Wharton Final Report

Final Report for the Wharton Global High School Investment Competition

1. OUTVESTERS
FINAL REPORT
Advisor: Bhavneet Kaur, [email protected]
Team Leader: Saaketha Nalamotu, [email protected]
Team ID: 7283834
Team Member Names:
Gagan Gutta
Devv Singhania
Samvit Nehru
Javed Shaik Aslam

2. Portfolio-at-a-Glance

3. Summary Page
The Elevator Pitch:
Yes, we might be boring. But in this difficult economic environment, boring is better. We are
against experimenting with unproven stocks in pursuit of elusive returns. When investing, why
concern yourself with entertaining? Instead, invest with Outvesters to experience consistent
returns at a manageable risk. We offer Mr. Hejmdahl a diversified, low risk portfolio for his
medium-term goal and a separate growth focused, higher returning portfolio for his long-term
goal.
Uniqueness of the Strategy:
As we built our optimal portfolios for Mr. Hejmdahl, we focused on developing a strategy to
meet his goals without compromising
on his personal values. Throughout
the competition, being unique is not
something we focused on. Rather, we
strived to design the best portfolios
that we could for the client. Perhaps,
the uniqueness of our strategy could
be established if the client selects our
strategy as the best for achieving his
goals.
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Advisor Reflections:
My name is Bhavneet Kaur and I have known Gagan Gutta, Sakeetha Nalamotu, Devv
Singhania, Samvit Nehru and Javed Shaik Aslam, in the capacity of their Business Management
teacher, as part of the International Baccalaureate Diploma Program.
Their report is well researched and reasoned. They researched various stocks, analysing and
choosing the stocks that are best for the portfolios. They included quantitative and qualitative stock
analysis to build the portfolios.
One of their milestone achievements includes their commitment and never say die attitude while
they completed this challenge. They worked positively and tirelessly to complete their research.
These students have shown excellent analytical skills and demonstrated the ability to look at things
differently.
Their meticulous planning, leadership skills, teamwork, decision-making, creativity, hard work
and determination has helped them complete the target of submitting their investment strategy and
trading plan on time.

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Picture source: azquotes.com

4. Trading Notes Analysis
Infosys was originally part of our long-term portfolio, but now it is in our medium-term portfolio
as well. The growing European market and post-pandemic demand for flexible IT infrastructure
offers the company growth opportunities. INFY’s five-year trailing returns of 20.81% combined
with a low beta of 0.66 and implied volatility of 29.73% makes it a low risk, high return stock
suitable for both portfolios.
HSBC was originally selected for our long-term portfolio since it was growing strong post
pandemic. But, upon further analysis, we dropped the stock from our portfolio. With its
unprofitability in the US market and uncertainty surrounding the UK’s exit from the EU, we are
uncertain of its future prospects. A high beta 1.45 was a concern too.
Since the mid-term report, our confidence in AMD has gone up, resulting in long-term portfolio
allocation to go up from 8.8% to 14%. We particularly like their GPU product line, and their
CPU market expansion appears promising. The company has 47.15% trailing returns over the
past 5 years, beta of 2, and implied volatility of 53%. We consider this a high-risk, high-return
stock to be held for longer term.

5. Report Details
Investment Strategy and Portfolio Analysis:
Mr. Hejmdahl has a medium-term and a long-term goal, so achieving them requires a two-
pronged investment approach: one, a portfolio for the startup fund and two, a separate portfolio
to realize his dream of opening a yoga center.
We initially screened the stocks based on their returns and risk indicators and followed it up with
qualitative analysis of their fundamentals. The current economic slump makes small and mid-cap
stocks less reliable, so we have only gone with large-cap, blue chip stocks in both portfolios.
Rebalancing the medium-term portfolio is less of a concern for us as it is well risk-adjusted.
Whereas the higher risk long-term portfolio requires more careful monitoring.
Medium Term Portfolio Analysis

The medium-term portfolio comprises 85% stocks, 10% bonds and 5% cash. Stocks such as
Infosys, McCormick and Co. and Regeneron are low risk and give steady returns. Combined
with dividend payments, this portfolio has generated an average annual trailing return of

6. 13.33%
2
over the past 5 years. The three risk indicators that we relied on: implied volatility,
VaR, and beta
3
all point to a low-risk portfolio. The beta of 0.54 indicates that the risk is almost
half that of the S&P 500 index, which is further validated by a low historical VaR of -4.63%
45
.
Though past performance doesn’t guarantee future returns, low implied volatilities
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of the stocks
in the portfolio indicates that our future risk remains low. Also, companies like Infosys and
Regeneron, despite being low risk, are in growth sectors (IT and biotechnology, respectively),
which will enhance the portfolio’s future earning potential. Our investments in AT&T,
McCormick and Co. and Aflac Inc., which are stable stocks in mature markets
(telecommunications, consumer staples and insurance, respectively), will continue to give decent
returns at low risk.
We have invested 10% of this portfolio in bonds and 5% in cash for risk mitigation. The total
15% allocated to cash and bonds in this portfolio is much higher than the 8% allocated in the
long-term portfolio, because we want to take less risk. Bonds are also returning the highest they
have since 2008, making them a good investment in the medium-term.
Overall, this portfolio has outperformed the S&P 500 over the past 5 years at a much lower risk.
Also, given the risks of recession, 43% of our portfolio is made up of stocks from the consumer
staples and healthcare sectors, which generally outperform the market during these times.
Despite the current economic conditions, we remain confident that our portfolio will return
enough to meet Mr. Hejmdahl’s medium-term goal of an 8.44% annual rate of return.

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All trailing returns and dividend data cited in this report have been obtained from morningstar.com
3
All beta data cited in this report has been obtained from finance.yahoo.com
4
Historical VaR calculated using portfoliovisualizer.com
5
All returns, dividend, beta, sharpe ratio, and VaR data cited throughout this report, unless otherwise explicitly
stated, is annualised over a 5-year period
6
Implied volatility data cited in this report has been obtained from barchart.com

7. For our qualitative analysis of the stocks, Porter’s five forces is one of the frameworks we used.
Below is an example of that analysis for Pfizer Inc.

Below are the quantitative metrics we used to support our analysis.

Long Term Portfolio Analysis
This portfolio is made up of 92% stocks, 5% bonds and 3% cash. An unusually high 64% of our
portfolio is in the technology sector dominated by stocks like Apple, AMD, and Nvidia. We
deliberately did this as it is one of the main growth sectors. We have invested the remaining part STOCKSPortfolio
Allocation
Trailing
Annual Returns
(5yr Daily )
Dividend
5yr traililng
yield
Beta
(5yr monthly)-
S&P 500
Implied
Volatility
(%)
Sharpe
S&P: 0.49
P/EDebt/
Equity
Current
Ratio
Net Profit
Margin
RoE
(5yr
annualised)
PFE 10% 11.10% 3.59% 0.6424.29% 0.597.710.391.59 38.02 25.98

8. in companies that are in the consumer staples, financials, and healthcare sectors. Even the non-
tech part of this portfolio generates good returns and has good future potential. Regeneron, for
example, is a biotechnology company, which is in a sector that has tremendous growth potential.
It was also included in the medium-term portfolio because of its low risk profile, and it is in the
long-term portfolio because of the growth potential.
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We have significantly reduced the allocation for fixed income sources in this portfolio (8% vs.
15% in the medium-term) as we are targeting higher growth, with a greater risk appetite.
Over the past 5 years, this portfolio has generated an average annual trailing return of 24.48%.
Though the implied volatilities in this portfolio are higher than the medium-term portfolio, we
find that the risk is acceptable given the longer investment horizon. The portfolio also has a beta
of 1.05, which is not a lot greater than the market average, and a historical VaR of -8.61%, which
again, is an acceptable level of risk for us.

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All P/E, Debt/Equity, Current Ratio, RoE and Sharpe Ratio for S&P 500 index data in this report obtained from
morningstar.com

9. Based on our qualitative analysis and the quantitative indicators, we are confident that this
portfolio will comfortably meet Mr. Hejmdahl’s long term goals.
We have analyzed the stocks in the long-term portfolio similar to the medium-term portfolio.
Below is an example:


Below are the quantitative metrics we used to support our qualitative analysis.
STOCKSPortfolio
Allocation
Trailing Annual
Returns
(5yr Daily )
Annual
Dividend
5yr traililng
Beta
(5yr monthly)-
S&P 500
Implied
Volatility
(%)
Sharpe
S&P: 0.49
P/EDebt/
Equity
Current
Ratio
Net Profit
Margin
RoE
(5yr
annualised)
AAPL 12% 28.13% 1.00% 1.22 32.96 0.9223.352.36950.88 25.31 86.51

10. Diversification: Sectoral, Geographical and Fixed Income
Sectoral Diversification:
Our long-term portfolio is tech heavy because of our desire for growth. AMD, for example, with
its strong GPU product line, has generated a 5-year trailing return of 47.15%. Phenomenal
returns like these are hard to find outside the tech sector. Given innovations in Artificial
Intelligence, Internet of Things, Blockchain technology, Robotics, and Quantum Computing, we
foresee strong growth in this sector. Hence, we feel justified allocating 64% of our portfolio to
this sector, though this leads to a higher
combined tech stock beta of 1.34,
indicating a higher risk than the S&P
500. This excess allocation comes with
an elevated risk, yet we feel these
volatilities will exist in the short term
while growth prevails in the long term.
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For the medium-term portfolio, we have gone with a more diverse mix of stocks to minimize
risk. We have stakes in mature industries like financials, consumer staples, and communications
for this reason. However, we still have a large stake in IT as we want to capitalize on the high
returns associated with those companies. Even in those companies, we have gone with mature,
blue-chip stocks like Cisco and Infosys, again for risk mitigation.


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Photo source: frugalnorwegian.com

11. Geographical Diversification:
We have primarily invested in North American stocks because of the market’s
transparency, strong regulatory compliance, and ease of access to financial data.
Despite actively considering European blue chips like HSBC and SAP, we didn’t
like their current market standing and financial position. We have consciously
avoided Latin American or Asian stocks, despite them being large markets. Our lack
of familiarity combined with economic instability, corruption, and inconsistency of
rule of law, in some of these countries, has discouraged us from entering those
markets. The one exception being Infosys from India which is a renowned local
corporation that we are familiar with.
A Note on Bonds:
Why we Reduced Bond Allocation in both portfolios:
In both the portfolios, we have decided to significantly reduce the allocation for US treasuries,
contrary to what we had initially recommended. Due to the current economic crisis, there are a
lot of stocks in the market with strong fundamentals and future growth prospects yet remain
undervalued. Hence, we took a stronger equity position to take advantage of the value existing in
these stocks.
Reason for Selecting Short Term Bills over Long Term Notes:
Given the current inflationary spiral in the US, we anticipate that the Federal Reserve will raise
the interest rates further, at least for the next 1 to 2 years. Therefore, our bond portfolio is made
up of GB12:GOV 1 year Treasury bills. This gives us the option to rebalance our bonds position

12. based on the fixed-income market, rather than investing in 5 or10-year Treasury notes with a low
interest rate.
A Note about the Economic Downturn:
The current global economic downturn presents us with both opportunities and threats in
building a solid investment portfolio for Mr. Hejmdahl.
Opportunities:
The current bear markets offer a unique opportunity to invest in value stocks. Also, it presents a
chance to invest in high yielding government bonds, which was not possible just a few years ago
because of low interest rates.
Threats:
The downturn has turned the market bearish and has caused the S&P 500 to drop 23.9% in the
first three quarters of 2022. High interest rates and runaway inflation contribute to an increase in
cost of capital which will become a drag on economic expansion. Traditional growth stocks,
particularly in the tech sector, have underperformed as well, which could be a cause for concern
in our tech-heavy long-term portfolio.
Despite this, we remain confident in our stock picks. The long-term growth potential of the tech
stocks is intact. These companies continue to innovate rapidly, and their underlying
fundamentals are still strong. Once the global economy enters the recovery phase, we feel that
these tech stocks will continue to grow as they have done before, and we are confident in taking
on the risk associated with them.