Fund Overview
The Wharton Investment Management Fund adheres to a small-cap
value investment discipline and has the ultimate goal of long-term
capital appreciation. It defines small-cap companies as those
companies with equity market capitalizations of less than
$2.0 billion. The definition of a value investment is difficult
to articulate, but in general a value stock is a company that
is priced below what it is worth today whereas a growth stock
is a bet on future growth potential. As a result, the majority
of the companies in which the Fund invests have low P/E ratios,
are asset rich, are currently out of favor but may be viewed
more favorably at a future date, are turnaround stories, or
have an underappreciated sustainable competitive advantage.
Investment Benchmark
The Fund’s investment universe is comprised primarily
of stocks included in the Russell 2000 Index. In order to
evaluate the investment return of the portfolio, however,
the Fund Fellows believe that the Russell 2000 Value Index
is a more appropriate comparative benchmark.
Buy and Sell Decisions
Most securities recommended to the Fund pass, at a minimum,
the following hurdles: (1) trailing P/E is in the bottom two
quintiles of the universe or relevant peer group, (2) the
ratio of EPS growth to trailing P/E exceeds 1, and (3) trailing
P/E is below the stock’s historical mean P/E. While
it is difficult to generalize, a stock is typically sold if
its P/E climbs into the top two quintiles of the universe
and is subject to mandatory review by the Fund Fellows if
either the target price is achieved or there has been a 20%+
relative decline in the stock price.
In addition to the general P/E criteria discussed above,
the Fund considers various other metrics of valuation, such
as price relative to book value, cash flow and revenues, as
well as dividend yield. The Fund also takes into account many
other qualitative and quantitative factors which would suggest
significant future price appreciation, such as a strengthening
balance sheet, expanding margins, earnings growth and various
other catalysts.
The basic format of how securities are presented to the Fund
has been consistent for several years, requiring both a written
report (with a projected earnings model) and an oral presentation.
A majority vote from the Fund Fellows is required prior to
both buy and sell decisions.
Portfolio Risk Management
The Fund Fellows have voted to limit the size of the portfolio
to no more than 40 stocks, with individual stocks accounting
for approximately 2-5% of the portfolio’s value at the
time of purchase. The Fund Fellows continuously monitor the
portfolio to ensure ample diversification of risk and sector
exposure.
Prior to recommending a stock, Fund Analysts consult the
Fund Fellows in order to receive guidance regarding the stock’s
overall attractiveness. Analysts whose recommendations are
ultimately approved by the Fellows are responsible for on-going
monitoring of the stock, which includes updating the Fellows
on company-specific events that could lead to a material change
in the stock’s future prospects.
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