Trade Weighs on Equities; Fixed Income Remains Steady


Hello everyone! The CSUF Student Managed Investment Fund is back with an update for the month of October!

With the annual CFA OC Request for Proposal Competition around the corner, the SMIF team and its analysts are hard at work and putting pen to paper. Our team has been incredibly eager to work towards exceeding expectations!

The CSUF SMIF portfolio outperformed the benchmark by 0.86% YTD as of the end of October. The overall portfolio returned 16.74% while the benchmark returned 15.88%. The greatest detractors to our performance came from the securities in our equity portfolio - specifically Hasbro and McDonalds. They experienced holding period losses of approximately 20% and 8%, respectively. The losses were a drag on our performance as the markets saw robust performances stemming from the Fed cutting the target rate by .25% and optimism about the ongoing trade negotiations between U.S. and China.


Our equity portfolio outperformed the benchmark by 2.64% YTD as of October. The overall portfolio returned 21.33% while the benchmark returned 18.68%. A significant portion of our returns can be attributed to our defensive positions which have previously been our leaders in many of the past months. With the recent signs of the U.S. and China moving towards an agreement to end tariffs, we can expect our defensive positions to perform well for the remainder of Q4.


Dollar General Corp. (DG)

DG had an HPR of 51.3% winning the first spot in the equity portfolio. Its 3rd Quarter earnings release will be December 5, 2019 where DG is expected to announce an EPS of $1.38, up 9.52% from the same quarter last year. It will follow suit from its 2nd Quarter earnings release where DG beat all expectations. According to Todd Vasos, CEO of DG, the catalysts that drove growth were category management, merchandise innovation, store operations, progress in its strategic initiatives, and, last but not least, cost control. It is worthwhile to note that, while it closed down some stores and opened new stores, it was still able to increase its sales by 8.4% from the 2nd quarter of 2018.

Costco Wholesale Corporation (COST)

COST had an HPR of 47.8%, putting it in second place in the equity portfolio. The most important driver of Costco’s profitability is comparable sales growth. They define comparable sales as sales from warehouses open for more than one year, including remodels, relocations & expansions, and sales related to commerce websites operating for more than one year. In October, Costco reported comparable sales growth of 5.7% and this boosted COST by 1.05% just a couple of days ago. This demonstrates how their core business is still growing in new regions where sales in existing locations is still strong.

Microsoft Corporation (MSFT)

MSFT had an HPR of 42.4%, being the third highest performer in the equity portfolio. In October, Microsoft announced earnings for their first fiscal quarter of 2020. Its EPS was $1.38, which surpassed analyst expectations of $1.24 per share. However, the stock didn’t react much to the earnings announcement. On October 25, Microsoft won the $10B contract with the Pentagon for cloud computing. Since the announcement the MSFT is up by ~5%.


UnitedHealth Group (UNH)

UNH had an HPR of 2.5%, being the second lowest performer in the equity portfolio. At the end of September, UNH had an HPR of -12.1%, largely in part due to the uncertainty regarding potential federal regulation of pricing the healthcare industry. The biggest risk towards UNH is the endorsement of the “Medicare for All” health care system, in which health insurance would be publicly funded by taxpayers. This health care system is fully supported by Democratic presidential candidates such as Elizabeth Warren and Bernie Sanders, both of whom have been rising in the polls. Due to this surge in popularity in these candidates, private healthcare insurers are strongly resisting the push for the Medicare for All system.

Service Corporation International (SCI)

SCI had an HPR of 2.1%, being the greatest laggard in the equity portfolio. The HPR has dropped from 7.3% at the end of September to just hanging on at 2.1% at the end of October. The company reported lower-than-expected results at the end of the 3rd quarter. The earnings have increased, but revenues have slowly declined. The death-care industry has seen a fierce competition in, not only the domestic market, but also in international markets such as in Asia and Latin America. The market in Asia is large and has the power to compete head-to-head with the market in the United States, in which SCI is a prominent leader.

Fixed Income

Our fixed income portfolio underperformed the benchmark by 3.06%. YTD as of October. The overall portfolio returned 5.79% while the benchmark returned 8.85%. Although we did have less volatility than the benchmark we continue to under-perform mostly due to our heavily underweight to treasuries which have performed amazingly well this year. With treasury yields extremely low we believe we are well positioned for the future but will consider increasing weighting in treasuries once the yield becomes more attractive.

In general, over the past month, we've seen yields both, increase and decrease before closing the month largely unchanged. Simultaneously, spreads widened as optimism for domestic economy rose. There have been stronger sentiments in the markets buoyed by hopes of an agreement between the U.S. and China along with that of a smooth Brexit transition.

Corporate bonds delivered positive returns and outperformed government bonds as there has been greater risk appetite with more positive corporate profits. Emerging market bonds delivered tepid performance as volatility persisted even as a number of emerging market currencies strengthened.

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