Category: Investment funds

Full report: GW Investment Institute Quarterly Report September 2021

Third quarter of 2021 recorded mixed returns for equities and increased market volatility towards the end of the quarter tied to a range of economic and political concerns. For the GW Investment Institute Student Investment Funds (GWII SIFs), returns were relatively flat at -0.8% vs. 0.06% for the S&P 500 Index during the quarter. Year to date, the GWII SIFs trailed the S&P 500 Index returning 11.7% vs. 15.9% for the S&P 500 Index. GWII SIFs continue to demonstrate resilience through the challenges of the pandemic and related economic impacts reflecting the hard work, diligence, and dedication of our students, faculty, staff, and alumni.

The GWII SIF has given students like me the unique opportunity to manage and grow a real investment portfolio. I served as an analyst/portfolio manager (along with other students enrolled in class) in two finance classes associated with SIFs – GW Real Estate SIF during fall of 2019 and GW Philips SIF during spring 2021. Although the circumstances of the past year limited the typical interactions that have made the SIFs so great, we in turn gained valuable experience from navigating the markets amid the many uncertainties during this challenging period. Much like the real-world, the class’s fast pace and at times demanding environment have undoubtedly expanded my skills and knowledge in the span of just a semester. I look forward to utilizing skills gained in GWII classes and GWSB post-graduation as investment banking analyst for a DC based investment firm.

Commentary by Hien (Julia) Nguyen, Student Research Assistant, GW Investment Institute

It has been an exciting week for the GW Investment Institute (GWII), and for me personally, to welcome students back on campus for in-person classes.

GWII is offering four classes in the department of finance this semester: Ramsey Student Investment Fund for graduate students, Real Estate Student Investment Fund, and two sections of the Phillips Student Investment Fund for undergraduate students. I teach three of the classes; and one section of Phillips is taught by Matthew Miller, an adjunct professor who is also a Senior Financial Associate with the Ross Group at RBC Wealth Management. Combined, 51 students will be managing almost $8 million of the George Washington University endowment.

It was great to see the enthusiasm in the first classes. Students were asking good questions to better understand the current portfolio and the GWII Investment Framework to analyze companies. I look forward to this semester: helping the students become intelligent investors, bringing interesting guest speakers to campus, and culminating with the students’ investment ideas.

Best regards,

Rodney E. Lake

Full report: GW Investment Institute Quarterly Report June 2021

For the quarter ending June 30, 2021, the GW Investment Institute Student Investment Funds (GWII SIFs) returned 10.0% vs. 8.6% for the S&P 500 Index and for the trailing one year the GWII SIF returned 39.5% vs. 40.8% for the S&P 500 Index. The GWII SIFs continue to perform well and reflect the hard work, diligence, and dedication of our students, faculty, and staff, thank you.

Congratulations to our Ramsey Scholars and our GWII Leadership Award recipients, these awards are funded from the payout of the GW Ramsey Student Investment Fund.
The 2021 GW Ramsey Scholars: Jakub Behun, Olivia Eckstein, David Lilla, Vikram Vignesh Nallakrishnan, Zihan Ni, Taylor Pischke, Victoria Schmit, Jeff Siaw, Jiajun Zhong, Lexington Zografakis.
The 2021 Leadership Award Recipients: Ethan Baron, Aizhan Daniyarkyzy, Samantha Horowitz, Oya Houalla, Hannah Jackman, Amelia Larkin,
Jodie Lian, Yejide Olutosin, Sam Rivere, Madison Walenda, Alex Win.

Commentary by Rodney Lake, Director, GW Investment Institute

Full report: GW Investment Institute Quarterly Report March 2021

For the quarter ending March 31, 2021, the GW Investment Institute Student Investment Funds (GWII SIFs) returned 2.3% vs. 6.2% for the
S&P 500 Index and for the trailing one year the GWII SIF returned 56.5% vs. 56.3% for the S&P 500 Index. The GWII SIFs continue to perform
well and reflect the hard work, diligence, and dedication of our students, faculty, and staff, thank you.

Commentary by Rodney Lake, Director, GW Investment Institute

GWII Investment Framework, BMPB, Business, Management, Price vs. Valuation, and Balance Sheet,

GWII BMPB – Price vs. Valuation

Is the process for valuing a company an art, a science, or some combination? We don’t know. Our focus is to make it more of a science and that is a constant work in progress. Additionally our aim is to simplify as much as possible, as Albert Einstein said, “Everything should be made as simple as possible, but no simpler.” 

In line with Mr. Einstein’s premise, let’s use Apple (AAPL) as our example case for valuing a company. Apple is also fitting because it is the largest portfolio position in both our GW Investment Institute Ramsey Student Investment Fund and Phillips Student Investment Fund. Further, I’m guessing people have heard of Apple.

For the Price vs. Valuation component finding the current price of a company’s stock is quite easy. You can find a company’s current price in a variety of different places, for example: on the exchange where they trade, Apple trades on the Nasdaq; your online broker (if you have one); or google finance; enter the company’s ticker, Apple’s ticker is (AAPL), and voilà. Apple’s share price as of March 19, 2021 is ~$120. To arrive at the market capitalization (total market value), often referred to as market cap take the current share price and multiply by the company’s total number of shares outstanding, in this case Apple has ~16.8 billion shares outstanding, hence, $120 (price per share) x 16.8 billion (shares outstanding) = ~$2 trillion market cap for Apple. That’s what the collective wisdom of the market says that Apple is worth at the moment. When you’re evaluating price vs. valuation as an analyst it is your job to say if you agree or disagree with this market valuation, and why. The value you determine for a company independent of the market is its intrinsic value. Hence if your research and analysis for Apple produces a $3 trillion valuation – that’s its intrinsic value, according to you, that would mean that the market is undervaluing Apple; market cap = $2 trillion vs. your intrinsic value of $3 trillion. This would signal a buy or a hold if you already own shares. Where there is a disconnect there is a potential opportunity, on both sides of this coin.

How do you establish the intrinsic value? There are different metrics and techniques to establish the intrinsic value. For example, price to earning (P/E), price to book (P/B), price to tangible book (P/TB), price to sales (P/S), EV/EBITDA, PEG ratio, comps, Discounted Cash Flow (DCF), and Dividend Discount Model.Again, to simplify we’ll use one metric to start, the Price to Earning ratio or P/E ratio. This is one of the most straightforward metrics to use for valuation and note it works as a better measure for an established company versus an early stage or rapid growth company.

If you have access to Morningstar online through your local library for example I recommend to use their reports to get started. You can also use the free version online, I will use the data from there for the following P/E examples. You may perform these calculations on your own using the source company data in the company’s 10-Qs and 10-Ks filed with the SEC. 

Using the data for Apple on Morningstar.com as of March 18, 2021, under the valuation tab the forward P/E is 28.0x whereas the forward P/E for the S&P 500 is 21.7x (the average valuation for one of the largest 500 listed companies). Apple’s valuation is higher than the market average. If you think Apple is an above average company then the relative valuation seems appropriate to start, how much higher then is the open question? Generally, higher quality businesses will have higher valuations. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett.

If you think Apple will continue to drive new sales, for example from its M1 chip, and it is a far above average business then maybe it’s undervalued. If you think Apple’s product line is not going anywhere and sales are going to plateau or even decline then you are starting to make the argument that it’s overvalued. If you think Apple will continue on its same trajectory (ceteris paribus), maybe it’s fairly valued. Remember our aim is to be as rigorous as possible, however, knowing that we cannot reliably predict the future. Therefore we would like to have some margin of safety between our intrinsic value and the current market value.

There are literally volumes written about valuation so one blog post will not cover all facets, we’re just starting to scratch the surface, hence to be continued. The next time we review valuation we’ll keep Apple as our example. Our GWII Investment Framework series will continue and our next post will be about the Balance Sheet component.

Rodney E. Lake

March 22, 2021

GWII Investment Framework, BMPB, Business, Management, Price vs. Valuation, and Balance Sheet

This is the second in a series of posts about the GW Investment Institute (GWII) Investment Framework BMPB: Business, Management, Price vs. Valuation, and Balance Sheet. Our GW students use this framework to evaluate companies for our GWII Student Investment Funds. The second framework component we’ll review is Management.

GWII BMPB – Management

You may have heard an investor say, “We are aiming to partner with the highest quality management teams”. Well, who isn’t, so what does that mean? How do you evaluate a management team? To help organize your research use the acronym CAPITAL: Capital, Allocation; Preparation; Incentives; Track record; Alignment; Long term.

Evaluate Management: CAPITAL

Capital Allocation	One of management’s primary responsibilities is capital allocation across: 1. Growth: organic / internal / Research and Development (R&D) + external / mergers and acquisitions; 2. Dividends; 3. Share repurchases; and 4. Debt reduction. What has management prioritized? How do they evaluate internal projects/investment, mergers and acquisitions, their dividend policy, share repurchases, and management of the balance sheet – specifically paying down debt. For example, the leverage on the balance sheet and its structure reflect the willingness of management to take risks for the business. We want to partner with teams that have the balance sheet prepared for difficult times.
Preparation	We are looking for management teams consistently preparing for difficult times across the board, also preparing for new opportunities, preparing to innovate, and preparing for whatever is next.
Incentives	People work to their incentives. Management’s compensation structure should create the proper incentives for them to sustain and grow the company. Check the Proxy Statement, “DEF 14A” filed with the SEC for management’s compensation structure.
Track record	Evaluate management’s track record for efficiency and effectiveness. One place to start is to calculate and understand the company’s Return on Equity (ROE), using the DuPont Formula: ROE = Profit Margin x Asset Turnover x Equity Multiplier. How does ROE and its component pieces compare to the industry? Average, above average, below average? This could be an indicator for management’s efficiency in some areas and effectiveness in others.
Alignment	Is management aligned with: employees, customers/clients, and shareholders. What actions demonstrate this alignment?
Long term	Is the management focused on the long term and are they consistent over long term periods. How is the management team positioning the company for the current market environment and how are they preparing for the future? For example, what’s management’s policy for R&D? How does the management team turn R&D into products or services that get to the market and have a positive impact on the company?

This is only a brief overview and will not likely be enough data to properly evaluate a management team. It is, however, a starting point and way to organize your initial research. We’ll follow-up with future blog posts for the management component of the GWII Investment Framework, next post will be regarding Price vs. Valuation.

Rodney E. Lake,

March 13, 2021

GWII Investment Framework, BMPB – Business

This is the first in a series of posts about the GW Investment Institute (GWII) Investment Framework BMPB: Business, Management, Price vs. Valuation, and Balance Sheet. Our GW students working as analysts and portfolio managers use this framework to evaluate companies for our GWII Student Investment Funds. We’ll start the review of the Business framework component.

What makes a good business? What distinguishes one business from another? As business people and investors we want to own the highest quality business that operate within industries that have tailwinds, i.e., favorable market conditions, this may seem obvious, however, is worth noting. Good businesses generally have high profit margins and cash flow that are consistent over time. We look for companies that have dominant market positions, companies where customers/clients love their products/and or services. We want to understand how much capital a business needs to grow, less is more in this area.

We work to understand the competitive landscape. What are the barriers to entry? Is there consolidation in the industry with limited new entrants, e.g., freight rail in the U.S. Is it a newer industry where an early mover has established a dominant position, e.g., Amazon (AMZN) Web Services (AWS). What portion of the client’s budget does the product and/or service represent, if a small portion, the company may have some pricing power, e.g., Apple (AAPL). More on pricing power in another post. What are the switching costs for customers? Steep, limited, or non existent? Some companies provide a high degree of value to their customers each day, e.g., a Starbucks (SBUX) coffee. What brand recognition and loyalty does a company have? For example: Tide,  produced by Procter and Gamble (PG).

Has the business created a network effect, the most obvious examples are the social media companies like Facebook (FB), Twitter (TWTR), and LinkedIn (now part of Microsoft (MSFT). Payment systems, like Visa (V), Matercard (MA), and now PayPal (PYPL). Once a company or a few companies establish a significant presence it can become difficult for new entrants to the industry.

Does the company make individuals or companies more efficient? examples include, Apple (AAPL) iPhone, Amazon (AMZN) Prime and AWS, Salesforce (CRM). 

How regulated is the business? And if regulated how does that impact the economics of the business, consider the difference between power generation and biotechnology, both industries have regulation, however, the return profile for a regulated electric utility company is quite different from that of a biotechnology company that’s drug approval process is regulated by the FDA. 

What has been the track record of the industry, consider software companies compared to airlines companies, as an investor you have access to either one.

We use a few basic metrics to start our analysis, for example: Return on Equity (ROE), using the Dupont Formula ROE = Profit Margin x Asset Turnover x Equity Multiplier; the revenue growth rate, and change in profit margin over time. 

This is by no means a comprehensive overview of how to evaluate a business nor all the tools to do so. Hence, more to follow in future posts. The next post will review the Management component of the GWII Investment Framework. Thank you.

Rodney Lake

March 5, 2021

COMMENTARY BY RODNEY LAKE, DIRECTOR, GW INVESTMENT INSTITUTE (link to full GWII 12/2020 quarterly report)

For the quarter ending December 31, 2020, the GW Investment Institute Student Investment Funds (GWII SIFs) returned 11.2% vs. 12.1% for the S&P 500 Index and for the calendar year 2020 the GWII SIF returned 27.6% vs. 18.3% for the S&P 500 Index. The GWII SIFs have outperformed the S&P 500 Index for the time periods of 1 year, 3 years, and 5 years, ending 12/31/2020 (see table). The performance of our funds reflect the hard work, diligence, and dedication of our students, faculty, and staff, thank you. 

2020 was not what we expected in 2019. A good lesson in how assumptions about the future can be dramatically changed by a single event, in this case the global pandemic, i.e., covid-19. There are signs to be optimistic about 2021 and moving forward. The fact that in approximately 12 months we have moved from starting the lock-down process to having two approved vaccines, a record time for development, that are both highly effective against covid-19, and that we are vaccinating approximately 1.6 million people per day (and increasing) is astounding.

We sincerely appreciate all the work our students have put forth in this challenging and unusual time. It takes dedication, time, and attention to create the level of focus our students have summoned. Thank you to our students for their understanding as we moved our teaching and processes online. In many areas we transitioned seamlessly in large part due to our students adapting so readily and quickly. We are all looking forward to moving back into the classroom as soon as we can do so safely. Our students consistently inspire us and give us many reasons to be optimistic about the future. On February 9th, 2021 we celebrated GW’s bicentennial, happy birthday to GW. We look forward to many more centuries.

February 24, 2021