Portfolio Insights
Fall 2020
The Washington College Brown Advisory Investment Fund (“Fund”) is a student managed investment Fund that was started over ten years ago with $500,000. It has provided students over this period with the unique experience of managing a portfolio with assets of approximately $1,192,000 as of September 30, 2020. We utilize our investment skills using real life experiences and discussions to make informed decisions for our portfolio. As students, we have big responsibilities which include researching, making portfolio allocations, and executing trades, and all 18 student team members participate in our process.
Due to the coronavirus pandemic, students had the opportunity to manage the portfolio through an historic market collapse., As a country, we experienced the fastest bear market in American history (22 days to fall 30% from the February highs). Through the month of February and March, our portfolio was down approximately a combined -$193,000 or -17.74%. The S&P 500 was down -20.92% during these months. Although these numbers were discouraging, our portfolio is structured to limit systematic risk. We outperformed the S&P 500 in these months by 3.18%. For the first 9 months of 2020, the Brown Advisory Fund is up 5.30% versus the S&P 500 up 4.09%
Our top five holdings at the end of the market crash were McDonalds, Apple, Johnson & Johnson, American Water Works, and Costco, and, as of September 30, 2020, nearly 33% of the portfolio, and during this time, 13.5% of our portfolio was cash. We typically like our portfolio to hold at least 10% cash to mitigate our total risk. Holding 10% cash gives our team the power to protect our portfolio from market swings in times of high volatility, in addition to the freedom to buy more shares of stock if we see an opportunity we want to act on quickly.
As the market began to decline in March, students of the Brown Advisory Investment Fund began to act on an OODA Loop, observe, orient, decide and act. We began to sift through the portfolio identifying potential areas that could be acted upon along with attempting to anticipate and evaluate the potential actions that the Fed would take. As a collective group, we discussed the Fed’s extraordinary actions of injecting massive amounts of money to stimulate the economy and providing unprecedented funds along with Congressional stimulus packages, tax cuts and Fed funding to the airline industry and many other companies. The type of environment that we saw in early March was one that had not been seen since 2008 with the downdraft, so we could anticipate that the Fed was going to make all the necessary moves to avoid the type of meltdown that occurred in 2008. Despite our ongoing evaluations and ideas for potential areas to capitalize on or to reduce, a recurring comment during discussions was always the high level of market uncertainty. The market was extremely volatile, to the point where it made it very difficult to even try to conjure up an opinion what would happen next. The market was not rational at the time as many investors were making decisions rooted in fear and day to day news. As a class, we are always trying to be agnostic in news or press releases that we read, so this was truly a driving value during these shaky months, which helped us get through these trying times with as minimal loss as possible.
The cruise and airline industry were two sectors that were continuously brought up in conversation. Although we still have not taken action on this sector, there will likely be an opportunity in the future. The demand for flying and going on a cruise was non-existent during these struggling times. Many believed these two industries would go bankrupt, and large companies would shut down. With help from government stimulus packages these industries have been able to recover slowly or buy time until business “normalcy” returns. Airlines such as American and Delta had drastic stock price drops (around 65%), along with Cruise Lines such Norwegian and Caribbean (around 80%). With that in mind, many investors were wary of jumping in on a potential rebound. Even legendary investor Warren Buffet sold out of airlines. Flying and cruise lines will not recover to pre-COVID levels for a few years leaving us as a class tentative to enter this sector. It is definitely one to keep an eye on for potential opportunities in the next few months.
We also discussed the price drop in crude oil. Crude oil prices shift based on consumers demand and production supplies. During the market crash, demand for crude oil was low. Airlines and cruise lines reduced levels of required fuel, and the public was not traveling in cars as much. This led to an over production of crude oil, and dropped the price to below zero for the first time. The Saudis and other producers were running out of storage space for their oil barrels, where it got to the point that they would actually pay investors to take barrels off their hands. Through the recovery, we have seen their prices rebound. Demand has increased as flying has slightly recovered, production has decreased, and inventories have been drawn down. Today, crude oil prices are hovering around $40 dollars a barrel. This is a commodity to continuously monitor due to its linear relationship with market shifts.
Over the course of these few weeks, students in the investment Fund have closely monitored positions within the portfolio to determine the next course of action in regard to the Fund. One of the biggest topics of discussion is our current holdings in Apple stock. Being one of our top five holdings Apple has been a dominant contributor within our portfolio. Students were tasked with analyzing the impact of Apple's recent stock split, 4-1, that occurred in late August. The stock split meant that our fund would own 4 times as many shares outstanding in Apple. However, total dividend yield is unchanged as a result of a split. With this information, we discussed our strategy of whether we should buy, sell or hold. One other approach that we discussed was the option writing with covered calls in order to mitigate our risk, sell the stock at a higher price, and acquire some cash from this position. The common consensus of the students is that we hold on to our position in Apple as we continue to monitor the stock’s performance. In the past, we have selectively sold call options on positions to mitigate risk, reduce position volatility, and take in cash.
Since March, our team has added Caterpillar and Microsoft to our portfolio. In late March as we hit a major market sell off, our class kept our eye on Microsoft. We had been thinking about buying Microsoft for some time and were waiting for the right buying opportunity. As news broke out about COVID reaching the US, Microsoft dropped to a discounted price, and we were able to purchase 65 shares of MSFT at $142/share (MSFT is currently trading at over $200). Knowing MSFT has been a very successful company in the past, as well as trusting that MSFT and the tech sector would find ways to thrive during the COVID crisis, we took a shot with MSFT, and it has paid off so far. CAT was another company that we had been looking at before the pandemic, and the selloff helped catalyze our decision to start a position and buy. In May, CATs share price dropped to roughly $100, and we saw that as a great buying opportunity, so we purchased 40 shares. We are confident in CAT’s business model, and their presence in the US and overseas exports should propel the stock upwards as businesses begin to open back up and expand in the future.
Our portfolio has done exceptionally well during the month of September. As of September 30th, 2020, the portfolio had a net change of 5.72% which equates to an increase of $64,508.10 bringing the total portfolio value to $1,192,503.06. This is an all-time high for the portfolio. Comparing this to our levels in March, we have increased the portfolio value by 25.1% which equates to an increase of $239,423. Our position in Apple did not quite crack the 10% size that we were expecting from the stock split, however it is still our largest position at 9.47%. Overall, the month of September turned out to be a great month for our portfolio as we beat the S&P 500 who was down 3.92% while we were up 5.72%.
Moving forward, our class is preparing for continued future market volatility with a potential COVID vaccine still not on the horizon and the Presidential election in less than one month. We have already begun discussing strategy for each presidential outcome. We will continue to take all necessary steps to put our portfolio in the best position to succeed during these volatile times with good security selection and trying to reduce portfolio volatility.
Top 10 Holdings Change January-September
This report has been prepared by:
Henry Butterfield: Hingham, MA (Economics Major, 2022 Grad)
Ryan Colbert: Sicklerville, NJ (Business Management Major, 2022 Grad)
Robert Kabonero: Rockville, MD (Economics Major, 2022 Grad)
Max Ruvo: North Caldwell, NJ (Economics & Business Management Major, 2022 Grad)
Disclaimer
This publication is provided for educational purposes only by students in Washington College’s Brown Advisory Student-Managed Investment Fund Program. The content of this publication should not be accepted as professional opinions or investment recommendations. We believe the source of the information in this publication was credible, but we do not guarantee that it is accurate or complete. Washington College and its affiliates assume no responsibility or liability for any losses resulting from any use of the contents in this publication.