best feedback possible, we presented done by a growing investment-consulting firm founded by his company (CSCO) as a buy-recommendation. After OSU alumnus, Russell Kuhns. We were treated to a finishing our presentation, we were able to converse with Mr. presentation on the exciting work that is done as an Investment Consultant. We heard from young Analysts as well as Vice Presidents on what it takes to make it in this fast-growing field. This event was great for our analysts, as they saw that there are other areas in investments besides equity research. The RV Kuhns team was extremely welcoming and we greatly appreciated not only their hospitality, but the sharing of their extensive knowledge of the investment consulting business. 25
  26. 26. 2007-2008 Annual Report Columbia Management presented a stock, with UOIG presenting Chico‟s and OSIG Columbia Management welcomed us with open arms presenting Becton Dickinson, both recommended as buys. and provided a comfortable environment from which we could This was a very exciting event for OSIG, as while we learn. After touring their facilities, presentations were given on are in our first year of existence, UOIG has been working for portfolio management, fixed income, and trading desks. This seven years towards excellence as a group, and it was great to was a great experience for us because, among many other see what can be accomplished through years of hard work and reasons, most students had never seen a Bloomberg terminal. dedication. After the meeting, we enjoyed a casual luncheon The learning atmosphere created at Columbia Management where we discussed our groups and exchanged opinions on allowed this experience to continue to drive our members to what makes a great investment group excellence. Additionally, Mr. Rocky Irinaga was especially helpful RISE: "Redefining Investment Strategy Education" not only during this trip but in meeting with members outside The RISE forum is the world‟s largest international of this visit and imparting his wisdom in the form of advice on undergraduate finance conference in the world. The University a personal level as well as for OSIG as we prepared to start our of Dayton hosts the conference each year and is dedicated to first year. bring the leaders of the investment world to speak to its students. This year‟s speakers consisted of everyone from the Investment Group Civil War President and CEO of the Federal Reserve Bank of Cleveland, On January 25, 2008, we held the first annual to Chris Gardner (The Pursuit of Happiness) of Chris Gardner Investment Group Civil War. For this event, we traveled to International Holding Corp. Eugene to join the University of Oregon Investment Group Each day, students have break out sessions with the (UOIG) weekly meeting. During the meeting, both groups industry‟s leading businessmen. These sessions are designed to be a forum, allowing students the opportunity to ask 26
  27. 27. 2007-2008 Annual Report professionals any questions they my have. These sessions and look forward to welcoming them back on campus next cover a wide range of topics, from Private Equity to Fixed year. Income. This year OSIG had the opportunity to send five of its College of Business Centennial Alumni and Business members to the conference. The members reported that “RISE Partner Awards Dinner has a way of putting a face on the industry of finance.” OSIG On May 1, 2008, four members of the Oregon State plans on sending members again next year and continuing our Investment Group had the opportunity to represent the group participation for the foreseeable future. and present to the Dean‟s Circle of Excellence. This presentation was a part of the College of Business‟s Centennial D.A. Davidson Presentation Alumni and Business Partners Awards Dinner, an all-day On April 19, 2008, we were delighted to welcome two event. These members had the opportunity to show valuable analysts from D.A. Davidson‟s Lake Oswego branch. Greg members of the OSU business community just what it was that Thomas and Matthew Yun spoke on what Investment Banking we had been working so hard on for all this time. After leaving is, how to get into the field, and described what it would be like the audience awestruck with our great performance, we had a as a new analyst working at D.A. Davidson. This presentation chance to talk and network with the business professionals who was a great look away from asset management and into a field attended the presentation. that many OSIG analysts were not as familiar with. Mr. Also included in the day was an exciting lunch with Thomas and Mr. Yun were extremely knowledgeable in their Tod Perkins, an OSU alumnus, and Investment Banking presentation as well as during the following Q&A session. Managing Partner and Partner with JP Morgan in New York, a Following this event, many upperclassmen were able to tour of the Montgomery Park building, including a Q&A make connections and pass along resumes. We hope that this session about commercial real estate investing, as well as the is the beginnings of a recruiting pipeline with D.A. Davidson, main event, a reception and dinner during which the members 27
  28. 28. 2007-2008 Annual Report who presented earlier were able to network with the College of Included into the trip will be the privilege of touring Wall Business‟s most successful and accomplished alumni. This Street with some of New York‟s top financial firms including was an amazing event, and we look forward in hopes of Goldman Sachs, JP Morgan, Fortress Investments, and Pequot participating next year. Capital Management. Along with our visits, we will have to opportunity to attend an OSU Alumni Dinner with some of Annual Banquet Wall Street‟s most prestigious OSU graduates. This spring will be our Third Annual Finance Our hope is that this trip will be profitable for all who Appreciation Banquet. This banquet is a way to say thank you are attending it, as well as be a capstone to their education. to the staff, students, and professionals who have been This will provide priceless networking opportunities, and we instrumental in the success of the finance department and the hope to make event an annual trip for our members to enjoy for student organizations within. This year‟s banquet will be held years to come. on May 15th and will be an opportunity for the Investment In addition to all of these great events, we are either Group to continue building its relationship with the College of planning or hope to attend many new events in the future, Business as well as alumni and other finance professionals who including a trip to Nike headquarters, visiting a prestigious have helped the Investment Group and Finance Clubs become Private Equity Conference, and attending the Berkshire what they are today. Hathaway Annual Shareholder Meeting in Omaha, Nebraska. New York City A Look Forward th On June 16 , 2008, the Oregon State Investment Group Oregon State Investment Group‟s founder, Justin will send 10 members to embark on the First Annual New Shanks, once said to the group, “If we are not growing, we are York Trip. The purpose of this trip is to allow students the dying.” This statement was not focusing on the quantity of the opportunity to network for possible future employment. group‟s members, but their quality and increasing group 28
  29. 29. 2007-2008 Annual Report identity. Each term, every member is expected to refine and focus exclusively on professional networking. The integration perfect their valuation and presentation skills, forcing of the Investment Group is complete, and the infrastructure for themselves to continually improve, not only in the accuracy of our future growth is in place. their valuations, but also in the quality and detail of the reports and presentations. Not only does this improve the knowledge Portfolio Restructuring and expectations of the group as a whole, but it improves each On June 5, 2008, the Oregon State Investment Group analyst, making them more ready for the responsibilities of a Management Team will be presenting to the OSU Foundation‟s fast-paced job in the finance world, a primary objective for the Investment Committee. The goal of this proposal will be to Oregon State Investment Group manage $1 million of the Foundation‟s assets. If we are The goal behind continuous group improvement is to successful in this attempt, the Oregon State Investment Group take the organization to a new level, qualified to compete with will be managing approximately $1.1 million in assets by Fall student-led investment groups not only across the nation, Quarter of 2008, including a $1 million dollar endowment fund around the world. The Oregon State Investment Group‟s aim from the Oregon State University Foundation and twenty- is to be the best, and most professional, student run investment thousand dollars from Oregon State University‟s English organization, providing best-in-class investment performance. Department in addition to our current portfolio. Achieving this aim requires that we exercise uncompromising standards of superiority and perfection in every aspect of our International Fund organization. Due to the acquisition of these new portfolios, Oregon During the past year, we have executed a major project, State Investment Group‟s current Large-Cap portfolio will be taking the Oregon State Finance Club and creating the Oregon liquidated and transformed into an international equity State Investment Group as a spin-off which focuses on asset portfolio under the management of next year‟s Junior Portfolio management and equity research, allowing the Finance Club to Manager, Jay Levesque. 29
  30. 30. 2007-2008 Annual Report This portfolio will initially be composed primarily of restructure our portfolio through the NAV-style International international Exchange Traded Funds (ETFs) and aligned with Fund. the geographic and sector allocation of its benchmark. As the analysts research and present international companies, the Endowment Fund ETFs will be replaced with equities in the form of American If our proposal and presentation are convincing, as Depository Receipts (ADRs) until the portfolio is transformed mentioned earlier, the Oregon State Investment Group will into a 100% equity portfolio. manage $1 million in assets from the Oregon State University The International Fund will be comprised mostly of Foundation, under the leadership of next year‟s Senior large-cap equities due to the availability of information for Portfolio Manager, Michael Beall. The funds managed would smaller companies overseas. However, analysts are be in the large-cap portion of the Foundation‟s assets and used encouraged to research companies of any size that provide for not-for-profit purposes. The new portfolio would start out adequate information. primarily composed of sector ETFs, strategically aligned and Recently, we have agreed to manage $20,000 for the weighted against the sector allocation of the Fund‟s Oregon State University English Department, a very exciting benchmark, the S&P 500. As with the International Fund, acquisition for OSIG. These funds will be a part of this qualified equities will slowly replace the ETFs until the International Fund and will be managed in hopes of raising portfolio is 100% equity. additional money for English Department scholarships. Therefore, the International Fund will be structured similar to a mutual fund and use Net Asset Value (NAV) for deposits and withdrawals of English Department money. Additionally, now that we have this set in place, we will be able to manage any other money, scholarship-based or not, without have to 30
  31. 31. 2007-2008 Annual Report Social Responsibility Transition to New Leadership Ultimately, the objective of all portfolios managed by The Oregon State Investment Group‟s current members the Oregon State Investment Group is to seek capital are extremely motivated to create a great organization that will appreciation. However, as a group, we have decided to invest span generation upon generation of the most intelligent and in companies which are socially responsible. hard-working finance students in the OSU College of Business. OSIG believes that social and environmental issues are To ensure that the organization lives on beyond the current important to the ultimate performance of any company and leadership team, we have taken steps to create a structure and investing in companies who take these responsibilities processes that will continue to make the Oregon State seriously will ultimately help us achieve our primary goal of Investment Group the face of the College of Business. First, long-term capital appreciation. Also, as future business 2008-2009‟s management team is already in place, as shown professionals, we feel it is important to set to set an example as earlier. This team was chosen through an application and a group to be socially and environmentally responsible in our interview process to be the group that the current management investing. Not only are these issues important to OSIG team thought could best carry on the OSIG tradition. Working members, but corporate responsibility in all forms is becoming to prepare this group for next year has only led us to reaffirm of more importance to corporate American and someday with our complete faith in this new management team. be a standard of required business practices. Therefore, if Another major step that we have taken to prepare for OSIG is to manage the $1 million allocation of the OSIG‟s future is the creation of the new Oregon State Foundation‟s money, this resulting portfolio, with the OSU Investment Group Analyst Guide. This extensive document, Foundation‟s approval, will only invest in companies that we spearheaded by next year‟s President, Adam Gulledge, will deem to be socially responsible. cover everything that new Analysts should know and learn during their first term with OSIG. Areas covered in this document include Code of Ethics, Organizational Structure, 31
  32. 32. 2007-2008 Annual Report Presentation Guidelines & Format, and DCF & Relative Valuations. This document will help to prepare future analysts for the Oregon State Investment Group based on the principles and high expectations that have been created in OSIG during the last year. A Bright Future Achieving our aim as an organization to be the best, and most professional, student-run investment management “In business everyone is out to grab, to fight, to win. Either you organization requires that we exercise uncompromising are the under or the over dog. It is up to you to be on top” standards of superiority and perfection in every aspect of our organization. However, the Oregon State Investment Group‟s - Alice Foote MacDougall, American Businesswoman true goal is to be the best student-run organization of any kind in the United States. We now have our infrastructure in place and have made great strides in building the group towards this goal over the last six months. We look forward to the bright future of the Oregon State Investment Group, and as an organization of passionate, motivated individuals, we are excited to rise to the top. 32
  33. 33. 2007-2008 Annual Report Special Thanks Robert Pace Countless professionals, faculty, and students have Managing Director, Partner supported the Oregon State Investment Group and its members Goldman Sachs from day one. Without everyone‟s support, we would not have Mr. Pace is an alumnus of Oregon State University and been able to perform as well as we have. Below are those who has had great success on Wall Street. His success is being have had the biggest impact on our success in 2007. Without shared this year OSIG in his support for the first annual New these outstanding members of faculty, and professional and York City trip, and for the College of Business overall with his alumni supporters, the Oregon State Investment Group would support for Finance Students Studying Abroad. not be where it is today. Steve Schauble Robert Zagunis, CFA VP and CFO, OSU Foundation Principle, Portfolio Manager Oregon State University Jensen Capital Management Mr. Schauble‟s experience with other student run Mr. Zagunis‟ track record for giving back is investment groups at previous schools has provided him the exemplified by his support for the Oregon State Investment cornerstone in which to help us develop our organization. He is Group. Without his and others contributions, managers and currently working hard to facilitate a management agreement members of OSIG would not have the opportunity to invest in between OSIG and the OSU Foundation for a $1 million a real portfolio. Mr. Zagunis is also involved as a guest portfolio. lecturer and speaker for the Oregon State Finance Club. 33
  34. 34. 2007-2008 Annual Report Ilene Kleinsorge, Ph.D J. Jimmy Yang, Ph.D Dean, College of Business Assistant Professor of Finance Oregon State University Oregon State University College of Business Dean Kleinsorge‟s excellent leadership and networking Professor Yang is a mentor and friend of both the qualities have proven invaluable to our organization. She Oregon State Investment Group and the Oregon State Finance continually supports both the Oregon State Investment Group Club. His experience in finance and investments is being and the Oregon State Finance Club by leveraging her shared generously with both organizations. His unselfish friendships with professionals and alumni. Through Dean willingness to assist in all matters pertaining to both Kleinsorge, numerous opportunities have presented themselves organizations, while also maintaining an active professor status for both organizations. cannot be thanked enough. Aaron Escobar Prem Mathew, CFA, Ph.D Director of Development, College of Business Assistant Professor of Finance Oregon State University, OSU Foundation Oregon State University College of Business Mr. Escobar‟s ability to encourage involvement from Professor Mathew is a mentor to students in the Oregon professionals and alumni has helped to expedite not only the State Investment Group inspired and motivated to succeed. OSU Foundation‟s partnership with the Oregon State Both he and Dr. Yang dedicate themselves to weekly meetings Investment Group, but has also provided for many talented and events for OSIG. His certification as a CFA is paying off guest speakers and mentors for the Oregon State Finance Club not only for him as a respected professor, but also for students as well. in the form of a generous scholarship for those interested in pursuing the CFA designation under his guidance. His support is highly appreciated. 34