Student Managed Investment Fund

Annual Report 2004-2005

CALIFORNIA STATE UNIVERSITY, LONG BEACH

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Table of Contents

Directors Letter to the Readers 4

OCSIM Letter 5

Executive Summary 6

Investment Philosophy 7

Economic & Capital Market Outlook 7

Sector Analysis 10

Fixed Income 14

Equity

Gildan Activewear, Inc. 15

Knight Transportation, Inc. 17

Abaxis, Inc. 19

Gibraltar Industries, Inc. 20

Verisign, Inc. 21

World Fuel Services Corp. 22

Performance 23

Learning Experience 27

OCSIM & LASFA 28

Meet the SMIF Team 30

Student Managers 31

Acknowledgements 35

Notes 36

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Directors Letter to the Readers

5

OCSIM Letter

6

Executive Summary

The Student Managed Investment Fund (SMIF) Program is an honors-level course offered through California State University, Long Beach’s (CSULB) College of Business Administration. Since inception in 1995, SMIF’s mission was to expose students to a real-life, real-dollar fund management experience. For the 2004-2005 academic year, the management team consisted of fourteen undergraduate and two graduate business students.

The 2004-2005 academic year was productive for the SMIF program. The students had an opportunity to apply their knowledge and skills in a real-world investment company setting using professional tools such as Bloomberg and Value Line. The team competed for and

won the privilege to manage the Orange County Society of Investment Managers Scholarship Fund for the second consecutive year. Several students received Bloomberg Certifications and registered for the CFA Level I examination. In addition, the students attended many professional events, including the LASFA Annual Career Expo and the OCSIM Annual Forecast Dinner. These activities exposed the students to the competitive and evolving world of finance and prepared them for future success.

The SMIF program provided students with the opportunity to apply their skills in reading economic indicators, forecasting, and evaluating securities. During the first semester, the students carried out the research segment of the portfolio management process. The SMIF team conducted economic, sector and industry analysis to determine the positioning of investments. Each team was assigned the responsibility to evaluate and follow three sectors. The teams presented their finding and forecast to

the class at the end of the first semester.

The students assumed the portfolio management role during the second semester of the program by selecting and evaluating the securities. Due to the nature of the fund, the investments were limited to equities, bonds, and money market instruments. Based on the forecasted market outlook, the asset allocation of 70% equity and 30% fixed income was thought to provide the portfolio with the greatest risk/return trade-off. The SMIF team decided to invest in U.S. small-to-mid cap companies for the equity portion of the portfolio, in order to take advantage of potential growth and greater returns. Out of many companies evaluated for the equity portion of the

portfolio, two were selected for investment. Gildan Activewear Inc. (GIL), a manufacturer and supplier of active wear, and Knight Transportation Inc. (KNX), a trucking transportation provider, were considered to be the leaders of their industries, as supported by their healthy fundamentals and good growth prospects.

Initially, securities with one year remaining until maturity and a credit rating of A or BBB were considered for the fixed income portion of the portfolio. However, due to a number of factors, including economic conditions and a short holding period, the team re-evaluated the investment prospects and decided to invest in money-market instruments in order to minimize loss. Although no bond investment was executed, the comprehensive research and evaluation still provided the students with valuable learning experience.

The overall portfolio returned a negative 1.32%. Third quarter 2004 returns were 0.08%; fourth quarter returns were 0.37%. First quarter 2005 returns were 0.56%;

“The SMIF program provided the students with the opportunity to apply their skills in reading economic indicators, forecasting,

and evaluating securities.”

Penny graph picture 407668

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Investment Philosophy

The SMIF philosophy was based on value investing, with a top-down approach to focus on sectors and industries with favorable prospects. The team invested in small-to-mid-cap securities traded on United States Stock Exchanges with the primary goal of capital appreciation.

Adherence to a semi-efficient variation of the efficient market hypothesis was emphasized. The Market is not strongly efficient because (1) stock prices do not fully reflect private information, (2) investors interpret available information differently, (3) information is not equally available and accessible to every investor, and (4) information is not free. There are inefficiencies, anomalies, and irrationalities in the market on which participants aimed to capitalize.

The management team attempted to benefit from investor over-reactions to current events. Valuation models based on company fundamentals were utilized to calculate a

company’s intrinsic value and compare it to market prices. Only equities that were significantly under-priced in relation to their intrinsic values were considered for the portfolio. In addition, SMIF tried to take advantage of the neglected firm effect as mentioned in “A Revival of the Small-Firm Effect” by Reinganum. The team looked for equities not closely monitored by institutional investors because such equities have a greater tendency to be undervalued; hence, it focused on the small-to-mid-cap universe. This philosophy can be successful because many institutional investors are constrained to invest in equities with larger market capitalizations.

Although a majority of investors are aware of the aforementioned, not all apply it strictly and rationally. When applying the strategy, emotions were excluded that often taint the decision-making process. Instead, strict adherence to the buy/sell disciplines was maintained.

Economic & Capital Market Outlook

INTRODUCTION

The Student Managed Investment Fund (SMIF) team has been following economic and market developments since the summer of 2004. In analyzing the mixed results of macroeconomic data over the past year, the management team believed that the economy was in a limited expansion period. We projected continued growth at lower rates and a modestly favorable environment for equities and fixed income securities. Capital and consumer spending drove economic growth in 2003, and tax cuts were expected to stimulate consumer demand in 2004. Homebuilders and technology sectors were expected to peak. Technology, energy and health care industries were expected to be the leading performers for the year. The Federal Reserve (The

Fed) was forecasted to raise discount rates, and the long term rates were to remain on the same level.

GDP

The SMIF team forecasted that the economy would expand by 4.4% in 2004, and slow to 3.6% in 2005. This coincided with Value Line’s projection of 3.5%. For 2006, the management team expected GDP to grow by 2.9%, which was in line with Bloomberg’s projections. The final estimates showed that the fourth quarter of 2004 GDP grew by an annual rate of 3.8%.1 The growth can be contributed to increases in personal consumption expenditures (PCE), private domestic investment

Penny graph picture 407668

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Economic & Capital Market Outlook

(inventory), and equipment and software components. An increase of imported goods was the largest contributor to the slight GDP growth slowdown in 2004, especially in the fourth quarter.

INTEREST RATES

The federal funds rate was forecasted to rise to 2.25% by the end of 2004, to 3% by mid-year 2005, and to 3.50% by the end of 2005. The Fed raised the federal funds rate from 1.50% to 1.75% in September and another 25 basis points up to 2% in November 2004. Fed officials believed that the economy was becoming stronger compared to the beginning of the year. There was some concern about the increase in the rate prior to the Presidential Election;

however, in the end, it was regarded as a sign of the improving health of the economy. By the time of this writing in May 2005, the Fed had raised the federal funds rate for the eighth consecutive time, to a level of 3.0%, the highest level since September 2001. The Fed’s willingness to continue interest rate increases indicates their belief in the underlying strength of the economy.

The yield for U.S. Treasuries with a 10-year maturity was expected to rise from 4.01% on September 27, 2004 to 4.72% by the end of April 2005. The 10-year Treasury yield went up to 4.64% by the end of March 2005, but the yield rapidly declined in the first two weeks of April. On April 29, 2005, the 10-year Treasury yield closed at 4.21%.2

ECONOMIC INDICATORS

In the fall of 2004, recent data showed that three out of ten leading economic indicators had increased. The positive contributors were manufacturers' new orders for consumer goods and materials, real money supply, and average weekly initial claims for unemployment insurance (inverted). The negative contributors were building permits, the interest rate spread, the index of consumer expectations, manufacturers’ new orders for non-defense capital goods, vendor performance, and stock prices. In the fall of 2004, the leading index stood at 115.7. The leading index remained flat from October 2004 to March 2005; when it decreased by 0.4%. At the end of the holding period, the leading index stood at 115.1.

In August, all four coincident index indicators increased, bringing the index to 113.8. The SMIF team forecasted the index to reach 121 by the end of 2005. It has been steadily increasing through 2004-2005. At the end of the holding period, the coincident index stood at 119.5

The lagging index was 98.2 in August. SMIF believed this indicator would remain relatively flat due to little growth in the overall market. The index was expected to reach 100 by mid-2005. Four out of seven components increased. The positive contributors to the index were the average prime rate charged by banks, change in labor cost per unit of output, ratio of consumer installment credit to personal income, and ratio of manufacturing and trade inventories to sales. The negative contributors were commercial and industrial loans outstanding, average duration of

unemployment (inverted), and change in the Consumer Price Index (CPI) for services. The lagging index had been increasing in 2004 with a short slowdown in June through October. At the end of the holding period, the index stood at 99.4 and remained relatively flat which indicated that the economy was expanding at a lower rate than its average long-term rate.

EMPLOYMENT

Initially, SMIF was concerned with the employment situation in the U.S. The employment rate increased slower than expected. Initial unemployment claims had been flat since March 2004. The employment situation has been improving slightly with initial claims decreasing by 12,000 to a total of 323,000 for the week ending November 20. This brought the four-week moving average down to 332,000, which was the lowest level since November 17, 2000, when it was at 321,800 (Bloomberg).

The management team projected modest improvements in the Labor market by mid 2005 compared to August 2004. There has been drop in unemployment index suggesting that employment growth in December has been stronger than previously expected. The average hourly earnings growth was 2.3% in August 2004, up from 2% in the first half of the year. According to a November Wall Street Journal survey of economists, unemployment was

“The Fed’s willingness to continue interest rate increases indicates their belief in the underlying strength of the economy.”

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Economic & Capital Market Outlook

predicted to reach 5.2% in May 2005. The forecasted unemployment rate for the fourth quarter of 2004 was 5.7%, and was expected to decrease to 5.4% in the third quarter of 2005. At the end of the first quarter of 2005 the unemployment rate was 5.3%.

CONSUMER CONFIDENCE

The SMIF management team expected consumer confidence to slowly increase to 100 by the end of April 2005. Slower income growth and high energy prices were expected to negatively impact consumer confidence. The index decreased in October as oil prices started to rise. The Consumer Confidence Index (CCI) remained at the

92-93 level until December 2004, when the index rose to 102.3 due to the holiday season expectations. However, the CCI declined each month of the first quarter 2005, and was down to 97.7 points in April.3 At the end of the holding period, consumer confidence was at its lowest level since November 2004.

MARKET OUTLOOK The fall semester was spent researching and analyzing data in order to develop an economic and market forecast. The following market outlook focused on 2005 and onward.

S&P 500

The S&P 500 index closed at 1,211.92 in 2004, which was a 7% increase from 2003. After analyzing the future economic outlooks and considering experts’ forecast, SMIF projected the index to grow by 3-4% in 2005. The equity markets grew moderately in 2004, and slower growth was expected in 2005.

BOND ISSUANCE

Bond issuances declined by 22.1% in the first three quarters of 2004, compared to the same period of the

previous year. This was a result of the strengthening of the U.S. economy and rising interest rates. Economic growth was strong in 2004 and was expected to continue through 2005 (The Bond Market Association's year-end survey of chief economists). The Fed was forecasted to increase the Federal Funds rate by 25 basis points, bringing it to 3.50% by the end of 2005. The yield of the 10-year Treasury note is expected to rise steadily throughout 2005 with a median forecast of 5.1% by December 2005.

INFLATION

The management team forecasted a 5% increase in Consumer Price Index (CPI) by mid-2005 primarily due to

the increases in food and energy prices. The CPI rose 3.3% in 2004 and 4.3% for the first three months of 2005. The core rate (excluding food and energy) increased by 2.2% during 2004, followed by a 3.3% increase in the first three months of 2005.4

OIL PRICES

The major concern in the last quarter of 2004 was the price of oil. The average price forecasted for 2005 was $40 per barrel. This was expected to negatively affect 2005 GDP growth by 0.1% to 0.2%.5 Actual oil prices reached $55 per barrel in October 2004. The SMIF team believed that oil price hikes were mainly the result of speculation and uncertainty in the market. The increase of oil prices can also be attributed to the increasing demand and tightening supply of oil. The tight supply of oil resulted from production disruptions, the continuing military and terrorist actions in the Middle East, and higher than expected demand from Asia.

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Sector Analysis

The SMIF managers used the sector and industry classifications as shown in finance.yahoo.com. Based on Yahoo Finance allocation there are twelve sectors, and 101 industries within them. Sectors were divided into four parts and assigned to different managers for the analysis and forecast.

BASIC MATERIALS SECTOR

The basic materials sector includes eleven industries: chemical manufacturing, chemicals-plastics and rubber, containers and packing, fabricated plastic and rubber, forestry and wood products, gold and silver, iron and steel, metal mining, miscellaneous fabricated products, non-metallic mining, and paper and paper products. The slowing growth of the economy was expected to negatively impact the demand of fabricated products. In addition, the anticipated increase in oil prices could drive up raw material costs and lead to reduced orders from large consumers like agricultural, construction, and automobile manufacturing industries.

When the dollar weakens, gold and silver generally appreciate; however, SMIF believed the mining industry’s outlook was poor due to environmental issues.6 Worldwide competition affected the steel industry despite increased demand and steel tariffs imposed by the United States Government.7 Based on SMIF’s economic outlook, the basic materials sector did not appear attractive for investment.

CAPITAL GOODS SECTOR

The capital goods sector consists of the aerospace, defense, construction, agricultural machinery, construction supplies and fixtures, construction raw materials, construction services, mobile homes and RVs and miscellaneous capital goods industries. After analyzing the sector, SMIF rated the sector as good.

The SMIF management team concentrated on the construction and agricultural machinery industry. This sector was expected to outperform the S&P 500 due to expected increases in real estate construction and spending on agricultural equipment. Although there are 28 public companies within the construction and agricultural machinery industry, SMIF managers were mainly interested in Caterpillar (CAT). Based on team projections CAT was expected to outperform Deere, S&P 500 and Dow Jones, due to its diversification and product quality.

However, the SMIF investment philosophy was focused on the small-cap segment which excluded a majority of the capital goods sector enterprises.

CONGLOMERATES

Conglomerates operate within industries from many different sectors, such as financial services, industrial products, and technology, and benefit from the diversification this provides. However, the diversity of this sector increases its complexity, making analysis of this sector more difficult. Conglomerates were ranked vis-à-vis other sectors comprising the economy by focusing on financial ratios such as Price-to-Earnings, Return-on-Equity, Dividend Yield, Debt-to-Equity, Price-to-Book, Year-over-Year Revenue, and Earnings-per-Share. Then, qualitative analysis was conducted. Based on the results of this analysis, the conglomerates sector was rated as fair. Furthermore, Value Line rated this sector favorably. Growth was expected to maintain its upward trend, and many companies within the sector received favorable timeliness ratings from Value Line.

Opportunities for this sector depend on the overall long-term economic growth and the increased demand for industrial and technological products. A number of companies within this sector can also benefit from the increased demand for financial products by baby boomers. On the other hand, some of these companies may be negatively impacted by currency and interest rate fluctuations or alleged fraud, as was observed in the insurance industry.

CONSUMER CYCLICAL

The consumer cyclical sector faced an uncertain outlook. Despite projections that the economy would remain in a limited expansion phase, which would be beneficial for this sector, a concern existed that possible increasing oil prices would stir inflationary expectations and hurt demand for consumer durables. At the time of analysis, ten out of the twelve industries within this sector were ranked by Value Line among the bottom third of all industries. With profit margins already weakened, the prospect of further increases in raw material costs suggests that many industries within this sector are particularly vulnerable. For example, the auto and truck manufacturing, auto and truck parts, and appliance and tool industries were suffering due to increasing steel prices.

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Sector Analysis

Moreover, within auto manufacturing, there was growing concern that customers were taking on more debt with “up-side down” trades, trading in cars that were worth less than the remaining principle, which would reduce future sales. Overall, increasing oil and raw materials prices, together with rising interest rates, were expected to render 2005 a challenging year for most industries within the consumer cyclicals sector, although a few industries within the sector, such as apparel, were viewed as being largely immune from such negative influences.

CONSUMER NON-CYCLICAL

Industries within the consumer non-cyclical sector include food processing, office supplies, household products,

tobacco, fish and livestock, alcoholic and non-alcoholic beverages, and agricultural crops. Apart from the tobacco industry, the outlook for this sector was fair. Poor weather conditions, high commodity, and energy prices will have a negative impact on the sector.

Within this sector, the alcoholic beverage industry appeared to be the most favorable. The demand for wine and spirits in general was expected to increase, with the fine wine and spirit segment of the industry (according to S&P Net Advantage) anticipated to benefit the most as a consequence of expected increases in real disposable income. Additionally, breweries faced stable and inelastic demand that would allow them to expand their profits by raising prices. Moreover, continued weakness of the US dollar was expected to hinder importation while encouraging exportation of alcoholic beverages. For the coming year, though, the industry was expected to have limited growth and was ranked 47 out of 98 industries by Value Line.

ENERGY

The energy sector consists of integrated oil and gas producers, oil and gas operations, oil well services, and coal. The sector’s performance was exceptional during

2004 to 2005 due to high crude oil prices. It is currently the number one ranked sector and is expected to perform well. The sector’s outlook, at time of analysis, was good, which was later validated by 2004’s fourth quarter performance. Investors focused predominantly on energy; hence, companies with favorable prospects were analyzed, but they were deemed overvalued. The industry SMIF decided to analyze for possible investment within the energy sector was coal. The coal industry showed a favorable outlook in performance and was ranked the fourth industry by Value Line. In addition, coal represented the cheapest source of fuel for electricity generation in view of the United States’ growing energy needs.

Seeing that the market reacted quickly to the coal

industry’s positive outlook, higher returns were reflected in the value. Thus, the industry was overvalued and the SMIF team decided not to pursue any investment in coal.

FINANCIAL SERVICES

The financial services sector is comprised of insurance, consumer financial services, investment services, and banking. Financial services faced an increasing level of uncertainty due to numerous legal issues, investigations, and regulations. One example of this was the investigation into Fannie Mae and Freddie Mac for the misapplication of GAAP accounting principles.

Compounding this uncertainty is the fact that the financial services sector is especially sensitive to changes in interest rates. With the Federal Open Market Committee (FOMC) projected to raise its federal-funds-rate target to 3% by mid-2005, and with higher interest rate expected to lead to higher default rates on variable-rate loans, the prospects for the industry, especially the mortgage market segment, appeared to be poor.

HEALTHCARE

The SMIF management team found the healthcare sector,

“Overall, increasing oil and raw materials prices, together with rising interest rates, were expected to render 2005 a challenging

year for most industries...”

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Sector Analysis

which includes biotechnology, healthcare facilities, major drugs, and medical equipment and supplies, to have a good outlook for 2005. Overall healthcare spending was anticipated to continue rising. The Department of Labor estimated that the 55 to 64 age group would increase by 43.6% between 2002 and 2012, and the World Health Organization projected an increasing incidence of chronic diseases. Both factors would drive increased demand for healthcare. Medicare reform committed $400 billion over 10 years for modernization and coverage to uninsured individuals. The Bush Administration’s support of malpractice reform, health savings accounts, and tax credits would also benefit the sector. Moreover, 2004’s election season could also be seen as beneficial to the industry – according to Sam Stovall, the chief investment strategist at Standard & Poor’s, healthcare issues perform well in the year following an election, increasing 14.9% versus the average S&P 500 increase of 3.6% since 1949.

Within the sector, the medical equipment and supplies industry appeared to offer the most potential to investors. Numerous new product launches anticipated throughout the coming decade should provide for continued favorable profit growth. Other promising segments within this industry include congestive heart failure treatments, diabetes management, and minimally invasive and robotic surgery. Changing demographics should also drive increasing demand for cardiovascular products, reconstructive orthopedic hip and knee implants, and diagnostic imaging products. As a reflection of these factors, Value Line estimated that 2005 earnings growth would be 11.5% and noted that their ranking of the industry’s relative strength was on an upward trend.

SERVICES SECTOR

Services Sector includes wide variety of industries ranging from advertising and retail to waste management and schools. The service sector is comprised of 25 industries mostly directed towards consumer consumption and spending. After analyzing the economic risk factors and the current phase of the business cycle in September 2004, SMIF managers concluded that the majority of the industries within the services sector would incur poor performance over the next year.

The sector has always been inherently sensitive to changes in consumer confidence and the demand for services. The SMIF team decided not to invest in the services sector, because the decline in consumer confidence due to weak stock and job market outlook, and expected increasing oil

prices were expected to negatively affect this sector. (economist).

TECHNOLOGY SECTOR

The technology sector includes industries as computer software and services, computer peripherals, internet, e-commerce, wireless networking, semiconductors, and entertainment technology. Value Line predicted a 10% increase in technology spending for 2005. The expected investment in technology infrastructure by businesses to improve competitive advantage and increase cost efficiencies set the management team’s view that the sector was good for investment.

The two most promising industries within the sector were computer software and services and internet. E-commerce industry was particularly attractive for investment. E-commerce offers comparable quality with lower prices to traditional retailing channels, and an added benefit to internet sales is the opportunity to target advertising. In 2003, internet sales topped the $100 billion mark, and, according to Value Line, sales were expected to double for 2004. The internet industry, as rated by Value Line, contained a timeliness ranking of 9 out of 98 in October 2004. In addition to Value Line’s positive outlook, the management team believed that expanding e-tailer and brick-and-mortar alliances and increasing online product offerings could produce revenue growth opportunities for the e-commerce industry.

TRANSPORTATION SECTOR

The transportation sector includes such industries as airlines, railroads, trucking, water transportation and other businesses related to transportation and shipping. The sector is sensitive to oil prices and overall global economic conditions. However, the world can not do without some industries in the transportation sector, for it is an essential part of the supply chain. The SMIF management team recognized that higher oil prices do not favor some industries, such as airlines, within the sector. However, there will always be the demand for one type of transportation or another, because it is an important requirement of conducting business. In addition, current growth of many nations’ economies and globalization of the world positively impacts the demand for transportation. The SMIF team believed that given the increasing levels of trade and exchange of goods between countries, the demand for transportation, such as trucking,

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Sector Analysis

would be unaffected despite of rising oil prices.

The trucking industry is comprised of 45 companies ranging in size and market capitalizations. At the time of economic analysis, the industry has been outperforming the market since 2003. The companies were left with a lot of bargaining power because the demand for freight was strong and supply tight. Despite the fact that the industry faced many negative factors, such as increasing labor cost, shortage of drivers, high oil prices and insurance expenses, most trucking companies posted strong earning results by the end of 2004, and the trend was expected to continue into 2005. In addition high oil prices were being partially offset by hedging, careful route planning, instituting fuel surcharges and raising prices on services.

UTILITIES

The utilities sector is composed of electric, natural gas and water utility industries. Electric companies generate and distribute electricity; natural gas companies conduct exploration and production and or distribute natural gas for resale; and, water utility companies distribute water to designated geographic areas. Since GDP, at the time of analysis, release for the second quarter of 2004 was 120 basis points below the first quarter of 4.5% growth, the utility sector outlook was considered good for its defensive play aspect.8 From a technical stance, the sector also appeared favorable, for the S&P Electric Utilities Index had advanced 19.31% over the year ending in September 2004 in comparison to 8.21% for the S&P 500 over the same period.

At time of analysis, the utility industry had improved their balance sheets by taking advantage of lower interest rates. In addition to interest rates, the industry had undergone consolidation that lead an industry transition from electricity to diversified energy enterprises which bettered the cost structure and aided the upgrading of the distribution infrastructure.9 Housing starts as a factor, household consumption directly affects revenues; hence, the ongoing positive trend of the Housing Starts Index was also expected to benefit the Electric Utility industry. Over the last two years, housing starts increased 3.6% and 6.54%, for period ending in September 2003 and 2004 respectively, year-over-year.10 The catalyst, the business cycle phase at the time of analysis displayed signs of post-recovery/maturing; hence, money inflow into non-cyclical sectors , as electric utilities, was expected to increase.

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Fixed Income

All SMIF teams at CSULB, are required to invest 25% to 50% of the portfolio in fixed-income securities. This is done for many reasons, but the most important ones are, on a philosophical level, the educational experience that is gained from the analysis of fixed-income securities, and, on a more practical level, the protection of the portfolio against geopolitical risks. Upon finishing the economic analysis, the SMIF team decided to allocate 30% of the portfolio to Fixed Income.

Mr. Doug Lopez, Senior Vice President and Portfolio Manager for Bradford and Marzec, Inc., was invited to bring his real life experience of fixed income management to the SMIF class. Mr. Lopez’s presentation consisted of a description of the technical tools for evaluating bonds, the

sources of relevant information, and the importance of considering benchmark risk. Dr. Runyon and Dr. Ammermann suggested further reading material to better understand and analyze fixed income, such as “The Handbook of Fixed Income Securities” and “Fixed Income Mathematics” by Frank J. Fabozzi, CFA.

SMIF’s economic forecast expected the Federal Reserve to increase the Federal Funds rate at each of their meetings due to inflationary expectations and increasing oil prices. SMIF Managers believed that real estate prices were inflated due to low interest rates; therefore the yield curve was expected to adjust accordingly. Considering all the factors, including the inflow of capital from China, SMIF Managers expected the yield curve to flatten and shift upward. On January 11, 2005, the 10-year Treasuries were yielding 4.24%. Taking into account all the economic forecasts, SMIF projected this yield to rise to 4.72%.

After forecasting the yield curve of U.S. Government Treasuries and the credit spread for all investment grade securities, the team decided to allocate the fixed income portion of its portfolio to securities with one year remaining until maturity and a credit rating of A or BBB. Due to the short holding period of four months, most of the return from the fixed income holdings would come from the accrued interest. Lower level securities provide higher coupon payments due to the higher credit risk associated with the company; therefore they will provide

higher return. SMIF’s findings were in line with the expectations of a variety of analysts at Bradford & Marzeck, Bear Sterns, Bloomberg, and other data contributors.

The SMIF team was limited to the available inventory at Solomon Smith Barney that met the specified criteria for fixed income securities. Despite this limitation, more than seventy fixed-income securities were available that satisfied the requirements. Later, the SMIF team analyzed all individual offerings to eliminate those securities that appeared to face a relatively high probability of being downgraded. For this reason, the bonds issued by General Motors Corporation, which is suffering from deteriorating fundamentals, were eliminated from the list.

The Management team’s original analysis forecasted a flattening and upward shifting yield curve. As a result, a sensitivity analysis was performed on all available securities by considering a change of +/- 25 and 50 basis points. Due to the short holding period, transaction costs, and an anticipated interest rate increase of 25 basis points, the team found that the return would be negative, ranging from -0.11% to -3.37%. Therefore, the SMIF students requested a waiver of the fixed income asset allocation guideline, to position the fixed income portion of the portfolio in Smith Barney’s money market fund. Members remain confident that a positive return provided by Smith Barney’s money market fund is in the best interest of the SMIF portfolio. Even though participants did not invest in fixed income securities, they believe the analysis was thorough and satisfied the educational purpose.

The SMIF team continued monitoring news associated with interest rates. The analysis and expectations of the yield curve fluctuations were accurate through the first week of April. On April 8, 2005, the long-end of the yield curve started to decline, forcing the prices and the return on the fixed income securities to increase. The yield for the 10-year Treasury increased to 4.64% by the end of March and decreased to 4.32% when the minutes of Federal Reserve Open Market Committee became publicly available.

“Considering all the factors, including the inflow of capital from China, SMIF Managers expected the yield curve to flatten and

shift upward.”

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Gildan Activewear, Inc.

Gildan Activewear is a highly specialized manufacturer and supplier of “blank” active wear for the wholesale imprint market. The product line includes T-shirts, collar-shirts, and fleece, made of 100% cotton or a blend of 50% polyester and 50% cotton in various fabric weights.11 Even though the company is incorporated in Canada, Gildan’s stock is traded on both the Toronto Stock Exchange (TSE) and the New York Stock Exchange (NYSE).12 Furthermore, the United States market represents 85% of their sales. SMIF found that Gildan stood out among its competitors and was worthy of further analysis.

COMPANY ANALYSIS

As evidenced by its strong market position, GIL successfully combines low prices with high quality products. Low prices are achieved through low labor costs by having its manufacturing facilities in South America and the Caribbean. Gildan was also able to control costs through vertically integrated operations, which include: yarn spinning, textile manufacturing, sewing, and distribution. Product quality is demonstrated by focusing on intricate details such as double stitched necklines, seamless collars, and superior knit surfaces that enhance printability.

Gildan is the market leader in T-shirt sales holding 30.2% of the U.S. market for the first quarter of 2005, which is a 13.5% increase over the same period for 2004. It also increased market share in sport-shirt and fleece markets, where it currently controls 24.6% and 18.6%, respectively. SMIF also anticipated growth in the international market, which was initiated only five years ago and is currently comprised of 36 distributors in 20 countries accounting for 7% of company sales. The European market constitutes a great opportunity for Gildan to grow exponentially.

The recent closure and relocation of its Canadian operations incurred a $7.8 million one-time loss. This strategic decision was estimated to save $4 million annually resulting from the Central American Free Trade Agreement (CAFTA), labor, and transportation. Furthermore, during the year of 2005, Gildan added two new major distributors in the United States.13 This valuable addition in its customers’ database will boost sales and lower the company’s exposure. Lower risk will be enhanced by steady and secure revenues in the United States mainly generated by the great distribution channels

that Gildan has access to. These management choices help combat the threat of competition from China and the recent liberalization of trade through the economical Central American work force. SMIF found Gildan, the industry leader, to have high growth potential along with low risk resulting from the stability of the apparel industry.

FUNDAMENTALS

At the time of analysis, Gildan had a 5-year compound annual sales growth rate of 19%. For the last 5 years, units sold and market share growth for this company was higher than the industry and its major competitors. The net earnings 5-year compound annual growth rate is 29.9%. In addition, the 5-year compound annual growth rate of diluted earnings per share is 24.3%. When SMIF analyzed Gildan, it thought that the company was in good financial health. The Return On Assets of 14.18% and the Return On Equity of 21.58% were higher than the industry. Gildan is a highly profitable company; the Earnings Per Share at the end of the fiscal year 2004 was $2.02 compared to $1.79 in 2003 and $1.45 in 2002. Gildan’s Price to Earnings Growth ratio of 0.59 was better than the industry’s PEG of 0.95.

Furthermore, Gildan had very low debt; the Debt To Equity ratio was 0.181. Gildan has been able to increase its revenues and its bottom line with very low debt. In addition, future growth could be enhanced with higher financial leverage. The operating margins of this company were 6.95% higher than the industry. Gildan’s expected return of 10.19% was higher than

GIL QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Consumer Goods

Textile - Apparel Clothing

1.4B

P/E:

P/B

ROE

D/E

DIV. YIELD

GIL IND S&P

22.21 19.70 33.33

4.07 4.52 4.73

20.68 11.10 13.88

0.17 N/A 1.35

0.00 0.65 1.62

Finance.Yahoo.com. 5/29/2005

16

Gildan Activewear, Inc.

its required return of 8.26%. Furthermore, Gildan’s stock had outperformed the S&P 500 since 2001. The stock price increased from $10 in 1999 to about $40 in 2005, which denoted a 400% price increase. Finally, Gildan’s long-term growth was projected to be over 10% for the next 5 to 10 years.

VALUATION AND SMIF DECISION

SMIF participant selected Gildan for the portfolio based on qualitative and quantitative analysis. Its strong market position, high quality product, and well-implemented low price strategy were important drivers of the decision. The discounted cash flow model was used to calculate the intrinsic value, which resulted in a target price of $56.28 at the end of 2005. This price appreciation would result in a capital gain of 33%. Yahoo’s target price was $49 and Zack’s target was $47.95. Bloomberg ranked the company number one with 100% consensus.14 SMIF approved the purchase of the stock with a vote of 15 to 1. The student management team based its decision on the financial strength of the company and the strategic initiatives implemented in recent years. Finally, the technical analysis provided by the Bollinger Band and the MACD indicated

a buy signal.

PERFORMANCE

Gildan was purchased at $45.50 on April 6, 2005 and was liquidated it on April 29 at $42.23. When the decision was made to purchase the stock, Gildan closed at $42.72. Unfortunately for SMIF, the company raised its earnings guidance the following morning and the stock opened at $45.50, which was the purchase price. The overall performance of Gildan was a negative $3.27 per stock or negative 7.19%.

Gildan Activewear, Inc. Performance Graph

17

Knight Transportation, Inc.

Knight Transportation, Inc., is a dry van truckload carrier with the market capitalization of $1.39B, and 2004 EPS of $0.83. KNX operates primarily in high density, predictable traffic lanes in selected geographic regions. The company's services include multiple and one-time pickups and deliveries within narrow time frames, specialized driver training, and other trucking services.15

COMPANY ANALYSIS

The company transports general commodities for shippers throughout the United States, focusing its operations on short- to medium-haul length (750 mile radius). Due to the greater demand for this segment of the market, these regional operations generate relatively high freight volumes and revenues per mile, while also enhancing safety and driver recruitment and retention. In addition, the company uses a satellite-based system to communicate with its drivers and track the loads, which enables KNX to respond promptly and accurately to customer requests and to operate more efficiently.

KNX is able to fulfill a significant part of its customers’ transportation requirements. Under carriage service agreements, KNX provides drivers, equipment and maintenance, and transportation management services that supplement customers’ in-house transportation departments.

Overall, the company’s strategy is to take advantage of the heavy traffic in regional markets, thus realizing operating efficiencies associated with regional hauls, and to offer flexible service to customers. Shorter hauls reduce the amount of time drivers spent away from home, consequently improving driver retention and reducing recruitment and training costs, insurance claims, and other costs.

FUNDAMENTALS

The combination of strong demand and tight truckload capacity is expected to continue in 2005. Moreover, with freight rate increases, sales from its new refrigerated truck service, and the expected addition of 400 new tractors, the company’s earnings are expected to grow by 26.8% in 2005. Over the next five years, the company’s EPS is expected to grow at an average rate of 11% per year, and free cash flow is projected to grow from just over $25 million in 2005 to more than $70 million in 2009.

Lower than expected economic growth, and the cost pressures from fuel and labor are the major threats for trucking companies in the current economic environment. The company may also face higher than anticipated costs from regulations on hours of service and engine emissions.

Wages and depreciation charges are expected to rise significantly as KNX expands its operations to include new drivers and additional tractors. In addition, the company has been adversely affected by the record high diesel prices of 2004, although fuel expenses were anticipated to moderate in 2005 and the company’s high fuel costs are partially offset by hedging agreements.

VALUATION AND SMIF DECISION

For the fiscal year ended December 31, 2004, KNX’s revenues increased 30% to $442.3M, while net income increased 35% to $47.9M. The revenue growth reflected the expansion of the company's customer base, increased volume from existing customers, and the addition of new tractors. In addition, earnings also benefited from both improving operating margins and a very limited use of debt financing.

The SMIF team began researching this stock at the end of February 2005. E-Trade forecasted 2005 EPS of $1.03, up 24% from 2004's $0.83, and expected 8% growth in 2006. Based on such projections, E-trade’s discounted cash flow model gave an intrinsic value of $16 for the stock (assuming a 10% cost of capital and a 4% terminal growth rate), while their relative valuation model provided a value of $35. Combining this

KNX QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Services

Trucking

1.4B

P/E:

P/B

ROE

D/E

DIV. YIELD

KNX IND S&P

27.79 28.90 33.33

4.61 4.24 4.73

18.53 10.90 13.88

0.00 N/A 1.35

0.14 0.26 1.62

Finance.Yahoo.com. 5/29/2005

18

Knight Transportation, Inc.

information together suggested a target price of $26, which was equal to, S&P’s 12-month target price of $26.00 per share (as of January 20, 2005). Similarly, the average recommendation on Marketwatch.com was a “buy,” with an average target price of $27.80 per share, and Bloomberg’s theoretical price was $27.50 per share. Finally, using Damodaran’s high growth valuation model, the SMIF team obtained a relative valuation of $28.25 and DCF valuation of $12.07.16 The price of the stock at the end of February, when participants valued the company, was fluctuating within $24-$25 price range. By March 7, 2005, the day the stock was presented to the rest of the SMIF team, the price of the stock had risen to $27.78.

The sales and EPS growth rates for the company were much higher than those of the industry and the S&P500. Furthermore, KNX has no long-term debt, although it has $10 million revolving credit agreement as of 2003. KNX's margins were higher than the industry and sector averages. Moreover, its above-average operating profit margins were expected to rise from 18% in 2004 to 19% in 2005 due to increasing freight rates, high asset utilization, and strong freight demand. As with the operating margins, the company’s other profitability and growth ratios were also favorable compared to industry and market averages.

Ultimately, the SMIF team decided to purchase KNX due to the combination of the company’s growth prospects,

good future outlook, and its overall financial health. The strength of this company is reflected in the fact that Knight Transportation’s stock was recently accepted for listing on the NYSE and began trading in December 2004 under the symbol "KNX”. Furthermore, the company had experienced the positive earnings surprise in January 2005.

PERFORMANCE

The SMIF team purchased two hundred shares of KNX on March 30, 2004, at a price of $ 24.25 per share. With fees and commission of $73, the total amount of the

purchase order came to $4,851. Unfortunately, soon after the stock was purchased, its price began to decline, and due to a 10% stop-loss policy, the stock was ultimately sold on April 12, 2005, at a price of $21.80, resulting in a loss of 12.88%. As of the time of this writing, KNX is continuing to trade in the $21-$22 range. Nevertheless, the SMIF team believes that this setback is temporary. The company’s prospects and growth potential still remain strong. However, near-term unfavorable economic conditions, with high energy prices and a depressed market, have temporarily dampened the stock’s performance. Unfortunately, the short investment horizon prevents SMIF from taking advantage of the strong growth that it still anticipates for this stock.

Knight Transportation Performance Graph

19

Abaxis, Inc.

Abaxis Incorporated develops and markets portable point-of-care blood. The equipment is capable of generating results for 13 different blood tests.17 The system is marketed under the name of Piccolo® in the human medical market and under VetScan® in the veterinary market. Abaxis operates in the medical equipment industry within the healthcare sector. Both the sector and industry were projected to have favorable outlook in SMIF’s analysis.

COMPANY ANALYSIS

SMIF found that ABAX had a competitive advantage because it was the first in the market with a point-of-care blood chemistry machine. In addition, ABAX protects its technology through patents. Abaxis had 27 patents. The team anticipated high growth potential in both the human and veterinary markets because of all its patent-protected products. Furthermore, the company has a number of new products in the pipeline, which could spur growth domestically and within international markets. Recent changes in Medicare, that encourage initial screenings, were seen as an excellent opportunity to increase sales in the domestic market. Also, the growing population of pets, as well as a new mammalian liver profile with bile acids, boosted our favorable outlook for the veterinary market. On the negative side, Abaxis encountered tough competition from IDEXX Laboratories Inc. (IDXX), a direct competitor that is much more established.

FUNDAMENTALS

Abaxis earnings per share of $1.18 in 2004 were better than the previous two years earnings per share of $0.02. However, $0.89 of it was a one-time tax benefit. The price to earnings ratio of 10.21 was lower than the industry P/E of 27.13. However, this might be biased due to the effect of the tax benefit. When SMIF analyzed the profitability of this company, we found out that Abaxis had operating margins of 13.64% compared to 6.32% for the industry. In addition, Abaxis had a high expected return of 30% compared to a required return of 9.96%. SMIF noticed that Abaxis’s capital structure consisted solely of equity, which gave it the opportunity to gain leverage.

Furthermore, Abaxis had a low Price to Earnings growth of 0.77 compared to 1.3 for the industry and 1.64 for IDXX. From 2003 to 2004 revenue growth was 34.76% compared to 3.75% from 2002 to 2003 and 3.83% from 2001 to 2002. The high revenue growth for last year did

ABAX QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Healthcare

Diagnostic Substances

210.4M

P/E:

P/B

ROE

D/E

DIV. YIELD

ABAX IND S&P

47.45 27.13 33.33

3.41 4.48 4.73

8.35 13.33 13.88

0.00 N/A 1.35

0.00 1.53 1.62

not provide SMIF with a clear signal for sustained growth.

VALUATION AND SMIF DECISION

At the time of analysis, Abaxis was trading at $12.91. The SMIF team used the discounted cash flow model to calculate the intrinsic value of $32.77. Even though Abaxis was undervalued, had a good business model and several patents protecting their products, SMIF decided not to invest in this stock because it was too volatile with no sustainable growth pattern. In addition, the one-time tax benefit in 2004 boosted the positive outlook of certain financial ratios as well as the intrinsic value, which were perceived by the team as possibly misleading.

The declining share price was a primary concern because the holding period was too short to realize the price reversal necessary to achieve the target price. High correlation of sales to military demand was also considered a negative aspect. In hindsight, this decision was correct because the price continued to decline until April 29, 2005, when it rebounded 19.35% with the release of the fourth quarter financial results. The final decision was not to purchase the stock. On the date of portfolio liquidation, Abaxis was trading at $9.50, which would reflect a capital loss of 26% had it been purchased, compared to a negative return of the market of only 3.72% for the same period.

Finance.Yahoo.com. 5/29/2005

20

Gibraltar Industries, Inc.

Gibraltar Industries manufactures, processes, and distributes steel products. Gibraltar’s segments revolve around processed metal works, building products, and thermal processing. Processed metals include cold-rolled stripped steel, coated sheet steel, steel strapping and powdered metal products. The majority of processed metal works are destined for the automotive, and hardware industries. The building products line manufactures and distributes building products. The thermal processing line refines metal properties of customer owned products.18

COMPANY ANALYSIS

Gibraltar was analyzed because it offers a wide product mix, and it contains a strong customer base. Gibraltar’s product output goes to industries within the capital goods, consumer cyclical, and transportation sectors. In addition, Gibraltar’s facilities are strategically positioned throughout the United States and Canada, which has allowed it to build a diverse and strong customer base. For example, the building product line supplies businesses such as Ace, Home Depot, and Wal-Mart. The processed metal product line supplies businesses such as BMW, Ford, GM, Honda, Mercedes-Benz, TRW, Toyota, and Warner. The thermal processing line services businesses such as 3M, Caterpillar, GE, and Whirlpool. Hence, the management team considered Gibraltar’s large-scale product distributorship and international infrastructure an economic moat .

FUNDAMENTALS

Gibraltar, at the time of analysis, had increased its earnings by 88 percent from the previous 2003 fiscal year. And over the 2000 to 2004 time period, earnings had grown annually an average of 36%. Over the same time span, the Debt-to-Equity ratio decreased by 33% ; the Times-Interest-Earned ratio increased by 105% ; Return-on-Assets increased by 21% ; Days-Sales-Outstanding had increased 24% and Return-on-Equity had decreased by 4%. The Current ratio was 36 percent which was a stable figure considering the data points for the last three years. In addition, Value Line’s Financial Strength rating was also taken into account, which was a B++ for Gibraltar.19 The Value Line rating ranges from A++ to C inclusive of nine different levels. Although no true comparables exist for Gibraltar since competitors are of smaller capitalization and are divided by product line, the ratios themselves

reflected a healthy company. The management team proceeded to value the company.

VALUATION AND SMIF DECISION

Gibraltar was valued by using industry multiples. Industry Price-to-Earnings were multiplied to the company’s Earnings-per-Share to arrive at a per share price for year-end 2004 and 2005. Year-end 2005 earnings were calculated by using Value Line’s estimated figures. From the two year-end equity prices, an annual growth rate was calculated; then, it was pro-rated for each quarter. According to estimated earnings, the quarterly expected growth rate for the equity was 3.25%. The position was analyzed towards the end of the first quarter; hence, the equity price should have been near or above the $22 mark, but the equity price was $21.75. And it was steadily trending below the nine and 18-day exponential moving averages with a wide Bollinger Bands divergence, which signaled a set price action trend. With the equity not meeting the quarterly price goal, the management team did not believe that the position would be able to recover and meet expectations. No investment was made in Gibraltar Industries.

PERFORMANCE

As of April 29, the last day of our holding period, Gibraltar Industries closed at $21.01. An investment in Gibraltar would have signified a 3.40% loss.

ROCK QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Basic Materials

Steel & Iron

582.5M

P/E:

P/B

ROE

D/E

DIV. YIELD

ROCK IND S&P

11.16 10.00 33.33

1.25 2.45 4.73

11.95 39.40 13.88

0.69 D/E 1.35

0.67 0.34 1.62

Finance.Yahoo.com. 5/29/2005

21

Verisign, Inc.

Versign was incorporated in Delaware in 1995 and went public in 1998. The company was initially started as an Internet database directory. It is listed on NASDAQ, and there are approximately 250 million shares currently outstanding with a market capitalization of $7.2 billion dollars. The company has about 2500 employees.

VRSN is organized into two service-based lines of business: Internet Services Group and Communications Services Group. The Internet Services Group consists of Security Services business and the Naming and Directory Services Group. The Security Services group is the leading provider of electronic certificates and internet-based trust services needed by websites, enterprises, and individuals, to conduct trusted and secure electronic commerce and communications. As a result of intelligent infrastructure services, VRSN enables people and businesses to find, connect, secure, and transact across today’s complex global networks. The Naming and Directory Services Group acts as the exclusive registry of domain names in the .com and .net generic top-level domains and certain country code top-level domains. VRSN also provides Internationalized Domain Name (IDN) services that enable Internet users to access websites in over 350 local language characters. The Communications Services Group provides Signal System 7 network services (an industry-standard system of protocols and procedures), intelligent database and directory services, application services, and billing and payment services, to telecommunications carriers and other users.

COMPANY ANALYSIS

A qualitative assessment exhibited Verisign’s strong customer base, platform infrastructure, and product diversification, but it also exhibited Verisign’s high competitive environment and volatile earnings. Verisign’s customer base is comprised of more than fifty Fortune 100 companies such as Microsoft, Bank of America, Visa, Hewlett-Packard, Texas Instruments, and Eastman Kodak. Its Unified Authentication platform allows for inexpensive scalability which reduces its customers’ infrastructure costs when enhancing their security platform. And although the company is primarily known as an internet database directory, it has aggressively expanded into telecommunications with recent acquisitions and alliances including Jamba! and Vonage. Jamba! is a provider of ring-tone downloads for mobile users in Europe, multi-media messaging services (MMS) which allows subscribers and service providers to distribute content via electronic

devices. Vonage is a provider of Voice over Internet Protocol (VoIP) which offers telephone access over the internet to the United States, United Kingdom, and Canada.

VALUATION AND SMIF DECISION

Despite favorable customer base, platform, and product diversification factors, Verisign is subject to a high competitive environment and volatile earnings. The Internet security arena is a high growth segment with a low cost of entry; hence, many smaller companies are vying for a share of VRSN’s lucrative market. Moreover, some companies prefer to develop in-house security systems to protect and maintain control of sensitive information. Due to this highly competitive environment and the threat of new technology, VRSN has been incurring increasing research and development and marketing costs to maintain its market position. The amalgamation of these factors resulted in negative earnings for Verisign which complicated valuation.

After analysis and presentation the management team decided not to invest in this company due to negative earnings over the past four years, and expected future earnings volatility. Negative earnings complicated evaluation on a comparative basis, and expected future earnings volatility complicated future growth determination. Based on these factors company’s intrinsic value was difficult to assess, and the decision was made to forgo investment in Verisign.

VRSN QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Technology

Internet Software & Services

8.3B

P/E:

P/B

ROE

D/E

DIV. YIELD

VRSN IND S&P

36.23 58.80 33.33

4.55 9.18 4.73

13.92 6.20 13.88

0.00 N/A 1.35

0.00 N/A 1.62

Finance.Yahoo.com. 5/29/2005

22

World Fuel Services Corp.

World Fuel Services Co. markets fuel and related services to marine and aviation customers. In the marine fuel services segment, it procures fuel for customers, assists in cost control via price hedging, facilitates claims management, brokers fuel purchases, transports fuel, and subcontracts fueling vessels for its customers. In the aviation fuel services segment, it provides fuel management, assists in price risk management, delivers fuel for storage, issues weather reports and provides ground handling for fuel.20

COMPANY ANALYSIS

World Fuel Services was analyzed because it had a unique niche, a global presence, and good expected future growth. It holds 15 percent of the world marine service market and 3 percent of the world aviation services market.21 INT provides fuel management for major airlines like Jet Blue and America West Airlines. World Fuels’ service of providing fuel price hedging for customers in a period when oil prices were expected to rise was viewed as perfect positioning. In addition, World Fuel’s competitive advantage resides with its IT system, for it facilitates the collection of global data and global fuel trading. World Fuel’s IT system also drives revenue in the aviation services by providing weather reports and flight plans for customers.

A competitive environment analysis was conducted to assess World Fuel’s prospects. The company faces competition in the aviation services arena from Mercury Air Group, and it faces competition from oil companies which attempt to market directly to consumers. But World Fuel’s broad focus allows customers to take advantage of services across air-water without utilizing a different company. It also offers credit to transporters that oil companies viewed as too risky. In addition to credit services, World Fuel’s global infrastructure and IT resources decrease the threat of competitor entry. Thus, after reviewing all qualitative information, the management team continued with the next step in analysis.

FUNDAMENTALS

World Fuel Services, at the time of analysis, had more than doubled its sales from the previous year, and over a four-year span the average earnings growth was 39 percent. The company was taking advantage of financial leverage by increasing, the Debt-to-Equity ratio from 1.29 in 2000 to

2.78 in 2004. In addition over the same time period Days-Sales-Outstanding was reduced by 11 days to 32; Basic-Earning Power increased by 51 percent, and Return-on-Equity increased by 57 percent.22 The fundamentals of the company were strong, and the management team proceeded to value the company.

VALUATION AND SMIF DECISION

World Fuel Services was valued using the Free Cash Flow to Equity method; hence, only earnings after normal capital expenditures were considered for the valuation. Data points for the last four years ending in 2004 were used; then, estimated growth rates were applied for four additional years, and a terminal value was added. The growth rate applied to earnings was calculated by averaging the earnings growth from 2000 to 2004 excluding growth for 2003. The 2003 growth was not included, for it was 121 percent, which was considered abnormal. All forecasted data points were then discounted back by the company’s Weighted Average Cost of Capital to year-end 2005. The calculated intrinsic value for the firm was $27.81 per share. The price for the equity at the time of observation was $27.96, thus fairly valued. In all, the management team abstained from purchasing World Fuel Services due to market overvaluation apparent from the FCFE method.

As of April 29, the last day of our holding period, INT closed at $25 a share. Had SMIF purchased this equity, it would have incurred a loss of 10.60 percent, excluding commissions.

INT QUICK LOOK

SECTOR:

INDUSTRY:

MARKET CAP:

Services

Basic Materials Wholesale

616.3M

P/E:

P/B

ROE

D/E

DIV. YIELD

INT IND S&P

21.00 N/A 33.33

3.16 2.90 4.73

17.20 10.90 13.88

0.46 N/A 1.35

0.00 0.49 1.62

Finance.Yahoo.com. 5/29/2005

23

Performance is detailed on a quarterly basis. Although the third quarter officially starts on July 1, 2004, the management team received the funds on August 31, 2004. Accordingly, the benchmark performance period accounts only for the time span of 2004-2005 SMIF holding period. The other quarters follow industry standards.

On August 31, 2004, the incoming management team was handed the reins of the SMIF portfolio. The SMIF team began the management process with the development of its investment philosophy, while simultaneously actively managing $100,000 virtual portfolio under the supervision of OCSIMSF. For the remainder of the third and fourth quarters, in addition to the development of its investment philosophy, the management team analyzed all the major economic indicators and examined the prospects of all the sectors and industries, and developed their forecasts based on this analysis. During this analysis period, the management team held the funds in Smith Barney Bank Deposit Program (SBBDP). Unfortunately, while the funds were held in cash equivalents, most of the major indices had exceptional performance during this period, which negatively affected the comparison to SMIF benchmarks, as can be seen in Exhibits 3 and 4.

The first major task for the first quarter of 2005 was sensitivity analysis of potential fixed income investments. Based on the results of this analysis, the management team decided to strategically allocate the fixed income portion of the portfolio into SBBDP, which at the time of analysis, had an expected annualized return of 1.75%. The most profitable alternative fixed-income investment prospect, on the contrary, had an expected annualized return of

0.54%. Viewing the implications of the decision in retrospect, the SBBDP returned about 2.00%, annualized, while the best performer from the available inventory of prospective fixed-income investments returned -3.36%, annualized. Similarly, an appropriate benchmark for our fixed-income performance is the Lehman 1-3 year treasury iShares, which yielded an annualized return of only 1.47% over the holding period.

The active management of the equity portion of the portfolio became the major focus of our activities near the end of the first quarter of 2005. A number of equities were considered for purchase during this period, although the SMIF portfolio managers recommended against investment in many of them. A major area of concern was the increased amount of uncertainty surrounding the small-cap segment of the market during the investment period. Additional areas of concern included oil prices, which continued to soar, and a rash of negative earnings surprises on Wall Street, which jointly contributed to poor performance in many of the major indices and created a negative environment for investment.

Nonetheless, at its point of maximum investment, on April 6, 2005, the portfolio held two positions which together comprised 21.41% of the total portfolio (transportation sector, 9.98%, and consumer cyclical sector, 11.43%), while the remaining 78.59% continued to be strategically held in the SBBDP. During the first and second quarters of 2005, the portfolio’s performance outpaced most of the major equity indices, as can be seen in Exhibits 5 and 6.

Performance

2004 2005 3rd quarter 4th quarter 1st quarter 2nd quarter

Beginning Balance $ 47,511.50

$ 47,554.78

$ 47,722.63

$ 43,026.61

Interest Earned $ 43.28

$ 167.85

$ 228.53

$ 79.01

Purchases $ - - $ (4,924.55)

$ (5,530.40)

Sales $ - - - $ 9,280.82

Ending Balance $ 47,554.78

$ 47,722.63

$ 43,026.61

$ 46,856.04

Exhibit 1. Quaterly summary of Activities

24

Performance

Date Debit Credit

Opening Balance June 28, 2004 $ 47,431.60

Interest Payment July 9, 2004 $ 22.52

Interest Payment August 13, 2004 $ 35.33

Beginning Balance August 30, 2004

$ 47,511.50

Interest Payment September 10, 2004 $ 12.25

Ending Balance September 26, 2004 $ 47,523.75

Opening Balance September 27, 2004 $ 47,523.75

Interest Payment October 8, 2004 $ 42.85

Interest Payment November 12, 2004 $ 56.11

Interest Payment December 10, 2004 $ 54.09

Interest Payment December 31, 2004 $ 45.83

Ending Balance December 31, 2004 $ 47,722.63

Opening Balance January 1, 2005 $ 47,722.63

Interest Payment January 14, 2005 $ 34.35

Interest Payment February 11, 2005 $ 65.67

Interest Payment March 11, 2005 $ 73.85

Ending Balance March 27, 2005 $ 47,896.50

Opening Balance March 28, 2005 $ 47,896.50

KNX March 30, 2005 $ 4,924.55

GIL April 6, 2005 $ 5,530.40

Interest Payment April 8, 2005 $ 79.26

KNX April 12, 2005 $ 4,290.21

GIL April 29, 2005 $ 4,990.61

Accrued Interest April 30, 2005 $ 54.41

Ending Balance $ 46,856.04

Exhibit 2. Monthly summary of activities

25

Performance

SMIF vs. Benchmark Third Quarter 2004

0.08%

2.88%

0.94%

5.19%

-0.92%

3.20%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

SMIF Portfolio S&P 400 S&P 500 S&P 600 DOW NASDAQ

Percentage Change

SMIF vs. Benchmark Fourth Quarter 2004

0.37%

11.82%

8.73%

12.76%

6.97%

14.69%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

SMIF Portfolio S&P 400 S&P 500 S&P 600 DOW NASDAQ

Percentage Change

Exhibit 3. Third quarter 2004 performance

Exhibit 4. Fourth quarter 2004 performance

26

SMIF vs. Benchmark Second Quarter 2005

-2.30%

-3.95%

-2.01%

-5.66%

-2.96%

-3.88%

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%SMIF Portfolio S&P 400 S&P 500 S&P 600 DOW NASDAQ

Percentage Change

SMIF vs. Benchmark First Quarter 2005

0.56%

-0.68%

-7.07%

-2.29% -2.59%

-8.10%-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%SMIF Portfolio S&P 400 S&P 500 S&P 600 DOW NASDAQ

Percentage Change

Performance

Exhibit 5. First quarter 2005 performance

Exhibit 6. Second quarter 2005 performance

27

The classroom environment typically provides students with all of the variables needed to complete an assigned task. However, the real world is seldom this organized and structured. In the field of investments, it can be especially challenging to adjust from the classroom to real-world application. SMIF has provided us with a unique opportunity to manage multiple portfolios, network with industry experts, present findings to various professional panels, work as a team, and learn by doing.

This year’s SMIF class quickly realized the importance of time management and teamwork. We were presented with unique and stimulating opportunities such as, managing the existing OCSIMSF portfolio, applying for the 2005 OCSIMSF Request for Proposal, and constructing and managing the SMIF portfolio. We learned to balance these tasks with other course work, jobs and personal obligations. Approximately 80 percent of the coursework was completed outside of the classroom, requiring

complete dedication to the program by all students. In order to be more efficient, the SMIF class was divided into teams. Each member learned to take on different roles to create synergy within and among the groups, enhancing our productivity. The implementation of a rotating CEO position also improved our productivity, as well as encouraged leadership skills.

Throughout the year we learned and applied a variety of technical and analytical skills in searching for appropriate holdings for the portfolio. We developed enhanced valuation techniques, which included conducting in-depth analytical research to value a firm both qualitatively and quantitatively, and made decisions based upon the results. MS Excel was utilized in constructing; Discounted Cash Flow to Equity, Comparative Analysis, Arbitrage Pricing Theory, and Expected Return financial models. This differs from other classes in that we had to make our own assumptions based upon the data available and filter out the pertinent information. One of the most beneficial tools we used to locate and analyze this data was the Bloomberg professional service, which is the pre-eminent industry-standard electronic resource for the investment profession. We were also able to attend Bloomberg seminars and obtain program certification, which will significantly augment our career prospects.

The actions we undertook were not without error, but we learned from our mistakes. The OSCIMSF virtual portfolio taught us the value of diversification and the consequences of holding three highly correlated securities, such as Texas instruments, Nokia, and Taiwan iShares. We learned the importance of complying with our investment policies in order to avoid larger than necessary losses due to not enforcing stop losses. Our investment decision of Gildan Activewear taught us how time is costly; we suffered a loss on Gildan due to the lag time between conducting research and purchasing the stock. Although these experiences were unpleasant, we value being able to learn from our mistakes before we enter the workplace.

The SMIF team developed advanced skills in effective delivery of oral and written presentations. Individuals and teams regularly presented information and recommended actions to the class by use of MS Power Point.

Throughout the year, we also gave multiple presentations to investment professionals. The RFP presentation to the OCSIMSF Investment Policy Board, the Portfolio Performance Report to OSCIMSF, and the SMIF Annual Report to the CSULB Investment Committee all gave SMIF members the opportunity and experience to speak in front of a panel of industry experts.

Participation in the 2004-2005 Student Managed Investment Fund at CSULB has been an amazing experience. The opportunity to carry out the investment process from beginning to end has been insightful. From the blank copy of the RFP, to the portfolio construction and management of the OCSIM and SMIF portfolios, and concluding with this annual report, we have grown exponentially in our abilities. This process incorporated a range of activities that we could never have realized from simply reading a textbook. There is no doubt that our experiences gained from SMIF have better prepared us for our future careers and differentiated us from other graduates. To quote CSULB President, Robert Maxson, “…if all you learn at a university is what you learn in the formal classroom, then you have not received the best education possible.” We are confident that due to the SMIF program, we have in fact received the best education possible.

Learning Experience

“We developed enhanced valuation techniques... to value a firm both qualitatively and quantitatively...”

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OCSIM & LASFA

HISTORY OF CFA INSTITUTE

The building of CFA institute started in Chicago in 1925. Analysts in Chicago founded the Investment Analyst Society of Chicago to encourage investment education and organize discussions with financial managers. Twelve years later Benjamin Graham and others founded the New York Society of Security Analysts (NYSSA). The first publication of this society, The Analysts Journal, started in 1945 and is currently known as the Financial Analysts Journal® (FAJ).

In 1947 financial analyst societies of New York, Chicago, Boston, and Philadelphia joined together to create the National Federation of Financial Analysts Societies (NFFAS). Similar Organizations were founded in other cities also. More societies joined NFFAS and contributed to its growth and organizational shape. In 1954 FAJ became the NFFAS major publication. The NFFAS reputation, professionalism, integrity, standards and professional competency contributed to its growth. It had more than 20 members by early 1960s.

The founding member of NYSSA, Benjamin Graham proposed rating standards for the analyst designation. The Institute of Chartered Financial Analysts (ICFA) was created in 1959 to offer a certification of competence exam. ICFA was incorporated in 1961 and by end of 1964 had created a set of three tests and incorporated a Code of Ethics into the program.

Gradually the NFFAS changed its name to the Financial Analyst Federation (FAF). The FAF and the ICFA cooperated with member societies to create sophisticated educational and training programs that consisted of publishing books, engaging in educational endeavors, and promoting conferences.

There was a major difference in membership of ICFA and FAF. ICFA was open to only CFA charter holders while FAF was universal. Another difference was that FAF was controlled by member societies while ICFA only by its members.

Through synergy of the ICFA and the FAF a new organization was created in 1990 to control and organize both societies, the Association for Investment Management and Research® (AIMR®). Even though these organizations were united under the AIMR umbrella, they were acting as separate entities until 1999. In 2004 AIMR changed its name to CFA Institute.

CFA institute has offices in Hong Kong, London, China and USA. It has about 70,000 voting members and 131

nonvoting member societies. The board of governors consists of 20 governors that are selected by members.

LASFA

The Los Angeles Society of Financial Analysts, Inc. (LASFA) was established in 1931. LASFA is a non-profit membership organization that serves the financial community of Los Angeles. With its membership at over 1600 strong, the organization strives to have the highest ethical and investment standards. It provides access to information, expertise and personal interaction to further professional development.

It strongly promotes the value of the profession and creates opportunities for CFA® candidates. Its partnership with University of Southern California provides a review program for CFA® candidates. One of this year’s SMIF students, Xuemei (Pauline) Wei was awarded a LASFA CFA® scholarship.

LASFA conducts events such as seminars, presentations, career expositions, dinners, luncheons, and social functions for potential and experienced professionals in the financial industry. Through LASFA’s forecast dinner, annual career development exposition, and various other events, SMIF students have had opportunities to network with experienced professionals and gain more in-depth knowledge about the investment industry.

OCSIM

The Orange County Society of Investment Managers (OCSIM) was founded 22 years ago by a group of investment managers who wanted an investment society near their home. The society recognized the importance of the CFA Institute, and was admitted as an “Associated Group” with Los Angeles Society of Financial Analysts (LAFSA) in 1997. In 2000, OCSIM officially became a charter society. Since its inception the society’s mission has been to “provide a forum for investment professionals to meet one another, exchange ideas, and establish cohesion within the Orange County investment community”. OCSIM is committed to keep its members up to date with the financial world through presentations, and it emphasizes the importance of having an ethical career life.

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OCSIM & LASFA

OCSIMSF

Orange County Society of Investment Managers Scholarship Foundation (OCSIMSF) fosters and promotes the development of investment professionals within the Orange County community. Each year it awards a scholarship to a student from the Orange County area. This year it selected Anthony Mattero, a member of the student management team at CSULB.

OCSIMSF AND SMIF

Student Management Investment Fund began its involvement with the Orange County Society of Investment Managers Scholarship Foundation in the fall of 2003 by competing in the OCSIMSF first Request for Proposal competition. To participate, Student Management teams from universities serving the Orange County community were invited to submit a response to a Request for Proposal (RFP). Given that the competition was in its experimental stage, the winning students were awarded a $100,000 virtual portfolio. The 2003-2004 Student Managed Investment Fund (SMIF) team from California State University, Long Beach’s College of Business Administration was honored to be the inaugural winners of the OCSIMSF RFP Competition.

THE 2003-2004 VIRTUAL PORTFOLIO

The management of the fund transgressed a full fiscal year, which resulted in participation by two distinct management teams. The 2003-2004 SMIF team managed the portfolio until the end of the 2004 spring semester. Members of the outgoing SMIF team met in the summer to update the incoming SMIF team of the portfolio’s status. The current SMIF team officially took over the management of the virtual portfolio in the beginning of the 2004 Fall Semester.

2004-2005 RFP COMPETITION & $100,000 PORTFOLIO

In addition to managing the prior year’s portfolio, the current SMIF team also entered the 2005 RFP Competition. The management team won the RFP competition for the second consecutive year earning the honor to manage a $100,000 real money portfolio.

The portfolio was funded through donations from the OCSIM members and other financial institutions. Various events were held to help finance the fund; among them was a golf tournament at the Strawberry Farms Golf Club in Orange County on September 30, 2004. Several students from the management team volunteered to assist on the day of the tournament. The event gave the students an opportunity to network with investment managers as well as raise awareness of the SMIF program at CSULB within the Orange County community.

ANNUAL REPORT PRESENTATION

The 2004-2005 SMIF team prepared the Annual Report for the performance of the 2004 virtual portfolio. On March 10, 2005 at the Northern Trust Bank, the current SMIF team presented the final results of the 2004 virtual portfolio to the OCSIMSF board. The students experienced a real world annual report presentation.

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Meet the SMIF Team

Members are listed from left to right

Back Row: Bryan Roth, Stephen Price, Carlisa Apple, Chiheb Kallala, Andre Robin, Anthony Mattero, Phiet Doan

Middle Row: Voskan Elbakyan, Lloyd Torres, Dimanch Bou, Xuemei Wei,

Ana Wantland, Irina Kutseva, Ali Oberoi

Front Row: Steven Horvat, Ryan Willey

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Student Managers CARLISA APPLE

Carlisa Apple is completing a Bachelor of Science in Finance with a concentration in investments. She is a member of the Financial Management Association National Honor Society and Phi Kappa Phi, a multidisciplinary honor society. Carlisa has leadership experience managing personnel in various work environments, as well as, managing resources and membership issues of a non-profit organization. Ms. Apple also has a proven ability to manage small business financial accounting. Upon successful completion of the Chartered Financial Analyst (CFA ®) Level I exam, she plans to pursue a career in portfolio management. Having lived a number of years in Spain, Carlisa is fluent in Spanish.

DIMANCH BOU

Dimanch Bou is an undergraduate at California State University, Long Beach majoring in Finance, Real Estate and Law, with a concentration in Investments. He is an active member of the FMA National Honor Society. Dimanch currently is employed at Bank of America where he has been recognized for his exceptional skills in fraud detection. He plans to pursue a MBA after his CFA designation. Dimanch plans to start his career as a financial analyst, continue on to become a portfolio manager, and one day have his own investment advisory firm. He is fluent in Khmer and English.

PHIET DOAN

Vincent Phiet Doan is a National Honor Society member of the Financial Management Association. He is the Vice President of Marketing and Strategic Planning. Since joining the SMIF program, Vincent has been a continual voice for conducting higher levels of quantitative analysis. In doing so, he has not only encouraged his classmates to conduct such analysis, but he has also spent countless hours working on a variety of spreadsheet applications to facilitate their conduct of such analysis. In addition to working toward his MBA, Vincent also plans to work toward earning the Chartered Financial Analyst (CFA) charter.

VOSKAN ELBAKYAN

Voskan Elbakyan is a candidate for a Bachelor of Science in Business Administration Finance, with concentration in Investments (3.7 GPA), and a Bachelor of Arts in Economics (3.8 GPA). He has joined the University Honors program, The Golden Key honor society, Beta Gamma Sigma Honor Society, and Financial Management Association International Honor Society. He is a Financial Risk Manager and CFA® Level I candidate. After completing his undergraduate work and obtaining three years of work experience, Voskan plans to get an MBA in Finance/Investment Banking. He is fluent in Armenian, English, and Russian, and plans to use his experience in former Soviet countries.

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Student Managers STEVEN HORVAT

Steven Horvat is graduating from CSULB with a degree in Finance. He is a Peer Mentor and a Corporate Mentee in the Mentoring Business Program. He is also a member of the Leadership Academy. While attending college, he has been working as a web designer and a freight forwarding agent. He is also a Chartered Financial Analyst (CFA®) Level I candidate and plans to pursue a career through the Financial Management Program at General Electric.

CHIHEB KALLALA

Chiheb Kallala is a MBA honors student, in Finance/Investment from California State University, Long Beach. After graduating in May 2005, Mr. Kallala will pursue a career as a financial analyst and a money manager performing valuation and managing portfolios. He is currently an intern with a private investment company working on a statistical stock price valuation and selection model. Mr. Kallala is on the dean’s list of outstanding students and is a National Honor Society member of the Financial Management Association. Presently, Mr. Kallala is preparing for his CFA® Level I exam.

IRINA KUTSEVA

Irina Kutseva is a candidate for B.S. Business Administration Finance with a specialization in Investments. Irina graduated with honors from Santa Barbara City College (SBCC) in 2001. She has been the recipient of numerous scholarships and awards including Award from Business Administration College of SBCC for the Excellence in Accounting. At CSULB, Irina became a member of the Golden Key Honor Society. The SMIF program gave Irina experience in managing a real asset portfolio. For the past four years, Irina has been working as Floor Manager at Pacific Ford Long Beach Lincoln Mercury Mazda. This job provides her with extensive experience in management, marketing, and sales.

ANTHONY MATTERO

Anthony Mattero is a student at CSULB, attaining a degree in Finance Investments. Upon graduation, he plans to pursue a career in the financial industry conducting research and valuing companies. Currently, Anthony is a mergers and acquisitions analyst at Baker Tanks, where he conducts research for acquisition targets and global expansion. Mr. Mattero is on the President’s list of outstanding students and is a member of the Financial Management Association and the Mentoring Business Program. He was also the 2005 Orange County Society of Investment Mangers Scholarship Foundation scholarship winner. After gaining industry experience, he plans to pursue a Masters Degree at the University of Southern California and obtain his CFA® designation.

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Student Managers ALI OBEROI

Ali H. Oberoi transferred from Arizona State University where he was enrolled in Business Honors College majoring in Finance and Economics. Ali then transferred to CSULB and is completing his Bachelor’s in Finance and Marketing. He is a member of the following National Honor Societies: Phi Eta Sigma, National Society of Collegiate Scholars, Gamma Beta Phi, and Golden Key. He is also an active member of the Delta Sigma Pi, a professional business fraternity. He is currently working full time at Wells Fargo Bank and is in the Top 5 in sales and referrals generated in Long Beach Coastal Division. In his spare time, he loves to play golf and swim.

STEPHEN PRICE

Stephen Price is an undergraduate Finance major with an emphasis in Investments at California State University, Long Beach. He is a member of Phi Kappa Phi Honor Society, Phi Eta Sigma National Honor Society, and Alpha Lambda Delta National Academic Honors Society. Stephen has also been nominated for the Dean’s Medal of Outstanding College of Business Administration Graduate of 2005. He has enjoyed being a peer mentor for the Learning Alliance and teaching a freshmen college course. Upon graduation, Stephen intends to purse a career in investments.

ANDRE ROBIN

Andre Robin is a candidate for Bachelor of Science in Business Administration at California State University, Long Beach. He is pursuing a triple major in Finance, Marketing, and Management with a cumulative grade point average of 3.8. After receiving his undergraduate degree, Andre will be obtaining a joint JD/MBA. Subsequent to completing his graduate degree, Mr. Robin will be using his diverse background and experience as a stepping stone to becoming a successful entrepreneur, as well as, an active community leader.

BRYAN ROTH

Bryan Roth is graduating from CSULB with a Bachelor’s Degree in Finance, Real Estate, and Law. He plans to obtain his MBA after gaining work experience in the financial field. He was given the privilege to serve as President for the CSULB Chapter of Financial Management Association. He has successfully completed The Equity and Fixed Income Bloomberg Product Certification. Bryan plans to prepare himself for the Chartered Financial Analyst (CFA ®) designation. After graduation, Bryan will pursue a career as a research analyst with the ultimate goal of becoming a portfolio manager.

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Student Managers LLOYD TORRES

Lloyd Torres is a Finance major, with a concentration in Investments at CSULB. His responsibilities within the SMIF include qualitative equity evaluation, spreadsheet equity valuation, construction of Arbitrage Pricing Theory and Expected Return financial models on potential equity positions, and development of PowerPoint presentations to communicate findings. He is a Level I candidate in the CFA® program. And he is a member of the Los Angeles Society of Financial Analysts, Financial Management Association, Association of Financial Professionals, and Institute of Management Accountants. Aside from Finance, he loves taking photographs with his old Yashica camera and developing his own black-and-white prints.

ANA WANTLAND

Ana M. Wantland is an undergraduate student at California State University, Long Beach, pursuing a Bachelor’s Degree in Finance with an emphasis in Investments. Ana is a member of Phi Kappa Phi Honor Society. Ms. Wantland is also part of the College of Business Administration’s Honors Program where she completed a disclosure project for Toyota Motor Sales, USA. Additionally, she was awarded the Latino Business Student Scholarship. Ana plans to pursue a MBA degree at the University of Southern California, and become a CFA® charter holder. She is fluent in Spanish and English.

XUEMEI WEI

Xuemei Wei is a graduating MBA student majoring in Finance/Investments and Accountancy. She is the Vice President of CSULB MBA Association, a member of Beta Gamma Sigma and a National Honor Society member of Financial Management Association. Ms. Wei is a Chartered Financial Analyst (CFA®) Level I candidate and was awarded a scholarship from the Los Angeles Society of Financial Analysts. Xuemei has experience in international business and is fluent in Chinese, English, and nearly fluent in French. She is pursuing a career in financial management and is particularly interested in Asian and U.S. markets.

RYAN WILLEY

Ryan S. Willey is an undergraduate Finance major with an emphasis in Investments. He is an active member of the FMA National Honor Society. After graduation, he plans to obtain his MBA from a top business school and later become a candidate for the Chartered Financial Analyst (CFA®). Ryan has a strong desire to learn more about investments and continues to gain a better understanding of portfolio management in preparation for a career in the Finance field. He has been investing in securities for himself for five years and along the way has gained valuable experiences.

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Acknowledgements

This annual report summarizes the accomplishments of SMIF throughout the academic year. SMIF would not have been able to achieve this without the tremendous contributions and inputs of several people who helped us along the way.

The 2004-2005 SMIF managers would like to extend our deepest gratitude to the following entities and individuals:

Fixed-Income Guest Speaker:

Mr. Doug Lopez, CFA, Vice President and Portfolio Manager, Bradford & Marzec, Inc. For taking his time to educate us and broaden our knowledge of fixed-incomes securities. His input was invaluable to our team in determining our asset allocation strategy and enhancing our understanding of fixed-income security analysis and selection.

Orange County Society of Investment Mangers Scholarship Foundation (OCSIMSF):

Mrs. Krista Zipfel, CFA, Chair of the OCSIMSF, and Principal, Advisors Solutions Group Mr. Russell Murdock, CFA, Vice Chair of the OCSIMSF, and Principal, Sea-Breeze Capital Management, LLC

Members of the OCSIMSF Investment Policy Committee For awarding the SMIF management team the honor of being OCSIMSF’s fund managers, and for their continued support and feedback regarding the investment portfolio. Their insights have truly helped us progress toward becoming future professionals of the investment community.

Orange County Society of Investment Managers:

Mr. Robert Panetti, President of OCSIM Mr. Jay Tsai, CFA, (Need to get his correct OCSIM position (Program Director, I think) & job title from Andre) Ms. Jackie Curran, Administrative Director, OCSIM

For inviting SMIF students to participate at the OCSIM Annual Forecast Dinner and providing us with greater exposure to profes-sionals in the industry.

Los Angeles Society of Financial Analysts (LAFSA): Ms. Linda Cahill, Administrator, LAFSA

Global Insight For providing their annual, quarterly, and monthly economic forecast reports. These reports were extremely beneficial in determin-ing our economic and market outlook.

CSULB IRA Board For their continued support and funding of the Bloomberg Professional Service and the LCD projector.

Bloomberg For supplying us with a great analytical tool for investment analysis and forecasts. Bloomberg enabled our team to make informed investment decisions by allowing SMIF access to current and historical information in the investment world. In addition, for pro-viding us the opportunity to gain Bloomberg Professional Certification through the training seminars.

Dr. Robert Maxson, President, CSULB

CSULB Investment Committee For overseeing and supporting the SMIF program.

Dr. Luis Calingo, Dean of the College of Business Administration (CBA)

Mr. William F. Hendry, Director of Development, CBA

CSULB Department of Finance and Law For continued support of the program..

Mr. Wes Seegers, Senior Vice President, Salomon Smith Barney For being our portfolio advisor and securities broker and for executing all transactions related to our portfolio. His continuous efforts allowed SMIF daily access to fixed-income inventory lists. The access to that information was vital in developing our portfo-lio.

Special Thanks:

Finally, the 2004-2005 SMIF Team would like to express their very special thanks and deepest gratitude to the advisors of the fund, Dr. L.R. Runyon and Dr. Peter A. Ammermann for their immense support, advising, and countless hours spent on our cause. Without their priceless contribution, SMIF would not have been able to accomplish this challenging task.

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Notes

1Bureau of Economic Analysis, U.S. Department of Commerce. www.bea.doc.gov

2Graph of Federal Funds Rate. www.hsh.com/fedfundsrate.html

3The Conference Board. www.tcb-indicators.org

4Bureau of Labor Statistics, U.S. Department of Labor. http://stats.bls.gov/news.release/cpi.toc.htm.

5Effects of Oil Surge Confound Forecast. http://www.latimes.com/business/la-fi-petruno17oct17,1,7771240.column?coll=la-headlines-business. October 17, 2004

6Chemical Manufacturing Profile. http://biz.yahoo.com/ic/profile/chmmfg_1085.html.

7Value Line. www.valueline.com

8Bureau of Economic Analysis. Gross Domestic Product. http://www.bea.gov/bea/dn/dpga.pdf

9Standard & Poor’s. Industry Surveys: Electric Utilities. New York: McGraw-Hill 5/8/2004

10Economic Research. Federal Reserve Bank of St. Louis http://research.stlouisfed.org/fred2/data/HOUST.txt

11 Yahoo Finance. http://finance.yahoo.com

12Reuters. Company Profile and Snapshot. www.reuters.com

13Gildan Activewear, Inc. Gildan Annual Report, 2004.

14 Bloomberg Machine.

15Yahoo Finance. http://finance.yahoo.com

16Damodaran, Aswath. Home page. http://pages.stern.nyu.edu/~adamodar. 3/1/2005

17Yahoo Finance. http://finance.yahoo.com

18Reuters. Company Profile and Snapshot. Reuters.com

19Value Line. www.valueline.com

20Reuters. Company Profile and Snapshot. Reuters.com

21World Fuel Services. World Fuel Services Annual Report 2003. Miami: World Fuel Services, 2003.

22Freeegar.gov. SEC Filings. http://www.freeedgar.com/

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