Trade; A Windfall for the SMIF Portfolio

September 6, 2019

News

 

Hello everyone! The CSUF Student Managed Investment Fund is back with an update for the month of July. Enjoy the read!

 

We wanted to welcome back our fellow Titans and wish them the best as the fall semester begins. We are very excited to hear about the experiences our officers have brought back from their internships here and abroad. Our team is also looking forward to bringing on new team leads drawn from our many talented analysts!

 

 

Equity

 

During the month of July, the CSUF SMIF equity portfolio returned 486 bps above the benchmark which represents a 4.27% increase over the outperformance during June. Much of the gains can be attributed to our allocation in defensive positions. They benefited from the volatility surrounding both, trade, and the FOMC's rate cut decision.

 

 

 

Leaders

Dollar General

Dollar General has become our top performing security through their implementation of initiatives that enhance the customer experience. This translates to higher topline growth from increased foot traffic and high-ticket priced items. These initiatives include DG Fresh, digital, Fast-Track, and non-consumables. Furthermore, they have offset headwinds related to rising carrier, trucking, and fuel costs through investment in their tier 1 transportation-management system. This system improves efficiency by reducing the average mileage required to deliver produce from their distribution center to their stores. As a result of management's decisions and guidance, Dollar General has been able to outshine its discount peers.

 

Costco

Costco is a top market leader in the warehouse industry. It has performed exceptionally well despite headwinds associated with trade war between the United States and China. In the fiscal Q1 earnings, they experienced unexpected margin pressures that came from increasing competition and rising costs. However, they successfully addressed margin pressures in Q2 as their core merchandise margins increased by 8 bps. Furthermore, Costco recently opened its first warehouse in Shanghai, China. The significance of this stems from its success in establishing stores in other international markets such as Japan or South Korea. Costco’s position in China offers a brand new growth opportunity if they can successfully carry out overseas expansion in the world’s second largest economy.

 

Ecolab

Ecolab has been making various acquisitions throughout the year that has aligned with their efficiency initiative. One of their more recent acquisitions is Chemstar. Chemstar provides food safety, sanitation, and hygiene solutions. The purpose of this acquisition is to better service Ecolabs retail customers. Ecolab has also launched a new cloud platform called Ecolab3D which will improve how businesses manage their water usage. The CSUF SMIF team thinks that their adherence to efficiency initiative’s vision has been a material benefit to them.

 

Laggards

UnitedHealth Group

Regulation and legislation have continuously plagued the healthcare sector. Administrative talks regarding systemic charges such as pressures on drug prices and Medicare-for-All have threatened healthcare payers including UNH. Although UNH recovered strongly from political headlines earlier this year, the stock fell victim to a J.P. Morgan hospital survey forecasting large increases in medical services usage that would increase medical loss ratios for insurers. However, the survey’s results are contrary to UNH’s increased 2019 guidance, which underwent a higher adjustment than the previous outlook. Moving forward, despite having positive sentiment towards UNH, our team will closely follow the company’s upcoming third quarter earnings to assess the accuracy of the third-party survey data and monitor the political environment around healthcare.

 

CVS Health

CVS’ shares plummeted earlier this year due to uncertainty about the future of healthcare and proposed legislation against pharmacy benefit management rebates. Since then, investors’ reactions to healthcare talks have calmed; and the Trump administration has chosen to discontinue pursuing such legislation. However, CVS’ price has yet to recover its losses over its holding period. 2019 has been noted as a transition year for CVS, while the company is on track to meet its synergy targets for the $70 million acquisition of Aetna. Despite hurting our performance in June, the stock has rebounded from meeting guidance and recovering from political pressures. The stock’s holding period return has improved from -12.8% to -5.1% between the months of June and August. Given our analysis of the company, our team is confident in CVS’ ability to smoothly integrate Aetna while fending off regulatory pressures.

 

Fixed Income

 

Our fixed income portfolio continued its stride of disappointing performance; this time underperforming the benchmark by 74 bps. The continuation of the trade war, between the United States and China, has been a cause of concern for investors; pushing them to fear a "looming" recession. Even though economic data was relatively solid, investors focused far more on the Fed. The Fed had wrapped up their two-day meeting where they decided to cut the Federal Funds Rate by 25 bps. This had rattled investors and sent a wave of panic throughout the market as investors sought to purchase Treasuries; pushing yields down to very low levels. In fact, the rates are very low with the yields on both, two and ten-year treasuries below 2.00%.

 

 

 

Leaders & Laggards

Our portfolio leaders thus far are our Vanguard Intermediate-Term Corporate Bond ETF at 11.5%, followed by our Aggregate Securitized iShares ETF, both at 7.8%. Our corporate fund benefited from better than anticipated corporate profits. In addition, our emerging market fund allowed CSUF SMIF to capture gains outside of the U.S. even while it remains our laggard in the portfolio due to mixed headlines surrounding trade talks.

 

 

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