FSAC Emerging Market Fund: Oct. 23rd Review

OVERVIEW:

The FSAC Emerging Market Fund is an investment portfolio that is actively managed by MBA students through an experiential learning class. The fund began through a generous donation of $200,000 from alumni and board members who thought the practice of managing a portfolio would be a valuable learning experience for future professionals. Each week a recap of the fund’s performance is given by the portfolio manager, followed by an update of a stock currently in the portfolio, and a pitch for a stock to be added to the portfolio.

Students vote on each pitch, both updates and new pitches, to see if it will be in the portfolio the following week. Each semester weaknesses in the portfolio are identified and addressed so students know what firms to look at for future pitches. Weaknesses include a lack of certain industries, geographic locations, or riskiness.

The fund is benchmarked against the MSCI EM fund, a diverse fund containing assets from our targeted countries. The benchmark is also included in our portfolio and offers a good example for ways to diversify our portfolio.

October 23rd Recap:

The student-run EMF fund experienced another week of steady growth, posting a weekly gain of 2.32%. The return for the blend of stocks (the fund excluding cash and the MSCI EM Index) was even higher at 2.59%. This brings our total return for the holding period to 21.31%, or 10.92% annualized.

Tencent Holdings continues to be the star performer of the fund with a 113.88% return over the holding period. Anglogold Ashanti LTD posted the biggest gain of the week returning 16.87%. However, the stock has not performed well since it was acquired last spring, down 10.46% in the period. Sterlite Industries also saw substantial returns, ending the week up 7.32%.  China Nat. Offshore Oil Corp. and Taiwan Semiconductor took the biggest hit this week dropping 3.50% and 2.98% respectively.

Below is a detailed breakdown of the funds performance:

New Pitch: ICICI Bank Ltd

Analyst Matt Justice presented a new pitch for ICICI Bank Ltd. (ICICI), the largest private sector bank in India in terms of assets. The bank is headquartered in Mumai, Maharashtra and has over 62,000 employees. ICICI offers commercial banking for retail customers, insurance, treasury operations, and venture capital services and private equity fund management.

A debate ensued with analysts weighing the pros and cons of buying ICICI. James Ball noted that the DCF was thorough and provided sufficient details that instilled confidence in Matt’s forecasts. Kang Zhang noted that the potential acquisition would bode well for diversification, as it would be our only financial institution in the portfolio. (NOTE: currently our fund’s bylaws restrict us from purchasing financial institutions, a rule that is being sent to the board to change). Kyle Worley stated that the timing seemed right considering the growing middle class in India and the potential for large growth.

In contrast, Haruka Abe noted that the finance industry is volatile, India is volatile, and there is an unknown ownership team. These all pose substantial risks in investing in a business of this nature. Additionally, because the firm is tied to India’s currency, inflation in India will greatly affect the actual cash flows of the business. Ryan Strub also noted that the group is not familiar with investing in India’s economy, which could present difficult challenges in forecasting growth rates.

Our team decided that it was best to postpone a vote on ICICI until we go through the process of changing the bylaws to allow financial firms in our portfolio. Once this is done, an updated DCF will be required and a re-vote will take place.

Written by strub@uoregon.edu

Ryan Strub is a second year MBA student in the Finance and Securities Analysis Center. He currently works as an Acquisitions Analyst for ScanlanKemperBard Companies, a Portland based real estate merchant banker. Ryan plans on developing socially responsible communities upon graduation.