Nibbs_Iris_FIN Seminar Term Project_FINAL

Kratchman Portfolio Management
Drexel University Spring 2015 Finance Seminar
Trailblazer Investment Advisors (TIA)

IRIS NIBBS, CFA

2 Kratchman Portfolio Management

Table of Contents
Objective ................................................................................................................................ 4

Introduction
.................................................................................................................................................................................
4

Economic Analysis .................................................................................................................. 5

GDP/Consumer
and
Government
Spending
..................................................................................................................
5

2013
.................................................................................................................................................................................................
6

2014
.................................................................................................................................................................................................
9

2015
Q1
.........................................................................................................................................................................................
12

Unemployment
Level
............................................................................................................................................................
13

2013
...............................................................................................................................................................................................
13

2014
...............................................................................................................................................................................................
14

2015
Q1
.........................................................................................................................................................................................
14

Interest
Rates/Housing
Market
........................................................................................................................................
15

2013
...............................................................................................................................................................................................
15

2014
and
2015
Q1
....................................................................................................................................................................
15

Currency/Level
of
Inflation
................................................................................................................................................
16

2013
...............................................................................................................................................................................................
17

2014
and
2015
Q1
....................................................................................................................................................................
19

Stocks
...........................................................................................................................................................................................
20

2013
–
2015
Q1
.........................................................................................................................................................................
21

Default
risk
and
Overall
Credit
Quality
..........................................................................................................................
21

Interest
Rates
and
the
Economy’s
Future
......................................................................................................................
22

Asset Allocation .................................................................................................................... 24

Cash
................................................................................................................................................................................................
25

Domestic
Equity
........................................................................................................................................................................
25

Bonds
.............................................................................................................................................................................................
25

International
Exposure
..........................................................................................................................................................
25

Commodities
...............................................................................................................................................................................
25

Real
Estate
...................................................................................................................................................................................
25

Current
Holding
Assessment
.............................................................................................................................................
26

TWX
................................................................................................................................................................................................
26

TWC
................................................................................................................................................................................................
26

DLTR
..............................................................................................................................................................................................
27

Commercial
Paper
...................................................................................................................................................................
27

Implementation .................................................................................................................... 28

Microchip
Technology
Inc.
(MCHP)
..................................................................................................................................
28

Exchange
Traded
Funds
........................................................................................................................................................
31

Large
cap
($5B
or
higher)-‐‑
18%
........................................................................................................................................
33

Mid
cap
($1B
-‐‑
$5B)-‐‑
9%
.......................................................................................................................................................
36

Small
cap
($1B
or
lower)-‐‑
9%
............................................................................................................................................
37

International-‐‑
22%
..................................................................................................................................................................
38

Specific
Commodities-‐‑
15%
..................................................................................................................................................
40

Cash/Risk
Free
Asset-‐‑
Choose
MMF-‐‑
7%
........................................................................................................................
41

Kratchman Portfolio Management 3

Bibliography .......................................................................................................................... 42

Appendix ............................................................................................................................... 49

Cash
Flow
Sheet
.......................................................................................................................................................................
49

Asset
Allocation
Table
..........................................................................................................................................................
50

Portfolio
Distribution
Table
...............................................................................................................................................
51

Ratios
on
Bond
Company
....................................................................................................................................................
52

Duration
on
Bond
...................................................................................................................................................................
53

Fund/ETF
Supporting
Data
................................................................................................................................................
54

Valuation
Ratios
for
Individual
Stocks
..........................................................................................................................
55


Objective
Introduction
This spring 2015 I will be taking on the family of Sam and Amy Kratchman as a new client
of the TIA firm. They were left with $1,000,000 and they will be choosing the best if they left
this investment with our firm. We understand that they are planning to retire with this
inheritance along with providing their children with a comfortable life. This will include looking
into having enough money to get a beach house, retiring in 26 years (at age 65) and putting
their two children through college. I will be aiming to create one of the best-‐diversified
portfolios for them. In order to do this there will be a set of analyses and then proper
recommendations in the end to see where the best areas will be to invest The Kratchman’s
money. First I will be analyzing the economy from 2013 up to and including present day
(Quarter 1 of 2015). Then I will create a portfolio that includes the risk and return of it, while
also including the asset allocations. Sam and Amy Kratchman will be put into great hands if they
join TIA through their journey of a newly found inheritance.


Economic Analysis
GDP/Consumer and Government Spending

Figure 11

1
http://bea.gov
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2008 2009 2010 2011 2012 2013 2014
Gross%domestic%product%(GDP) )0.3 )2.8 2.5 1.6 2.3 2.2 2.4
!
Personal%consumption%expenditures )0.3 )1.6 1.9 2.3 1.8 2.4 2.5
!!Goods................................ )2.5 )3.0 3.4 3.1 2.8 3.4 3.4
!!!!Durable!goods...................... )5.1 )5.5 6.1 6.1 7.3 6.7 6.9
!!!!Nondurable!goods................... )1.1 )1.8 2.2 1.8 0.7 1.9 1.8
!!Services............................. 0.8 )0.9 1.2 1.8 1.3 1.9 2.0
!
Gross%private%domestic%investment )9.4 )21.6 12.9 5.2 9.2 4.9 5.9
!!Fixed!investment..................... )6.8 )16.7 1.5 6.3 8.3 4.7 5.3
!!!!Nonresidential..................... )0.7 )15.6 2.5 7.7 7.2 3.0 6.3
!!!!!!Structures....................... 6.1 )18.9 )16.4 2.3 13.1 )0.5 8.1
!!!!!!Equipment........................ )6.9 )22.9 15.9 13.6 6.8 4.6 6.5
!!!!!!Intellectual!property!products... 3.0 )1.4 1.9 3.6 3.9 3.4 4.9
!!!!Residential........................ )24.0 )21.2 )2.5 0.5 13.5 11.9 1.6
!
%%Exports 5.7 )8.8 11.9 6.9 3.3 3.0 3.1
%%Imports )2.6 )13.7 12.7 5.5 2.3 1.1 4.0
!
Gov't%expenditures%&%investment 2.8 3.2 0.1 )3.0 )1.4 )2.0 )0.2
!!Federal.............................. 6.8 5.7 4.4 )2.7 )1.8 )5.7 )1.9
!!!!National!defense................... 7.5 5.4 3.2 )2.3 )3.3 )6.6 )2.2
!!!!Nondefense......................... 5.5 6.2 6.4 )3.4 1.0 )4.1 )1.5
!!State!and!local...................... 0.3 1.6 )2.7 )3.3 )1.2 0.5 1.0
Real%GDP:%Percent%Change%From%Preceding%Year


Figure 22

2013
In 2013 there were a lot of influences that made the GDP grow but not at a great amount. To
start 2013 did not start out well since the government was not stable at the time. There was a
government shutdown that greatly influenced the markets in the first quarter. It was one of the
longest government shutdowns in U.S. history aside from the one that occurred in the mid
1990s. It cost The United States nearly $2billion in productivity.3
This later hurt the economy
because the economic growth slowed down immensely just by the government being
shutdown for 16 days. By the government shutting down this causes uncertainty that later cost
$2 to $6billion in economic growth. Consumer spending was also stopped because national

2
http://bea.gov
3
http://www.washingtonpost.com/politics/federal-‐government-‐shutdown-‐cost-‐2-‐billion-‐in-‐lost-‐productivity-‐omb-‐
report-‐says/2013/11/07/e883c3ec-‐47f2-‐11e3-‐bf0c-‐cebf37c6f484_story.html
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2011 2012 2013 2014 2013Q1 Q2 Q3 Q4 2014Q1 Q2 Q3 Q4
!!!!Gross!domestic!product......... 1.6 2.3 2.2 2.4 2.7 1.8 4.5 3.5 -2.1 4.6 5.0 2.2
!
!!Personal!consumption!expenditures 1.55 1.25 1.64 1.72 2.45 1.23 1.39 2.51 0.83 1.75 2.21 2.83
!!!!Goods............................... 0.71 0.64 0.78 0.78 1.35 0.30 0.80 0.83 0.23 1.33 1.06 1.01
!!!!!!Durable!goods..................... 0.43 0.52 0.49 0.50 0.61 0.33 0.36 0.42 0.23 0.99 0.67 0.44
!!!!!!Nondurable!goods.................. 0.28 0.12 0.29 0.28 0.74 -0.03 0.43 0.41 0.00 0.34 0.39 0.57
!!!!Services............................ 0.84 0.61 0.86 0.94 1.11 0.93 0.59 1.69 0.60 0.42 1.15 1.82
!
!!Gross!private!domestic!investment 0.73 1.33 0.76 0.93 1.12 1.03 2.50 0.62 -1.13 2.87 1.18 0.84
!!!!Fixed!investment.................... 0.86 1.17 0.70 0.83 0.42 0.74 1.01 0.95 0.03 1.45 1.21 0.71
!!!!!!Nonresidential.................... 0.85 0.84 0.37 0.78 0.20 0.21 0.67 1.23 0.20 1.18 1.10 0.61
!!!!!!!!Structures...................... 0.06 0.32 -0.01 0.22 -0.33 0.19 0.29 0.34 0.08 0.35 0.14 0.14
!!!!!!!!Equipment....................... 0.66 0.37 0.26 0.36 0.28 0.09 0.27 0.76 -0.06 0.63 0.63 0.05
!!!!!!!!Intellectual!property!products.. 0.13 0.15 0.13 0.19 0.24 -0.08 0.11 0.14 0.18 0.21 0.34 0.41
!!!!!!Residential....................... 0.01 0.33 0.33 0.05 0.22 0.53 0.34 -0.28 -0.17 0.27 0.10 0.11
!!!!Change!in!private!inventories....... -0.14 0.15 0.06 0.10 0.70 0.30 1.49 -0.34 -1.16 1.42 -0.03 0.12
!
!!Net!exports!of!goods!and!services -0.02 0.04 0.22 -0.23 -0.08 -0.54 0.59 1.08 -1.66 -0.34 0.78 -1.15
!!!!Exports............................. 0.87 0.44 0.41 0.42 -0.12 0.82 0.67 1.30 -1.30 1.43 0.61 0.42
!!!!Imports............................. -0.89 -0.40 -0.19 -0.65 0.04 -1.36 -0.09 -0.22 -0.36 -1.77 0.16 -1.58
!!Govt!expenditures!&!investment -0.65 -0.30 -0.39 -0.03 -0.75 0.04 0.04 -0.71 -0.15 0.31 0.80 -0.32
!!!!Federal............................. -0.24 -0.15 -0.45 -0.14 -0.79 -0.26 -0.08 -0.79 -0.01 -0.06 0.68 -0.54
!!!!!!National!defense.................. -0.13 -0.18 -0.33 -0.10 -0.55 -0.09 0.03 -0.55 -0.18 0.04 0.66 -0.58
!!!!!!Nondefense........................ -0.11 0.03 -0.12 -0.04 -0.24 -0.17 -0.11 -0.24 0.17 -0.10 0.01 0.04
!!!!State!and!local..................... -0.41 -0.15 0.06 0.11 0.04 0.31 0.13 0.07 -0.14 0.38 0.13 0.22
Contributions!to!Percent!Change!in!Real!Gross!Domestic!Product


parks were shut down during this time costing around $500million in visitor spending.
Production of goods and services were halted for 6.6 million days due to the number of
employees not being able to work during this time as well.4
GDP was greatly affected by this
and Figure 2 shows this with the quarter-‐to-‐quarter numbers. That can also be the reason as to
why government spending was negative in the first quarter of 2013.

Gas prices also rose during 2013 and this had an influence on consumer spending.
Approximately 70% of consumers say that gas prices do have an influence on their spending.5

As gas prices rose they have to alter something else in their life, such as lowering the quality of
food that they buy to use that money towards the gas that they buy. Also people will
sometimes change the type of car that they own to have a car with better mileage or cheaper
gas intake. In 2013 gas was around $3.46/gallon in the beginning of the year then towards the
end of the year it was close to $3.82/gallon. Business owners and consumers had to look at
their spending consciously because gas was on the rise this year and it was not in their favor.

4
http://www.washingtonpost.com/politics/federal-‐government-‐shutdown-‐cost-‐2-‐billion-‐in-‐lost-‐productivity-‐omb-‐
report-‐says/2013/11/07/e883c3ec-‐47f2-‐11e3-‐bf0c-‐cebf37c6f484_story.html
5
http://www.forbes.com/sites/prospernow/2013/07/31/rising-‐gas-‐prices-‐influence-‐consumers-‐spending/


Figure 36

As far as government spending in 2013 the national deficit keeps increasing. It is currently at it’s
all time high at $16.9trillion. The Congress is said to borrow approximately $0.19 for every
$1.00 that they produce for the government. Tax revenue has been on the verge of returning
back to normal. Although this is occurring government spending is continuing to grow at
exponential levels that is creating infamous history in the U.S.7

6
http://www.heritage.org/research/reports/2013/08/federal-‐spending-‐by-‐the-‐numbers-‐2013
7


2014

Figure 48

Figure 59

In 2014 the U.S. is continuing to recover from the shutdown that occurred the year before.
People still do not feel safe with spending their money after the government came from such
an unstable time. An example is that people will continue to eat at their home instead of going

8
http://www.gallup.com/poll/180401/consumer-‐spending-‐strong-‐mostly-‐unchanged-‐december.aspx
9
http://www.gallup.com/poll/180401/consumer-‐spending-‐strong-‐mostly-‐unchanged-‐december.aspx


out to “wine and dine.”10
When referring to Figure 1 GDP did increase so the economy is still
performing at a good level. Consumer spending was consistent with last year’s numbers besides
Quarter 1. During this time The United States had a massive set of extreme winter weather
conditions that were not normal for the area. This affected production by places getting closed
down due to the conditions. After the winter season passed consumer spending went back to
normal and surpassed 2013’s consumer spending, which is positive news. Consumers are now
starting to trust their government more by spending more on goods and services amongst the
country. You can see this in Figure 4 by the upward trend that in taking place. In Figure 5, after
winter season ended consumer spending for both low income and high income consumers both
increased in consumer spending so weather definitely had an impact on spending in 2014.

10
http://news.stanford.edu/news/2014/september/shutdown-‐siepr-‐paper-‐092514.html


Figure 611

In regards to government spending it is similar to 2013 just slightly lower. After the introduction
of the Budget Control Act, the total spending has decreased immensely saving a lot of money
for the country. This has been in use for two years and that is another factor as to why the
GDPs for the past two years have also been similar in that category.

11


2015 Q1

Figure 712

In the first quarter of 2015 consumer spending did not go up as expected by the increase in
wages across the country.13
Although this happened there are projections that there will be an
increase in the coming months of 2015 for consumer spending due to the wage increase. When
looking at Figure 7 this was the smallest change in the past 3 years but hopefully this will
change. The severe winter weather conditions again did have a huge impact on consumer
spending these last few months, just like they did in 2014. So economists’ predictions should be
correct based on the positive outcome that occurred last year in 2014. In the latest news GDP
was 0.7%. This was due to multiple factors but the bigget was the impact the US strong
currency had on the decerase of exporting goods which is the major calculation for GDP. The
weather for Q1 also disrupted the importing and exporting of goods for the United States.

12
http://www.gallup.com/poll/181769/february-‐consumer-‐spending-‐level.aspx
13
http://www.ibj.com/articles/52492-‐us-‐consumer-‐spending-‐edges-‐up-‐on-‐income-‐increases


Unemployment Level

Figure 814

2013
Refer to Figure 8. When looking into 2013 the unemployment rate is still steadily going down
from the previous years, it is 6.7% by the end of December. 182,000 jobs were added15
to the
job market, which was slightly lower than 2012 but significantly higher than 2011. This shows
that the economy is still going in the right direction of having an almost fully employed country.
The less unemployed people that are in the country, the more consumer spending occurs. This
also increases the production levels in companies because more people are getting hired to do
more exports for the country. This is a positive outlook into the Future for the U.S. The Fed will
just keep a look at this as a factor to increase the Fed rate, which will be later discussed.

14
http://www.tradingeconomics.com/united-‐states/unemployment-‐rate
15
http://www.ibtimes.com/us-‐jobs-‐report-‐december-‐2013-‐unemployment-‐rate-‐drops-‐67-‐nonfarm-‐payrolls-‐big-‐
miss-‐wont-‐affect-‐fed


2014
In 2014 when still referring to Figure 8, the unemployment rate is still decreasing at a steady
pace. It is currently at 5.8%.16
This is a good outlook for the U.S. That means more people are
getting added to the labor force and production is still increasing. This will be a great impact on
GDP to add more exports to the country. This will make businesses more profitable and
consumers more satisfied.
2015 Q1
Some information still has not been released yet for the first quarter of 2015. But from the
information that we have received so far the outlook is looking positive for 2015.
Unemployment percentages are still decreasing. We are currently at 5.5%, so we are getting
closer to being a fully employed economy.17
This is great news for the economy because then
most of the people in the United States are involved in the nation’s labor force. That means less
people are likely to be homeless and production should be increasing along with that. This will
positively affect our GDP’s growth in the coming months, hopefully in a more influential and
positive way like it should.

16
http://www.usnews.com/opinion/economic-‐intelligence/2014/12/10/unemployment-‐rate-‐hides-‐who-‐the-‐
jobless-‐really-‐are
17
http://www.bls.gov/news.release/empsit.htm


Interest Rates/Housing Market
2013
In 2013 bank rates were raising that caused stress in the financial world. In May 2013-‐June 2013
10-‐year Treasury rose from 1.63% to 2.72%.18
Rising yields are an indicator of a growing strong
economy but this quick pace caused panic. Due to these rates increasing this would influence
the housing industry. People will not want to buy houses when interest rates are rising. So
instead they would wait to see if the rates would get any lower before investing and making the
most out of their money. This can also affect the Stock Market because investors will now be
making less profit with interest rates growing due to their return decreasing. So they would
look elsewhere to invest their money if rates kept increasing in the country. Equities would also
be another source of income better suitable for investors at this time.19

2014 and 2015 Q1
Now when talking about the Fed rates, they have been low for a long period of time. They have
been close to around 0% since the crisis in 2008. In 2014 it was no different, although now it is
expected that the Fed won’t raise rates in the government not until as early as summer of
2015.20
With the rates being so low the economy has been progressing immensely but this will
soon cause fear in the economy because the rates have been low for too long. They have been
trying to keep the rates low so people can invest more in the country as an incentive to recover
faster from the 2008 U.S. financial crisis. The plan has been working so far but what will happen
in 2015 will make the markets and economy shift if the Fed is planning to increase the fed rate

18
http://www.forbes.com/sites/mikepatton/2014/05/27/how-‐rising-‐interest-‐rates-‐could-‐affect-‐your-‐portfolio/
19
http://www.forbes.com/sites/steveparrish/2013/08/20/what-‐happens-‐if-‐interest-‐rates-‐go-‐up/
20
http://money.cnn.com/2014/09/17/news/economy/fed-‐interest-‐rates-‐janet-‐yellen/


this coming summer. There are only a few positive sides to an increasing. It would indicate an
improving economy, while avoiding hyperinflation and stabilizing growth.21
So either way the
U.S. looks like they are in good hands with the Fed seeking different routes with their Fed rates
and the growth of the US.

Currency/Level of Inflation

Figure 922

21
http://www.post-‐gazette.com/business/money/2014/12/15/2015-‐Interest-‐Rate-‐Projections-‐Here-‐s-‐how-‐rates-‐
will-‐affect-‐your-‐money-‐next-‐year-‐personal-‐finance-‐investment/stories/201412150011
22
http://fx-‐rate.net/USD/EUR/#graph


2013

Figure 1023

In 2013 CPI has increased overall and that is a good because it shows that there is positive
activity going on in the country and that has a positive outcome on GDP. The inflation is not too
high so there are no signs of hyperinflations and they are consistent with previous numbers. In
the energy and gasoline industries the numbers are negative because of the decrease in prices
for the year. Gasoline and Energy industry are parallel to each other and this is indicated in
Figure 10.

23
http://www.econedlink.org/lessons/index.php?lid=1161&type=student


The USD is also still increasing and becoming a stronger currency in the market. You can
reference Figure 9 when looking at the USD for 2013-‐2015(Q1) when being compared to its
Euro dollar competitor. The USD has become stronger as the time has passed between 2013
and now and the U.S. economy is now starting to feel the side effects of this. Even though the
currency is becoming a stronger asset in the market, this can have both a positive and negative
impact on the country. People will travel more and spend more money on foreign items
because their money is can now be spread out more in the foreign economies. On the other
hand, this can have a negative impact on both the economy that then impacts the GDP of the
US. Around 70% of GDP falls under consumer spending. By the currency becoming stronger less
people from outside of the U.S. will invest in our currency because it is too expensive. There will
be a decrease in foreigners spending money on our goods and services for the same reason.24

This is not good for our economy because we are still trying to recover from the 2008 recession.
If foreign markets do not adjust their exchange markets then the Fed will have another
incentive to raise their rates. They already see that the U.S. is reaching full employment and
inflation is increasing at a slow pace. 25
So a stronger USD will add more fear into a newly
recovering economy. It is also advised for investors to move their money into more mid and
small-‐ cap stocks to have less risk in their portfolio. Including that, it would be safer to invest in
mutual funds and exchange-‐traded funds.26
In the end, it is always best to keep the portfolio
diverse by investing in all varieties because the USD can also do the opposite and become
weaker in the near future.

24
http://www.cbsnews.com/news/how-‐will-‐a-‐strengthening-‐dollar-‐affect-‐the-‐us-‐economy/
25
http://www.cbsnews.com/news/how-‐will-‐a-‐strengthening-‐dollar-‐affect-‐the-‐us-‐economy/
26
http://money.usnews.com/money/personal-‐finance/mutual-‐funds/articles/2015/04/14/how-‐a-‐strong-‐dollar-‐
could-‐affect-‐stocks


2014 and 2015 Q1
In 2014 and early 2015, inflation has continued to decrease. It started at 1.5% in 2013 and then
decreased to 0.07% in 2014.27
After the passing of Operation Twist and Quantitative Easing
program starting in 2011 and 2012, the country’s inflation has been decreasing over the years,
which is a really good thing for a recovering economy. By inflation decreasing, money will be
used to buy more items in the economy. Consumers can buy more items and this will help
stimulate the economy even more, especially since it is still recovering. By consumer spending
more money and stimulating the economy the GDP will get stronger, demonstrating a stronger
economy.

27
http://inflationdata.com/inflation/inflation/annualinflation.asp


Stocks

Figure 1128

Year-‐Over-‐Year Turn Over29

S&P 500 (Blue) DJIA (Red) Russell 2000
(Purple)
NASDAQ (Green)
2007 3.53% 6.4% -‐2.75% 9.8%
2008 -‐38.49% -‐33.8% -‐34.80% -‐40.5%
2009 23.45% 18.8% 25.22% 43.9%
2013 32.39% 26.50% 38.82% 40.12%
2014 13.69% 7.52% 4.89% 14.75%

28

http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#%7B%22range%22%3A%2210y%22%2C%22scale%22%
3A%22linear%22%2C%22comparisons%22%3A%7B%22%5EDJI%22%3A%7B%22color%22%3A%22%23cc0000%22
%2C%22weight%22%3A1%7D%2C%22%5EIXIC%22%3A%7B%22color%22%3A%22%23009999%22%2C%22weight%
22%3A1%7D%2C%22%5ERUT%22%3A%7B%22color%22%3A%22%23ff00ff%22%2C%22weight%22%3A1%7D%7D%
7D
29
Professor Amy Kratchman


2013 – 2015 Q1
The U.S. economy has come a long way from the recession that it hit in 2008 as you can see
above in both Figure 11 and in the table. All four markets have recovered within the first year
and are continuing to recover. In 2014 you see a dip in the total annual return. A valid
explanation for this is that the USD is becoming a stronger currency. A huge indicator of this is
when comparing the U.S. markets to foreign markets that are heavily influenced by U.S. trade,
for example the European or Asian/China’s markets. Those markets’ numbers have been very
volatile since the increase of the USD’s strength. This can have a negative impact on the
markets. Investors are adjusting their funds to better protect their capital. So companies are
also adjusting to this change in a stronger currency. Despite the low year-‐over-‐year total return
all four markets are still going in the upward trend. Additionally, it is said that S&P’s returns are
barely getting affected by the strengthening of the dollar.30
All 4 markets are following the
same trend so you can virtually say that for all four markets. Although I still think it is too early
to see if the markets are being greatly affected by this. Companies should still be precautious
and aware that the strengthening of the USD is making change in trade amongst the nations.
It’ll be too late if you see the markets are being affected by this change in the future.
Default risk and Overall Credit Quality31

When looking at the years 2013 and 2014 the default risk and credit quality has changed greatly,
so we will be analyzing these numbers in this section. In 2013 the default risk was shown to be

30
http://www.forbes.com/sites/laurengensler/2014/10/01/what-‐a-‐stronger-‐dollar-‐means-‐for-‐stocks/
31
http://www.nact.org/resources/2014_SP_Global_Corporate_Default_Study.pdf


81 but when looking at 2014, it has decreased to 61. This in turn made the global speculative-‐
grade default rate decrease from 2.28% to 1.42% in 2014. The reason this had occurred was
from the increase in the number of speculative-‐grade issuers in 2014, and there was also a low
number of defaults. They issuers had increased from 2,804 to 3,163 that year.

The one-‐year global Gini ratio had increased to 93 in 2014, making it the second highest in 34
years. This shows the impact the credit quality had since it influences over 90% of the ratio. The
credit quality in 2014 had been a “B-‐ or lower”, and the overall rating of ratings had decreased
the same year. The downgrade rate had decreased from 2013’s 9.4% to 8.4% in 2014. And the
upgrade rate had also made a fall from 2013 to 2014 by going from 11.4% to 9.3%.

The U.S. has hit its lowest percentage in the past 34 they still remain on the top for holding the
most defaults globally at 55% in 2014. Then coming behind them are the emerging markets,
counting for roughly 25% of remaining global defaulters.

Interest Rates and the Economy’s Future

There has been some factors and past evidence that make people assume that interest rates
will increase in the latter part of 2015, but I believe otherwise. I believe that the interest rates
will stay the same for atleast another year. I think that the Federal Reserve is afraid to increase
rates because the economy has been doing so well from the rates being near 0. They want the
U.S. economy to flourish more since we took such a hard hit in 2008/2009. As stated in the


economic analysis section, inflation rates have been increasing slowly, while unemployment
rates have decreased along with stock prices increasing. Since they are doing this it may be
going on for too long. The interest rates may stay low for too long and cause problems in the
economy. This can cause recessions and “double-‐dip recessions, and this may be a potential for
the U.S. economy as well. Our clients cannot afford to lose money since they have huge
investments to make in the near future. So I think that it will be appropriate to invest in an
intermediate stock. I will be looking into a stock that is around 10 years long due to the rates
being so low for much longer. Also the option of buying a convertible bond will be analyzed. So
if the economy does continue to improve then the bond can convert into a stock for the
Kratchman Family to receive a greater return.

Investment grade was chosen over a high yield because it is less risky. Also when looking at the
past return that risk that high yield held was not worth the return it was making when
compared to investment grade. The investment grade area made much higher and more
consistent returns in the past years and that is why we will be looking in this area. In addition,
BB-‐ rating range is what I will be looking into for bonds because they are stable and show that
the company is coming from a stable, strong economy.


Asset Allocation
We are going for a more moderate/conservation approach for the Kratchman Family asset
allocation. Asset Allocation

Large&Cap&Equity
18%
Mid&Cap&Equity
9%
Small&Cap&Equity
9%
US&Treasury
10%
Investment&Grade&Corporate
4%
High&Yield&Corporate
0%
Municipal&Bonds
6%
Developed&International
8%
Emerging&International
14%
Specific&Commodity
5%
Specific&Commodity
10%
Real&Estate
0%
Cash&/&Risk&Free&Asset
7%
Percentage)Invested


Cash
I advise for the Kratchman family to have 7% invested in this section since at their age they
have a lot of responsibilities. A lot of things can occur in their family where they will need to
make money liquid in order to use it quickly. They have two children and accidents are bound
to happen at all of these ages. Putting 15% in cash along with saving 15% monthly will keep the
Kratchman family safer and feel more comfortable with the money that we allocate into the
other sections of their portfolio for the future.
Domestic Equity
They should invest around 36% total in the total domestic stock market. This will be spread out
in to three major sections of the area. There will be 9% put into mid and 9% small cap equities
since they tend to be more volatile and unpredictable. We put 9% into the large cap equity
since they are more stable stocks in this area. This will give the family a better return for their
investment.
Bonds
Bonds will give the Kratchmans a constant return of money over the rest of their investment
period. That is why we are allocating 20% into this market. We have not invested in the high
yield area because they have been receiving negative returns and that is not what we want in
this portfolio. Through this we are putting 10& in US Treasury, 4% in Investment Grade
Corporate and 6% in Municipal Bonds. We are putting the most in US Treasury because they
had a highest return when compared to the other bonds when look at the 20 year average
return.
International Exposure
International exposure is always a great way to diversify a portfolio. We are putting 22% in this
area with 14% going into the Emerging International. There is a lot of potential in the emerging
markets and this is a great time to invest in such a highly influential area. 8% is going into the
developed markets because these markets are more stable and they will make a consistent
return. They do not make as high of a return so more money is being invested into the
emerging markets area.
Commodities
As for commodities we are investing a total of 15% with 10% going towards Oil. Right now oil is
very low so this will be a good time to invest. The prices will go up again and when they do we
will make a great return. Gold is only getting 5% because it is always a good safe commodity to
join but their returns aren’t as high as we want them to be.
Real Estate
We are investing 0% in this market because they are still an unstable market to look into
especially after the slow recovery it is getting after the great recession in 2008. They may have
a positive outlook into the future but for now the money will be getting allocated into other
areas that are more promising for the Kratchman family.


Current Holding Assessment
TWX
Time Warner has done well over the past 21 years that the Kratchman Family has held the stock.
They have made a cumulative of 653% that folds the company’s stock over 6 times since the
price that it was invested with on the original day. The Return of the stock has been 30.96%
while holding a risk of 47.19%. After looking into this stock and seeing what the family needs I
would advise to drop this stock. Even though they have done exceptionally well this stock holds
too much risk for the return that it is making. When you break down the cumulative return of
the stock they only make 31.09%, which is a lot lower than the risk. We want to use a stock that
has a higher return than the risk dealt out in the company so it is advised to drop this stock in
the portfolio.
TWC
Time Warner Cable has also done well over the past 6 years since the spinoff that occurred
from Time Warner. They have made a cumulative of 200% with folds the company’s stock over
twice times since the original day. The Return of the stock has been 33.36% while holding a risk
of 25.33%. After looking into this stock and seeing what the family needs I would advise the
family to definitely keep this stock. The risk of the return is very low when compared to the
other sticks that the Kratchman family hold and they also hold the highest return when the
cumulative is broken down year by year. When you break down the cumulative return of the
stock they make a return of 33.33%, which is a lot higher than the risk. TWC perfectly
exemplifies a stock that we want to use that has a higher return than the risk dealt out in the
company so it is advised to keep this stock in the portfolio.


DLTR
Dollar Tree has done well over the past 16 years since the time the Kratchman Family originally
held this stock. They have made a cumulative of 350% with folds the company’s stock over 3.5
times since the original day. The Return of the stock has been 21.90% while holding a risk of
35.48%. After looking into this stock and seeing what the family needs I would advise the family
to definitely keep this stock. Even though the risk of the stock may seem to be high this stock is
stable, especially when compared to TWX. That is why I advise to keep this stock rather than
TWX. When you break down the cumulative return of the stock they make a return of 21.88%,
which is still good. DLTR is a safer stock and should be kept in the Kratchman family’s portfolio.
They are also about to go through their biggest acquisition ever. They are acquiring
FamilyDollar, which will make huge improvements to this company.
Commercial Paper
Commercial Paper has done poorly in the past 16 years since the Kratchman family invested in
it. They first invested in this company with $5000 and in the past 16 years the price has been on
a constant decline. It is now priced at $3,495 making it a loss of over $1,000. The value of the
stock is high at $116,074.16 and is not a risky asset, although it is advised to not keep this in
their portfolio. The family can use this money to either invest in other areas of their portfolio or
keep it in their savings.


Implementation
Microchip Technology Inc. (MCHP)

When we were contemplating which bond to add to our portfolio, we decided that they should
belong to staple industries important to everyday consumption. The focus company is
Microchip Technology Incorporated in the Specialized Semiconductor Industry. They are the
leading provider of microcontroller, mixed-‐signal, analog and Flash-‐IP solutions.32
They will be
the company to buy a bond from. The company has a Price-‐to-‐Earnings ratio of 28.72, which is
lower than the industry average of 53.50. You want the number to be lower than the industry’s
so this is a great indicator. When looking into what company to do technology immediately
comes to mind. It is nearly impossible to find an electronic device or machine that does not
require a microchip. Companies are always trying to develop the next big thing in technology.
The Microchip market has evolved along with innovation buy creating microchips with different
sizes and capabilities to help the industry grow. Regardless of how new innovations shape
technology, microchips have become a staple in the market. The top executives have also made
great strides to encourage growth of the firm within this industry.

Microchip Technology Inc.
MCHP Valuation Ratios33

Market Cap (intraday): 9.85B
Enterprise Value (Feb 11, 2015): 9.88B
Trailing P/E (ttm, intraday): 28.62
Forward P/E (fye Mar 31, 2016): 16.8
PEG Ratio (5 yr expected): 1.41
Price/Sales (ttm): 4.6
Price/Book (mrq): 4.27
Enterprise Value/Revenue (ttm): 4.71
Enterprise Value/EBITDA (ttm): 13.7
Industry: Semiconductor-‐ Specialized
Industry P/E: 53.5

32
http://finance.yahoo.com/news/volvo-‐cars-‐upgrade-‐microchips-‐most150-‐120300596.html
33
http://finance.yahoo.com/q?s=MCHP


Market Share

Figure
12

34

When referring to Figure 12, you can see that MCHP is the leader in holding 64% of the
microcontrollers within the semiconductor industry. This is a great indicator because this is the
main part of the semiconductor industry and they are on top by holding most of the market
share in this area. Then they hold 23.74% of the analog interface products, but that is not bad
since their competitor is Texas Instruments, who specify in this area, unlike MCHP.

34
http://csimarket.com/stocks/competitionSEG2.php?code=MCHP


Current Events

Always looking to expand and grow their company. In 2009 MCHP, acquired a privately owned
R&E International to improve their integrated circuit systems.35
It is also expected in Q3 2015
that MCHP will be buying another semiconductor company Micrel.36
It was also recently
announced that Volvo will be using their OS81110 Intelligent Network Interface Controllers
(INICs) in their new Volvo XC90 model.37
They are also one of the top technology companies
that are earning “double digit profit growth.” You can refer to Figure 13 below. They had the
highest forward price-‐to-‐earning-‐ratio in the semiconductor industry. Also they hold the second
highest growth when analyzing and comparing the tickers across the board. By MCHP looking to
acquire other semiconductor companies, they are looking nowhere but upwards. Expansion
and innovation is what they focus on in their company. They want to be the leaders in this
sectors and our data proves this.

Figure
13

38

35
http://www.microchip.com/newsandevents.aspx
36
http://www.marketwatch.com/story/microchip-‐technology-‐to-‐buy-‐micrel-‐2015-‐05-‐07-‐18103148
37
http://finance.yahoo.com/news/volvo-‐cars-‐upgrade-‐microchips-‐most150-‐120300596.html
38
http://www.marketwatch.com/story/some-‐technology-‐companies-‐still-‐boast-‐double-‐digit-‐profit-‐growth-‐2015-‐
03-‐24?page=2


Bond

39

When investing in MCHP we will be buying the Microchip Tech 144A Cv 1.625%. This will be the
best option for our client given their credentials. S&P gives this company a “BB-‐” rating which is
perfect. When comparing this rating to the Barclay’s benchmark, this indicates that the
company is coming from a strong economy. It also signifies that MCHP is a stable company to
invest in. When choosing which type of bond to use we decided to choose the convertible bond
rather than a regular bond that doesn’t convert. Even though it was a bigger investment, this
will give our client more options in the future. MCHP looks like they have a lot of potential and
growth in the future for their company. If the right opportunity and time comes, the bond can
be converted into a stock. This will give the family a chance to to gain more money and then
earn dividends in their investment to MCHP. This will give the Kratchman family more options
and feel stable by investing in a bond that gives payments out now semi-‐annually, and then can
potentially change over into a stock if the company shows potential in the future.

Exchange Traded Funds

When looking at what other bonds to invest in we chose to look in ETFs that are indexed as our
fixed income rather than actively managed funds. We had chosen this route because ETFs are
less risky of an investment to handle. Since you are also following indices there is less volatility
since multiple companies and sectors are involved in these indices. There are also less fees to
deal with when handling ETFs and saving money is always a positive, especially with our
client.40
When saving money you can allocate that money to either being saved or further and
more efficiently invested in another part of the portfolio. When looking further into ETFs we
had used http://www.etf.com (Figure 3) as a filtering tool to see what bonds would populate
after entering in the credentials we wanted. We ended up finding two perfect matches for the
Kratchman Family after the research was completed with the following credentials that you see
again in Figure 14.

39
http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=mchp
40
http://www.cnbc.com/id/102277366


Figure
14

iShares 7-‐10 Year Treasury Bond ETF (IEF)

This bond was chosen because it fit perfectly into the credentials we were looking for. This
bond will mature within 7-‐10 years and that is perfect for the economy we are in and it is in the
intermediate category. Interest rates will remain low so this will be a good investment for the
family. This will also be stemming from the U.S. Treasury Market that is also a stable area to
invest in.

Intermediate Municipal Index ETF (ITM)

As for the municipal bond ITM will be the best option for this family. This is also in the
intermediate time frame of 11 years, which is good because of how interest rates are going in
the domestic economy right now and in the near future. Municipal bonds are also a great
investment, especially since they are tax-‐free. So that is another cost that you can cut away and
invest somewhere else in the portfolio or save.


Large cap ($5B or higher)-‐ 18%
PepsiCo (PEP)-‐ 5%
PepsiCo is one of the most well known companies form around the world. They produce a
multitude of consumer good products for many years and they are going nowhere but up.
Consumer goods are always a great investment to make because they do well during all parts of
the business cycle. So if an economy is going through a recession, people will still go out and
buy these products because they are a staple in the household.
Their main competitor is Coca-‐Cola but PepsiCo is known to be the better investment in the
financial world. In the past year PepsiCo’s stock rose by 22% while Coca Cola’s stock price only
rose by 12%.41
That should be a huge indicator that PepsiCo is expanding and growing at a
much faster rate than its top competitor. PepsiCo was also at an all time high with their stock
price at $100 in the 2014 Q4 data. With that they plan on giving between $8.5 and $9 billion
back to their shareholders, which is a great indicator that their company is very stable and
progressing a a very high rate right now.42

As far as dividends, PepsiCo has been known to give out dividends and it has been going on for
over 40 years. Dividends are a great indicator for a company because then that means that
their company is doing so well that they can afford to pay out dividends to their investors.
PepsiCo has a very strong cash flow and this proves why they are a great company to invest in.
They are also the leaders in the snack industry and hold 22 “billion-‐dollar” snack companies, so

41
http://moneymorning.com/2013/12/13/why-‐pepsico-‐nyse-‐pep-‐stock-‐is-‐the-‐real-‐no-‐1/
42
http://www.fool.com/investing/general/2015/02/15/why-‐you-‐cant-‐afford-‐to-‐ignore-‐pepsico-‐stock-‐in-‐201.aspx


each company makes a profit of atleast $1 billion that is something Coca Cola cannot say about
themselves since they only hold 20. 43

It is predicted that PepsiCo will also have a stronger outlook in 2015. They are projected to
grow 7% in the earnings per share growth. Then if their P/E ratio stays around 21.62 then their
dividend should be at 2.7%. This will then entice that the shareholders should expect a total
return of 9-‐10%. This will be great and overall will be higher than Coca Cola.44
This company is
overall a great investment and their innovation ad forward h=thinking mentally will make this a
great choice for this portfolio for the Kratchman family.

Apple (APPL)-‐ 5%
Apple will be a great investment to make. 5% will be allocated in this company’s stock. This
company has improved immensely over the years since it’s IPO. You can see this in the picture
below. They are an extremely innovative company that adapts to change and it always looking
for room for improvement. They try their hardest in expending their customer base and from
this Apple has been spreading their company into other sectors to add to their competitive
edge. They give out dividends so this is a great sign that Apple is a stable company. They have
acquired one of the largest audio companies, Beats, which extended them into the audio sector
of the market. They have also seen that there is a new market of online music streaming and
Apple will be releasing another product of their own at the end of June 2015, Apple Music, that

43
http://www.fool.com/investing/general/2015/02/15/why-‐you-‐cant-‐afford-‐to-‐ignore-‐pepsico-‐stock-‐in-‐201.aspx
44
http://www.thestreet.com/story/13043245/2/pepsico-‐vs-‐coca-‐cola-‐which-‐stock-‐is-‐the-‐better-‐choice-‐for-‐
2015.html


will compete against the top music streaming services, including Tidal, Spotify, and Pandora.45

Apple has also introduced their Apple watch which spread them into another sector of
technology. Apple is a company that you don’t want to pass and this is only the beginning for
Apple. They continue to improve themselves to become the leaders in every sector that they
join.
46

Time Warner Cable (TWC)-‐ 5%
Previously stated in the Current Holding Assessment section
DollarTree (DLTR)-‐ 3%
Previously stated in the Current Holding Assessment section

45
http://www.forbes.com/sites/julianmitchell/2015/06/09/wwdc-‐2015-‐the-‐hidden-‐strategy-‐that-‐gives-‐apple-‐
music-‐the-‐edge-‐over-‐its-‐competitors/
46
http://money.cnn.com/2015/03/03/investing/apple-‐stock-‐make-‐money/


Mid cap ($1B -‐ $5B)-‐ 9%
Trinity Industries (TRN)-‐ 5%
5% will be invested in this company. They specialize in a multitude on industrial products that
have been used in various companies over the years. They have aslo recently acquired Meyer
Steel Structures for $600 million47
, showing that they are looking to expand and improve their
company over time. There is great potential future growth for this company and they are also
well diversified into 5 different sectors. Their valuation measures are great, with a P/E ratio of
7.29, that is high and a great indicator for this company. They are the leaders in the electric
transmissions towers and they plan to be the leaders in the 4 other sectors they are involved in,
in the near future.
Boston Beer (SAM)-‐ 4%
Alcohol is known to always do well in the economy through all parts of the business cycle. It is a
product/industry that withstands and gets through the roughest times while other industries
may suffer greatly. That is why we will be investing 4% in Boston Beer. This company has been
around for many years and they are one of the top producers in this industry. Despite their
prices falling by 9% this is a great company to invest in. They have increased their marketing by
investing $45 million into that department, to gain more customers this year to have more of a
competitive edge against their leading competitors. It is also predicted that this company will
be bough by their main competitor, Anheuser-‐Busch InBev (BUD), which will make their stock

47
http://investorplace.com/2014/09/mid-‐cap-‐stocks-‐to-‐buy/view-‐all/#.VXEcTGCsCXM


increase to over $300.48
Currently the stock price is around $250 so this will be a great
investment to make right now before they get bought out.
Small cap ($1B or lower)-‐ 9%
IPG Photonics (IPGP)-‐ 5%
We will be investing 5% in this company because they are the top leaders of their sector. They
control around 70% of their market and this is a great indicator for investing in this company.
Fiber-‐optic lasers are what they produce in this company and demand for this product will be
on the rise in the coming years because of the advanced technology it holds. Automobile
companies are their main customers and as they convert to more high-‐tech appliances in their
manufacturing areas, this company will go only upwards because of the demand that they are
receiving for their product. They have been reducing costs immensely and it has been recorded
that they have dropped from $85 to $5 cost per watt.49
The company’s price share has also
increases by $17% ($53-‐ expected $70) within weeks and this shows how much interest is in
this company. This is a great time to invest in IPGP before they become even more expensive in
the future.
1. iRobot Corp (IRBT) http://www.forbes.com/pictures/mee45edfe/irobot-‐corp/
IRobot will be getting 4% of our investment share. Their share price rose by 33% in the last year
and they continue to rise. Many companies and households are going towards using robots
right now and this company specializes in this area. This type of technology is emerging quickly

48
http://investorplace.com/2014/09/mid-‐cap-‐stocks-‐to-‐buy/view-‐all/#.VXEcTGCsCXM
49
http://www.forbes.com/pictures/mee45edfe/ipg-‐photonics/


in the world and this is the right time to invest in this sector. 60% of iRobot’s revenue stems
form home robots and then the rest goes into military robots.50
They are gaining their revenue
in the top two areas of the robot industry and they are in high demand right now. It is
estimated that the stock price will rise from around $32 to $43 which is a great improvement.
There is no better time than now to invest in this company and that is why they will be included
in this well diversified portfolio.
International-‐ 22%
Developed-‐ 8%-‐ iShares MCSI United Kingdom (EWU) ETF (United Kingdom Region)
8% will be invested in the United Kingdom’s ETF. We will be going into this area because this
region has been one of the leading ETF’s for developed countries. You can refer to the picture
below to see that they are ranked #2 in the whole world only coming behind Argentina, who is
a very unstable country to invest in. This ETF was chosen because that are the main and largest
ETF for the United Kingdom and so it will be the best fund to look into for this region.51
The
currency is one of the strongest on the whole world and they are one of the oldest established
countries sin the world. They are targeted to 85% of the market in the United Kingdom, and are
made up of mostly mid and small cap stocks, while also holding the title of being one of the
best international developed ETF, that is non-‐US. 52
They have the most experience and
knowledge and this stable economy will be best for the Kratchman family to invest in.

50
http://www.forbes.com/pictures/mee45edfe/irobot-‐corp/
51
http://finance.yahoo.com/news/jolly-‐good-‐time-‐u-‐k-‐113018157.html
52
http://www.ishares.com/us/products/239690/ishares-‐msci-‐united-‐kingdom-‐etf


53

Emerging-‐ 14%-‐ iShares MCSI BRIC (BKF) Do BRIC ETF
Emerging markets are an extremely hot topic right now in the investment and international
business world. BRIC has become a term that all investors know and this portfolio is not missing
out on this opportunity. 14% will be invested in the BRIC ETF. The Kratchman family will not
regret this decision because they will be making a lot of profit from this sector. Since 4 major
countries are involved in this ETF they will help each other in progressing in the market.54
So if
one country does poorly in one quarter, another country will help the ETF so that is does not
fail all-‐together. So this ETF is a portfolio in itself from it having multiple regions in it. The

53
http://www.etf.com/etfanalytics/etf-‐finder
54
http://www.ishares.com/us/products/239614/ishares-‐msci-‐bric-‐etf


overall rating for this ETF is a B and that is great for this family.55
This shows that the ETF is
coming from stable economies and this is perfect.
Specific Commodities-‐ 15%
Gold-‐ 5%
We will be investing 5% in the SPDR Gold ETF. Gold is always a good commodity to hold onto.
They are a safe asset in any portfolio and this ETF is the closest way to invest in gold itself. This
ETF also has an A rating and that is extremely good for the family for investing because this
means this ETF is very tradable, efficient and fit for investing at this moment. Also at this time
Greece is going through a very hard time in their economy and one of the best things to invest
in right now is gold. A large part of the euro zone will be investing in commodities such as gold
because of the chance that Greece might default, or restructure themselves at the least.56
Gold
is the best way to protect their money, and before this happens, now is a good time to invest
some of this portfolio into this ETF.
Crude Oil-‐ 10%
We will be investing 10% into the USO ETF. This is the best ranked Oil ETF with the most
stability. Right now it has a B rating and that is great for the Kratchman family. They are the
most liquid and largest ETP for this sector and that is a great indicator.57
This is coming form a
stable economy, the United States and this is a good time to invest. Right now Oil prices are low

55
http://www.etf.com/BKF
56
http://www.forbes.com/sites/greatspeculations/2015/06/04/three-‐things-‐to-‐buy-‐after-‐greece-‐restructures-‐or-‐
defaults-‐on-‐its-‐debt/2/
57
http://www.etf.com/USO


so this will be prime time for investors to buy up these ETFs, so that when they go back up they
will gain profit.
Cash/Risk Free Asset-‐ Choose MMF-‐ 7%
Vanguard Prime Money Market Fund (VMMXX)
Cash is always a great investment for a portfolio. It provides security and it is the most liquid
asset to have. 7% will be invested in this section of the portfolio and this will go towards the
Vanguard Prime Money Market Fund. Vanguard is one of the top investors when it comes to
this sector and this find is one of their top performers.58
59
It is very low risk so money will make
little profit but it will be very stable and that is what we want in this section of the portfolio.60

58
http://www.theskilledinvestor.com/wp/best-‐money-‐market-‐funds-‐259.htm
59
http://quote.morningstar.com/fund/chart.aspx?t=VMMXX&region=usa&culture=en-‐US
60
https://personal.vanguard.com/us/funds/snapshot?FundId=0030&FundIntExt=INT#tab=0


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