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Fund Update - Martinmas Semester 2016

Overview

The University of St Andrews Investment Society operates a real-money, long-equity investment portfolio of £15,600 ($19,400) for the purposes of education and charitable contributions. We train hundreds of analysts each year on the basics of finance, valuation, and investing – and at the end of each semester give them the opportunity to pitch a stock to the entire fund. These stocks form the basis for our fund, the proceeds of which are donated to charity.

The fund is subdivided into eight sectors, each led by a Sector Head and an Assistant. The sector leadership teams are assisted by the Fund Management Team, a subcommittee of the society’s main governing body. The society has won the St Andrews Student Union’s “Best Society” award, for two years in a row, and was last year a finalist for the National Undergraduate Employability award for the best University Society in the United Kingdom.

Fund Performance

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Holdings

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Sector Allocation

Geographic Allocation

Change in Holdings

Qualcomm - New Position

Qualcomm Inc. was voted into the portfolio during the second stock pitching event of the last academic year. Entry into the position was deferred due to concerns regarding the company’s overexposure to the smartphone market. Following its acquisition of NXP Semiconductors, Qualcomm has now obtained exposure to new markets and revenue streams, specifically through NXP’s payment services and automotive chip solutions. As a result of the company’s continued outperformance, mitigation of demand associated risks and new growth opportunities, a position, representing approximately 8% of the portfolio’s invested capital, has been taken despite a historically unfavourable GBP/USD exchange rate.

McDonald's - Position Closed

Sufficient share price appreciation and limited scope for generating further returns justified closing the position to mitigate the effects of currency volatility prior to the EU referendum given the portfolio’s high exposure to the US Dollar.

NET1 - Position Closed

Due to the continued underperformance of this holding, and the absence of any expected reversal in this trend, the holding in NET1 was closed whilst it benefited from a historically favourable exchange rate. Its liquidation also served to reduce the influence of dollar exposure on the portfolio’s valuation prior to the EU referendum.

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Rolls Royce - Position Closed

Rolls-Royce has experienced multiple operational headwinds since 2014 but has yet to adequately reposition itself. The anticipation of continued earnings growth depression brings an expectation of relative future underperformance. The likelihood of a turnaround over the medium term appears unlikely and has consequently resulted in the liquidation of this position.

Caterpillar - Position Closed

Continued profitability and demand concerns because of weakened commodity prices has led to the relative underperformance of the holding and justified liquidation whilst the GBP/USD exchange rate was historically favourable. There remains little indication that a reversal in this downturn shall occur over the medium term.

Millicom International Cellular - Position Closed

Despite increasing revenues over the past several years, Millicom has remained unable to convert an improving year-on-year top-line into sustainable earnings growth. As a result of continued underperformance, significant overexposure to geopolitical risk in emerging markets and unfavourable future prospects, the position in Millicom was closed to stem further losses.

Carrefour - Position Closed

Carrefour has been unable to generate further top-line growth nor improvements in profitability despite measures being taken by management to streamline and restructure operations. The position was closed to allow a reallocation of capital given Carrefour’s overweight allocation, the portfolio’s relative overexposure to consumer goods/services and Carrefour’s underwhelming future prospects.

Headwinds

Overall, the portfolio has performed well, buoyed by the depreciation of the pound in recent months against the US Dollar. The majority of the portfolio is held in dollar-denominated securities, meaning that a depreciation of the pound increases the value of our holdings.

There are several potential risks in the near future: the delay or cancellation of Britain’s exit from the European Union would boost the value of the pound, relatively speaking, reducing returns. Political instability in the United States, and talk of “re-negotiating” the US National Debt, would lead to a flight from the US Dollar to safety (the Pound, Euro, or Yen) – this would depreciate the dollar against the pound, again cutting returns.

The second-order effects of a weaker USD would be to accelerate US exports, as goods will be comparatively cheaper in other nations. This effect would likely be smaller and less immediate than the negative impacts of USD depreciation. Coming fiscal policy changes in the United States, though, could boost growth in the short term as a new administration seeks to cut taxes and increase infrastructure spending.

The Fund Management Team

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