d’artagnan capital fund - xavier university · dividend"yield" 2.11! 2.31!...

1 | X S E I F S e m i -‐ A n n u a l R e p o r t

D’Artagnan Capital Fund Williams College of Business Xavier University 3800 Victory Parkway Cincinnati, OH 45207-5162

Semi-Annual Report March 31, 2011 – September 30, 2011

2 | D C F A n n u a l R e p o r t

TABLE OF CONTENTS

XSEIF Fund Manager Bios………………………………………………3

XSIF BEA Board Members………………………………………………6

Semi-Annual Performance Report……………………………………8

Fund Strategy………………………………………………………………..12

Fund Officer Roles…………………………………………………………13

Economic Report…………………………………………………………..14

Sector Reports

Consumer Discretionary…………………………………….17 Consumer Staples……………………………………………..25 Energy………………………………………………………………33 Financials………………………………………………………….40 Health Care……………………………………………………….47 Industrials…………………………………………………………54 Information Technology……………………………………..63 Materials…………………………………………………………..69 Telecommunication…………………………………………...74 Utilities……………………………………………………………..80 Current Holdings as of November 17, 2011……………………….…87


XSEIF FUND MANAGERS

Ryan Alleman Ryan Alleman is a senior Finance major from the Greater Cincinnati area. Within the fund, Ryan is responsible for the Industrials sector. This past summer Ryan completed an internship in the Purchasing Department of Toyota Motor Engineering & Manufacturing of North America. Currently, Ryan serves as a student representative to the Advisory Committee of the University Planning & Resourcing Council at Xavier, as well as Student Body President.

John Barber John Barber is the Energy sector analyst, and is a senior Finance major from Springfield, KY. John is a former intern of Fort Washington Investment Advisors in Cincinnati, and currently works part-time at the O'Connor Sports Center at Xavier. He is also a board member of Xavier's Alternative Breaks program, the 4pm Student Mass Coordinator, a volunteer mentor/tutor, and enjoys playing intramural football and basketball at Xavier. Upon graduation in May 2012, John plans to seek employment in corporate finance.

Ben Homan Ben is a senior Finance major, graduating in December. He is responsible for analyzing the Telecommunications and Information Technology sectors. When not at school, he enjoys going to the gym and reading. After graduation, Ben is seeking a financial analyst position.

Nicholas Laborie Nicolas Laborie is currently a second year utilities fund manager for the D’Artagnan Capital Fund. He also works at Toyota Engineering & Manufacturing North America in the Risk Management Group. He will be graduating in May of 2012 and will go full-time with Toyota in June.

Steven Latos Steve Latos is a Senior Finance Major/Information Technology minor from the Northwest suburbs of Chicago, IL. As a member of the investment fund, Steve is one of two analysts in the Consumer Staples sector. Currently, he is an intern for the River Hills Group at Merrill Lynch Wealth Management after previously working as an intern for American Internet Services Network in the summer of 2010. Out of the classroom, Steve is the Vice President of the Xavier Club Golf team and a starting pitcher on the Xavier Club Baseball team. Upon graduation, Steve is planning to start his career in investment banking.


Ben Lawrence

Ben is a senior Finance major from Indianapolis who oversees the Industrials sector. Ben is currently the Chief Executive Officer for the D'Artagnan Capital Fund for the fall semester. During the school year, he runs Track and Field while holding a part-time internship at Valuation Research Corporation. Upon graduation, Ben will begin his career at Stout, Risiuous, Ross as an analyst in their valuation and financial opinion group.

J. Curtis May

J. Curtis May is a senior Finance Major from Akron, Ohio. He oversees the information technology sector for the Investment Fund. Curtis is currently interning with United Bank of Switzerland and is also employed by the Applied Finance Department at Xavier as a Bloomberg Research Analyst. Aside from the Fund, Curtis is the Treasurer for the Xavier University Men’s Club Volleyball team, and is also a practice player for the Xavier Women’s basketball team.

Jaclyn O’Driscoll Jaclyn is a senior Finance major with an Economics minor, who is from Los Angeles, CA. She currently oversees the Healthcare sector. Jaclyn is the senior resident assistant in Buenger Residence hall, and over the summer she interned at Merrill Lynch. She has previously interned at Fifth Third in their Investment Advisors division as well. Last year she was Vice President of the Financial Management Association and a member of the University Board for Scholarships and Financial Aid.

Mathew Pastorcic Matt Pastorcic is a junior Finance and Accounting major from Cleveland, Ohio. Matt is the Consumer Discretionary Sector Analyst. Currently at Xavier, Matt is involved with his professional business fraternity, Delta Sigma Pi and the Financial Management Association. Last semester, he gained his first internship experience as a member of the accounting department at Senco Brands. He plans on continuing to gain real-world experience next semester when he will work as an audit intern at Deloitte. An interesting fact about him is that his is fluent in Croatian.

Steven Rosenbaum Steve Rosenbaum is a senior Finance Major/Information Technology Minor. From Oak Lawn, Illinois, Steve is a Consumer Staple Analyst for the Investment Fund. Steve currently interns for Raymond James Financial Services as the branch "client care specialist." He is also the President of the Xavier Club Baseball team and a member of the Financial Management Association. In his free time, Steve enjoys golfing, playing softball, watching the Chicago White Sox, Green Bay Packers, and Xavier Basketball.


Joseph Simoneau Joe Simoneau is a junior Finance major with a minor in economics. He is from Trumbull, Connecticut and currently manages the financial sector of the investment fund. He interned over the past summer with a finance and accounting firm back home and plans on interning in New York City in the summer of 2012. He is a member of the Xavier S.T.A.R. club and helps write for the Xavier Economics Magazine. In his free time, Joe likes to play soccer and watch football.

Daniel Strong Dan Strong is a senior Finance major from Midland, MI. He is the Materials sector analyst for the investment fund. Dan enjoys watching Xavier basketball and playing intramural floor hockey. Upon graduation in May 2012 Dan plans to pursue a career in corporate finance.

Phillip Weickert Phillip Weickert is currently a senior Finance major at Xavier University. He is one of the Information Technology Sector Analyst. When he is not working on his finance coursework, Phillip enjoys playing Basketball. He also is involved with many intramural sports, the FMA and Beta Alpha Psi. In addition to his Finance major he is majoring in Accounting. He has been successful in two internships in Public Accounting, where he worked busy season at Deloitte & Touché, LLP as well as Grant Thornton, LLP.

Michael Krzan Michael Krzan is a Junior pursuing a degree in Finance and Accounting. As a member of the fund, Michael oversees the information technology sector. Originally from Columbus, he returned to his hometown over the summer to complete an internship within the Credit Risk Management arm of PNC Financial Services. Currently, Michael is the President of the Financial Management Association and an Analyst Intern with Merrill Lynch Wealth Management. Mike is scheduled to sit for the first level of the CFA in December. In his leisure time, Michael enjoys playing competitive sports. He is the captain of his Intramural Flag Football team and a member of the Xavier Boxing Club.

Joe Bauer Joe Bauer is currently a junior Finance major with a Mathematics minor at Xavier University. He is currently the materials sector analyst. Originally from Rochester, NY, Joe prides himself on his loyalty, especially to Western New York Professional Sports teams, regardless of their levels of success. When he is not working on his finance coursework, Joe enjoys playing Ice Hockey. He is currently the treasurer of the Xavier Club Ice Hockey Team, and also serves as the team captain. In addition, he serves on the Xavier Club Sports Council Peer Judicial Review Board.


XAVIER FINANCE BOARD OF EXECUTIVE ADVISORS November 2011

Maribeth Amyot Vice President-Financial Administration Xavier University Mike Andriole Senior Director Emerging Markets Business Development Eli Lilly & Company Rebecca Hochstetler Associate Director, Finance North America Fabric Care Financial Analysis The Procter & Gamble Company J. Hunter Brown Watson Wilkins & Brown LLC Jim Brugger Director, Cash Management Macy’s Inc. John E. Callahan Chicago Board of Trade Thomas M. Cooney President Cooney, Faulkner & Stevens, LLC William Effler Senior Vice President American Money Management James Eglseder Investor Relations Manager Fifth Third Bank J. Douglas Gerstle Assistant Treasurer, Global Treasury Procter & Gamble Brian Gilmartin Portfolio Manager Trinity Asset Management

George A. Haddad First Vice President-Wealth Management Advisor Merrill Lynch Tami Hendrickson Vice President, Treasurer Federal Home Loan Bank of Cincinnati Bill Hogan Senior Vice President – Investments American Money Management John P. Horan Vice President Merrill Lynch R. Bryan Kroeger Senior Vice President-Middle Market Lending U.S. Bank, N.A. Thomas Lieser Vice President – Investments UBS Financial Services Matthew D. McCormick Vice President, Principal & Portfolio Manager Bahl & Gaynor Investment Counsel Nick C. Reilly Portfolio Manager and Principal Horan Capital Advisors Kimberly Renners Director of Wealth Management OJM Group Christopher M. Rowane, CFA Senior Vice President & Senior Portfolio Manager Huntington Financial Advisors


James D. Schade Senior Vice President Merrill Lynch Dora J. Vorherr Director of Finance Corporate Research and Development The Procter & Gamble Company Edward N. Waldvogel Vice President – Capital Management The Kroger Company Kevin P. Whelan, CFA Vice President and Portfolio Manager Opus Capital Management James Wilhelm, Jr. Senior Portfolio Manager Fort Washington Investment Advisors, Inc Rebecca S. Wood Managing Principal Fund Evaluation Group, LLC Patrick Sledz Financial Advisor Merrill Lynch Special Advisor to D’Artagnan Capital Fund


SEMI-‐ANNUAL PERFORMANCE REPORT By: Steven Rosenbaum and Matthew Pastorcic Summary Statistics: The above chart shows statistics for the D’Artagnan Capital Fund (DCF) from the period of March 31st, 2011 – September 30th, 2011. The DCF returned a total gross return of -12.49%, which is above the benchmark’s return of -13.78%. Given our exposure to total risk as measured by the Sharpe Ratio and M squared, we outperformed the S&P500. Given our exposure to solely systematic risk as measured by the Treynor Ratio and Alpha, we also outperformed the benchmark. Our average beta during the 6 month period is 1.07, making us slightly more volatile to changes in the overall market. Although the markets have done poorly and our beta was higher than the overall market, the DCF still slightly outperformed the benchmark during this time.

Statistic DCF S&P 500

Price/Earnings T12M 13.64 11.90

EV/EBITDA T12M 8.40 8.57

Dividend Yield 2.11 2.31

Expense Ratio .250% 6 Month Turnover 15.8%

The above chart depicts common valuation ratios for both DCF and the S&P 500. Our trailing twelve month P/E was slightly higher than our benchmark, while our trailing twelve month EV/EBITDA and Dividend Yield were slightly below our benchmark. Although these ratios serve their purpose as comparison measures, the DCF is an opportunities fund and invests in undervalued large cap equities and not in an asset with any particular valuation ratio.

Statistic DCF S&P 500

Total Return Gross: -‐12.49% Net: -‐12.74% Gross: -‐13.78%

Sharpe Ratio -‐0.086 -‐0.102

Treynor Ratio -‐0.125 -‐0.146

Beta 1.07

6 Month M² 230 BP 6 Month Alpha 240 BP


DCF Investment Growth: The above graph illustrates the investment growth of the DCF (measured in blue) and the IVV Index (measured in red), which is a common ETF used to measure our S&P500 benchmark. Both saw gains in the spring months and sustained heavy losses in the volatile and turbulent summer months. Our DCF did slightly outperform the benchmark during this time.

Return Attribution:

Sector

Relative Weight to Benchmark

Asset Allocation Return

Security Selection Return

Total Excess Return

Information Technology + + + + Consumer Staples -‐ -‐ -‐ -‐

Health Care -‐ -‐ -‐ -‐ Industrials + + -‐ -‐ Energy + + + +

Financials + -‐ + + Utilities + + -‐ -‐ Materials -‐ + -‐ -‐

Telecommunication Services + + + + Consumer Discretionary -‐ -‐ -‐ -‐

Cash + Total

-‐ + +

Excess Return Attribution

-‐0.28% 1.57%


The above charts illustrate the amount of the DCF’s excess return over the S&P500 benchmark that is caused from asset allocation and security selection. As an opportunities fund, our strategy is to place money in securities with the largest mispricing, not in any particular sector or industry. The DCF’s returns hold true to its strategy with 1.57% of its excess return coming from security selection.

Style Analysis:

Style Analysis

Sector Portfolio Weights

Russell 1000 Value Index 46.28% Russell 1000 Growth

Index 53.72%

The above chart illustrates how DCF’s returns compare with the Russell 1000 Value Index and the Russell 1000 Growth Index. As an opportunities fund, it is irrelevant whether our portfolio is composed of value or growth stocks. With that said, a slight majority of the DCF’s securities reflect those of growth companies.


Individual Performance and Top Holdings:

Top Holdings Portfolio Weight 1) Visa Inc. 6.38% 2) Apple Inc. 6.07% 3) McDonald's Corp. 4.89% 4) Illinois Tool Works Inc. 4.34% 5) Cognizant Tech 4.24%

The above charts illustrate DCF’s Best and Worst Performers from the 6 month period ending September 30, 2011. Notice that 3 of our 5 best performers are from the Information Technology Sector and they also hold a large weight in the portfolio. The Information Technology Sector is also most responsible for our excess asset return attribution. Worst Performers include Peabody Energy and Alcoa, neither being a top holding in the portfolio.

Sector Weightings: The above chart illustrates the each sector’s relative weight in our portfolio compared to its weight in the S&P 500 benchmark. Overweight sectors include Information Technology and Telecommunications, both of which have outperformed during the period.

Best Performers Return 1) Visa Inc. 15.92% 2) McDonald's Corp. 13.83% 3) Progress Energy 13.61% 4) Apple Inc. 10.67% 5) Intel Corp. 10.07%

Worst Performers Return 1) Peabody Energy Corp. -‐53.26% 2) Alcoa Inc. -‐45.01% 3) General Motors Co. -‐37.74% 4) Express Scripts Inc. -‐34.00% 5) Aflac Inc. -‐33.79%


Xavier University D’Artagnan Capital Fund

Strategy Statement

The D’Artagnan Capital Fund is an opportunities fund which seeks to position itself in undervalued stocks in the marketplace utilizing a bottom-up approach. Our analysts extensively research company financials, management, and industry competitors in formulating financial valuation models which lead to investment decisions. Our goal as a fund is to continuously outperform our benchmark – the S&P 500 – on a risk-adjusted return basis while remaining compliant in accordance with our prospectus.


Xavier University D’Artagnan Capital Fund

Officer Positions

Chief Executive Officer

Student and staff appointed position at the beginning of each semester. This individual is in charge for leading the operations as well as giving oversight to the rest of the fund per strategic objectives. Also responsible for updating board members and other key individuals on performance reporting and current initiatives within the fund, as well as act as a contact between these individuals and other fund members.

Chief Investment Officer

A monthly rotated position which is in charge for all the investing-related decisions as well as leading class discussions per each meeting. This individual initiates trade requests which the fund analysts and managers approve upon, and acts as a liaison between the course professor and fund members in each transaction. Also leads class discussions as well as manages day-to-day discussion objectives.

Compliance Officer

A monthly rotated position which is in charge of making sure current fund holdings align with prospectus guidelines and that the fund never falls out of compliance. Updates fund members each meeting on current state of fund and areas of concern in terms of compliance, as well as gives trading oversight to each transaction and how it will effect overall compliance.

Economist

A monthly rotated position which is in charge of keeping up with current market and economic trends as well as updating fund members on the current happenings. This individual gives a brief overview of current and relevant economic events at the beginning of each fund meeting, and is responsible for having a broad knowledge of how these economic activities effect current fund positions.


ECONOMIC OUTLOOK By Ryan Alleman & Joe Simoneau

Application of Economics to Fund Strategy As a Large Cap Equity Fund, DCF monitors relevant economic events which directly affect our fund and complement our bottom-up valuation approach. Weekly economic summaries are shared at the beginning of each class period in order to inform analysts of important economic events and data.

Because DCF applies a bottom-up strategy (prioritizing individual stock selection) we only analyze economic data which can be used in tandem with our strategy. The economic outlook, as well as the regular economic reports, is designed to provide an overview which can help guide our decision making without influencing strategic decisions of the fund.

To supplement our strategy of valuing individual stocks, DCF analysts provide both quantitative and qualitative data to support their recommendations. In order to do this effectively, analysts must consider economic conditions that will directly impact each firm or sector. These economic factors also affect our two specific valuation models; discounted cash flows and relative valuation. In calculating the discounted cash flow models, analysts consider the economic outlook in applying the inputs of the DCF models, specifically the growth rates that we assume as well the interest rates. In relative analysis, analysis look for companies with competitive advantages or disadvantages in how they are affected by macroeconomic factors, thus making them more or less attractive in comparison to their peers.

2011 Through the 3rd Quarter

1. The 3rd quarter of 2011 saw 2.5% growth in Gross Domestic Product 2. Real GDP grew 1.3% during the 2nd quarter of 2011 3. The stock market has seen continued losses throughout the first half of the year with the

Dow losing 14% and the S&P 500 losing nearly 13% 4. Business Investment in the 3rd quarter grew by 16% 5. Consumer Spending in the 3rd quarter rose by 2.4% on an annualized basis

a. This rate is twice as fast as during the first 6 months of 2011 6. The University of Michigan’s Consumer Sentiment Index rose to 60.9 in October 2011;

up from 59.4 in September, 2011 but well below the 67.7 from a year earlier. 7. A massive earthquake and tsunami hit the eastern coast of Japan in March resulting in

damage in the hundreds of billions of dollars, including major damage to Japan’s energy system

8. According to the University of Michigan, 57% of consumers currently see major economic policies unfavorably – this is the highest percentage they have recorded


a. In contrast, only 7% of U.S. consumers see current economic policies as being favorable

9. In early August, debt rating firm Standard & Poor’s downgraded U.S. debt for the first time in history

a. While no other rating agencies followed suit, the downgrade had a significant impact on equities markets and created a contentious political debate for addressing the issue

10. Nonfarm payrolls increased at a rate 3.1% in the 3rd quarter of 2011 a. The overall unemployment rate remained high in October, at 9.0%

11. Real export prices grew 0.4% in October while real import prices rose by 0.3% during the same period

12. The consumer price index continued to increase throughout 2011, beginning at 1.6% in January and climbing to 3.9% in September

United States Debt Crisis The big economic news surrounding the U.S. over the summer period was how Washington is going to deal with debt ceiling and the growing debt issue we have. During the first quarter of 2011, things were starting to point toward a stable market state, but that would change in March with the first signs of “double-dip” in the housing market. Along with this, Treasury and bond yields show signs of bad times coming and the nuclear crisis takes place in Japan. The crisis in Japan put our markets into an extremely volatile state as U.S. markets move closer to another recession. All of these events lead up to the biggest economic news of the summer, which was the Standard & Poor’s downgrade of the U.S. Treasury bond and the approaching debt ceiling. These two events put the U.S. financial system under speculation as to where our markets were going and what our government was doing to fix the state that they are in. On a positive note, the yield on Treasury bonds moved lower showing investor confidence in the U.S. financial system. Having the investor’s confidence in our markets over the rest of world’s markets is a good sign moving forward and gives hope that we can reach a stable-state economy sometime in the near future.

European Debt Crisis Throughout the summer of 2011, the debt crisis in Europe continued to gain worldwide attention, while impacting economic conditions. While European nations such as Greece, Portugal and Spain have been plagued by debt issues for several years, these issues come into greater prominence in May, becoming particularly evident in Greece. At this time, the Greek people rejected proposed austerity measures, designed to avoid default, instead taking the streets in protest. Due in large part to Greece’s inability to implement substantive austerity measures, Standard and Poor’s downgraded Greece’s public debt rating to CCC – the lowest in the world – in June. Despite widespread protests, the Greek parliament did approve a fourth round of austerity measures over the summer. These additional austerity measures resulted in


several tax increases, as well as the adoption of a plan from the International Monetary Fund which would write-off Greek debt by 50%. This proposed plan remains unpopular in Greece however, resulting in the resignation of Prime Minister George Papandreou in November. At the time of this report, the crisis in Europe remains unresolved, and continues to have volatile effects on the global equity market.

International Exposure

Although DCF does restrict itself to investing largely in S&P 5OO equities, we do seek international exposure through emerging markets. This exposure allows DCF to take advantage of growth outside of the United States and Europe, particularly in nations such as Brazil, Russia, India & China. Several firms which DCF currently holds have significant footprints in these emerging markets, position themselves well for long-term growth in the global economy.

2012: A Look Ahead

After such economic turmoil both domestically and globally, the DCF has numerous issues to monitor in the near future. Given that the European debt crisis remains unresolved, it remains the biggest issue due to the close ties it has with U.S. markets. The resolution of this crisis will ultimately determine what direction investor confidence will go.

Another major issue moving forward is the politics that are surrounding our markets. Given the ongoing debate amongst politicians surrounding the U.S. economy, coming elections will prove to have a significant impact on domestic markets. With that said, the presidential election in the fall of 2012 is hailed to be the biggest economic-oriented election since the Great Depression. A major policy change could be the difference the U.S. economy needs to reach a stable state.

Furthermore, a final economic issue to be observed going forward involves U.S. GPD growth and it’s correlation to unemployment. As unemployment has remained high over the past six months, consumer sentiment has dropped to lower and lower levels. Increasing GDP growth will ultimately lower unemployment as new jobs are created and will restore consumer sentiment.

These highlighted issues are just some of the major drivers in our current economy going forward. As history has shown, new events and trends are constantly developing which can ultimately affect economies beyond the scope of reasonable forecasting. The DCF must remain observant of developing economic actions and continue to apply their effects on company analysis.


CONSUMER DISCRETIONARY By Matthew Pastorcic Sector Allocation Recommendation: Neutral/Underweight Current Sector Weight in Portfolio 7.64% Current Sector Weight in Benchmark 10.81% Benchmark Weight +- 50% 5.40%-16.21% Sector Stocks in Portfolio 2 Sector Stocks in Benchmark 77 Portfolio Sector Beta .82 Benchmark Sector Beta 1.06

Sector Summary The Consumer Discretionary Sector includes all industries that provide non-essential goods and services. Its manufacturing segment includes leisure equipment, textiles and apparel and automotive. The services segment includes media production and services, consumer retailing, and hotels and restaurants. Although there will always be specific opportunities that will outperform the sector and overall market, I recommend a neutral or slightly underweight position for the following reasons:

1. While the economy is still recovering from the 2009 recession, the recent earnings rally seems to have priced in expected gains in the sector’s securities. Because of its cyclical nature, being overweight in the sector during an upswing is ideal. Continuous above expected consumer discretionary spending needs to occur in order to capitalize on mispricing.

2. Falling unemployment will lead to increased consumer spending. 3. Price and inflation pressures on commodity costs will negatively impact consumer

spending. 4. Consumer confidence has yet to make a definitive move to the upside, showing

consumer’s mixed view of the direction of the economy. 5. Austerity measures being taken in Europe may hinder the ability of consumer

discretionary companies to sell products abroad.


Comparative Returns Consumer Discretionary Index vs. S&P 500

The S&P 500 experienced a sharp downturn in the last few months of the summer of 2011. U.S. political tensions with regard to increasing the debt ceiling, European economic woes concerning Greece’s financial stability and the civil unrest Libya are all responsible for this sudden downturn. Almost surprisingly, the consumer discretionary sector as a whole outperformed the S&P 500 during this time.

Sector Holdings Analysis

From the period of 3/31/2011 to 9/30/2011, the portfolio held 2 securities from within the Consumer Discretionary Sector: McDonald’s and General Motors, representing 64.18% and 35.82% of the sector’s weight respectively. With only two securities representing the Consumer Discretionary Sector in the overall portfolio, the sector strategy is true to the objective of an opportunities fund, which is to put money in the best opportunities. Each of these securities was chosen based on their standing within their industry and their opportunity to outperform the market. Below is a breakdown of the sector weightings.


McDonald’s Corporation (MCD) Price: $87.82 Shares: 700 % of Portfolio: 4.90% McDonald’s Corp. operates or franchises its nearly 33,000 fast-food restaurants in the global restaurant industry. Roughly 80% of these restaurants are operated by franchisees, with the remainder under the control of the company. Roughly 70% of McDonald’s 24 billion in sales were derived internationally and the remaining 30% here in the United States.

The reason for holding McDonald’s is because the analyst believes investors haven’t realized that it’s operating structure, changing product mix and international growth places it in a position to outperform in the restaurant industry. McDonald’s operating structure, characterized by its ability to generate income from both its operated and franchised restaurants gives it the ability to generate consistent revenue from both customer demand and franchise operations. It plans to remodel 4,000-5,000 stores in the next 4 to 5 years and continue to add unique products such as their McCafe drinks in its efforts to increase sales. China is a key market for McDonald’s long-term growth. McDonald’s continues to add new locations in China in its attempt to recapture market share from YUM brands.

General Motors Company (GM)

Price: $20.18 Shares: 1700 % of Portfolio: 2.74% General Motors Company is a global automotive company. It develops, manufactures and markets automobiles and parts worldwide. General Motors is the nation’s largest automobile manufacturer; sales represented nearly 20% of U.S. car and truck market in 2010. Including strategic partnerships, GM manufactures vehicles in over 30 countries, with sales in over 120 nations. Foreign operations accounted for about 74% of 2010 sales.

The investing strategy behind General Motors is the analyst’s belief that the benefit the company will receive from having leading market shares in developing economies, advantageous joint ventures and securing a satisfied workforce is greater than what is priced at the current valuation. General Motors strong presence in the international auto industry has it poised to capitalize on the growth of developing economies. General Motors has the number one market share in China, representing almost 10% of the country’s total auto sales and the number one market share in South America, with 19% of the continent’s auto sales. Along with a strong international presence, GM’s recent joint venture with the Shanghai Automotive Industry Corporation in order to develop new fuel efficient technology may lead China to lax strict import regulations and allow GM access to profits from China’s large population. Given the U.S. auto industry is highly unionize and this doesn’t look like it will change in the near term, GM’s recent favorable contract extension with the United Auto Workers Union (UAW) places it in a competitive position. This 4 year contract includes $5,000 year-end bonuses to all employees, while only increasing labor costs 1% annually. A possessing a satisfied and skilled labor force in uncertain economic times is a huge asset.


Changes in Sector Holdings

As of November 17th, there have been no changes to the holdings as described from March 31st to September 30th. The Consumer Discretionary Sector holdings have been evaluated and it has been agreed that it is in the best interest of the DCF to continue to hold MCD and GM, based on their ability to generate above expected returns.

Watch List

Name Mkt Cap YTD Return Pct

Beta YTD

Rev Growth 2011

TTM P/E

TTM ROE

Dividend Yield

HOME DEPOT INC 56,924.58

6.03

0.92

2.75

16.32

19.09

2.75

LOWE'S COS INC 27,151.76

(12.26)

0.93

3.38

13.99

11.00

2.60

NEWS CORP-CL A 44,630.44

16.58

1.27

1.91

13.55

10.02

1.13

NETFLIX INC 4,726.42

(48.76)

0.88

29.48

20.46

82.02 -

WYNN RESORTS LTD 16,449.48

28.08

1.32

37.40

25.32

13.41

1.52

MARRIOTT INTERNATIONAL-CL A

10,593.34

(23.25)

1.23

7.18

28.22

25.77

1.27

FAMILY DOLLAR STORES 6,922.44

19.88

0.78

8.65

18.84

30.97

1.22

DOLLAR GENERAL CORP 13,410.63

28.01

0.67

10.50

19.34

16.21 -

The strategy of the sector through the end of the semester will be to look for value in industries that are still recovering from the 2009 recession. As the housing and entertainment industries continue to rebound, companies such as Home Depot and Wynn Resorts are in positions to capitalize. If economic uncertainty continues, companies such and Family Dollar and Dollar General should continue to beat expectations.

Screening Process

The screening process of this sector is to look for companies with the following requirements:

1. Leading market share in industry/ poised to grow in respect to competitors. 2. Having higher margins than competitors/ improving margins. 3. History of setting and meeting performance goals. 4. Undervalued Discounted Cash Flow and Relative Valuation Models.

Due to the number of companies and industries contained in the sector, the analyst begins with more of a top-down approach by looking at which industries he believes are poised to grow and outperform the rest of the sector. From there, he looks at the companies within the industry that are poised to take advantage of the growth, usually the largest 2 or 3 companies in the industry. Then he performs DCF and Relative Valuation Models to see if the stock seems undervalued. If so, he performs more in-depth qualitative analysis to confirm the original opinion.


Sector Analysis

Industry Life Cycle Position

As a whole, the industries within the Consumer Discretionary tend to be in the mature stage of their life cycle. Industries such as the restaurant, auto and media have been around for decades and appear to have saturated the domestic market. The industry maturity phase is characterized by increased competition and the lowering of overall prices. Growth from companies within the sector will be derived from growth in the global economy.

Business Cycle

The consumer discretionary sector contains companies whose business cycles are highly cyclical in nature. These companies sell products and services that are discretionary and can be added or cut depending on the consumer’s optimism. In a rapidly growing and expanding economy these companies will do exceptionally well, whereas in a troubled economy their business models will struggle.

External Factors

Government

The government’s role in the discretionary sector could impact the consumer discretionary sector’s growth based off the regulations it passes. For example, raising the debt ceiling and cutting the budget deficit by approximately $2.4 trillion over the next 10 years may inadvertently impact the discretionary spending power of the consumer. Public employee benefits, along with social programs such as social security and Medicare are likely to be cut, taking money consumers would normally spend out of their pockets.

Social

Social trends and beliefs are extremely relevant to companies in this sector as they provide goods and services that are optional to consume. The company adjusts and adopts the next popular trend will have an enormous competitive advantage, regardless to the economic climate. Former examples include Abercrombie, as it was and still is a favorite among teens and McDonald’s, whose advertising has connected with and created a relationship with children.

Foreign

The emergence of a global middle class has a great influence on companies within the consumer discretionary sector. As developing countries expand, billions of new customers are entering into the discretionary market and are targets of these companies. Consumer Discretionary companies are tailoring their goods and services to fit the needs of possible new customers. Consumers in China have begun to show significant interest in attaining luxury goods, representing a large potential market for companies like Tiffany and Nordstrom if they can adapt and adjust their products to fit demand.


Analysts Future Outlook

Major economic indicators that I feel will predict the overall performance of the Consumer Discretionary sector includes:

1. Unemployment Rate 2. Consumer Price Index 3. Consumer Confidence 4. Implementation of Austerity Measures

Unemployment Rate

Job creation in the public sector has lagged private sector growth. Government jobs have continued to be cut, while only a small amount of jobs have been added. President Obama’s proposed American Jobs Act includes reducing overall payroll taxes for 98% of businesses and eliminating payroll taxes for added workers. If this act passes, private sector employment growth could continue and the overall unemployment rate fall.

Unemployment is critical to the overall financial success of companies within the Consumer Discretionary Sector. It gives consumers more discretionary income and also lowers the overall fear in the economy, boosting consumer confidence and their willingness to may discretionary purchases, leading to higher revenues for companies within the sector. The overall strengthening of the economy, along with possible assistance from congress leads me to believe unemployment will continue to fall.

Consumer Price Index (CPI) A drawback in investing within the Consumer Discretionary Sector is the steady rise of consumer prices, as measured by the CPI. Below is a graph of the monthly CPI. CPI was at its lowest point during the 2009 recession at 2.1% and has risen steadily since to its current level of 3.9%. Inflationary pressures on commodities such as energy, food and paper will hinder overall consumer spending. Turmoil in the middle-east and the overall increase in harvesting costs are responsible for this increase. The portfolio’s current holdings in General Motors and McDonald’s are both prepared to adjust to a rise in overall prices.

One way consumers are looking to spend less on gas is by switching to more fuel efficient automobiles. After its 2010 bankruptcy, General Motors has restructured and revamped several of its brands, including selling off several of its unsuccessful brands such as Hummer and Saturn. General Motors is committed to developing better fuel efficient technology as shown both by its recent joint venture with the Shanghai Automotive Industry Corporation and by expanding its fleet. Earlier this month, General Motors introduced its all new electric car, the Spark. Other electric vehicles include the Volt, Sail, Cruze and Beat. General Motors is poised to capitalize as consumers begin favoring fuel efficient vehicles.

McDonald’s dominating presence both in the U.S. and abroad gives it the pricing power to offset some of the elevated commodity costs. Its management has an excellent track record and has been pushing to increase its internal operating efficiency to cut down on waste.


Although our holdings are prepared for the increase in commodity prices, it negatively affects the overall sector performance. Consumers will be spending more on mandatory home expenses such as heating and cooling and less on discretionary goods.

Consumer Confidence

Another threat in investing in the Consumer Discretionary Sector is the consumer confidence level. Consumer Confidence is a measure of consumer’s overall willingness to spend along with their view of the direction of the overall economy. Below is a graph depicting the U.S. consumer confidence from 2005 to September, 2011. It reached a pre-recession high of 97 and has dropped off significantly since. Consumer confidence has moved horizontally between 2009 and 2010 and then has dropped in the past summer months. The U.S. consumer confidence hasn’t made a significant move upward since moving out of the 2009 recession. Consumer’s hesitant view on the overall direction of the economy does not give a good outlook for their discretionary spending.


Austerity Implementation

Both Europe and the United States have been making attempts to cut their budget deficits. One of the biggest targets for cuts is that of hiring freezes and wage cuts, coinciding with increased taxes in many cases. Greece announced on September 21, 2011 that it will lower the threshold above which income is taxed to $6,800 annually from about $11,000. It announced cutting pensions above $1,600 a month and cutting the wages of government employees by 5%. Portugal has imposed a hiring freeze in the public sector, along with a freeze in salaries and an increase in VAT tax. Italy is currently in discussions regarding raising the retirement age in order to help cut their national debt. The United States’s recent debt ceiling agreement includes cutting the budget by an approximate $2.4 trillion over the next 10 years. The U.S. has also been slashing public sector jobs.

With many of the companies within the Consumer Discretionary Sector having operations internationally, austerity measures limiting consumer spending will have a negative effect on both consumers’ ability and willingness to spend. Both of our current holdings, General Motors and McDonald’s generate a great deal of their revenues internationally and these austerity measures may negatively impact their ability to generate sales.

Conclusion

While a steady decline in unemployment in the United States is a good sign for overall sector performance, it is tempered by rising commodity costs, mixed consumer sentiment and the implementation of global austerity measures. These facts, along with the recent rally pricing in high earnings expectations for the sector overall, are the basis for recommending a neutral or underweight sector holding in the portfolio.


CONSUMER STAPLES By Steve Latos and Steve Rosenbaum Sector Allocation Recommendation: Underweight Current Sector Weight in Portfolio 8.73% Current Sector Weight in Benchmark 11.76% Benchmark Weight ± 50% 5.88-17.63% Sector Stocks in Portfolio 4 Sector Stocks in Benchmark 41 Portfolio Sector Weighted Average Beta 0.59 Benchmark Sector Weighted Average Beta 0.67 Sector Summary The consumer staples sector includes companies whose businesses are less sensitive to economic cycles. The companies within the sector include manufacturers and distributors of food, beverage and tobacco and produce of non-durable household goods and personal products. It also includes food and drug retailing companies as well as hypermarkets and consumer super centers.

The consumer staples sector has historically had a low correlation relative the market (current weighted average beta of S&P 500 Consumer Staples firms is 0.71). This results from the make-up of the products within the sector. Due to these two facts, this sector is typically outperforms other sectors in economic downturns, and underperforms other sectors in boom periods.

The products have a low price elasticity of demand, meaning a change in prices will have a small effect on the demand for goods. Given this, a change in price can move a consumer from one product to a substitute, thus pricing in the consumer staples sector plays an important role.

Other notes:

1.) Given the defensive nature of the sector, these companies generally tend to depend less on strong growing economies.

2.) Given the increase in consumer spending and consumer sentiment, near future outlooks are brighter, as consumers will be able to move to premium brands.


3.) Consumption represents 70% of the economy, further proof of the defensive nature of the sector.

4.) Although continued economic growth will prove to be beneficial for the sector, top-line growth does not appear to be great given the mature nature of the firms within the sector.

5.) If the U.S. dollar gains strength against other currencies, a majority of companies within the sector could experience negative operating results because companies will have to pay more to sell their exports.

6.) The following chart tracks the performance of the sector through the period 04/01/2011 to 09/30/2011.

Comparative Returns Consumer Staples Index vs. S&P 500

The S&P 500 Consumer Staples Index is representative of the return of the consumer staples sector and the S&P 500 index is representative of our benchmark return. Through the period 04/01/2011 to 09/30/2011, the Consumer Staples Index outperformed the S&P. The staples sector hit its low of -5% in mid-August, while the benchmark hit its low of -15% also in mid-August. The staples sector had a positive return for the majority of the period, whereas the benchmark provided a negative return for the majority of the period.


Strengths and Weaknesses

Strengths

As mentioned above, a company that provides staple products involves the basic necessities of life, so consumers will continue to purchase these goods in stressful economic times. The point can be illustrated by the performance of the sector from March 31, 2011 through September 30, 2011. Despite a large drop in the S&P 500 in August, the 40 consumer staples firms in the S&P 500 outperformed the entire S&P 500 by 14.46%.

One of the main reasons that the sector can maintain fairly consistent sales over time is their ability to create a wide economic moat through brand recognition. For example, companies such as Wal-Mart and Proctor & Gamble are reputable firms that have been a large player in the United States economy for several decades. In other sectors, such as information technology, companies can emerge from nowhere by being the first to an innovative idea.

The consistency of cash flows to consumer staple firms can be proven by the firms’ ability to pay out dividends to shareholders. Of the 40 consumer staples firms in the S&P 500, 38 pay a dividend. The only two that do not, Dean Foods Co and Constellation Brands rank 38th and 39th, respectively in terms of market cap within the firm. The quintessential example of a dividend payer is Proctor and Gamble, who has issues a dividend for the past 121 years, increasing the dividend in each of the last 55 years.

Weakness

With increased commodity costs, companies within the Consumer Staples sector, especially those producing food, beverage, and household items, have had to find a way to offset the increased input costs. Some companies, such as Kellogg, have focused on collecting customer preference and taste information to produce a higher quality product. In addition to gathering customer data, Kellogg has developed a new marketing campaign to promote these new and improved products. Other companies, such as Pepsi, have passed costs onto customers in order to battle ever-tightening margins.

Besides higher costs due to increased commodity prices, the sector as a whole has put an emphasis on producing products for a wide demographic of people because of the volatile economic market. Procter & Gamble, for example, which produces household items such as soap and detergent, has created a lower-end soap and detergent in Gain, geared for those who are more cost sensitive. Tide, on the other hand, is a higher-end P&G product, retaining client that are less cost sensitive. By creating products for all demographic, companies within this sector are trying to retain market share and client loyalty.


Sector Holding Analysis

As of September 30, 2011, the D’Artagnan Capital Fund currently held 4 stocks in the Consumer Staples sector. These stocks are Wal-Mart Store Inc., PepsiCo Inc., Kellogg Company, and Procter and Gamble. Compared to our S&P 500 benchmark, our fund is currently underweighted in the sector. Below are brief descriptions for each of the holdings.

Wal-Mart Stores, Inc (WMT) Price: $51.90 Shares: 375 Percentage of Portfolio: 1.55% Percentage of Sector: 17.78%

View: A new development for Wal-Mart stores is their unveiling of new Wal-Mart Express stores. These stores will average approximately 15,000 square feet, compared to Wal-Mart Supercenters of over 150,000 square feet. While these stores will add to sales, the products to be offered at these stores will be consumable items with lower margins, which may lower the company’s overall EBIT margin in the long-term future.

Wal-Mart is one of the companies on our watch list, since it is nearly impossible for a store to retain such market power over an extended period of time. When market share does begin to decrease, factors such as Net Fixed Assets and Non-Cash Working Capital will impact Wal-Mart’s stock price in a negative fashion. Current Discounted Cash Flow and Relative Valuation techniques have led to our analysts believing Wal-Mart’s current intrinsic value is about $55 dollars. If that price is reached, look for the fund to sell Wal-Mart.

PepsiCo Inc (PEP) Price: $61.90 Shares: 600 Percentage of Portfolio: 2.96% Percentage of Sector: 33.93% View: PepsiCo, Inc. is a global food, snack and beverage company. In addition to producing soft drinks such as Pepsi and Mountain Dew, PepsiCo also sells Tropicana orange juice, Gatorade sports drink, and Aquafina water. Their snack business is composed primarily of Frito-Lay, the world’s number one snack maker. The 600 shares of PepsiCo held by the Fund make Pepsi the largest holding in the Consumer Staples sector.

Pepsi did not prove to have a strong of 2010 as many expected, due to an increase in commodity prices and a downturn in demand for carbonated beverages. Pepsi has responded by shifting its focus to more healthy products; the company has set a goal that 30% of its portfolio will consist of healthier products. Currently, that figure is 22%. Being


able to adapt to consumers, as well as the possibility for increased sales in overseas markets suggest a bright future for Pepsi.

Kellogg Company (K) Price: $53.19 Shares: 400 Percentage of Portfolio: 1.70% Percentage of Sector: 19.44% View: Kellogg Company is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods with their main products being: cereals, cookies, crackers, and fruit-flavored snacks among many other. As of February 25, 2011, these products were manufactured by the Company in 18 countries and marketed in more than 180 countries. Due to pressures faced from increased commodity prices, Kellogg has passed costs onto consumers to offset the additional costs of product inputs. In turn, Kellogg has paired with Epsilon, a subsidiary of Alliance Data, a leading provider of loyalty and marketing solutions, to increase Kellogg’s customer engagement. Through the partnership, Kellogg will maintain a consumer relationship management platform with which it can analyze customer tastes and preferences. With an already strong market position, and a dedication to improving its products, look for Kellogg’s sales growth to improve even in times with volatile commodity prices, eventually leading to higher profits.

Procter and Gamble (PG) Price: $63.18 Shares: 500 Percentage of Portfolio: 2.52% Percentage of Sector: 28.86% View: The Procter & Gamble Company (P&G) is focused on providing consumer packaged goods. The Company’s products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores, and neighborhood stores. The company operates through three business units: Beauty and Grooming, Health and Well-Being, and Household Care. Given P&G’s size, they gain advantages in terms of distribution, brand reach, and scale with suppliers. Throughout its history, P&G has proven to be an outstanding company that can change with the times and the markets it operates in. In turn, P&G is focusing on both higher-end and lower-end consumers.


P&G recently announced a joint venture with Powermat Ltd., the leader in wireless charging. With joint ventures, such as the Powermat case, or acquisitions such as Gillette, P&G has shown a commitment to increasing business operations. Combine P&G’s ambition to acquire new business, its market power, its historical success, and its commitment to dividends (P&G has paid a dividend for 121 consecutive years); P&G is a healthy hold.


Both CVS Caremark Corp (CVS) and Diageo Plc-Sponsored (DEO) were sold during the last half-year. Below are reasons for the sales: CVS Caremark Corp (CVS) Sell Price: $36.43 Number of Shares: 200 Sale Date: 5/10/2011 View: CVS Caremark Corporation (CVS Caremark) is a pharmacy healthcare provider in the United States. It provides pharmacy services through its pharmacy benefit management mail order and specialty pharmacy division. CVS has an alliance with Alere, LLC, which helps them offer programs covering several chronic diseases such as asthma, diabetes, congestive heart failure, and coronary artery disease. The main reason D’Artagnan Capital Fund decided to sell CVS was due to several risks that face the firm. The current economic uncertainties have led customers away from the front-end goods produced by CVS, which will put a damper on sales growth in the near future. In addition, a problem facing many consumer staple firms, rising commodity prices, will lead to lower margins. Finally, uncertainty with government regulations in the health care industry was a concern that could be avoided with other securities in the sector. Diageo PLC (DEO) Sell Price: $81.15 Shares: 200 Sale Date: 5/10/2011 View: Diageo plc (Diageo) is engaged in the drinks business with a collection of international brands with eight of the world’s top 20 brands. Given Diageo’s strong portfolio of liquor and beer, the company continues to be the leader in its industry. However, in the recent economic downturn, Diageo’s premium brands have reduced sales growth as people trend towards other, more affordable beverages.


In addition to sluggish sales growth, Diageo is facing increased pressures on its margins as a result of higher commodity prices. With Diageo’s limited growth and squeezed margins, the company will have to look for mergers and acquisitions to increase firm value. Potential Targets The following seven companies have been discussed amongst the Consumer Staples analysts as potential buys. Included are statistics for each company measuring size, risk, return, and efficiency.

Name Mkt Cap

Ret YTD Pct

Beta YTD

Rev - 1 Yr Gr:Y P/E

ROE LF

Dvd Yld

ALTRIA GROUP INC 56284.29 16.24 0.66 0.40 13.89 72.57 5.99 KIMBERLY-CLARK CORP 27312.57 14.13 0.60 3.30 14.74 31.04 4.02 MOLSON COORS BREWING 7297.25 -20.93 0.85 7.32 11.74 7.91 3.29 DIAGEO PLC-SPONSORED 52441.49 16.77 0.80 1.60 17.17 41.07 3.77 DEAN FOODS CO 1849.34 13.91 1.09 9.08 16.24 -1.47 0.00 KRAFT FOODS INC 62154.22 14.59 0.66 26.97 16.14 9.06 3.30 Average 44217.87 7.84 0.76 10.01 14.89 24.86 3.13

Sector Breakdown

Beverage

Due to increased commodity costs and no real growth in demand, companies within the beverage industry have to either pass increased input costs onto consumers or find a way to improve manufacturing efficiency. S&P staples such as PepsiCo and Coca-Cola are the main companies within the beverage industry, but global alcoholic beverage company Diageo has also faced increased pressure with its higher-end brands lagging in a volatile economic climate. Household & Personal Care Products

Because of continued economic volatility, the main focus within this industry has been the development and promotion of higher and lower end products. Companies like P&G are developing products such as Gain detergent to market to consumers with tighter budgets, while still producing Tide, its higher end detergent.

Packaged Food

Companies within this industry, such as Kellogg, H.J. Heinz, General Mills, and Kraft are all facing increased commodity prices. To offset the costs of increased commodities, these companies are focusing on marketing and client management to improve products and focus on consumer tastes and preferences in order to improve sales.


Retailing – Broadlines and Department Stores

Because of the increase in social media in today’s day and age, the retail industry is focusing on this media to drive sales growth. Nearly seventy percent of retail executives have reported increases in marketing and deals through sites such as Facebook and Twitter. A majority of these executives expect sales to grow over the next twelve months. *Source: WSJ-Study based on results of September 2011 survey of 100 retail industry executives at U.S. middle market retail companies (revenues of $25 million to $1 billion).

Retailing – Food

Given the minimal barriers to entry and strong competition from dollar stores, warehouse clubs, etc., this industry continues to be competitive. Additionally, with increased commodity costs, food prices have also increased, separating consumers into a high-end and low-end grouping.

Tobacco

Health concerns have led to a decrease in the percentage of smokers worldwide. However, with the population rising, the number of smokers worldwide has actually increased. Still, health concerns and marketing efforts will tend to generate a negative attitude towards tobacco products. Combining that with increased government taxes and regulations, and the long-term outlook for tobacco is shaky.

Analyst’s Future Outlook

Our recommendation for the Consumer Staples sector is to continue to underweight given the continued, although not robust, growth the economy is experiencing. Our fund is an opportunities fund, and while we say we expect the sector to be underweight in the future, it will ultimately be proven in our valuation models. In the discounted cash flows model, sales growth rates will not be as high as companies in other sectors that will benefit more from a better economy. The other alternative is the potential for a double-dip recession. While these are rare, sales growth would be better for staples than for in other sectors, as evident in 2008 and 2009 financial statements. Since the chance of a double-dip is small, we will look to keep the sector underweight for the foreseeable future.


ENERGY By John Barber

Sector Allocation Recommendation: Overweight Current Sector Weight in Portfolio 13.21% Current Sector Weight in Benchmark 12.29% Benchmark Weight ± 50% 6.14-18.43% Sector Stocks in Portfolio 6 Sector Stocks in Benchmark 39 Portfolio Sector Beta 1.12 Benchmark Sector Beta 1.26

Sector Summary

Since March 31, 2011, both the S&P 500 and the Energy Sector have seen losses in returns. The sector as whole has been more volatile in performance against the index, underperforming throughout the period and a steep slide in returns from summer to fall.

Comparative Returns Energy Index vs. S&P 500


Strengths and Weaknesses of the Sector

Strengths

• Relatively low variable costs

• Current lack of cost-effective alternatives to oil, gas, and coal

• Growing demand from emerging markets

Weaknesses

• High exploration and production costs

• Volatility

• Difficult to manage oversight liabilities for world-wide operations (e.g., BP)

• Political instability in the areas where oil is primarily extracted

Energy is an exciting sector characterized by volatility due to global demand shocks and supply-side uncertainties due to political instability in the areas where oil is primarily extracted. Energy companies also have large amounts of capital expenditures necessary for the exploration and extraction of oil and natural gas. Therefore, these firms have a high degree of operating leverage (high fixed costs). Thus, if one assumes the economy will emerge from its recent slow-growth lull, energy would be an advantageous asset allocation as the sector would benefit from growing energy needs that accompany economic expansion, and outperform the market. Unfortunately, as we have seen over the course of the reporting period, the sector has underperformed the benchmark in a weak overall economy.


As of September 30, 2011, the fund owned six energy stocks (BP, CVX, TOT, BTU, XOM, CHK) whose holdings represented 12.57% of the fund’s market capitalization.

DCF ENERGY HOLDINGS as of SEPTEMBER 30, 2011

Company Name Market

Capitalization

Total Revenue

(LTM) EBITDA (LTM)

EBITDA Margin (LTM) ROE

EV/EBITDA (LTM)

P/E (LTM)

Dividend Yield (%) Beta

BRITISH PETROLEUM $138.57B $361.78B 41.12B 12.96 19.72 4.06 6.07 2.89 1.04 CHEVRON CORP $211.95B $229.69B 56.31B 20.27 23.51 4.71 7.89 3.11 1.01 TOTAL SA $121.21B $222.42B 44.13B 19.96 19.52 3.72 6.97 5.75 1.16 PEABODY ENERGY CORP $11.80B $7.61B 1.91B 26.05 20.64 10.51 12.55 0.46 1.45 EXXON MOBIL CORP $376.36B $419.53B 69.76B 16.07 26.43 6.87 9.48 2.38 0.97 CHESAPEAKE ENERGY CORP $17.89B $11.95B 5.22B 49.49 12.41 6.57 18.02 1.16 1.20


British Petroleum (NYSE: BP)

Close Price (9.30.2011): $36.07 Total Shares Owned: 1140 Period Return (v. Sector): -16.70% (+7.46%) Percent of Portfolio (Sector): 3.28% (26.09%) BP p.l.c. (British Petroleum) is an international oil and gas company. Their business included providing fuel for transportation, energy for heat and light, retail services and petrochemicals products. The company focuses on two segments: Exploration and Production (9.8% of revenue for 2010), and Refining and Marketing (89.3 % of revenue for 2010). Three areas related to E & P. First, Upstream involves the actual exploration for oil and natural gas assets that are economically viable for the company and the development of these assets. Second, Midstream involves the transportation and processing of the oil and gas extracted from their assets. Lastly, Marketing and Trading involves the retail/sale side of natural gas, crude oil and petrochemical products.

Chevron Corporation (NYSE: CVX)

Close Price (9.30.2011): $92.59 Total Shares Owned: 440 Period Return (v. Sector): -12.50% (+11.66%) Percent of Portfolio (Sector): 3.25% (25.85%) Chevron Corporation (Chevron) is comprised of multiple businesses that will provide energy for the future of human progress. This includes Exploration & Production, Manufacturing, Products, Transportation, Chemicals, Mining and Technology. Chevron has major investments in the top oil and gas regions of the world such as the United States, Kazakhstan, Australia, Thailand, Angola, Nigeria and other countries. Additionally Chevron provides refining operations that are place in some of the fastest growing markets. Also they own pipeline and shipping interests which allow them to eliminate conflict with other companies. Other businesses include chemical production, mining of coal and rare earth metals, and innovative technological research will solve problems in the future.

Total SA (NYSE: TOT)

Close Price (9.30.2011): $43.87 Total Shares Owned: 600 Period Return (v. Sector): -24.61% (-0.50%) Percent of Portfolio (Sector): 2.10% (16.70%)


TOTAL S.A. is a French international oil and gas company with operations in about 130 countries. These operations are split up into four segments: Upstream, Downstream, Corporate and Chemicals. In the Upstream segment, they focus on oil and gas exploration, development and production, liquefied natural gas. In the Downstream segment, they focus on refining, marketing and the trading and shipping of oil. Outside of their basic oil and gas operations, investments in coal mining and power generations have been made. They also have part ownership in a company called Sanofi-Aventis, which is a pharmaceutical company based in Bridgewater, NJ.

Peabody Energy Corporation (NYSE: BTU)

Close Price (9.30.2011): $33.88 Total Shares Owned: 250 Period Return (v. Sector): -52.79% (-28.63%) Percent of Portfolio (Sector): 0.68% (5.37%) BTU (Peabody Energy Corp.) is the largest private-sector coal company in the world headquartered in downtown St. Louis, MO. Peabody mines and markets predominantly low sulfur coal, primarily for use by electric utilities. The company also trades coal and emission allowances. Peabody owned U.S. owned mines are in Arizona, Colorado, New Mexico, Wyoming, Illinois, and Indiana. The company also owns a minority interest in a Venezuelan mine through a joint venture.

Exxon Mobil Corporation (NYSE: XOM)

Close Price (9.30.2011): $72.63 Total Shares Owned: 300 Period Return (v. Sector): -12.60% (+11.56%) Percent of Portfolio (Sector): 1.74% (13.83%) Exxon Mobil Corporation operates petroleum and petrochemicals businesses on a worldwide basis. The company’s operations include exploration and production of oil and gas, electric power generation, and coal minerals operations. Exxon Mobil also manufactures and markets fuels, lubricants, and chemicals. Exxon enjoys the largest market capitalization of the sector and remains near the top of the S&P 500 in the same category.

Chesapeake Energy Corporation (NYSE: CHK)

Close Price (9.30.2011): $25.55 Total Shares Owned: 750


Period Return (v. Sector): -23.23% (+0.86%) Percent of Portfolio (Sector): 1.53% (12.16%) Chesapeake Energy is the second-largest producer of natural gas. Located in Oklahoma City, the company is looking for ways to discover and develop economically profitable natural gas and oil fields onshore in the U.S. Currently, Chesapeake manages positions in the Barnett, Fayetteville, Haynesville, Marcellus and Bossier natural gas shale plays and the Eagle Ford, Granite Wash, Cleveland, Tonkawa, Mississippian, Wolfcamp, Bone Spring, Avalon, Niobrara and Williston Basin liquid plays. In addition, the company vertically integrates its operations and owns midstream, compression, drilling and oilfield service assets. The CEO Aubrey McClendon has been in charge since the foundation of the company and is the largest holder of the company’s stock with about 3 million shares. Another large holder is Carl Icahn, who has acquired a 5.8% share and looks for management to limit spending.

CHANGES IN SECTOR HOLDINGS PURCHASES:

• BRITISH PETROLEUM (MAY 2011)

• CHEVRON (MAY 2011) SELLS:

• Transocean LTD (May 2011)

• Devon Energy Corp. (May 2011)

Stock Screening

The D’Artagnan Capital Fund is determined to find undervalued companies that provide opportunities within our S&P 500 universe. Therefore the issue of screening various stocks to be able to pick a small sample of companies to value is obvious. The process is as follows:

1. Initially, a relative valuation analysis is developed for each of the current holdings. To save some time, a template of relevant information is already saved within my Bloomberg Account. This template consists of the following information that I believe to be important: Last Price, Market Capitalization, Beta, P/E T12M, EPS T12M, BEst: P/E: Year, BEst: EPS F12M, EV/EBITDA T12M, EBITDA T12M, BEst EV and BEst EBITDA F12M.

2. With this information, the 20 closest companies to the holding’s market capitalization are analyzed. To see where the comparable firms lie within their industry, the average and median is calculated for each statistic.

3. Trailing PE is the first column analyzed. If a company is trading at a PE multiple 2 below the average and median, it is put that on the watch list.


4. Future PE is the second column analyzed. If a company’s predicted EPS is higher than the trailing EPS and the PE is predicted to decline, it is put that on the watch list.

5. Trailing EV/EBITDA is the third column analyzed. If a company is trading about 2 below the average and median multiple, it is put that on the watch list.

6. The last column analyzed is created by dividing BEst EV over BEst EBITDA F12M. This creates a list of future EV/EBITDA multiples. If a company is trading 2 below the average and median multiple, it is put on the watch list.

7. Before performing the DCF approach, eliminate all companies that do not fit the prospectus’s requirements of likeable to the S&P 500 in terms of marketability and capitalization.

8. Outside of this research, it is important to keep up to date on any energy stocks in the news and when each company release of earnings. It is also important to look at 1 month, 3 month and 6 month performance statistics. As an opportunities fund, checking for beaten down stocks is a great technique to start a position if the valuation model supports your decision.

Prospects

Based off screening strategy, alongside some preliminary qualitative analysis, the following represent prospects with the highest potential for this sector, sorted by preference of purchase.

Murphy Oil Company (NYSE: MUR) MUR (Murphy Oil Corp) is a worldwide oil and gas exploration and production company with refining and marketing operations in the US and UK. The company also has exploration and production activities in countries that include the US, Canada, the UK, Malaysia, and Ecuador. Murphy Oil has retail operations in the US as well. Murphy is joining with Vendgogh LLC to pilot “gas island vending” at select Murphy USA stores in Arkansas, Georgia, and North Carolina (installation set for this month).

Noble Energy, Inc (NYSE: NBL) Noble Energy, Inc. is an independent energy exploration and production company. The company explores for and produces crude oil, natural gas, and natural gas liquids. Noble Energy operates primarily in the Rocky Mountains, Mid-continent, and deepwater Gulf of Mexico areas in the US, with key international operations offshore Israel, the North Sea, and West Africa.


Sector Breakdown

Coal

Coal production is the amount of coal that is mined and sent to market. In 2010, the amount of coal produced at U.S. coal mines was 1,085.3 million short tons. Coal is mined in 26 States. Wyoming mines the most coal, followed by West Virginia, Kentucky, Pennsylvania, and Montana. Coal is the most common fuel for generating electricity in the United States. In 2010, 45% of the Country's nearly 4 trillion kilowatthours of electricity used coal as its source of energy.

Petroleum

Primarily, Petroleum is used for gasoline, diesel fuel, heating oil, and propane. Also, Petroleum can be burned to produce hot combustion gases to turn a turbine or to make steam to turn a turbine. Residual fuel oil, a product refined from crude oil, is often the petroleum product used in electric plants that use petroleum to make steam. Petroleum was used to generate just over 1% of all electricity in the United States in 2010.

Natural Gas

Natural gas, in addition to being burned to heat water for steam, can also be burned to produce hot combustion gases that pass directly through a turbine, spinning the turbine's blades to generate electricity. Gas turbines are commonly used when electricity utility usage is in high demand. In 2010, 24% of the Nation's electricity was fueled by natural gas.

Nuclear, Alternatives, & Renewables

This includes hydropower, biomass, bio-fuels (ethanol & biodiesel), wind, geothermal, and solar. There are currently no Energy stocks in the S&P 500 that operate primarily as alternative energy companies; however, some companies in the Utilities sector do capture these lines of business.


The Energy Sector is an integral part of the S&P 500. In the long-term, the companies that will survive are those that can meet consumer energy demand despite dwindling supplies of non-renewable energy. On the other hand, for the near future coal and oil are the cheapest and most efficient forms of energy. The sector is currently overweight in our portfolio which puts the D’Artagnan Capital Fund in a position to outperform our benchmark as the economy improves and the Energy Sector benefits from growing demand. Market-timing, however, has historically proved to be one of the most difficult tasks in investing; therefore, my strategy will remain at the security-selection level exploiting mispricing in the market of individual stocks.


FINANCIALS By Joseph Simoneau

Sector Allocation Recommendation: Underweight Current Sector Weight in Portfolio 11.74% Current Sector Weight in Benchmark 13.50% Benchmark Weight ± 50% 6.75-20.25% Sector Stocks in Portfolio 6 Sector Stocks in Benchmark 81 Portfolio Sector Weighted Average Beta 0.86 Benchmark Sector Weighted Average Beta 1.28

Sector Summary

Due to the performance of the overall market during the summer months, the returns have been extremely low especially in the financial sector. Our holdings in banks saw losses over the summer and insurance did not do much better. In such a instable economic time, holding a financial can be very risky. So many different aspects of the global environment attribute to how the world markets do, especially the financial market. Financials have had the worst return of any sector in the recent months, as shown in the graph above. With everything going on, including the massive government regulations being placed on these companies, the financial market is at one of its most sensitive points in recent history. Looking forward, 2012 seems to be bringing a stronger financial field and hopes for economic stability on a global basis.


Comparative Returns Financial Index vs. S&P 500


Strengths

The financial sector has been the one sector as of late that has had very little strength. There have not been many redeeming qualities surrounding financial securities these days due to the extremely volatility in those markets. One possible strength, though, could be the attention that they are getting. Because of how worried people are about the financial stocks it shows that the future could be good for them. People are showing concern for banks and this can be good since they will be the first priority to get back to a stable state.

Weaknesses

The main weaknesses in financials are the debt issues in Europe and in the U.S. and the lack of stability in world markets. Each day the market fluxuates in one direction heavily and then does the opposite the next day. This is mainly due to the Eurozone financial crisis and Greece’s fiscal downturn. If a solution to their problems can be reached we should see some stability returning to the markets, but in the meantime this remains issue number one surrounding the future of the financial sector.


Holding Analysis

Ticker Company Name Price Market Cap (in millions) Tier 1 Capital Price/Book ROE Beta Provisionsjpm equity JPMorgan Chase & Co 33.28$ 126,456.20$ 12.10% 0.72$ 9.76% 1.13 16,639.00$ usb equity US Bancorp 25.94$ 49,504.00$ 10.50% 1.62$ 12.67% 1.10 4,356.00$ pnc equity PNC Financial Services Group Inc 53.87$ 28,341.66$ 12.10% 0.87$ 10.93% 1.21 2,502.00$ key equity KeyCorp 7.47$ 7,118.07$ 15.16% 0.74$ 4.64% 1.33 638.00$

J.P. Morgan (JPM) Last price (9/30/11): $29.86 Shares: 780 % of sector: 15.96% % of portfolio: 1.87%

Headquartered in New York City, JPMorgan Chase, the U.S.’s second largest bank behind Wells Fargo, has continued to struggle through the problems that the financial crisis has left them. Now, with the summer financial downturn, JPM’s stock has taken more hits due to the fiscal crisis in Europe because of their debt obligations overseas. The fund holds JPM because their stock has already absorbed the European debt crisis and is overreacting to the current market.

US Bank Corp. (USB) Last price (9/30/11): $23.54 Shares: 300 % of sector: 4.80% % of portfolio: 0.56%

US Bancorp is a regional bank based in the Midwest that provides financial services to all sorts of clients. They have fared well throughout the financial crisis and leads major U.S. banks in one-year revenue growth at 5.74%. USB has done a great job of keeping their debt obligations in check, which is a major reason why they were able to go through the summer almost completely unscathed. USB provides the fund with good security in the financial sector based on their quality of credit, upper management strategies and asset allocation.

PNC Financial Services Group (PNC) Last price (9/30/11): $47.86 Shares: 1100 % of sector: 36.01% % of portfolio: 4.23%

Like USB, PNC Financial Services is a regional bank and is headquartered out of Pittsburgh, Pennsylvania. PNC is another bank that has handled the 2008 financial crisis fairly well, but the summer crisis took a small toll on their stock price. Since the summer downturn, things have


looked much better as their projections for the third quarter have gone up. PNC is expected to finish a deal with the Royal Bank of Canada’s U.S. unit in early 2012. This will expand their growth potential significantly and improve their already high value as a company. Their growth potential and risk management have been two of the main factors behind the fund’s position to hold them.

Key Corp. (KEY) Last price (9/30/11): $5.93 Shares: 4200 % of sector: 16.92% % of portfolio: 1.99%

KeyBank operates under the holding group KeyCorp, headquartered in Cleveland, and provides banking services to over 15 states in the east and Midwest. KEY has had lots of trouble dealing with their net charge-offs and has caused their stock to drop significantly. While they maintain decent asset quality and high customer service levels, they will need to address their bad debt problems if they want to maintain a positive bottom-line.

Ticker Company Name Price Market Cap (in millions) Price/Earnings Price/Book ROE Betacb equity Chubb Corp/The 67.78$ 18,847.70$ 12.28 1.21$ 13.95% 0.79afl equity Aflac Inc 44.87$ 20,944.76$ 7.26 1.65$ 24.07% 1.37

Aflac (AFL) Last price (9/30/11): $34.95 Shares: 250 % of sector: 5.94% % of portfolio: 0.70%

AFLAC Inc. is an insurance group based out of Columbus, Georgia that deals primarily in accident and health insurance. Due to Japan’s environmental crisis in March, AFL’s stock price has dropped but they are beginning to rebound. With 75% of company revenues coming from Japan, they suffered only one quarter of net income decline and are now back on track. The reason the fund owns AFL is because of their ability to control their side of the market and post positive returns.

Chubb Corp. (CB) Last price (9/30/11): $59.99 Shares: 500 % of sector: 20.38% % of portfolio: 2.39%


The Chubb Corp. is an insurance company based out of Warren, New Jersey focused mainly on property and casualty insurance. CB’s stock is one that I believe to have even more growth potential than it has already shown since the fund purchased the stock. They have faced major bottom-line issues because of hurricane Irene, causing their pretax catastrophe cost to rise from $58 million to $420 million. CB is a company that could rebound majorly from late 2011 and outperform in 2012. The fund maintains a position here because they have a strong global outreach, their advancement in technology, and its conservative client portfolio.


-Sold 800 shares of WFC on 5/10/11

-Sold 500 shares of USB on 5/10/11

-Purchased 780 shares of JPM on 5/10/11

Prospects

Wells Fargo & Company (WFC)

Wells Fargo, one of the largest banks in the U.S., has always been a bank that provides dependability to the stock holder and pays out a high dividend. They are on the watch list because in the current financial market a good, stable stock is what might be the safest option. They have a low debt position compared to their peers and have dealt with recent government regulations extremely well. Being able to manage liquidity well has been very tough for banks, but WFC has been able to do it better than almost any other bank, despite their European exposure.

ETF

Another possibility for the financial sector at this time could be an ETF. This would provide much more security and a more reliable return in a time when that is seldom within the sector. An ETF would bring much more diversity, especially because it covers a wide spectrum of different financial securities. As far as screening goes for the ETF, one that has the least amount of European exposure seems like the best place to start. This one quality has a direct relationship with returns these days so possibly an ETF based in a non-European country would be the best route to take.


Sector Breakdown

Diversified Financial & Regional Banks

Just when things started to look better for the financials and regional banks, our economy was hit with yet another financial crisis. Over the summer, Greece’s debt woes along with some other European nations put the global economy into a downward spiral. With a good amount of the debt in Europe tied to the U.S., our large banks suffered greatly. With most major banks already in huge debt trouble, this catastrophe did not help. Companies are struggling to find ways to reduce their risk exposure and get the financial sector back to a stable state. For this to happen, management needs to step in so they can avoid future loan issues and improve credit quality.

Another main issue along with European economic trouble has been government regulation. With banks now being hit with capital regulations there has been much more pressure on them to meet these requirements and adjust their systems to do so. The Dodd-Frank Act has been the main driver in this area because the government does not want to see a crisis like in 2008. Different amendments to this act have further trouble banks, both big and small. All of these policies together have strained financials and caused excess costs to meet these capital requirements.

Insurance

The insurance market has been a subsector in the financial field that has had high volatility in recent quarters. With environmental disasters across the globe and the state of our current housing market, certain insurance companies have taken significant losses in the second and third quarters. Life insurance agencies have suffered the most in the recent quarter due to the Japan environmental crisis. Many U.S. companies in the insurance field are subject to risk in Japan and China so this was a major setback for them. Both of our holdings in this area (CB & AFL) have done well to avoid this issue, unlike some insurers were able to do.

The housing insurers have fared much worse than other insurers, though, due to the still-present after-effects of the 2008 housing bubble burst. There is a long chain connecting the numerous reasons for the bad performance from stocks that deal in this area. Much of it starts with the fact that unemployment is so high and that contributes majorly to the lack of consumer spending. This in turn lowers the amount that people can borrow and thus affects the housing market still. President Obama’s housing plan could have some effect on this market, but no results have been seen yet.

Analyst Future Outlook

Looking forward, I think that good things are coming for the financial market for the rest of 2011 and early 2012. Banks are starting to become more and more regulated with time and this is going to make them safer in the long-run. The European financial crisis has wound down since


its start, though it is not completely over yet. Once stability can be reached overseas our markets will increase significantly and go back to the progress it was making before the summer. A key aspect for banks is to decrease their write-offs as much as possible. Banks losses have been coming mainly from expose to bad debt on all levels of money lending. Banks need to use the liquidity requirements of Basel III and Dodd-Frank to leverage themselves from the risk of bad debt so they can gain the credit quality needed in a good economic environment. If banks can manage their risk more efficiently, which I believe they will, I can see banks making a big turnaround in early 2012.


HEALTH CARE By Jaclyn O’Driscoll

Sector Allocation Recommendation: Underweight Current Sector Weight in Portfolio 9.72% Current Sector Weight in Benchmark 11.09% Benchmark Weight ± 50% 5.54-16.63% Sector Stocks in Portfolio 5 Sector Stocks in Benchmark 45 Portfolio Sector Weighted Average Beta 0.78 Benchmark Sector Weighted Average Beta 1.06

Sector Summary

Below is a table with our current holdings in the health care sector. Throughout the report I will expand on these stocks, strengths and weaknesses, and my outlook for the future. As of September 30th, we currently hold 5 securities in this sector. The table below shows these securities with measures depicting each securities risk, efficiency, and expected growth. The stocks that we currently hold cover the areas of pharmaceuticals, managed care, and medical products and supplies.

Company Name Ticker Quantity Price (9/30) Market Cap (Bill) Beta Current P/E Projected EPS EBITDA Margin % of Sector % of PortfolioJohnson & Johnson JNJ 400 $63.69 73.58 0.62 13.09 0.09 0.31 20.91% 2.03%Express Scripts ESRX 400 $37.07 22 0.94 17.46 0.43 0.06 12.17% 1.18%Abbott Laboratories ABT 500 $51.14 83.08 0.63 11.62 -0.20 0.24 20.98% 2.04%UnitedHealth Group Inc. UNH 750 $46.12 48.59 0.96 10.15 0.27 0.09 28.38% 2.76%Teva Pharmaceuticals TEVA 575 $37.22 38.52 0.74 12.2 0.62 0.30 17.56% 1.71%

Median 48.59 0.74 12.2 0.27 0.24 20.91% 2.03%Total 100.00% 9.72%

Stocks in Portfolio


Comparative Returns Health Care Index vs. S&P 500

*Bloomberg only has historic data on SPXHC index starting in 05/31/11.


Strengths

The strengths of this sector are the equity’s low betas, and the high paying dividends. The low beta is attributed to the stability of the health care market. As more baby boomers are entering retirement age, these keeps health care companies are able to see large growth and stability in the future. Additionally the health care needs of Americans are continuing to grow due to the magnitude of health problems individuals are being diagnosed with. Another strength of this sector is the high dividend payout. Many of the established and secure companies have been rewarding their investors with high dividends, and consistent dividend growth. An example of this is Johnson and Johnson has been increasing their dividend for the past 49 years, and also has one of the highest paying dividends in the sector. I see this as strength for this sector, because a high dividend will help get us through with the stocks are not performing as well.

Weakness

The major weakness of this sector is the uncertainty of health care reform legislation. This summer there were several rulings in many states regarding the legality of the bill. This has raised concerns about the constitutionality of it. The U.S. Justice Department and the Obama administration have decided to bring the bill to the Supreme Court this year, in the hopes that this will finally settle the debate and mixed rulings. In October the Court will decided on


whether or not they will be hearing the case in their upcoming session. If they decide to hear to case, which is considered likely due to its importance, the ruling will not come out until June of 2012. This will then have a major impact on the presidential election in November, and could completely sway the votes of Americans.

Another weakness of this sector is possibility of law suits against the malfunction of medical devices, or of negative effects from pharmaceuticals drugs. This could cost the companies millions in lawyer’s fees, in additional to any settlement amounts that they may have to pay out. Also negative press from the litigation could negatively affect sales for a particular drug. Additionally, if any of the issues deal with a manufacturing problem then there will be an additional cost to replace or fix the equipment. This also would have a negative effect on sales and EBIT, due to the time and costs that it takes to fix the manufacturing problem.


The fund currently holds 5 stocks in the Health Care sector. These sticks are Johnson & Johnson, Express Scripts, Abbott Laboratories, Teva Pharmaceuticals, and UnitedHealth Group. Below is a brief description of our current holdings.

Johnson & Johnson (JNJ)

Price: $63.69 Shares: 400 Percentage of Portfolio: 2.03% Percentage of Sector: 20.91% Johnson and Johnson is one of the largest holdings in the health care sector portfolio, and is the largest health care company in the index based on market cap. The company and its subsidiaries are engaged in the research and development, manufacture and sale of a range of products in the health care field. This company is a strong hold based on their stability and their high dividend. JNJ has been able to steadily increase its dividend for the past 49 years. They also are only one of four publicly traded companies with an AAA credit rating, which indicates that this security is as reliable of a holding as a U.S. government treasury. They also currently have the lowest beta in this sector, which is due to their diverse lines of products and businesses.

Express Scripts (ESRX)

Price: $37.07 Shares: 400 Percentage of Portfolio: 1.18% Percentage of Sector: 12.17%


The company is a full service pharmacy benefits management and specialty managed-care company operating in North America. The company’s customers include insurance carriers, third party administrators, employers, managed care organizations, and union-sponsored benefit plans. Their main driver of business is their pharmacy benefits management, which has grown on average for the past two year by 49.95%. Since the company is only limited to the U.S., there is some distress that their growth will begin to slow down. However the company is looking into acquiring Medco Health Solutions, which is also in the pharmacy benefit management business. The company hopes that this will help increase efficiency in their full service pharmacy business, and it fits within the company’s core competencies. The company has shown a history of successful acquisition of companies, and paying down its debt with solid free cash flow generation.

Abbott Laboratories (ABT)


Abbot Laboratories is our smallest holding in the health care sector. The company is involved in four areas: pharmaceutical products, diagnostic products, nutritional products, and vascular products. They discover, develop, manufacture, and sell their products and services worldwide. On October 18th the company announced that they will separate into two publicly traded companies next year. One company will be focused on diagnostics and medical devices, which will retain the name Abbot. The other company will be focused on pharmaceuticals, which has yet to be named, and will be lead by a long time Abbott official. Currently the company’s pharmaceutical business is their revenue drive, with a two year average growth of 9.67%. The company is currently experiencing growth in their Japan and developing countries markets.

UnitedHealth Group Inc. (UNH)


UnitedHealth Group Inc. is our largest holding in the health care sector. The company works with the health care industry as a whole to expand the access to high quality care for individuals across the country. They also service the needs of older Americans through specialized care services, and provide information and research to providers and payers. The four main drivers


of their business are their health benefits, OptumHealth, Ingenix, and Prescription Solutions. Their main revenue driver is their health care services and benefits segment.

UNH was bought on May 5th, and became the fifth holding on in this sector. The main reason for its purchase was the company’s size. They currently have 77 million customers, which are spread out throughout the country. This lowers their risk for region-specific disasters and changes in state regulations. Another reason for its purchase is their strong position within the managed care segment. Since they have a strong presence already in the market, the company is positioned to capture gains as more Americans are entering into retirement. Additionally, this company should be closely monitored, especially since the health care reform legislation, and Medicare and Medicade will greatly affect the company’s future revenues.

Teva Pharmaceuticals, Industries (TEVA)


Teva Pharmaceuticals is a global pharmaceutical company, which develops, manufactures, and markets generic pharmaceuticals and active pharmaceutical ingredients. The company is currently headquartered in Israel. The company has seen sales decline in the U.S. by 15% for 2010, however they had an increase in sales in developing countries of 22%. A reason for the decline in sales in the U.S. do is to quality issues, which have slowed down production at their Irvine, CA plant. The company is currently working with the FDA to get quality back up to production level. TEVA is also currently in the middle of two major lawsuits. They have recently settled two previous lawsuits in the past year, which has had a negative impact on their G&A expenses.


-05/05/11 Purchased 750 shares of UnitedHealth Group, Inc. for $50.05

Prospects

Bristol-Meyers Squibb Co. (BYM)

Bristol-Myers Squibb Co. is a global biopharmaceutical company. The company license, manufactures, markets, distributes, and sells pharmaceutical products. They have several drugs


that have been approved, or in Phase III, which should replace a majority of the lost revenue from the upcoming expiration of patents. This includes the company’s partnership with Eli Lilly on its drug Necitumumab, which is also in Phase III. Recently the company has met its $2.5 billion cost savings and cost avoidance goal for the 2010 year. This is due to management cutting back on marketing selling and administrative expenses, and simplifying process and services. Additionally this stock pays one of the highest dividends in the pharmaceutical sector (4.52%).

Sector Breakdown

Pharmaceuticals (Abbott Labs, Teva Pharm., Express Scripts)

There are a large number of patents for major drugs that are set to expire in the within the coming year, which will present an unprecedented loss for Big Pharma. The biggest companies to get hit will be Pfizer, Elli Lilly, and Johnson &Johnson. As a reaction to this Big Pharma has been in the process of an expense-reduction program, in which they are realigning their cost structures to anticipate lower sales. Finally, this subsector is looking to expand into biotechnology for future potential product protection and revenues.

Facilities

This sub-sector has faced a challenging environment in recent years. Profits are being pressured by the decrease in elective procedures, unemployment, and uninsured patients. With the health care reform issue being debated, and the bill being debated by the Supreme Court, this sub-sector is looking to have gains in the long term.

Managed Care (UnitedHealth Group)

This sub-sector could potentially be impacted the most by the health care reform bill. Additionally, unemployment rates and the rise of uninsured people have created an obstacle for MCOs. The reform bill will be creating more restrictions on the way MCOs operate, which could potentially hurt the way they do business. A response to this future hit is that MCOs are reducing their SG&A costs as a percentage of premiums and management fees.

Products and Supplies (Johnson and Johnson)

The health care reform bill will have a major impact on this sub-sector, providing that it gets through the Supreme Court. The biggest area to be hit with this will be with the medical device companies, which have been relying on inpatient numbers at hospitals. However, the medical device companies have been making up some of their losses in the emerging markets. Long term growth looks good for this sub-sector because of aging populations, expanding middle class in emerging markets, and increased obesity.



Looking forward I plan to keep this sector underweighted due to the uncertainty of how this sector will be impacted by health care legislation. The bill has already been challenged in several states, and has produced several different rulings. The case for the president’s health care reform bill will be reviewed by the Supreme Court on November 10th, which will indicate if the court will allow for the case to be presented in their upcoming term. If they accept the case, which is considered highly likely considering its importance, then they will not come out with their ruling until June of 2012. This puts a lot of uncertainty on the companies in this sector, especially since all of our holdings will be impacted in some way by the ruling. Therefore I see keeping the sector underweight the entire year will be the best play.

In addition to this I also want to closely monitor Abbott Laboratories, which will be splitting into two companies in the upcoming year. From there I will need to decide how these two companies fit into our overall strategy for the fund, and into my strategy for this sector. I hope to sell off some of our holdings in TEVA, and find another opportunity in another generic or band name pharmaceutical company. This is because TEVA has experience some major setbacks in the past year, which could indicate bad management decisions being made.


INDUSTRIALS By Ryan Alleman and Ben Lawrence

Sector Allocation Recommendation: Overweight

Sector Weight in Portfolio as of 11.11%

Sector Weight in Benchmark as of 10.09%

Benchmark Weight ± 50% 5.04% – 15.13%

Sector Stocks in Portfolio 5

Sector Stocks in Benchmark 60

Portfolio Sector Beta .97

Benchmark Sector Beta 1.12

Sector Summary

Since March 31, 2011, both the S&P 500 and the Industrials Sector have seen losses in returns. The sector as whole has been more volatile in performance against the index, underperforming throughout the period. While the sector’s performance has been unimpressive, there are reasons to believe it will continue to outperform in the long term.

Comparative Returns Industrials Index vs. S&P 500



As of September 30, 2011, the fund owned five industrials stocks (CSX, GE, FDX, ITW, JEC,) whose holdings represented 11.11% of the fund’s market capitalization.

DCF INDUSTRIALS HOLDINGS as of SEPTEMBER 30, 2011

General Electric Company (NYSE:GE)

Close Price (9.30.2011): $15.22 Total Shares Owned: 1450 General Electric (GE) is one of the largest companies in America which is divided into 5 different business segments, including Energy Infrastructure, Technology Infrastructure, NBC Universal, GE Capital and Home & Business Solutions. Incorporated in 1892, GE is headquartered in Fairfield, Connecticut. While U.S. operations account for a large portion of revenues, GE’s has a significant global presence – having operations in over 100 foreign countries.

While being impacted by the recent economic recession – with revenues dropping 23.5% over the past few years – and with most analyst forecasting around a 5% loss for the coming fiscal year, GE shows promise in the future as a long-term buy. Currently undervalued, especially with the current Japan crisis having an adverse affect on stock price, GE should build revenues by nearly 15% (given a 5% decrease in 2011) over the coming 5 year – restoring them to historical high’s. Much of this growth can be attributed to GE’s sell-off of their unprofitable Security business segment (to United Technologies) and with their recent acquisitions of Dresser Inc. (Energy) and Wellstream PLC (Oil & Gas). In the 3rd Quarter of 2011, GE saw operating earnings of $3.4 billion – an 11% increase year-over-year.

Company Name Market Capitalization

Total Revenue (LTM)

EBITDA (LTM)

EBITDA Margin (LTM) ROE

EV/EBITDA (LTM)

P/E (LTM)

Dividend Yield (%) Beta

CSX CORP $22.85B $11.61B $4.42B 37.78% 11.54% 10.18 13.4 2.21% 1.24

FEDEX CORP $26.02B $40.37B $4.58B 11.30% 21.27% 11.43 15.3 0.63% 1.11

GENERAL ELECTRIC $173.74B $145.68B $26.01B 16.17% 10.27% 34.64 11.23 3.66% 1.15

ILLINOIS TOOL WORKS $23.79B $17.75B $3.27B 18.31% 21.60% 10.98 13.45 2.93% 1.31

RR DONNELLY & SONS $3.12B $10.60B $1.27B 12.50% 11.54% 8.02 6.55 6.25% 1.15


Due to these factors, as well as future federal funding in infrastructure and a general consensus that the market is on the rebound from the recession, there is reason to believe that GE will continue to grow in value.

CSX Corporation (NYSE:CSX)

Close Price (9.30.2011): $18.67 Total Shares Owned: 1950 CSX Corporation, together with its subsidiaries, provides rail-based transportation services in North America. The company offers traditional rail service, and the transport of intermodal containers and trailers. It provides integrated intermodal transportation services linking customers to railroads, through trucks and terminals. The company also engages in the real estate sale, leasing, acquisition, and management and development activities. As of December 25, 2009, it operated approximately 21,000 route mile rail network and 216,000 freight car fleet in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec.

Total revenues for CSX topped at $11.26 million in 2010, up nearly 20% over the previous year. This, coupled with the fact that efficiency has increased with the operating ratio dropping 3.8% from the previous year, means overall more income to CSX. While management has done an effective job, the heavy investment in infrastructure should help to drive both volume and efficiency. For the 3rd Quarter of 2011, CSX announced record earnings of $464 million – an increase of 19% year-over-year. Given these conditions, CSX has good prospects going into the future as a long-term buy.

FedEx Corporation (NYSE:FDX)

Close Price (9.30.2011): $67.68 Total Shares Owned: 450 FedEx is the world’s largest express-delivery company and earns more than 60% of its revenue from its express division. The firm’s 2 other segments, ground and freight, allow FedEx to exploit its competitive advantage in parcel delivery as it can handle most types of shipping. The strength of the space’s barrier to entry allows for few competitors, including the withdrawal of DHL, allowing FedEx the opportunity to be a greater part of their clients’ operations. Additionally, FedEx Office provides document production technology, internet access, Web-based printing, and shipping services to customers from brick-and-mortar stores.


Operating income almost tripled from 2009’s $747mm to an impressive $1,998mm in 2010 and the operating margin increased from 2.1% to 5.75%. Through the end of 2011, FedEx is planning on combining two of its freight segments and projects the new structure will require 100 fewer facilities and 1,700 fewer employees. In June, FedEx reported fiscal fourth quarter earnings of $10.55 billion – an increase of 12% year-over-year. More than likely, this move will serve to increase efficiency and lower costs in the long run but we don’t believe it will provide any short-term gains.

R.R. Donnelly & Sons Company (NASDAQ: RRD)

Close Price (9.30.2011): $14.12 Total Shares Owned: 535 Founded more than 146 years ago, RR Donnelley and Sons Company is the world’s largest commercial printer. They currently print and bind a major share of prevalent national publisher’s such as Time, Newsweek, and T.V. Guide. Beyond these publications, they also print and bind for telephone directories, encyclopedias, and school and religious books. Beyond their printing and publishing products, they also house Internet-based capabilities to provide pre-media, logistics, and business outsourcing products and services to clients in both the public and private sectors. Besides extensive operations in the United States, which accounts for roughly 75% of the company’s net sales in 2010, RR Donnelley also has extensive international presence in Asia, Europe, Latin America, and Canada.

In the near future, we believe RRD will continue to experience growth in value through its effective management within a struggling area of the sector (printing & publishing). For the 3rd Quarter of 2011, RRD reported earnings of $2.7 billion – an 8% increase year-over-year. RRD has shown opportunity to grow its market share, particularly through new technology such as its acquisition of Helium.

Illinois Tool Works, Inc. (NYSE: ITW)

Close Price (9.30.2011): $49.23 Total Shares Owned: 1030 Illinois Tool Works is a diversified manufacturer of engineered products and specialty systems. Operating in more than 6 lines of business, the company has significant exposure to transportation, electronics, power systems, construction and fluids industries. Based in Glenview Illinois, the company currently has more than 20,000 patents or pending patent applications; as a result, the company consistently ranks as one of the top U.S. patent holders. 2010 Revenues totaled more than $15 billion. Globally, ITW employs more than 59,000 people through its network of more than 200 companies.


ITW can expect to see significant top-line growth due to their exposure to emerging markets as well as their emphasis on future mergers & acquisitions activity. Additionally, the company has recently expressed its renewed emphasis on generating higher levels of free cash flow while maintain a strong dividend yield. As emerging markets continue to expand and as established markets rebound ITW is in position to take advantage of future growth. For the 3rd Quarter of 2011, ITW reported year-over-year earnings growth of 20%.


During the past six months, the industrials sector has seen two primary changes within the fund. DCF sold off our position in Jacobs Engineering in May. In September DCF also sold our summer holding of a Spyder ETF. The proceeds from the Spyder sale resulted in one buy within the sector:

5/10/2011 – Jacobs Engineering (JEC) – 350 shares at $46.99/share

9/6/2011 – RR Donnelly & Sons (RRD) – 535 shares at $14.79/share

Sector Breakdown

The Industrials sector is very broad and includes companies whose businesses are dominated by one of the following activities: the manufacture and distribution of capital goods (aerospace & defense, construction, engineering & building products, electrical equipment, industrial machinery;) the provision of professional and commercial services and supplies (printing, employment, environmental and office services;) and the provision of transportation services (airlines, couriers, marine, road & rail and transportation infrastructure;) and industrials conglomerates.

Industrial Conglomerates

Within Industrial Conglomerates, DCF currently owns General Electric. Diversified organizations such as General Electric are broadly exposed to the national and global economies. As a result, they tend to succeed during time of economic expansion and remain static during times of economic decline. Due to their size, Industrial Conglomerates tend to have strong exposure to emerging markets. As a result, these conglomerates can take advantage of growth anywhere in the global economy. With the recent political turmoil in Europe, the growth of emerging markets as begun to slow, resulting in a more static level for Industrial Conglomerates. With an anticipated resolution to the problems in Greece, it is expected that Industrial Conglomerates will continue to succeed. As a result, we will continue to focus on this area of the sector.


Transportation (Air Freight, Logistics, Airlines, Marine, Transportation Infrastructure)

Within Transportation, DCF currently owns CSX, and FedEx. Transportation – in a strong way – is linked to the volatility of energy prices. When energy prices are low, as they have been recently, air and over-the-road logistics become preferred methods of transportation due to their speed. When energy prices are high, as they appear to be trending, rail transportation becomes the preferred method of transportation due to its fuel efficiency. Other traditional transportation methods – such as water transportation – are largely unaffected by oil prices. In order to take advantage of trends in the oil market – which appear to going higher – we would prefer to stay away from air and over-the-road transportation services while focusing on rail and water transportation services.

Construction (Building Products, Construction & Engineering, Electrical Equipment, Machinery)

Within Construction & Machinery, DCF currently owns Illinois Tool Works. With current stimulus being directed towards infrastructure projects, as well as the long-term need for infrastructure improvements, we expect to see continued growth in this area of the sector. While new construction of both residential and commercial real estate continues to be low, it is possible that we are nearing a bottom in these markets and that continued growth will

Aerospace & Defense

DCF does not currently have any positions within Aerospace & Defense. With the scaling back of the wars in Iraq and Afghanistan, as well as budget pressure in the United States, it is increasingly likely that spending in the Aerospace & Defense sectors will decrease. As a result, we will not prioritize firms in the Aerospace & Defense industries at this time.

Commercial Services

Within Commercial Services, DCF currently owns RR Donnelley. Commercial Services has been another area that has been impacted by a decrease in new construction, as some of the peripherals of new construction (i.e. fire systems, security systems, etc.) have been less utilized. In addition, with print media heading more and more in a digital direction, print specialists such as RR Donnelley are being challenged to diversify. Given these current pressures on Commercial Services, this is not an area of the sector in which we will concentrate. However, with a possible return of new construction, opportunities could arise for some of the peripheral construction firms as well. This could be an opportunity to gain expose to construction without investing in the construction sector directly.


Professional Services

DCF does not currently have any positions within Professional Services. Professional Services has been an area that has been bolstered by the economic downturn. As firms began to seek ways to cut spending, many of them sought opportunities to outsource non-essential tasks to law firms, accounting firms and placement services. If unemployment rebounds in the near future, it is possible that this area of the sector will struggle. As a result, it is not an area in which we will concentrate.


Strengths

Several factors should continue to demonstrate strength within the industrials sector:

As the global economy continues to emerge from the recent recession, many firms are prepared to begin new capital expenditure projects which they may have previously put on hold.

As a result, we should see increased opportunities for manufacturers of products such as engines, turbines, heavy industrial equipment, agricultural machinery, trucks, tractors, and other highly priced commodities.

To help jump start the national economy, the federal government continues to propose new forms of economic stimulus.

A key focus of the stimulus is our national infrastructure, with proposed projects such as improving our interstate and railroad systems and encouraging new forms of mass transit. These products should result in increased opportunity for manufacturers of construction and heavy industrial equipment, as well as other industrials firms that focus on infrastructure related activities.

Emerging markets are expected to spend roughly $6.3 trillion on infrastructure projects over the next three years.

China is expected to spend roughly $23 Billion on major infrastructure projects, some of which have already begun. This spending will increase opportunity for conglomerate companies within the industrials sector who specialize in construction, heavy industrial equipment, transit power, and other infrastructure activities.

Weaknesses

A number of factors continue to demonstrate areas of weaknesses within the industrials sector:


With the recent debt crisis within the United States, the federal government is currently focused on deficit reduction.

Some aerospace firms and heavy machinery firms which supply defense equipment could be disproportionally impacted by these proposed spending cuts.

As global energy prices continue to rise, several firms within industrials could be negatively impacted.

According to a recent report by the U.S. Energy Information Administration, industrials firms and equipment consume roughly one half the worlds’ total delivered energy.

With the increase in commodity prices, industrials firms will likely continue to feel strain both on top line growth as well as their margins.

In addition to manufacturing equipment that is highly dependent on other industries which focus on raw materials (i.e. mining, metals manufacturing, etc.) many industrials firms manufacture equipment which contains large amounts of commodities such as heavy metals. As a result, the industry which the sector targets is negatively impacted by commodity prices, and the sector itself is impacted by commodity prices.

Screening and Strategy

After identifying companies which align with the fund’s prospectus, industrials uses multiple processes to identify undervalued firms. One possible next step is to value companies based off of their Price to Earrings (P/E) ratio. A low P/E target relative to a particular industry shows that a company may be possibly undervalued.

Another potential starting point is to utilize our sector’s outlook to focus on areas of the sector that are well established for growth. By focusing on these firms, the analysts are able to maintain our strategy of using a bottom up approach to identify undervalued firms, while also prioritizing areas of the sector that are poised for future opportunities.

Once potentially undervalued firms have been identified, a discounted cash flow (DCF) and relative valuation is performed on the prospect companies to see whether they are truly undervalued in the market. This, combined with qualitative analysis, is then implemented in either recommending a sell/buy/hold position to the other fund analysts and managers. Within Industrials, there are currently 60 firms in the S&P 500.


Prospects

Based off the our screening strategy, alongside some preliminary qualitative analysis, the following represent prospects with the highest potential for this sector, sorted by preference of purchase.

Caterpillar (NYSE: CAT) Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. 2010 Revenues totaled more than $42 billion. Caterpillar is based in Illinois and has been in operation for more than 85 years. CAT operates 6 distinct business lines: Machinery, Engines, Defense Products, Electronics and Agriculture Products, as well as a financing arm. Currently the firms manufactures their products 110 facilities worldwide, roughly half of which are in the United States. Through this manufacturing, CAT is able to distribute their products in 200 countries, with a network of 220 worldwide dealers.

Eaton Corporation (NYSE:ETN) Eaton provides power management solutions to industrial customers. The firm sells to both original equipment manufacturers and aftermarket consumers. More than 50% of its sales come from outside of the U.S. This gives the company the ability to capitalize on emerging markets, such as the growing auto market in China.

3M Company (NYSE:MMM) 3M is a diversified manufacturer with a global presence in over 60 countries. Its core business segments include: industrial and transportation, display and graphics, health care, consumer and office, electro and communications, and safety, security and protection. Recently 3M has had much acquisition activity, taking in companies like Cogent, Winterhur Technologies, Arizant, and Nida-Core.


Though the industrials sector has been underperforming the S&P 500 index, we believe that it has the potential to outperform the index in the near future. Increased spending in infrastructure, as well as the continued growth of emerging markets, will increase revenues for companies with operations both domestically and abroad. As a result, we are comfortable taking an overweight position in the Industrials sector while continuing our emphasis on security selection.


INFORMATION TECHNOLOGY By Curtis May and Phillip Weickert

Sector Summary

As of September 30, 2011, the fund owned seven information technology stocks: Visa, Apple, Cognizant Tech Microsoft, Google, Intel, and Qualcomm.

The S& P’s 500 Information Technology Index, has fallen 9 percent at the end of September, compared with a 14 percent decline in the S&P 500 Index. Since the IT sector has outperformed the S&P 500, we decided to keep its overweighting within the portfolio. Three of the top five performers over the last six months for the portfolio were in the IT sector. This is attributable to the securities selection in our sector.

Sector Allocation Recommendation

Sector Weight in Portfolio

Sector Weight in Benchmark

Benchmark Weight ± 50%

Sector Stocks in Portfolio

Sector Stocks in Benchmark

Portfolio Sector Beta

Benchmark Sector Beta 1.01

0.98

75

7

9.2% -‐ 27.8%

Fall 9.30.2011

18.50%

25.10%

Overweight

Spring 3.31.2011

1.12

75

Overweight

28.47%

19.68%

7

9.84% -‐ 29.52%

1.03

Name SubsectorPercentage of total Portfolio

Percentage of IT Stocks in Portfolio

Market Cap BetaTotal Return 4/1/2011 -‐ 9/30/2011

Visa Inc IT Services 6.39% 22.64% $59,268.96 Million 0.96 16.864%Apple Inc Electronic Equip 6.08% 21.54% $374,822.84 Million 1.06 10.669%

Cognizant Tech IT Services 4.25% 15.05% $22,242.23 Million 1.13 -‐23.917%Microsoft Corp Software 4.17% 14.76% $208,535.03 Million 0.94 -‐1.073%Google Inc Internet Software 2.46% 8.73% $166,074.77 Million 1.05 -‐12.971%Intel Corp Semiconductors 2.55% 9.04% $116,245.52 Million 1.02 10.114%

QUALCOMM Inc Communication Equip 2.33% 8.24% $84,474.09 Million 1.06 -‐9.978%


It is unusual for a cyclical industry to outperform the market when economic growth declines. A possible reason for this is less downside risk in the technology sector than other cyclical sectors because of stronger balance sheets. Large cash balances on IT companies’ balance sheets may be a leading buffer for the cyclical risk. Some companies, such as Google and Microsoft with their purchases of Motorola Mobility and Skype respectively, are using their cash for mergers and acquisition to try and continue to grow, even in a slowing economy. We expect IT stocks to continue this trend in the future.

Comparative Returns

Information Technology Index vs. S&P 500

The graph above is representative of the daily return of the Info Tech Index in the S&P 500 and our benchmark, the S&P 500 index. Through the period 04/01/2011 to 09/30/2011, the Info Tech Index closely followed the S&P for the last six months, but outperformed the S&P during the month of September.


Relative Analysis

The list on the next page represents the 75 Companies in the Information Technology Sector of the S&P 500, sorted by market capitalization. Current holdings are shaded.

Name Market Cap:Q P/E:Q Beta:M-6 Total Return:M-6 EBITDA Mrgn:Q EPS:QAPPLE INC 375,706,681,344$ 14.61 0.83 14.49 32.89 7.13MICROSOFT CORP 209,324,900,352$ 9.22 0.87 2.03 42.25 0.68IBM 206,104,952,832$ 13.49 0.82 10.22 23.26 3.23GOOGLE INC-CL A 165,482,872,832$ 17.56 0.94 11.26 36.20 8.44ORACLE CORP 141,781,565,440$ 15.17 1.14 -7.31 44.40 0.36INTEL CORP 119,071,047,680$ 8.93 0.82 2.88 44.48 0.67CISCO SYSTEMS 86,796,951,552$ 12.28 1.03 4.00 25.36 0.22QUALCOMM INC 84,537,491,456$ 17.58 1.08 1.58 38.74 0.63HEWLETT-PACKARD 70,410,338,304$ 7.85 1.06 -33.54 14.34 0.94VISA INC-CLASS A 69,604,638,720$ 17.14 0.98 16.56 62.59 1.28EMC CORP/MASS 42,818,699,264$ 19.26 1.04 -9.86 24.39 0.29MASTERCARD INC-A 40,256,688,128$ 17.76 1.22 27.64 54.17 5.65EBAY INC 38,061,121,536$ 19.79 1.22 -0.91 28.52 0.38ACCENTURE PLC-A 37,019,938,816$ 15.76 1.06 5.39 14.57 0.95TEXAS INSTRUMENT 30,451,619,840$ 10.79 0.94 -7.82 34.64 0.52DELL INC 29,784,160,256$ 8.41 1.10 -3.03 8.80 0.48AUTOMATIC DATA 23,088,300,032$ 18.42 0.87 -3.58 21.60 0.62SALESFORCE.COM 19,608,205,312$ 803.94 1.20 -0.26 10.38 -0.03CORNING INC 19,392,839,680$ 6.57 1.29 -28.27 35.21 0.52COGNIZANT TECH-A 19,039,481,856$ 22.97 1.20 -8.32 20.64 0.75NETAPP INC 17,530,128,384$ 20.31 1.14 -17.83 18.42 0.38BROADCOM CORP-A 17,308,489,728$ 17.90 1.05 3.85 17.04 0.50YAHOO! INC 16,628,599,808$ 15.87 1.04 -16.26 29.19 0.23APPLIED MATERIAL 16,237,760,512$ 8.56 1.03 -16.62 26.13 0.36INTUIT INC 14,037,879,808$ 22.03 0.96 -1.21 33.19 -0.19MOTOROLA SOLUTIO 13,638,450,176$ 18.14 0.91 3.30 12.45 0.38SYMANTEC CORP 12,015,754,240$ 16.80 1.05 -13.10 26.86 0.24TE CONNECTIVITY 11,925,088,256$ 9.23 1.08 -0.35 17.35 0.76ADOBE SYS INC 11,901,264,896$ 13.72 1.05 -10.33 34.84 0.39MOTOROLA MOBILIT 11,315,109,888$ 0.82 61.97 2.19 -0.11ANALOG DEVICES 10,300,664,832$ 11.94 0.94 -6.50 40.75 0.73CITRIX SYSTEMS 10,267,289,600$ 30.46 1.33 -7.89 25.78 0.49ALTERA CORP 10,116,557,824$ 12.03 1.07 -17.24 45.47 0.58PAYCHEX INC 9,777,552,384$ 18.35 0.90 -8.17 42.61 0.41XEROX CORP 9,667,759,104$ 7.83 1.22 -15.56 13.58 0.23SANDISK CORP 9,653,961,728$ 8.22 1.21 8.64 32.57 0.97CA INC 9,499,524,096$ 11.76 0.99 -11.02 36.66 0.47WESTERN UNION 9,466,039,296$ 9.68 0.99 -15.52 28.27 0.38JUNIPER NETWORKS 9,199,165,440$ 17.26 1.32 -35.69 20.14 0.16TERADATA CORP 9,009,098,752$ 25.13 1.15 5.39 23.20 0.52NVIDIA CORP 8,349,549,568$ 16.08 1.37 -20.54 20.19 0.25AUTODESK INC 7,871,567,360$ 32.15 1.33 -19.95 20.27 0.31RED HAT INC 7,621,232,640$ 61.78 1.15 10.36 21.99 0.21FIDELITY NATIONA 7,441,871,360$ 14.14 1.02 -23.37 29.12 0.45XILINX INC 7,244,324,864$ 12.14 0.88 -5.42 33.84 0.48FISERV INC 7,148,416,000$ 13.47 0.95 -6.13 31.22 0.90AMPHENOL CORP-A 6,927,556,608$ 13.64 1.17 -12.75 22.52 0.80ELECTRONIC ARTS 6,747,232,256$ 1.14 26.51 1.89 -1.03BMC SOFTWARE INC 6,578,335,744$ 16.41 0.94 -26.70 35.67 0.66KLA-TENCOR CORP 6,379,914,240$ 7.63 1.05 9.99 38.79 1.15LINEAR TECH CORP 6,280,946,176$ 11.57 0.90 -2.77 54.18 0.47WESTERN DIGITAL 6,018,480,128$ 7.35 1.13 -26.45 14.65 1.03MICROCHIP TECH 5,936,068,096$ 15.18 0.90 -7.11 39.21 0.42COMPUTER SCIENCE 5,921,564,672$ 7.81 1.19 -25.39 13.09 1.18MICRON TECH 5,708,429,824$ 63.78 1.55 -45.16 32.54 -0.14F5 NETWORKS 5,623,252,480$ 23.92 1.31 9.93 32.26 0.84SAIC INC 5,482,259,968$ 11.06 0.93 -27.08 9.45 0.51FIRST SOLAR INC 5,459,933,184$ 10.40 1.36 -60.74 30.06 2.28ADV MICRO DEVICE 4,913,010,176$ 4.62 1.35 -35.49 11.66 0.13VERISIGN INC 4,549,905,408$ 66.53 1.02 -1.66 50.15 0.36FLIR SYSTEMS 4,001,236,480$ 16.48 1.12 -21.00 25.13 0.41JDS UNIPHASE 3,878,279,936$ 26.95 1.80 -38.75 11.41 -0.03HARRIS CORP 3,859,502,336$ 7.30 1.17 -20.74 19.01 1.01AKAMAI TECHNOLOG 3,665,474,304$ 19.68 1.26 -13.19 39.95 0.23MOLEX INC 3,580,989,952$ 11.32 1.29 -4.60 19.15 0.46JABIL CIRCUIT 3,427,568,128$ 8.87 1.45 6.44 5.67 0.54TOTAL SYS SERVS 3,261,733,888$ 15.82 0.91 7.48 26.63 0.30LSI CORP 2,967,502,848$ 27.26 1.25 -14.21 14.72 0.05LEXMARK INTL-A 2,142,208,640$ 5.68 1.08 4.84 15.47 0.87TERADYNE INC 2,049,886,976$ 9.18 1.29 -8.30 28.24 0.30NOVELLUS SYS 1,903,790,720$ 7.99 0.97 8.14 25.71 0.74


COMPUWARE CORP 1,674,454,528$ 15.63 1.17 -23.17 20.20 0.10TELLABS INC 1,565,519,104$ 1.27 -7.33 0.14 -0.38MEMC ELEC MATER 1,207,468,928$ 13.79 1.64 -54.31 8.74 -0.41MONSTER WORLDWID 883,750,272$ 12.38 1.67 -44.05 11.57 0.26


Strengths

The IT sector is a high growth industry. This offers many opportunities to find mispricings that we can capitalize on. The IT also has significant room for growth in emerging markets such as China and India. As stated in the sector summary, there are also many opportunities for mergers and acquisitions in the IT sector, as many tech stocks are sitting on piles of cash. These high amounts of liquidity have enabled tech companies throughout the sector to be resistant to recent downturns in the economy. It also shows that more established companies with high cash balances and mature growth rates can still offer opportunities for expanded growth.

Weaknesses

The IT sector is hard to value because it is a highly competitive industry. Since it is highly competitive, litigation between tech companies is very common given the high amount of intellectual property that seems to be infringed upon every year. Impending lawsuits are an issue that needs to be kept in mind and monitored closely. Google, Apple, and Microsoft seem to be constantly involved in legal proceedings. Another major weakness of the IT sector is that roughly 60% of its revenues derive from foreign countries, the most of any sector. This offers a substantial risk as it exposes the sector to the debt crisis on a large level. Since most of the stocks in the IT sector are cyclical, they move with the market. With the market in a downturn, investing in a sector such as Consumer Staples may make more sense to avoid the downturn of the market. However, the IT sector did outperform the S&P for the month of September, and prospects for growth remain high.

Future Planned Changes

IT makes up the largest portion of the portfolio with a 29.3% weighting and 4 stocks that individually have a 3.5% weighting. Considering the size of this sector, the analysts allocate a large portion of their time on evaluating current holdings at a deeper level. We plan to make the following changes in our portfolio:

1. Rebalance share in Apple: To lock in gains realized over the past year and reduce the

company risk associated with a 6.08% weighting in one stock, we want to reduce the weighting in Apple to 5.5%.


2. Rebalance share in Visa: To lock in gains realized over the past year and reduce the company risk associated with a 6.39% weighting in one stock, we want to reduce the weighting in Visa to 5.5% after further review.

Prospects

F5 Networks (FFIV)

F5 Networks (FFIV) is a technology company that offers hardware and software for networking, WAN optimization, secure remote access and file virtualization, and other resources. It is currently trading at 111.19, which is in the middle between its 52-week high of $145.76 and the 52-week low at $80.00.

Revenues for F5 Networks have shown a steady increase over the past several quarters, with the last quarter coming in higher by 12.7%. In terms of valuations, the FFIV shows a price earnings ratio of 23.92, well below its five-year average of 44.19, making it a good point to buy. The company should also be able to improve on its 30% EBIT margin going forward as total operating expenses have decreased by almost 8% over the last three years. F5 Networks should continue to provide excellent returns with industry leading technology and solid market position.

Sector Breakdown

Software

Security software is one product line that is seeing strong demand. Recent security breaches at companies such as Epsilon Marketing is further pressuring an emphasis on security. The implementation of cloud computing will also pressure an increase in network security as more and more data is pushed through the internet.

Another area that will need some attention will be security software. This will be high concern due to the “green movement” and everything becoming electronic. This software will need to be advanced for personal and business security. The more that becomes electronic, the more that private information is available to be stolen.

Lastly, cloud computing will have a huge impact on the software industry. As more and more consumers are interested in the cloud platform, software companies will need to revamp their software to run efficiently and effectively on the cloud platform. This will most likely lead to a situation where software items such as Microsoft Word can be purchased and installed on a computer or you can purchase a subscription to Word that will be implemented on the cloud. One thing that is for sure is that it will be an exciting year for software as the industry shifts


from their traditional purchase and install to software subscriptions, cloud computing, and tablet or smart phone platforms.

Semiconductors

Semiconductors should see an increase in value due to the fact that there are more and more components that need to be made for each new piece of hardware that is created. Designing the technology that comes out will play a major role in the future. Also another reason to be encouraged by semiconductors going forward is that when there is a cyclical correction, spending on a tech service tends to decline less than hardware.

Hardware

The idea of convergence between a PC and a mobile phone has been the topic of discussion for many years. With the invention of the iPhone and iPad people were able to see how this convergence could start to play out. Although the mobile phone market and the tablet market are heating up, the software and system capabilities of these hardware devices will determine the success of the products. Their ability to involve cloud computing into these hardware’s will also be an indicator of hardware’s success in the future.

The tablet market should see the most growth in the near future for the Technology sector. Apple’s iPad sales were up 311% for 2011. Many new tablets have been introduced to the market to try and take some the market share away from Apple. Other tablets have been released by Amazon, Barnes and Noble, Samsung, Sony, among others. All of these companies see a tremendous growth opportunity in the tablet market.

Unlike software, hardware requires larger capital investment and is thus seen as more risky. If companies decide to invest in the hardware expansion there is a risk that it will not sell, or that sales will not meet estimates. This could pose a substantial financial setback to a company who invested the capital. Software is much easier to scale up or down in production to meet demand and thus poses less risk in a risky sales environment.


Since the economy is demanding lower prices, companies need to become more efficient. Technology can provide a way to become more efficient after all costs are cut. Cloud Computing will help cut back technology storage and will allow companies to access all records on any qualified device. Interactions with smartphones have grown within the last five years, first time this summer there were more smartphone purchased than any other type of phones. Due to the green movement and a lower operating cost, companies are taking the paperless route, which could expand the software companies into a variety of applications, including advertising, and media. Robotics is increasing in the military allowing for fewer casualties. Advertising on internet web browser are increasing which provides a great deal of revenue.


MATERIALS By Daniel Strong

Sector Allocation Recommendation: Underweight Current Sector Weight in Portfolio 3.29% Current Sector Weight in Benchmark 3.44% Benchmark Weight ± 50% 1.72-5.16% Sector Stocks in Portfolio 3 Sector Stocks in Benchmark 30 Portfolio Sector Weighted Beta 1.27 Benchmark Sector Weighted Beta 1.21

Sector Summary

The materials sector is very sensitive to changes in the market as a whole because of its high sensitivity to business cycles. The materials sector is a volatile area that closely follows the trends of the market and the S & P 500. While it is closely correlated to the swings of the market the materials sector tends to move in the same direction as the market but with higher gains and larger losses than the market.

It is for this reason that I recommend underweighting the materials sector in the near future. I believe the market will fall because of concerns over Greece defaulting. If this does happen the materials market will follow suit but with larger losses than the S & P 500 will see.

The companies in the materials sector are highly dependent on other industries and the performance of the market as they are involved in the discovery, development, and processing of raw materials. Thus the companies that make up this industry are very dependent on the demand of their products which in turn are dependent on demand for them. The demand for materials is primarily driven by the business cycles of the automobile industry and the construction industry. As I see the outlook for the market being unpromising I believe that demand for the goods that the materials sector company’s produce will be down and as I mentioned before this sector could see larger losses than other industries.


Comparative Returns Materials Index vs. S&P 500


As of September 30, 2011 the fund owned three materials sector stocks (AA, PX, SIAL) who account for 3.30% of the fund’s total value.

Ticker Market Cap (millions) P/E

EV/EBITDA TTM Beta

Estimate 3 yr EPS Growth

EBIT Margin TTM ROE

PX US Equity $ 30,062.88 18.840 10.745 0.94 124.28% 21.37208

21.52

SIAL US Equity

$ 7,610.50 17.149 10.185 1.08 117.13% 25.62748

20.97

AA US Equity $ 11,515.77 11.260 6.366 1.49 144.84% 5.967734

1.944

Alcoa Inc. (NYSE: AA)

Close Price (9/30/11): $9.57 Total Shares Owned: 2300 Percent of Sector: 53.19% Percent of Fund: 1.76%


Alcoa is the world’s third largest producer of aluminum and operates in 31 countries. Alcoa is the world’s largest producer of primary aluminum, fabricated aluminum, and alumina though it is growing in all major aspects of the industry. Aluminum and alumina account for more than three-fourths of Alcoa’s revenue. Alcoa operates in four business segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. The company was founded in 1919 and is headquartered in Pittsburgh, Pennsylvania.

Alcoa had a projected sales increase of 19% in 2011 and is forecasted to gain 2.6% in 2012. Alumina and aluminum prices and volume are expected to increase in 2012 based on an expected increase in demand. Earnings per share of Alcoa are expected to rise in 2012 to $0.96 from $0.81 projected in 2011. Alcoa is expected to see increased operating profits based off of higher demand and the production of new lower cost plants. Alcoa is currently trading near its 52 week low of $8.45 and much lower than its high of $18.47.

I believe we should hold on to our shares of Alcoa based upon the projection that prices for alumina and aluminum will increase along with volume in 2012. Alcoa has a relatively high beta of 2.09 but I believe it is still worth the risk to hold on to Alcoa as I project them to be able to reach I higher stock price in the near future.

Praxair Inc. (NYSE: PX)

Close Price (9/30/11): $93.48 Total Shares Owned: 75 Percent of Sector: 16.94% Percent of Fund: 0.56% Praxair is one of the world’s largest industrial gases companies in the world and the largest in North and South America. They supply atmospheric, process and specialty gases, high-performance coatings, and related services for their customers in over 30 countries. Praxair serves a variety of industries including: metals, health care, food and beverage, energy, electronics, and chemicals. The company was founded in 1907 and is headquartered in Danbury, Connecticut.

Like most companies in the materials sector Praxair is highly dependent on global demand for its products which is dependent on other industries which are driven by the global economy’s movement. Unlike Alcoa, Praxair is in the more specialized field of gases, with the problems going on in Greece I do not see Praxair fairing as well as other companies that deal in more generic goods. Praxair also sold its U.S. home health care business in March 2011 which saw annual sales of about $150 million. Praxair is also highly dependent on energy costs as they are their highest costs, is energy costs rise PX may see their profit margins shrink.


Praxair accounts for only 0.55% of our fund’s holdings which will make any gains or losses in the future insignificant. I recommend we sell our stake in PX and use the funds for a company with better growth potential.

Sigma-Aldrich Corp. (NYSE: SIAL)

Close Price (9/30/11): $61.79 Total Shares Owned: 200 Percent of Sector: 29.86% Percent of Fund: 0.99%

Sigma-Aldrich Corporation does business in a range of chemicals, biochemicals, and equipment worldwide. SIAL sells over 100,000 chemicals with over 80,000 customers, including scientific research institutions and pharmaceutical companies. SIAL can be seen as more of a life sciences and technology company than a chemical company as its products are used primarily in scientific research and pharmaceutical development. SIAL was created by the merger of Sigma Chemical and Aldrich Chemical companies in 1975 and is headquartered in St. Louis Missouri.

There are a number of risks that I see in Sigma-Aldrich and in an uncertain economy I believe SIAL is too risky for us to hold. SIAL’s products are generic and available from many competing companies but they separate themselves by offering same-day shipping. A result of this is SIAL has above-average inventories which during a bad economy can cause problems with low cash availability and thus adding risk due to low liquidity. SIAL’s largest source of income is from international sales which makes their profits highly dependent on foreign currency trends and the United States dollar’s value.

SIAL accounts for less than 1% of our fund’s holdings and with their sales and profits being very difficult to predict I believe we should sell our stake in them and find a less risky company to invest in.


-‐ Sold 75 shares of PX on 5/5/11

-‐ Sold 100 shares of SIAL on 5/5/11


Sector Breakdown

The Materials sector is a collection of companies that are involved in the discovery, development, and processing of raw materials. This also includes the mining and refining of metals, chemical producers, and forestry products. This sector is highly sensitive to changes in the business cycle as they supply materials for construction and other industries which rely on a strong economy. Supply and demand fluctuations also greatly affect the materials sector because prices of raw materials are largely driven by demand.

Prospects

DOW CHEMICAL (DOW)

Dow is a provider of plastics, chemicals, and agricultural products that does business in over 175 countries and is the third largest chemical company by market capitalization. Dow’s annual R&D is over $1 billion, and as a result they are consistently coming up with new and improved areas of revenues that can add value to the company. Dow was founded in 1897 and is headquartered in Midland, Michigan.

POTASH CORP. OF SASKATCHEWAN, INC. (POT)

PotashCorp is the world’s largest potash producer and the third largest producer of nitrogen and phosphate, these being the three primary crop nutrients used to produce fertilizer. PotashCorp was founded in 1975 and is headquartered in Saskatoon, Saskatchewan, Canada.


The materials sector has kept in-line in terms of performance with the S&P 500 index, following it in its up and downs but historically it can show larger losses and greater gains than the index. With uncertainty with Greek’s possible default I believe we should equally weight or underweight the materials sector for our fund.


TELECOMMUNICATIONS By Ben Homan

Sector Allocation Recommendation: Neutral Current Sector Weight in Portfolio 3.42% Current Sector Weight in Benchmark 3% Benchmark Weight ± 50% 1.5-4.5% Sector Stocks in Portfolio 2 Sector Stocks in Benchmark 8 Portfolio Sector Weighted Average Beta .66 Benchmark Sector Weighted Average Beta .69

Sector Summary

Since March 31st, both the Telecom sector and the S&P 500 have suffered negative returns. However, Telecom has experienced less price volatility and outperformed the S&P, especially over the final two months of the period. As seen in the graphs below, the Telecom sector has outperformed the market during the past six months by almost 8%. Additionally, both DCF Telecom holdings American Tower and AT&T outperformed the Telecom index as a whole.

Comparative Returns S&P 500 v. S&P 500 Telecom Index


Performance – DCF Holdings vs. Telecom sector


Strengths

The Telecom industry is a global system that affects almost everyone in the world. It connects the world and makes communication almost effortless. Because the need for industry is strong and will continue to be so in the future, there is no worry that the sector will become irrelevant. A significant strength for Telecom companies comes in the fact that due to the high requirements of startup capital, the threat of viable new entrants to the market is relatively low. This has been especially true in the past several years. The depressed U.S. market and new regulations have made financing more difficult to come by for potential Telecom startups. As it stands, 78% of Telecom revenue in the U.S. comes from just four companies: AT&T, Verizon, Sprint, and T-Mobile.

An additional strength for the sector comes in the development of data plans and similar services. Wireless providers now provide data plans which allow users to connect to the internet via their phones. These data plans come with different usage limits and varying costs and are increasingly becoming necessary. It is estimated that only 60% of wireless customers have data plans. As this percentage increases, Telecom sectors will be able to enjoy continued revenue growth.


Weaknesses

As discussed above, the sector requires large amounts of capital. The industry is one of the most dynamic, and Telecom companies must continually invest in new technology. This in combination with the necessary leasing of communication tower space results in relatively low margins. Despite the threat of new entrants being relatively low, the Telecom sector experiences a high degree of competition. Because products and services do not significantly differ from carrier to carrier, customers look for the lowest prices while still receiving reliable service. This means that the power of the buyers is very high and Telecom companies must compete on a low cost strategy. High capital requirements, low margins, and necessary low product cost results in a sector that is difficult to compete in unless you are one of the large and well established companies.

Sector Holdings Analysis

During the period, the D’Artagnan Capital Fund held two stocks in the Telecom sector. These were American Tower and AT&T. Compared to our S&P 500 benchmark, the fund was overweight. Below is a brief description of the holding.

DCF TELECOM HOLDINGS as of NOVEMBER 6, 2011

Company Name Market Capitalization Total Revenue (LTM) EBITDA (LTM) EBITDA Margin ROE EV/EBITDA Dividend Yield BetaAT&T (T) $174.5B $124.3B $39.01B 31.38% 10.33% 5.84 5.90% 0.47 American Tower (AMT) $22.64B $2.34B $1.41B 60.26% 7.91% 20.25 -‐ 0.39

AT&T, Inc. (NYSE: T)

Closing Price (9/30/11): $28.52 Shares: 600 Percentage of Portfolio: 1.36% Percentage of Sector: 38.88% View: AT&T is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services. As of 2010, AT&T is the 7th largest company in the United States by total revenue, as well as the 4th largest non-oil company in the US. Domestically, they serve 95.5 million wireless subscribers and operate in all 50 states as well as Puerto Rico and the U.S. Virgin Islands. Due to the high barriers to entry within the industry, AT&T enjoys relatively low competition, coming primarily from two companies, Verizon and Sprint. Despite relatively high market saturation, AT&T has opportunities to continue revenue growth through several areas. Only


around 60% of AT&T customers have data plans currently, and demand for data usage is predicted to increase 8-10x by 2015. As this demand and usage increases, AT&T can expect to grow revenues. To meet increasing demand, AT&T has proposed a merger with T-Mobile, the 4th largest of the wireless providers. This move has been blocked by the Department of Justice and is presently being reviewed. If this passes, AT&T will substantially increase its network and subscriber base.

Currently, AT&T is the sole holding of the DCF in the telecom sector. We believe that holding just AT&T, based on the growth opportunities presented, provides a greater opportunity to outperform the market than by holding several telecom stocks. In addition to potential price appreciation, AT&T has one of the most attractive yields in the S&P at 5.90%. American Tower, Inc. (NYSE: AMT) Closing Price (9/30/11): $53.80 Shares: 500 Percentage of Portfolio: 2.14% Percentage of Sector: 61.12% View: American Tower develops, owns, and operates communications sites; and leases antenna space on multi-tenant communications sites to wireless service providers, and radio and television broadcast companies. American Tower owns approximately 21,000 towers in the United States as well as an additional 18,000 internationally in Brazil, Chile, Colombia, Ghana, India, Mexico, Peru, South Africa and the United Kingdom.

Because of the high costs associated with building and/or acquiring towers, American Tower has very little competition. However, American Tower’s revenue growth faces risk from potential mergers among wireless carriers. Their revenues are generated by four main companies both domestically and abroad, so changes involving these companies could significantly impact American Tower’s financial position.

Changes in Sector Holdings 5/3/11 -- Verizon (VZ) – Sold 300 shares at $38.00

Screening Process

Telecom stocks were selected based on the following requirements:

1) Leading market share within the industry 2) Consistent positive earnings over the last 3 years


3) Low valuation multiples compared to industry averages 4) Undervalued discounted cash flow model

Because the Telecom sector is so small, the screening requirements differ slightly from other sectors. Because of the capital requirements, a large market capitalization relative to the sector is important. A company must then have produced positive earnings for the last several years. If a Telecom company is consistently failing to produce profits, the capital requirements will be difficult to meet and could result in the company falling behind competitors in terms of innovation and quality of service. After additional qualitative analysis, a relative valuation and discounted cash flow model are performed to evaluate whether or not the company is undervalued.

Prospects

AT&T (T) AT& T has proposed a merger with T-Mobile. Currently being blocked by the Department of Justice, if the merger goes through, AT& T will significantly increase its network coverage and quality as well as provide additional revenue through an increased customer base. AT& T also provides one of the most attractive dividend yields in the S&P 500 at 5.90%. The income from the high yield, in addition to the potential revenue gains from the T-Mobile merger make AT& T an intriguing prospect. MetroPCS (PCS) MetroPCS communications are a small, fairly new entrant into the Telecom industry. Although it has not established profitability yet, MetroPCS should be monitored due to its differentiation strategy. While most Telecom carriers provide 4G plans solely on a 1 to 2 year basis with smartphones costing over $200, MetroPCS is attempting to corner a different part of the market. Management made the correct decision in skipping the construction of a 3G network and moving directly to 4G. MetroPCS is targeting consumers that want 4G capabilities while on a month to month plan. Additionally, they are working with suppliers to develop 4G capable phones in the $100-150 range.

Sector Breakdown

The industry has two main segments: wireless and wireline services.

Wireline

Originally the main revenue driver of the industry, wireline services deal primarily with home phone services. Growth in this segment has been stagnant as people continue to rely more on wireless plans. Wireline providers have tried to offset this by increasing their services in wireline video and business aspects.


Wireless

Wireless has been the primary growth driver of the industry. Cell phone usage has exploded over the last decade and revenues continue to grow as more people are upgrading to smartphones and the required data packages. However, the percentage of revenues generated by wireless voice services has decreased since 2009, with data plan revenue increasing to now 33% of total Telecom revenues.


Our recommendation is to move towards neutrally weighting the Telecom sector. Due to the high domestic market saturation, future valuation models should begin to reflect slightly slowing growth rates. However, we believe that margins should improve slightly as companies begin to focus more on cost control.


UTILITIES By Nicholas Laborie

Sector Allocation Recommendation: Underweight

Current Sector Weight in Portfolio: 3.14%

Benchmark Weight ± 50%: 1.88% - 5.63%

Sector Stocks in Portfolio: 3

Sector Stocks in Benchmark: 35

Portfolio Sector Beta: 0.76

Benchmark Sector Beta: 0.78

Sector Summary

With only modest improvement expected in the housing and power markets, look for utility stocks to realize only a modest advance in 2012. Along with the slowly recovering housing and power markets, political turmoil has greatly affected growth opportunities in utilities companies; with the government implementing new policies and regulations on nuclear energy, costs have risen and projects have halted. However, with the constant volatility shown by the market in recent months, the DCF should perhaps consider moving to a neutral weighting in the sector. Although, the priority should be allocating money into better opportunities and these opportunities are few and far between in the utilities sector.

The D’Artagnan Capital Fund currently holds 3 stocks in the Utilities industry: PG&E Corporation (PCG), Progress Energy (PGN), and NRG Energy (NRG). In comparison to the S&P 500, DCF is currently underweight in the sector.

Currently two of our three stock holdings fall into the upper-tier of the S&P 500 Utilities sector market capitalization size and also have lower betas than the overall sector. This shows that DCF currently holds positions in less risky securities in an already relatively defensive industry during a very volatile time period.

In the following report, there will be a discussion of screening process for security selection using relative analysis, the advantages and disadvantages of investing in the utilities sector, and the reasoning behind the recommendation of an underweight allocation in this sector.


Comparative Returns

Utilities Index vs. S&P 500

Current Holdings Analysis

Progress Energy (NYSE: PGN)

Shares owned: 300 Close Price (4/15/2011): 46.43

Progress Energy, headquartered in Raleigh, N.C., is a Fortune 500 energy company with more than 22,000 megawatts of generation capacity and approximately $10 billion in annual revenues. Progress Energy includes two major electric utilities that serve about 3.1 million customers in the Carolinas and Florida.

The company is pursuing a balanced strategy for a secure energy future, which includes aggressive energy-efficiency programs, investments in renewable energy technologies and a state-of-the-art electricity system. Although growth within the utilities sectors is very limited, Progress Energy has taken the necessary steps to expand in emerging markets. Because of forward-looking management and growth strategy, Progress Energy has proven to be an undervalued security that demonstrates vast growth potential.


PG&E Corporation (NYSE: PCG)


PG&E Corporation is a holding company that holds interests in energy based businesses. The company’s holdings include a public utility operating in northern and central California that provides electricity and natural gas distribution; electricity generation, procurement, and transmission; and natural gas procurement, transportation, and storage.

PG&E Corporation has recently announced that it received approval of its revenue needs in the 2011-2015 Gas Transmission and Storage Rate Case from the California Public Utilities Commission. This is an extremely important step for PG&E as it preserves the long-term safety and reliability of natural gas service for customers at reasonable rates. With interest in nuclear energy, PG&E Corporation is a company that has long-term stability potential and has proven to be undervalued as well.

NRG Energy (NYSE: NRG)


NRG Energy, Inc., together with its subsidiaries, operates as a wholesale power generation company. The company engages in the ownership, development, construction, and operation of power generation facilities. It also involves in the transacting in and trading of fuel and transportation services; the trading of energy, capacity, and related products in the United States and internationally; and the supply of electricity, energy services, and cleaner energy and carbon offset products to retail electricity customers in deregulated markets. The company operates natural gas- fired, coal- fired, oil-fired, nuclear, solar, and wind power plants. As of December 31, 2010, it had power generation portfolio of 193 operating fossil fuel and nuclear generation units with an aggregate generation capacity of approximately 24,570 megawatt (MW), as well as ownership interests in renewable facilities with an aggregate generation capacity of 470 MW. The company portfolio also includes approximately 24,035 MW generation capacity in the United States, and 1,005 MW generation capacity in Australia and Germany. In addition, it has a district energy business with steam and chilled water capacity of approximately 1,140 megawatts thermal equivalent. NRG Energy, Inc. was founded in 1989 and is headquartered in Princeton, New Jersey.


Changes to Holdings

• Purchased 300 shares of Progress Energy @ $39.66 (4/07/2010) • Sold 875 shares of Georgia Power Co. @ $25.46 (10/06/2010)

• Sold 800 shares of Duke Energy Corp. @ $17.65 (10/13/2010)

• Purchased 175 shares of PG&E Corp. @ $47.72 (12/17/2010)

• Sold 350 shares of Dominion Resources @ $42.11 (12/17/2010)

• Sold 200 shares of PG&E @ $45.52 (5/10/2011)

• Purchases 280 shares of NRG Energy @ $24.10 (5/10/2011)

Relative Analysis

The following list represents the 35 companies in the Utilities Sector of the S&P 500 sorted by market capitalization in descending order; current holdings are shaded.

Ticker Company Name Market Cap P/E Total Return YTD Beta - 1 yr EBITDA Margin Dividend Yield SO US Equity SOUTHERN CO 37,050,601,472.00 $ 18.46 18.41 0.55 33.44 4.37 D US Equity DOMINION RES/VA 29,369,139,200.00 $ 16.63 24.52 0.68 30.25 3.82 EXC US Equity EXELON CORP 29,185,810,432.00 $ 10.24 9.76 0.69 35.61 4.77 DUK US Equity DUKE ENERGY CORP 27,488,329,728.00 $ 14.43 20.71 0.64 39.23 4.84 NEE US Equity NEXTERA ENERGY 23,847,940,096.00 $ 12.92 11.82 0.75 31.97 3.90 AEP US Equity AMERICAN ELECTRI 19,171,620,864.00 $ 15.75 14.71 0.72 31.85 4.74 SE US Equity SPECTRA ENERG 19,072,710,656.00 $ 16.57 20.99 0.96 47.83 3.82 FE US Equity FIRSTENERGY CORP 19,033,030,656.00 $ 13.46 29.48 0.76 25.48 4.83 ED US Equity CONS EDISON INC 17,152,499,712.00 $ 16.54 22.24 0.62 24.01 4.10 PPL US Equity PPL CORPORATION 17,141,820,416.00 $ 10.27 17.18 0.65 37.26 4.72 PEG US Equity PUB SERV ENTERP 17,140,060,160.00 $ 11.64 9.93 0.80 33.60 4.04 PCG US Equity PG&E CORP 16,584,380,416.00 $ 12.09 -11.82 0.64 28.90 4.45 PGN US Equity PROGRESS ENERGY 15,513,749,504.00 $ 17.50 27.64 0.65 30.00 4.71 EIX US Equity EDISON INTL 13,280,060,416.00 $ 13.41 8.33 0.76 29.16 3.14 SRE US Equity SEMPRA ENERGY 12,859,199,488.00 $ 12.01 4.98 0.82 26.98 3.58 XEL US Equity XCEL ENERGY INC 12,637,949,952.00 $ 15.06 14.21 0.71 26.25 3.99 ETR US Equity ENTERGY CORP 12,279,230,464.00 $ 8.76 1.74 0.73 33.55 4.78 AES US Equity AES CORP 9,141,498,880.00 $ 10.54 -2.22 1.17 27.96 0.00 DTE US Equity DTE ENERGY CO 8,821,357,568.00 $ 14.16 19.14 0.78 27.21 4.51 CNP US Equity CENTERPOINT ENER 8,650,692,608.00 $ 14.40 33.57 0.85 26.26 3.89 OKE US Equity ONEOK INC 7,984,748,032.00 $ 25.76 44.20 0.95 9.38 2.89 CEG US Equity CONSTELLAT ENER 7,893,816,832.00 $ 17.27 30.66 0.79 9.48 2.45 AEE US Equity AMEREN CORP 7,803,406,848.00 $ 11.25 19.28 0.84 29.59 4.96 WEC US Equity WISCONSIN ENERGY 7,567,079,936.00 $ 14.81 14.13 0.75 26.71 3.18 NI US Equity NISOURCE INC 6,249,098,240.00 $ 16.47 32.03 0.83 23.95 4.14 NU US Equity

NORTHEAST UTILS 6,131,131,904.00 $ 14.20 11.35 0.80 29.39 3.17 SCG US Equity SCANA CORP 5,498,824,192.00 $ 14.30 8.87 0.76 26.47 4.55 CMS US Equity CMS ENERGY CORP 5,220,815,872.00 $ 13.64 15.53 0.80 23.32 4.08 NRG US Equity NRG ENERGY 5,191,739,904.00 $ 32.61 10.13 1.01 22.45 0.00 PNW US Equity PINNACLE WEST 5,049,631,744.00 $ 15.73 17.11 0.79 37.35 4.54 XYL US Equity XYLEM INC 4,660,149,760.00 $ 1.61 POM US Equity PEPCO HOLDINGS 4,443,806,208.00 $ 15.18 11.93 0.82 17.44 5.52 TEG US Equity INTEGRYS ENERGY 4,144,561,920.00 $ 16.49 13.64 0.86 15.06 5.14 TE US Equity TECO ENERGY INC 4,101,729,024.00 $ 15.33 10.62 0.89 27.98 4.53 GAS US Equity NICOR INC 2,531,855,104.00 $ 23.26 14.27 0.75 15.05 3.34


Screening Process

The utilities sector in general is more of a value-oriented sector rather than a growth one. Most electric utilities have a franchise territory. Electric utilities that are in well-developed states may not have a lot of opportunity to grow their business. They are limited by the geographic size of their franchise territory. By analyzing P/E, EV/EBITDA, and dividend yields this allows for accurate valuation of any securities within the utilities sector. However, also utilizing qualitative analysis to search for those rare utilities companies striving to expand into new markets and projects (as will be seen by potential prospects) has proven to be important as well. Steps in application of screening process:

1. List stocks currently listed in S&P 500 Utilities Index

2. Target companies with P/E ratio lower or equal to average P/E ratio (because growth is limited, do not eliminate companies that fall near the average until performance of qualitative analysis to further analyze their growth potential).

3. If company issues dividends, analyze projected 3 year dividend growth and see if it is aligned with the average or if they plan to stop paying dividends (this is an important factor because dividends can be an attractive surplus when investing in utilities).

4. Take into consideration EBITDA margins and eliminate any companies that fall well below the average, as this shows poor efficiency.

NOTE: Screening process is merely a functional execution of how to find undervalued stocks in my sector; however, if research provides an opportunity within that company, further valuation will be implanted to make a decision.

Prospects

Based on the screening process as well as the qualitative research, two potential securities could be undervalued as well as one stock that showed promising growth (NRG).

Ticker Company Name Market Cap P/E Total Return YTD Beta - 1 yr EBITDA Margin Dividend YieldEXC US Equity EXELON CORP 29,185,810,432.00$ 10.24 9.76 0.69 35.61 4.77ETR US Equity ENTERGY CORP 12,279,230,464.00$ 8.76 1.74 0.73 33.55 4.78AES US Equity AES CORP 9,141,498,880.00$ 10.54 -2.22 1.17 27.96 0.00

Exelon Corporation (NYSE: EXC)

Exelon Corporation is a utility services holding company. The company, through its subsidiaries distributes electricity to customers in Illinois and Pennsylvania. Exelon also distributes gas to customers in the Philadelphia area as well as operates nuclear power plants in states that include Pennsylvania and New Jersey. Because nuclear power constitutes 20% of U.S. electricity, does not produce greenhouse emissions, and is at least for existing plants a low-cost source of energy: Exelon proves to be undervalued not only because it has many operations in


nuclear energy, but also its 8% decline in the past month due to market overreaction in respect to the natural disasters in Japan and the nuclear meltdown.

Entergy Corporation (NYSE: ETR)

Entergy Corporation, together with its subsidiaries, engages in electric power production and retail electric distribution operations in the United States. The company operates in two segments, Utility and Entergy Wholesale Commodities. The Utility segment involves in the generation, transmission, distribution, and sale of electric power in the portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans. This segment operates coal, gas, and hydro power generation facilities, as well as a natural gas distribution business. The Entergy Wholesale Commodities segment owns and operates six nuclear power plants in the northern United States that sell the electric power produced by those plants to wholesale customers. This segment also provides services to other nuclear power plant owners; and owns interests in non-nuclear power plants that sell the electric power produced by those plants to wholesale customers.

AES Corporation (NYSE: AES)

The AES Corporation, through its subsidiaries, operates as a power company in Latin America, Africa, North America, Europe, the Middle East, and Asia. The company owns and operates two businesses, Generation and Utilities. The Generation business owns and/or operates power plants to generate and sell power to wholesale customers, such as utilities and other intermediaries. It generates electricity through various sources, including coal, gas, fuel oil, biomass, hydroelectric, wind, and solar. The Utilities business owns and/or operates utilities to distribute, transmit, and sell electricity to end-user customers in the residential, commercial, industrial, and governmental sectors. As of December 31, 2010, the company owned electricity generation and distribution facilities with a total capacity of approximately 40,500 megawatts and distribution networks serving approximately 12 million people in 28 countries.


Strengths

1.) High dividend yields

2.) With the Federal Reserve keeping interest rates low and interest rates on C.D.’s and savings accounts being miniscule, investors are turning to electric utilities as an attractive replacement.

3.) Development of more nuclear projects is bringing more growth to the utilities sector as a whole.


Weaknesses

1.) Environmental considerations dealing with emissions of pollutants.

2.) Very difficult for utilities companies to build coal-fired generating facilities due to strict opposition from environmentalists and the public.

3.) Sharp increases in the costs of building materials and labor have made any kind of utility construction much more expensive.

4.) Electric utilities will be facing significant new challenges adjusting to the green

initiatives put in place by the new administration and Congress. Coal generates 56% of electricity in the United States which is a significant contributor to carbon emissions.

5.) The cost to reduce carbon emissions will have a significant impact on the economics of the utilities sector and their support industries.

6.) With the recent natural disasters faced in Japan, many nuclear projects have been halted and current nuclear power plants are being reevaluated for safety.

7.) New government regulations on nuclear energy will raise costs for utilities companies.

8.) Due to price regulation and prices increasing, utilities companies will have more trouble passing on costs to customers and eventually have to incur some of the costs.

9.) Weather and natural disasters


Although utilities are less volatile, less risky, and offer high dividend yields to investors, the opportunities for capital appreciation and high returns are lacking. With new government implementations and regulations dealing with emissions of pollutants and nuclear power plant safety issues, there will be a long-term struggle for utilities companies in general. As prices continue to rise, more and more companies have cut down on their dividend growth, which happens to be the most attractive reason to invest in utilities. Companies will also be faced with issues passing on rising prices to consumers as the government may intervene and disallow companies to do so. With the U.S. economy recovering and Europe starting to show signs of life, investors will lean more towards cyclical sectors rather than defensive ones. For these specific reasons, underweighting the utilities sector and focusing on allocating money towards better opportunities would be the strategically correct thing to do. This being said, because the fund takes a bottom-up approach to investing, the fund will always be looking for opportunities in the utilities sector that have good growth potential and high returns. In this report there are 3 potential securities that will be looked at throughout the semester and the fund may potentially reduce its position in a current security to take advantage of these opportunities.


CURRENT HOLDINGS AS OF SEPTEMBER 30, 2011

Abbott Labs (ABT) 500 Shares

Aflac Inc. (AFL)

250 Shares

Alcoa Inc. (AA) 2300 Shares

American Towers (AMT)

500 Shares

Apple Inc. (AAPL) 200 Shares

AT&T Inc. (T)

600 Shares

BP PLC (BP) 1140 Shares

Chevron Corp (CVX)

440 Shares

Chesapeake Energy Corp (CHK) 750 Shares

Chubb Corp. (CB)

500 Shares

Cognizant Tech Solutions (CTSH) 850 Shares

CSX Corp (CSX)

1950 Shares

Express Scripts Inc. (ESRX) 400 Shares

Exxon Mobil Corp. (XOM)

300 Shares

FedEx Corp. (FDX) 450 Shares

General Electric Co (GE)

1450 Shares

General Motors Co (GM) 1700 Shares

Google Inc. (GOOG)

60 Shares

Illinois Tool Works Inc. (ITW) 1030 Shares

Intel Corp. (INTC)

1500 Shares

Johnson & Jonson (JNJ) 400 Shares

JPMorgan & Chase Co (JPM)

780 Shares

Kellogg Co. (K) 400 Shares

Key Corp (KEY)

4200 Shares

McDonald’s Corp (MCD) 700 Shares

Microsoft Corp. (MSFT)

2100 Shares


NRG Energy Inc

300 Shares

Peabody Energy Corp. (BTU) 250 Shares

Pepsico Inc. (PEP)

600 Shares

PG&E Corp. (PCG) 425 Shares

PNC Financial Services Group (PNC)

1100 Shares

Praxair Inc. (PX) 75 Shares

Procter & Gamble Co. (PG)

500 Shares

Progress Energy Inc (PGN) 300 Shares

Qualcomm Inc. (QCOM)

600 Shares

RR Donnelley & Sons Co

535 Shares

Sigma Aldrich Corp. (SIAL) 200 Shares

Teva Pharmaceutical Industries

(TEVA) 575 Shares

Total SA (TOT)

600 Shares

US Bancorp (USB) 300 Shares

UnitedHealth Group Inc (UNH)

750 Shares

Visa Inc. (V) 935 Shares

Wal-Mart Stores Inc. (WMT) 375 Shares

d’artagnan capital fund - xavier university · dividend"yield" 2.11! 2.31!...

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