Rotunda Fund – A Turnaround Story

Image

As one of the five Senior Portfolio Managers in Darden Capital Management, I was asked last week to draft a performance update to be published in our annual newsletter to be shared with the Board of Trustees and DCM alumni. After writing the piece, I felt it provided a summary that might be helpful for prospective students interested in learning more about the inner workings of DCM and so I decided to post my write-up here:

Funded with $750,000 in 2010, the Rotunda Fund was the black sheep in DCM when we took over the reins on April 1, 2013. Its assets had grown only 13% between January 1, 2011 (date $750k was fully invested) and March 31, 2013 compared to a 31% increase in the S&P 500 TR over the same period. The patience of the Board of Trustees in the fund’s sustainability mandate is paying off this year with the fund returning close to 16% in the ten months since the current team took over on April 1, 2013. While the fund still has a small negative alpha (less than 1%) for the year, we believe we have positioned Rotunda to return positive alpha in the coming months and are in third place out of the five DCM funds on an absolute and relative performance basis year-to-date.

This turnaround in the fund’s performance has been the combination of solid fundamental stock selection by the 2012-13 team as well as smart additions to the portfolio by our team that have kept pace with the strong returns witnessed in the market. Top performers in the portfolio are:

  • Gilead Sciences (GILD): Gilead is a rare breed, a large-cap biotech pharma that behaves like a small-cap growth stock, offering investors healthy growth with the safety of a well-developed product portfolio. The stock is up 121% since purchase on the back of strong sales of its HIV and hepatitis drugs and a rich R&D pipeline.
  • Acuity Brands (AYI): A lighting and control solutions company that continues to benefit from higher energy  efficiency products as energy and environmental concerns come to the forefront; increasing construction, renovation and tenant improvement projects as the global economy improves; and expansion into underpenetrated geographies and channels. The fund has realized a 116% gain on this position pitched by last year’s CIO Taylor Heaps.
  • Hain Celestial (HAIN): Hain Celestial manufactures, markets and sells natural and organic food and personal care products that are gaining preponderance among consumers. Rotunda has enjoyed a 95% return on this position as Hain has continued to grow organically and through acquisitions. This performance was despite Carl Icahn’s sale of his position in September 2013 at levels 30% below the stock’s recent $99 peak.     

The rosy picture painted so far is not to say that we haven’t had our setbacks. A couple of sales early in the year, namely Harman International and Fedex, cost us a lot of alpha as these stocks appreciated significantly after we sold the positions. However, we have tried to learn from our mistakes and have initiated a “mini-pitch” requirement from any team member recommending a sale to ensure that we put in a comparable amount of analysis into any sale as we would a purchase decision. This has reaped benefits with the eight sales we have made since the “mini-pitch” requirement yielding a 2% positive return on average per sale (i.e. stock is down since the sale).         

Finally, I’d like to touch on the steps we have taken to learn more about sustainable investing and address misconceptions amongst other students about Rotunda’s mandate. Rotunda’s mission is not just to apply negative screens and stay away from “sin stocks” but rather to implement positive environmental, social and governance criteria to identify companies with long-term sustainable business models that will outperform due to their lower costs, better supply chain practices, decreased risks, etc. This is discussed in more detail in an op-ed I co-authored with Andy Larson that is included separately in this DCM Advisor and also published in the Darden student paper, the Cold Call Chronicle, in an effort to increase student interest for the fund.

Additionally, educating ourselves, as well as first years that attend our meetings, about the art of sustainable investing has been a critical part of the learning this year. Rich Evans teaches a case on sustainable investing in his Investments course that was very helpful. Andy Larson and Erika Herz have pointed us to a lot of sources for research and introduced the team to practitioners in the field. Amongst others, we spoke last year with Bruno Bertocci, Lead Portfolio Manager of UBS’ multi-billion dollar Global Sustainable Equity Strategy, and Bennett Freeman, SVP for Sustainability Research and Policy for Calvert Investment’s $12 billion AUM platform. These conversations were so helpful that we are bringing Bruno and Bennett down to campus in February to give the broader Darden community an opportunity to engage with thought-leaders in the space.

DCM has been my most fun and rewarding experience at Darden and I believe has significantly aided in my preparation for a career in investment management. I appreciate the opportunity I was given to serve as a Senior Portfolio Manager and hope I can give back as an alumnus to future fund managers some of what I have gained from my experience this year.   

Rohan Poojara

Senior Portfolio Manager

Rotunda Fund 

Posted in Uncategorized | Leave a comment

The New Paradigm in Asset Management: Sustainable Investing

As part of my leadership roles in EMDC, Net Impact and DCM, I hosted Bruno Bertocci, the lead portfolio manager of UBS’ Global Sustainable Equity strategy, and Bennett Freeman, the SVP for Sustainability Research and Policy at Calvert Investments, for a lunch and learn event at Darden last week. Sustainable investing is one of the fastest growing fields in the asset management space today, with $3 trillion in AUM. Bruno and Bennett spent an hour talking to students and faculty about how investors are reacting to this potentially radical market change and the opportunities that exist for the astute investor.

Video | Posted on by | Leave a comment

Mexico!

I recently got engaged (Yay!!) and Mexico was part of the discussion for the bachelor party and honeymoon destination. Although we ended up selecting different locations – Jamaica and xxxxx (the honeymoon destination is a surprise) – for both, I still had the opportunity last weekend to visit Mexico. Sure it was not a honeymoon in Cancun but I had a terrific experience at the IPADE case competition that I participated in. And it was an all-expenses paid trip!

Details, you ask? I’d definitely be asking that question as a prospective, incoming or first-year Darden student and I would highly recommend trying to land a spot in the Darden contingent next year. Every year, IPADE, the leading business school in Mexico, hosts a case competition at its Mexico City campus. Several business schools from the States, Europe and Asia send two participants each to Mexico for three days. IPADE students from their Mexico City and Monterrey campuses are also part of the mix. The evening before the main event, participants are split into teams with students from different schools, nationalities and backgrounds commingled. This was a very interesting twist and different from the four other case competitions I have participated in during my time at Darden for which I always partnered with my classmates from school.

Image

Beautiful IPADE campus – formerly a businessman’s mansion 

We were given the case the following morning and had 18 hours to analyze and put together a deck with our solution. The event was sponsored by Deloitte and Novartis and the short turnaround was rough but something I was used to after participating in Deloitte’s case competition at Darden last year. Unfortunately, we did not win but I learned a lot not just about analyzing business problems but also about working collaboratively in a stressful environment with a group of individuals I had never met before. 

Image

My team at IPADE

After all the learning, it was time for some fun. Following the awards ceremony, all the participants were given a twelve hour tour of Mexico City by our wonderful hosts at IPADE. We walked around enjoying the beautiful architecture, shopped, ate delicious food and bonded over drinks at a couple of bars around the city. It was a great evening and here are a few glimpses of the city’s beautiful architecture:

Image

Metropolitan Cathedral   

 

Image

Black Christ

Image

Museum of Fine Art

A terrific experience overall and I can’t wait to go back to Mexico and visit other parts of the country!

Posted in Uncategorized | 1 Comment

Sustainable Investing = Doing Good and Making Money: A Darden Professor and Student’s Perspective

Image

Whether you aspire to be an entrepreneur, finance professional, consultant or business manager after Darden, understanding the sustainability perspective of value creation is critical because it is now shaping the business and investment world and will continue to do so for years to come.

Sustainable business is about creating a system of business capable of sustaining itself indefinitely while enhancing the quality of peoples’ lives. The definition of good business is increasingly aligned with sustainable economic development, which is a growth strategy designed to deliver high marks not just on profitability but also on other performance metrics such as ecological system protection, human health, social equity and community cohesion. Never before has the need for promulgating sustainable business practices been more important.

The world’s population will grow from 7.1 billion today to a staggering 9.5 billion by 2050. To feed 2.4 billion new mouths and deliver on the material and energy needs stemming from an increase in goods and services from $21 trillion to $56 trillion for an emerging global middle class requires that our ability to generate agricultural and industrial output  increase dramatically. At the same time, resource use that neither permanently depletes existing natural capital nor overwhelms us with pollutants needs widespread adoption. However, companies that engage in sustainable business practices need not do so solely for the purpose of creating a better world, but can generate increased revenues and improved profitability as they create innovative products, services, and processes; gain access to new technologies and markets; engineer collaborative supply chain practices; and drive costs down through efficiency measures. 

Darden provides several opportunities for students to learn about the field through courses on sustainability, innovation, and entrepreneurship as well as clubs such as Net Impact and the Emerging Markets Development Club.

While the adoption of sustainable business practices requires a different consciousness among business leaders, it also represents a unique opportunity for financial investors to capitalize on a new frontier of innovation. The precursor to sustainable investing was socially responsible investing which screened out “sin stocks” in the alcohol, tobacco and gambling industry. However, sustainable investing has evolved significantly since then. Today, in addition to these negative screens are rigorous positive, solution-focused criteria and the expectation that companies will outperform their competitors because of good financial, environmental, social and governance practices combined. An analysis of a company’s record on social issues reveals its true character and, we believe, is a significant indicator of its long-term financial viability. Data increasingly supports the proposition that companies with strong positive social and environmental policies often have lower turnover, higher productivity, better brand reputation and customer loyalty. On the governance front, characteristics such as transparency — to  stakeholders and the public — and appreciation of the gains from employee diversity and ethical conduct throughout supply chains are associated with superior performance.

The $3 trillion in assets under management in sustainability-informed investment strategies (i.e. assets invested in companies with sustainable business practices) highlights that the process of alignment of investors’ goals with the concept of sustainability in business has begun in earnest.

Darden Capital Management’s Rotunda Fund manages close to a million dollars of Darden’s endowment by investing in companies with sustainable business practices. 

However, sustainable investing is still not a mainstream investment philosophy. Dated assumptions that financial returns must be sacrificed if a firm seeks economic and social benefits for a broader set of stakeholders unfortunately are still prevalent. An increasing body of investment research, however, suggests that integrating economic, environmental and social considerations into traditional financial analysis offers investors a more comprehensive view of companies’ value creation potential and leads to better informed investment decisions. Thus, in our opinion, it is only a matter of time before sustainability metrics become a key part of any fundamental investment philosophy.

Never before has it been so important to position our futures with companies poised for long-term, sustainable growth. Many companies now employ sustainability frameworks and tools and as the overall business environment moves in this direction, business leaders in this field will benefit from early mover advantages and a wealth of institutional knowledge.

This article was co-authored by Andrea Larson, Associate Professor of Business Administration, and Rohan Poojara, a second-year student at Darden. Professor Larson teaches the Sustainable Innovation and Entrepreneurship course at Darden and Rohan Poojara is the Senior Portfolio Manager for the Rotunda Fund and a Vice President in the Net Impact and Emerging Markets Development Clubs.

Bibliography:

 

Posted in Uncategorized | Leave a comment

Investing at Darden

Image

Charlottesville is the headquarters of the CFA Institute as well as home to a few prominent investment offices such as Investure, whose leadership often volunteer their time to co-lead case discussions with Darden faculty. Once a year, however, Charlottesville takes on an even more prominent role for the global investment community when Darden hosts its annual University of Virginia Investing Conference (UVIC) and investors, policy-makers and the financial press descend on Charlottesville.

The event was kick started this year on November 14 with the second annual Darden @ Virginia Investing Challenge (DVIC) in which students from fifteen leading business schools (Carnegie Mellon, Chicago Booth, Columbia, Cornell, Darden, Duke, Emory, Kellogg, Notre Dame, NYU Stern, UCLA Anderson, UNC Keenan-Flagler, Vanderbilt, Wharton and Yale) participated in a stock pitch competition. After the first round, three schools moved on to the final round in which Columbia Business School won the event with a short pitch for RocketFuel (FUEL) and took home $3,000 for their effort. Darden Capital Management, Darden’s student-run $9 million investment fund in which I serve as a Senior Portfolio Manager, had organized and helped host DVIC. While I wasn’t a contestant in the stock pitch competition, it was a great opportunity to learn, share ideas and network with students and judges.

The rest of the day was dedicated to the Investing Conference. The first speaker was Jason Trennert who was the consummate strategist, wonderfully presenting various scenarios and getting the audience to think hard about what 2014 has in store. One takeaway that stuck with me – probably because we’re currently focused on LBOs in our corporate financing and economic history classes – was Trennert’s projection that 2014 would be the year of the activist investor and LBOs. Richard Chilton then spoke about the process of finding quality business models to invest in and the evening ended with a panel in which CIOs of various university endowments discussed the shift in the allocation of their assets, particularly the increased emphasis on private equity.

The next day started with a special session with Kyle Bass for the students in Rich Evans’ Investments course. Bass is a regular at UVIC and spoke to us about his views on various strategies ranging from macro investments in countries like Argentina to individual equity plays in General Motors stock. The next two hours were probably the best part of the conference for me personally because I had the privilege to host Joyce Chang, the Head of Emerging Markets and Global Credit Research at JP Morgan. I will be joining JP Morgan full-time after graduation and it was a pleasure to spend one-on-one time with a very senior member of the bank. After lunch, the conference wrapped up with an address by billionaire investor, Oaktree Capital’s Howard Marks, and an energy panel that highlighted public and private investment opportunities to capitalize on the booming sector.

I’ve now attended the fifth and sixth annual UVIC conferences as a student at Darden. My first introduction to UVIC, however, was the fourth conference when my boss at the time, Vincent Reinhart (currently Morgan Stanley’s Chief U.S. Economist), spoke at the event. I have to admit I was jealous of Darden students when I witnessed the quality of speakers that descended on campus and learned about the tremendous freedom Darden Capital Management offered them to learn about investing. I’m thrilled that I’ve had this opportunity to be a part of the school and benefit from DCM, DVIC and UVIC.  

Posted in Uncategorized | Leave a comment

Why Study Business and Economic History?

Image

“Mr. Ford replied that he did not believe in history, that history was of the past and had no bearing upon the present and that, there being nothing to be learned from it, history need not be studied nor considered. The American Revolution he refused to have touched upon, saying that the Revolution was ” tradition,” that he did not believe in tradition.”  New York Times, May 15, 1916.

“I don’t know much about history, and I wouldn’t give a nickel for all the history in the world. It means nothing to me. History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today.” – Henry Ford, Chicago Tribune, May 25, 1916.

Is history “bunk”?  Henry Ford’s famous comment was not just a casual afterthought.  He made similar statements to the press at least two other times, on June 6, 1916, and October 28, 1921, when he dispensed with the qualifiers and simply said, “history is bunk.”  It is ironic that by 1916, Ford was 52 years old and had lived long enough to accumulate plenty of personal history.  Not known for mild opinions, Ford was also known for isolationist, pacifist, racist, anti-semitic, and conspiracy theory views.  Along with “that huge Mississippi of falsehood called history,” (Matthew Arnold), “live for the moment,” (Monster Magnet), and “history will teach us nothing,” (Sting), “history is bunk” stands as one of the convenient justifications for myopic thinking.  Why study history?  In particular, why should business students and practitioners study business and economic history? 

Popular thinking suggests that what has happened before is likely to happen again and that therefore knowledge of history can prepare you for what’s coming, much like wearing seatbelts in a car.  Mark Twain held that “History may not repeat itself, but it does rhyme.”  Some people who live long enough claim to have a sense of déjà vu: “Uh oh, these economic conditions feel familiarly like a recession.”  To the extent that history repeats or rhymes, the lessons from one episode may be relevant to the next.  The philosopher, George Santayana, asserted that, “when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.”  But the sheer variability of human experience over time challenges the notion that history truly repeats or rhymes.  We need a better reason to study business and economic history.

Our view is that an understanding of context is vital to an understanding of the present and an outlook on the future—and context to a significant degree is history.  Studying history provides a better understanding of how the present evolved out of the past and how the future is in a process of evolving out of the present. This ability to learn from the past is a foundational skill and requires business leaders to make sense of the context of problems and opportunities facing the organization. In the words of John Maynard Keynes, understanding context requires the leader to “…contemplate the particular in terms of the general” because a model or methodology that may have worked very well in some historical context, might fail in today’s framework. Thus, it would be foolhardy to define “context” as just the present moment. Instead, everything we know about the present context is shaped hugely by history, that is, how we got to the present.

In their book, In Their Time: The Greatest Business Leaders of the 20th Century, Nitin Nohria and Anthony Mayo point to the role of contextual intelligence as a means of understanding great business leaders. They discovered that there was a co-evolutionary relationship between the actions of business leaders and the contextual landscape in which they operated; each influenced and shaped the other. The environmental factors that they highlight—demographic shifts, technological breakthroughs, government regulations, geopolitical forces, labor movements and societal norms—coalesce to create a contextual framework for business and society. Within each decade of the twentieth century, these factors ebbed and flowed, coalescing in unique combinations. A business executive‘s ability to make sense of his or her contextual framework and harness its power often made the difference between success and failure.

Thus, knowing business history is important for the development of business leaders. History yields insights into the development of the global economy, of industry structures, and of business strategies. It illuminates government-business relations, technology, corporate culture and business ethics.

Toward the end of his life, Henry Ford moderated his views on history.   In response to his widely quoted 1916 interview in the Chicago Tribune, that newspaper called him an “anarchist.”  He sued for libel.  The court found for the plaintiff, but awarded him only six cents in damages.  In court, he had been publicly humiliated for his lack of formal education, which prompted him to reflect on the possible lessons of history. 

He later confessed, “As a young man, I was very interested in how people lived in earlier times; how they got from place to place, lighted their homes, cooked their meals and so on. So I went to the history books. Well, I could find out all about kings and presidents; but I could learn nothing of their everyday lives. So I decided that history is bunk…I am going to start up a museum and give people a true picture of the development of the country. That is the only history that is worth observing, that you can preserve in itself. We’re going to build a museum that is going to show industrial history, and it won’t be bunk.”  With that, he founded the Henry Ford Museum and Greenfield Village in Dearborn, Michigan, one of the best repositories of industrial history in the world.    

This article was co-authored by Robert Bruner, Dean of the Darden School of Business, and Rohan Poojara, a second-year student at Darden. The two of us are engaged in a business history reading seminar this year along with eight other students and two other instructors.

Bibliography:

Posted in Uncategorized | Leave a comment

The Case for Legal Immigration Reform

Image

Dean Bruner wrote a terrific blog post ‘The Case for International Students’ yesterday highlighting the advantages of a diverse student body at Darden with students born in many different countries. While I agree with his arguments, I’d like to add more color to one of the motivations the Dean highlights behind recruiting international students namely, “(international students) found companies and create jobs (in the U.S.).” Despite the statistics and measured contribution of skilled immigrants, U.S. immigration policy makes it an arduous process for these students to start their own firms and for companies to hire them after they have been trained in the best U.S. universities. I hope I can add some insight that will be informative as readers contemplate the ongoing immigration reform battle on Capitol Hill. Note: I had published a similar version of the post below in which I made for legal immigration reform in the National Review.

More than 30% of the scientists and engineers in Silicon Valley who have helped America stay at the cutting-edge of technological innovation are foreign born. One-quarter of the Americans who have won Nobel Prizes have been immigrants, even though immigrants comprise just one-eighth of the U.S. population. Therefore, an immigration policy that attracts skilled workers can help provide American businesses with the highly productive workers they require.

Much research, however, has been focused on the detrimental effects of illegal aliens, including lower wages for native workers that compete with low-skilled immigrants for jobs, and higher tax burdens on Americans who pay for public services. These economic factors combined with Congress’ sluggishness on passing a comprehensive immigration reform bill given its distraction with issues like Syria have stalled solutions like the DREAM Act that grants legal status to unauthorized aliens.

However, legal immigration policies for permanent and temporary visas must be reformed because, unlike low-skilled, illegal immigrants that come to the U.S. surreptitiously, high-skilled, legal immigrants boost the competitiveness of the U.S. economy and increase the flow of capital into the nation. In addition, these workers would be well paid and therefore would add to government revenue by paying more in taxes than they would receive in government benefits. A greater proportion of high-skilled workers in the labor force also would lead to an increase in the demand for low-skilled employees, thereby decreasing both poverty and unemployment.

For the past several decades, the Family Reunification Act has defined U.S. immigration policy. Visas have been allocated on the basis of family ties to a U.S. citizen. From 1999 to 2008, only 15% of the approximately one million legal permanent residence visas issued were employer-sponsored. America’s failure to reform immigration policy has caused the U.S. to lose ground to Canada and Australia, for example, which have altered their immigration criteria to attract high skilled rather than family-based immigrants.

The situation is no better with temporary visas granted for business and employment purposes. Decades of overregulation and micromanagement by the government have led to almost one hundred different categories of visas with complex rules and high costs. For example, firms pay government fees in the range of $2,500 to $4,500 for every employee they petition to hire on an H-1B (temporary work visa for skilled professionals), in addition to bearing the cost of delays in hiring and attorney fees of several thousand dollars. This affects the competitiveness of U.S. firms, particularly smaller ones, as emphasized in a recent Government Accountability Office report: “Small firms were more likely to fill their positions with different (that is, less suitable) candidates, which they said resulted in economic losses, particularly for firms in rapidly changing technology fields.”

There is a lot of evidence to show the benefits of a skills-focused immigration policy. Volker Grossmann and David Stadelmann used data from thirty OECD countries to demonstrate that high-skilled immigration increases public expenditure for productive uses like education, roads, railways and electricity. This leads to an increase in the marginal product of capital and boosts the incentives for investment in both publically financed infrastructure and private capital.

The benefit of legal immigration policies that place an emphasis on attracting skilled workers is also emphasized in the research of Sarit Cohen-Goldner and Yoram Weiss. Their work highlights that public investments in Israel increased after waves of high-skilled immigrants entered the country. Additionally, they also found a gradual transition from blue-collar to white-collar occupations in the workforce. Moreover, the benefits don’t stop with the highly skilled immigrant-immigrants’ children are also often exceptional contributors to society as Alex Nowrasteh highlights here.

So how should we reform America’s legal immigration system so that the U.S. remains the destination of choice for the best and brightest in the world? There are several policy prescriptions suggested by reformers, but my favorite is Pia Orrenius and Madeline Zavodny’s pro-market strategy outlined in their book Beside the Golden Door. They recommend an auction process in which the government sells permits to employers to hire foreign workers. Revenues raised from the auctions will allow the government to compensate any parties for costs imposed by this freer immigration policy. To prevent abuse, workers will not be tied to a particular employer and will have a clear path to citizenship that should be an incentive for them to invest their savings in the U.S. instead of back home.

While this blog post doesn’t directly relate to life at Darden, I hope it’s helpful to my current and prospective classmates as you all think about a highly sensitive issue like immigration. In my opinion, research has clearly highlighted the fiscal benefits to a nation of an efficient immigration system. And Dean Bruner has done a good job highlighting a lot of the intangibles that international students bring to a school/classroom before they even join the workforce so do check out his post here

Posted in Uncategorized | 3 Comments