MBA Student Investment Management Fund

MBAStudent InvestmentManagement Fund

MBAStudentInvestmentManagementFund

ArizonaStateUniversity

Semi-AnnualPresentation

December2020

MBASIMFundTeam

MBAStudent InvestmentManagement FundArizonaStateUniversity

2

Aleksey Kim

Johnathan Hoke

Festus Olatunde

Makayla Ragnone

Farrukh Solhail

Abraham Levi

I. InvestmentThesis

II. StrategyImplementation

TableofContents


3

InvestmentThesis


Equityofafirmwithdebtinitscapitalstructureisanalogoustoacalloptionwrittenontheassetsofthefirm.

400

350

300

250

200

150

100EquityValue($)

GraphicalRepresentationofEquityasaCallOption

Firmassetvalue=FaceValueofDebt50

00 250 500 750

FirmAssetValue ($)Black,Fischer,andMyronScholes,1973,“ThePricingofOptionsandCorporateLiabilities”,JournalofPoliticalEconomy81,637–654.&Merton,RobertC.,1974,"OnthePricingofCorporateDebt:TheRiskStructureofInterestRates",JournalofFinance29,449–470.


5

CallOptionReplicatedTraditionalvaluationmodelsdonotadequatelyreflecttheembeddedoptionthatequityholdersenjoy.


6

Equity=Assets– Debt

Equity=Assets+PutOption– SafeDebt

Structuralmodel

Traditionalmodel

Eisdorfer,Goyal,andZhdanovhypothesizethatifinvestorsdonotvaluethedefaultoption,misvaluationcanoccur.


7

InvestmentThesis

HighDefaultOption LowDefaultOption

TraditionalValuation(e.g.DCF)

Misvalued AppropriateValuation

ValuationwithDefaultOption

AppropriateValuation AppropriateValuation

Eisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.

ValuationofEquityintheModel


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Therearetwocomponentstovaluingequitywithinthemodel,1)valuetotheequityholders(iftheyweretooperateintoperpetuity),2)valueofdefaultoption.

ValueofEquity=ValuetoEquityHolders+ValueofDefaultOption


ValueofDefaultOptionThe default option can be deconstructed into two parts: 1) discountingthe cash flows of a firm until an optimal stopping time, 2) discounting thecash flows of a firm into perpetuity.

Optimal StoppingTime

Equity Assets– SafeDebtEisdorfer,Goyal,andAlexeiZhdanov,2019,“EquityMisvaluationandDefaultOptions”,TheJournalofFinance74,845–898.


9

ComparingModelValuetoMarketValueStocksaresortedintodecilesaccordingtotheratiooftheequityvalueimpliedbythevaluationmodeltotheactualequityvalue.

2.5B2.0

5B

TheoreticalValue

5B0.5

2.5BCurrentMarketValue

TheoreticalValue

CurrentMarketValue

Undervalued


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Overvalued

Characteristicsoffirmswithhighdefaultoption



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• Higher distress probability

• High volatility

• Low profitability

Implementation


PortfolioConstructionProcessOverview

*CRSP/Compustat till2018,supplementedwithBloombergforcurrentinfo


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Source accounting and return data

Calculate the theoretical equity value

Calculate model equity/current equity value

Sort ratios into deciles and invest in the 9th and 8th decile

PortfolioConstruction:Inputs&Assumptions

ModelEquityValue

ModelInputs

SG&A Proxy forfixedcosts

SICCodesUsed tocalculateindustry averagesforDepreciation&CAPEX

ReturnonAssets EqualsWACC


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• Currentliabilities

• Long-termliabilities

• Revenue• FixedCosts• Volatility• Risk-free rate• COGS• WAAC• CAPEX• Depreciation• Leverage• SICCode

MBAStudentInvestmentManagementFund

DecileDetailsandConstruction

Size

Market-to-Book

StdevofReturns

Ourdata

Paper’sdata

Decile1

21,419 833

12.50 2.69

2.3 4.2

3.85

2.1

Decile5

9,828 2,034

1.96

2.9

Decile10

5,768 436

5.51 1.4

2.2 4.9


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Paper data an average of 1983 – 2012, our data a snapshot of October 2019

… …

Final#ofStocks:69

Russell 3000

$1- $6billionmarketcap

Decile9th and8th

Newscheck

InvestableUniverse


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FilteringforInvestableUniverse

SectorWeightingComparisonOurPortfolioRussel3000


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2%

12%

12%

4%

7%

14%3%11%

2%

9%

24%

2%

12%

12%

4%

7%

14%3%

11%2%

9%

24%

0%

Basic MaterialsConsumer CyclicalFinancial SevicesReal EstateConsumer DefensiveHealthcareUtilitiesCommunication ServicesEnergyIndustrialsTechnologyCash

SectorWeightingComparison


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Asset Russel 3000 Portfolio Number of Stocks Allocation per equity Average Market Cap

Basic Materials 2.44% 2.31% 3 0.8% $2.7BConsumer Cyclical 12.05% 11.62% 12 1.0% $2.7BFinancial Services 12.47% 12.03% 11 1.1% $2.5BConsumer Defensive 6.76% 6.51% 7 0.9% $2.6BHealthcare 14.45% 13.92% 6 2.3% $2.1BCommunication Services 10.51% 10.13% 5 2.0% $2.9BEnergy 1.91% 1.81% 3 0.6% $1.7BIndustrials 9.15% 8.82% 9 1.0% $3.3BTechnology 23.70% 22.84% 13 1.9% $2.4B

Rebalancing

WewillpullthemostupdateddataonBloombergascompanies’reportfinancialinformation.

PullLatestDataAvoidBankruptCompanies

Wewillhaveadedicatedteamtomonitorthatthesecuritiesarenotunderbankruptcy.

RebalanceAccordingly

WeshallrebalanceourportfoliomonthlyusingsectorweightsofRussell3000.


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TaskAllocationProcess

MonitoringCompanyStatus

ExecutingTradesandRebalancingPortfolio

DataPulling

PythonCoding


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Eachteammemberwill rotatepositionsthroughoutthesemester.Thiswill ensureallteammembersareexposedtoeveryaspectoftheinvestmentprocess.

InputtingMarketData

MBAStudent InvestmentManagement Fund

ThankYou!


Questions?

ValueofDefaultOptionContinued

TaxRate

(Sales– COGS)

InterestPaymentstoDebtholders

DistressCosts*

*Incurredwhenafirmincursnegativecashflows.

Principal Repayment

CapitalExpenditures

TaxShieldDuetoDepreciation

Expense

FixedCosts



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Documents

MBA Student Investment Management Fund