Sunday, May 26

Kaizen Capital Management

Investment Strategy Summary

Our Investment strategy is fully client-centric and we would achieve that by active management. We aim at fulfilling it by using a distinct strategy for distinct objectives. Inflation today is the highest since the past 3 decades; to suit our client’s need to pay scholarship, we made sure that we invested in equities which has been a good inflation hedge historically. We also made our portfolio less vulnerable to volatility in the market to support withdrawals.

Investment Strategy Uniqueness

We will have 2 conflicting strategies, one with higher risk and higher volatility and the other with lower risk and lower volatility. The combination of these strategies in one portfolio won’t make our portfolio market neutral but it would cater to the client goals in an effective manner. While other teams view their portfolio from a holistic lens we perceive it by allocating a certain percentage of its value to each distinct client goal

This Graph displays how Kaizen High Potfolio performed to the relative Benchmark Index .The Kaizen High Portfolio was less Suspectible to volatility

In addition to that the kaizen high portfolio has outperformed S&P 500 since January 2022

You can see how diverse Kaizen High portfolio is and how it is spread across all sectors . The intention was to be as concentrated as possible in Financials services and Oil & Gas Business

The Portfolio composition was done with the perspective of long-term investments except for some outliers which need to be actively managed. Furthermore, we also made a priority to find companies whose Net Current Assets are more than its Market Capitalization

Portfolio analysis

Our Team was certain with sticking to companies with Large capitalization even though we realize that historically companies with small capitalization have outperformed Large Cap companies but due to our client’s consistent goal of withdrawing we made sure that our portfolio is invested in companies that are highly liquid. Despite missing out on the illiquidity premium we do have the benefit to change portfolio composition dynamically with the changes in the market. Since our investment strategy is contingent on our active management skills it would be easier to sell large-cap companies due to the high volume traded

Our team had limited options to work with and looking at the Fixed Income landscape we saw a lot more risk. Yields on corporate debt and other non-investment grade is too low and we feel that valuations are too high. The returns are subpar while the risk we assume is relatively enormous. As far as investment-grade debt is concerned we feel that treasuries are overvalued and are not a long-term sustainable option and the spread between 10 and 30-year treasuries shows that the spread is lower than usual signifying a lack of confidence in the strength of the economy in the future.. Even after imminent rate hikes, our team doesn’t recommend investing in credit or any other fixed-income instruments with the exception of some asset-backed securities. Although we would recommend investing in short-term adjustable residential REITS since they can be adjusted with rising inflation and cashflows can be dynamically adjusted. alongside that industrial warehouse space is set to do really well due to the e-commerce growth that we are seeing, the returns there have been phenomenal. We would also recommend investing in commodities especially copper and lithium to diversify in uncorrelated assets to the overall market and we also are seeing an increase in demand for these elements in the long term. Although we have a consensus that these markets have been a little frothy but it totally fits in our long-term vision

Our team has a bullish case for emerging market equities. We feel the type of returns required to have generational wealth for our client’s successors would be generated in Emerging Markets. in addition to that excluding China, there have been great emerging market returns this year but our team’s biggest investments have been in large-cap Chinese equities. We feel that the markets are discounting the Chinese government factor heavily into the prices of these stocks and we feel that Chinese equities meet our objectives for long-term investments. We also concluded that the Chinese government wouldn’t let the real estate contagion spread into the rest of its economy and the technology companies that we invested in also had stakes in renewable energy which has generated a compounded 40% annual return this year. The emerging market equities have historically outperformed Domestic equities.

Equities

Marriot

We felt investing in Marriott International would be ideal for the reopening of the economy, after cruise lines, hotel chains have been affected the most by the pandemic and the companies that have navigated are leaner, more adaptive, and competitive with debt issued at extremely low rates

During the third quarter of 2021, the company added 114 new properties (17,456 rooms) to its worldwide lodging portfolio. At the end of third-quarter 2021, Marriott’s development pipeline totaled nearly 2,769 hotels, with approximately 477,000 rooms. Nearly 206,000 rooms were under construction as well.

As of Sept 30, 2021, the company operated, franchised, and acted as a licensor of hotels as well as timeshare properties to 7,900 properties across 138 countries and territories under 30 brand names.

The aforementioned data helped us to infer that the new properties added to Marriott’s enterprise of hotels would further increase its revenue with the corresponding increase in tourism. The positive sentiment by the market is a good sign in its favor. This is reflected by the high forward P/E ratio that is projected for next year. This helps us reasonably infer that earnings are in line to catch up to its revenue in the foreseeable future.

Morgan Stanley

We felt very strongly about consumer banking and investment banking stocks due to the dealogic’s estimates about global advisory revenues and dealmaking in the upcoming years

We are also considering that the federal reserve would be on track to hike rates in 2022 considering the highest inflation this year after the last 3 decades. With our estimates of high dealmaking and market-making revenues for 2022, we felt that Morgan Stanley would be a great fit. We also believe Morgan Stanley is undervalued compared to its peers with the P/E ratio of 12 and considering relative valuation MS is the best fit.

General Motors Company

The Electric vehicle market is very promising with a high rich valuation but the markets aren’t efficiently allocating capital. General Motors have come up with an ambitious but realistic plan to produce electric vehicles only and the transition would take a few years but our team doesn’t see any of that valuation materializing soon. That is why we are concentrated in the company

Exxon Mobil Corporation

Due to the current ESG phenomenon investors are being reluctant to finance new oil drilling and what that has led to is energy companies paying the investors back instead of reinvesting since the cost of capital is too much, in the current oil market we are seeing that companies believe that they want to sell oil at these high levels rather than invest in renewables. We are witnessing that Exxon has taken a different approach, it has a diverse board after the proxy battle with an activist fund and is dedicated to not only returning cash flows to investors but it is also investing in carbon capture and other ways to reduce emissions and achieve net-zero carbon emissions. We have concluded that it is necessary to invest in oil companies due to the global oil prices and how the prices may be stickier and more permanent than the market is anticipating.

Our team believes that Nichole’s needs a portfolio with a beta of less than 1 so her fundamental goal of providing 5000$ scholarships is not susceptible to the volatile markets that we are expecting ahead due to the imminent interest rate hikes in years ahead

To cater to her two different financial needs we believe that we split her portfolio into two halves and thus 2 strategies

one where there is lower volatility and returns less correlated to the market

and over the years she can pay for the scholarship, where there are less systematic risks to her portfolio

The other half is generational wealth, in that timeframe our team believes that we can afford to invest in riskier early-stage growth companies and cyclical value companies which would compensate for higher risk premiums. Not only that we would also be getting illiquidity premiums since most of these companies are less traded

We are not using conventional strategies to make our portfolio more diversified by buying the whole benchmark index instead we are applying 2 contrarian strategies to a single portfolio that caters to the client’s 2 different goals. we feel the goal of creating a generational wealth cannot be achieved without investing in riskier equities and meanwhile, the team cannot guarantee the impact on net portfolio value since every year more than 5% of the portfolio value would be withdrawn so to cater to the clients need two conflicting needs we will have 2 conflicting strategies, one with higher risk and higher volatility and the other with lower risk and lower volatility. The combination of these strategies in one portfolio won’t make our portfolio market neutral but it would cater to the clients’ goals in an effective manner

We would like to emphasize the short-termism of the markets.

In the short-run demand and supply, popularity and sentiments set prices

markets mimic a voting machine but fundamentals overshadow that in the long term

Our team wants to actively manage due to rapid change in technology in this century

There are many innovations and inventions taking place simultaneously in various sectors AI, Biotech, Robotics .etc and in order to capitalize on that we want to have a certain level of active management to flexibly invest and we are of the view that the market we are looking at is long term deflationary and technology would be more immersive than our lives than ever before.

NOTE: This report was written by Kaizen High’s Trading and Investment society for the Wharton investment competition.

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INVESTMENT RISKS

There are risks associated with investing in securities. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.

Muhammad Abdullah (Sabir)

dabirabdullah875@gmail.com

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