MBA SIM Fund 2014 2015 MBA Presentation May

MBA SIM Fund 2014 -2015 MBA Presentation – May 1, 2015 1

James Lyle Aishwarya Srinivasan Nic Kostman Noel Hill Eugene Lee Jeremy Mortensen Rob Bayless Tyler Blue 2

Agenda Dividend Premium Strategy Review n Strategy Operations n n n Performance n n Strategy Accuracy Returns Attributions REITs n 3 Operational Challenges n Strategy Review Performance

Dividend Premium Strategy

SIM Fund Objectives n n n 5 Apply range of course principles to fund management Utilize resources to maximize learning n Manage scope Portfolio Model n 85% - Quantitative Strategy (core) n 15% - REITs (diversification)

Dividend Stock Pricing Anomaly n 6 Why does it exist? n Mutual fund demand to pass through dividends (Harris, Hartzmark, and Solomon 2014) n Cash guarantee

Dividend Stock Pricing Anomaly “…Companies have positive abnormal returns in months when they are predicted to issue a dividend. ” (Hartzmark & Solomon 2012) n Div Declared Buy (Div Declared -1) 7 Div-Ex Sell (Div-Ex)

Exclusionary Rules n n n 8 Traded in the Russell 1000 Index Domiciled in the US Market Cap over $10 billion Excluded sectors: Insurance, Banks, Utilities, REIT Quarterly Dividends over the past year Universe: 191 securities n Cap holdings at a maximum of 80

Weekly trade schedule Old New 9

Investment Universe 10

Strategy Operations

Operational Challenges n n Reconciliation Sensibility Checks Solutions - Weekly process rotating reconciliation responsibilities. - Differences in opinion of what is “sensible, ” - Established foundation rules such as industry momentum, insider trading, negligent operations, but some decision making was on a case-by-case basis. 12

Cash Management Solutions n Overweighting n Initial purchase n Post–purchase overweighting prioritized based on closest forecasted declaration date. n Indexing n Insufficient Cash n Prioritized purchases based on closest forecasted ex-date 13

Performance

Strategy Accuracy n 19. 6 days of average lead time in purchasing vs. actual announcement date n 0. 4% of planned purchases missed announcement date (1 of 226) n 25% of Sell transactions on Ex-date vs. post-Ex. n Average Holding Period: 34. 5 Days n Std Dev = 16 days n Range: 7 to 99 days n Actual vs. Hartzmark and Solomon 15

Returns vs. S&P 500 11/17/14 - 4/17/15 Total Return Dividend Strategy Return Tracking Error (Annualized) Std. Deviation (Annualized) Sharpe Ratio 16 Portfolio +4. 02% +4. 25% 4. 59% 11. 13% 0. 52 S&P 500 +2. 59% 13. 37% 0. 56

Dividend Yield Return Contribution: 5. 16% 17

Attribution 18

Strategy Tapering n Back to the Russell 3000 n Dividend run-up period eventually falls outside of our time horizon Fiduciary Responsibility n 19

REITs Strategy

REITs – Overall strategy n Approximately 15% of total portfolio n Primary purpose (for us) was diversification n Focused on ETFs with low expense ratios, high trading volumes, and high assets under management n 21 Also filtered out REIT ETFs from non-reputable companies

REITs – Holdings Expense Ratio Holdings Yield AUM NAV Vol. Inception Date Vanguard REIT ETF 0. 12% 141 3. 62% 28. 03 B 82. 57 3. 99 M 9/23/2004 SPDR Dow Jones REIT ETF 0. 25% 92 3. 01% 3. 28 B 92. 63 325 k 4/23/2001 Vanguard Global ex-U. S. Real Estate Index Fund 0. 24% 632 3. 72% 2156. 4 59. 02 442 k 11/1/2010 REIT 22

REIT Returns n Total Portfolio: 8. 52% Annualized: 20. 73% n Benchmarks: n Since Inception Total Return Annualized REIT Portfolio 8. 52% 20. 73% Russell 3000 4. 03% 9. 79% S&P US REIT Index 4. 83% 11. 75% 23

Daily Correlation of Returns REIT Portfolio Russell 3000 Vanguard High Yield Dividend (VYM) REIT Portfolio 1. 000 Russell 3000 0. 611 1. 000 Vanguard High Yield Dividend (VYM) 0. 597 0. 966 1. 000 i. Shares Select Dividend ETF (DVY) 0. 719 0. 899 0. 907 24 i. Shares Select Dividend ETF (DVY) 1. 000

SIM Fund Learning Points 1. Implementation is easier said than done 2. Cash management is an everyday task 3. Effective reconciliation requires a solid process design 4. Dividends yields have surprising magnitudes that look great at first 25