Hello everyone! The CSUF Student Managed Investment Fund is back with an update for the month of February!
The CSUF SMIF portfolio underperformed the benchmark by -0.58% as of the end of February. The overall portfolio returned -6.06% while the blended benchmark returned -5.48%. This month also saw a shakeup in our portfolio. As the broader stock market fell through the floor while treasuries soared, a handful of our positions hit their stop losses and were sold off. We have since formed a short-term tactical plan on how to allocate our portfolio based on the potential economic losses from COVID-19.
*All relevant performance data, news, and information is between 2/3/2020 and 2/28/2020.
The SMIF equity portfolio outperformed the benchmark by 2.24% as of the end of February. Our equity portfolio returned -6.23% while the benchmark returned -8.47%. We can thank our very defensive portfolio for that since we have a significant overweight in Consumer Staples.
HealthEquity Inc. (HQY)
HQY has a weighted return of 0.13%. HealthEquity provides Health Saving Accounts (HSAs) for over 12 million million customers which are tax-advantaged savings accounts owned by individuals to pay for medical expenses. As of one year ago HQY has seen an 180% increase in users from 4.6 million and a 43% increase in assets from $8.1 to $11.5 billion. With the impact of COVID-19 on the global economy HQY’s stock has weathered the month of February quite well before seeing price declines continuing into March. As people turn to safer assets - as well as take emergency measures in their own life - it is possible for us to see customers put aside money for possible medical expenses or fees that they might incur if the virus becomes more global. HQY can facilitate this transaction more smoothly with the introduction of their new Investment Desktop 2.0 which provides an intuitive platform for members to better customize their financial and health goals.
Dollar General Corporation (DG)
DG has a weighted return of 0.01%. Dollar General has been one of CSUF SMIF’s best performing securities for the equity portion of our portfolio. They were a leader for us because DG’s management had continually made efforts to expand their product line and convenience to customers. At the start of the semester, the SMIF team agreed to take our profits in DG and re-allocate the funds to parts of the market in which we see undervaluation. With the arrival of COVID-19 the timing could not have been better. The impact on supply chains is taking a toll on the securities market as a whole - and specifically the firms exposed to the consumer discretionary market. CSUF SMIF believes taking profit out of this sector is wise considering most consumers will have less disposable income for nonessential goods, in tandem with a high probability of diminished access to public places. Companies heavily dependent on supply chain efficiency will most likely experience hindrances in their ability to offer products to their customers.
*The remainder of our DG position was liquidated and settled in early February.
Service Corp. International (SCI)
SCI has a weighted return of -0.04%. Service Corporation International released its Q4 earnings on February 17 which announced that earnings were in line and would increase increase year-over-year. Furthermore, on February 20th, the company announced a 6% dividend increase over that of the previous quarter. SCI is an American provider of funeral goods and services, therefore, the COVID-19 virus may not affect their business significantly moving forth unless there are dangers greater than systematic risks resulting from the virus. If we see a higher mortality rate from COVID-19, than the company may see an improved upside in the company's share price. The virus has the potential to influence investors to flock to more defensive assets and SCI could be a good asset for the portfolio to hedge against COVID-19.
Abbott Laboratories (ABT)
ABT has a weighted return of -0.37%. Abbott, similar to other laggards, has significantly felt the effects of COVID-19. China is ABT’s second-biggest single market and accounts for 7.6% of the companies $31 Billion in net sales. Additionally, Abbott’s pediatric-nutrition formula, Eleva, is the country’s leading baby formula. As a result of the virus, sales of Eleva and its other products may experience a significant decline worldwide. However, a potentially positive aspect of their business is in diagnostics which may increase significantly in the United States and elsewhere with the exponential growth of COVID-19. Due to the company’s various and diverse products and worldwide presence, there will likely not be a further significant decline, relative to the broader market, unless the virus becomes a severe threat to many nations and quarantines excludes millions of people from buying products.
Walt Disney Co. (DIS)
DIS displays a weighted return of -0.46%. As COVID-19 tears through markets around the globe, Disney experiences the negative impacts from the virus. With 37% of revenue sourced from the 'Parks, Experiences, and a Product line business' segment, DIS' share price remains crippled by the spread of the virus. Due to the closure of park locations in Shanghai, Hong Kong, and Tokyo, investors are parking their assets in less hot sectors - greatly contributing to a steady decline for DIS. In addition, DIS' tourism cruise line and theater attendance remain low as individuals aim to protect themselves from the virus. In spite of these facts, the company just released “Onward” a Pixar film that topped first place in the box office this most recent weekend, providing a decent cushion for Disney’s financials. This is even in spite of the fact that the movie released in China where most of the 70,000 movie theaters are closed.
Hasbro Inc. (HAS)
HAS has a weighted return of -0.62%. Hasbro is currently experiencing the effects of COVID-19 on its supply chain. This compounds the company's felt effects from the uncertainty from last year's negotiations relating to the US-China Trade War. HAS has a highly concentrated portion of its business in China, as 67% of their business relies on imports from Asia. As a result of factory closures throughout Asia, Hasbro’s operating revenue will have likely been truncated - with the fear of getting sick filling the news, consumers are turning to daily essentials to stock up on essential household products. In addition to the supply chain havoc that the virus has wreaked, a decline in Disney’s sales, one of Hasbro’s largest clients, has crippled the performance of HAS' stock price.
*The entirety of our HAS position hit its stop loss in late February and was liquidated.
The SMIF fixed income portfolio underperformed the benchmark by -1.33% as of the end of February. Our fixed income portfolio returned 0.17% while the benchmark returned 1.50%.
Our fixed income portfolio has continued to underperform the benchmark mainly due to our underweight in treasuries. Treasury yields have continued to decline this month mostly due to COVID-19 fears, with the 10-year yield ending the month at 1.13%. Furthermore, we saw the spread between the 2yr and 10yr treasuries increase significantly this month - beginning at 18 basis points and ending at 27 basis points. Although the U.S. Treasury yields are reaching new lows, they still offer higher yield than other developed countries' bonds do such as in Europe and Japan - both of which offer negative yields.
Another large detractor from our portfolio is our short duration as our's is currently a year and a half less than the benchmark’s 5.91 is at. Prior to the Coronavirus outbreak we had expected the interest rate environment to shift and have our short duration work in our benefit. However, with this epidemic, the market has once again preferred long-term. We see the effects of this by THOPX being one of our laggards, returning 0.00%. THOPX is a short-term investment-grade corporate fund with an effective duration of only 1.64.
Our leader this month has continued to be IEI, our 3-7yr treasury ETF, with a weighted average return of 0.11%. This is because of the market’s flight to safety within treasuries.
Our laggard for the month was our Latin America-focused emerging markets fund, REBCX, with a weighted average return of -0.05%. REBCX’s top holdings such as Brazil reported a few cases of COVID-19 and there are fears that these countries may not have healthcare systems to support it. While seeing how recent events have affected China drastically, we feel that there is too much unsystematic risk from being in a concentrated fund and are looking into a higher quality, more diversified emerging market fund.