Darden Capital Management Case Study

Darden Capital Management

The trustees of the Monticello Fund were having their annual meeting for the Darden Graduate school endowment which is managed by its MBA Graduate Students. The Fund strategy was to use fundamental analysis to identify and invest in new companies and to outperform S&P 500.

The new MBA fund managers took over the management of Monticello Fund on the 31st of March 2004 where the previous team had generated returns of 42.9% over 12 months which outperformed S&P 500 of 35.1% for the same period.

They had a list of companies to invest in which had mixed enthusiasm amongst the mangers. The list included 6 companies in 6 different sectors ranging from technologies to Gold and Silver.

The team split into two ideas and school of thought. The first group wanted to concentrate on underpriced stock giving the highest return to the fund by investing in Micron. The second group wanted to adhere to return but with a sound caution to risk.

Although the second group had the same ideas on looking at risk they were in conflict by the way this risk should be measured. One person wanted to measure risk and return by looking at the betas and standard deviation of the stock, while another was simply stating that a fully diversified portfolio would mitigate the risk taken.

Fundamental analysis is important the point of investing in a portfolio it is not just mitigating risk but fundamental factors such as the financial soundness of a company is paramount when investing before looking at risk or ways to mitigating risk some attention to a firm’s financials condition and the stock outlook needs to be taken into consideration .

Berkshire Heathway total returns 2000-2010 was 76% compare to a negative S&P of 11%. Their sole strategy is to invest not in the stocks but in the business coupled with diversification of sectors.

In order to make an alpha the stock to be bought will have to be priced attractively. This is why we have decided to look at the stock and its future outlook as per the table attached.

From a dividend discount model perspective all the applicable stocks have proven to be overvalued. 2007 stock prices all have increased from their 2004 value although this might indicate a whole market movement but when forward PE ratio is considered, it shows that in Boise Cascade and New York times had a larger PE in 2004 than in 2007 which indicate that they have reached their growth potential and have grown their earnings in the future relative to price and reduced their risk .

Looking at the returns relative to the Beta & Standard Deviation Boston Beers, Maylan Labs & New York Times are the best pick out of the 6 where New York Times showing all the positive aspects of the future of a stock with growth in revenue and the lowest volatility with an acceptable return and an A rating credit worthiness.

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