An Interview with DIPP

Editor’s Note: Founded in 2007, the Dartmouth Investment and Philanthropy Program is a student run investment group that manages a $450,000 portfolio. Commonly referred to as DIPP, the program aims to provide Dartmouth undergraduates with hands on investing experience while raising money for worthy charities. Since its inception, DIPP has donated around $50,000 to various local and national charitable organizations, including $9,000 in the past year alone. The Dartmouth Review had the chance to sit down for a Q&A with DIPP Co-heads Teddy Carter (TC) and Dylan Alvarez (DA) to gain insight into the organization.

The Dartmouth Review (TDR): Thanks for being here guys. Let’s start with your philanthropy, which is really the core mission of your organization. How does the philanthropy process work, and what are your guiding principles in choosing which organizations to donate to?

Teddy Carter (TC): We generally get 20 or so preliminary applications and then narrow that list down to maybe 10 who will come in and make a pitch to the club. One criteria we have is that these organizations are all run by Dartmouth students or have Dartmouth students or alums heavily involved with them. We also try to support organizations where our money is going to a direct cause. So it’s not like, “oh, we just need some money for operating”. It’s usually for some specific purpose. We also skew towards organizations that can’t easily raise the money elsewhere. So if they’re part of some larger organization that’s well-funded and we don’t feel like our giving will make a major difference, we will probably give to someone else.

Dylan Alvarez (DA): One thing to note is that all of the money is being invested or going to charities. There’s no club budget, management fees or anything like that. We don’t even have a budget to buy pizza for meetings, for instance. So, we are really maximizing the total profits going to outside organizations. Also, after we give to the organizations, we keep in touch with them and try to help them in any way we can.

TDR: Through DIPP’s philanthropy, you have the potential to act as an activist for various issues. How do you deal with this as an organization?

TC: I think we try to support a wide variety of causes. We don’t try to support causes with a political motive or groups pushing for some sort of policy reform. We’re more so trying to support people who are doing things that most humans would consider as good. You know, they might have some sort of agenda in some way, but ultimately the money is going to charitable causes that are actually making a difference and trying to get something done, as opposed to just advocating on behalf of a group.

TDR: Do you guys look at your philanthropy through an ROI-based lens?

DA: Yeah. So essentially, that’s exactly what it comes down to, return on investment. We look closely at how much good is going to be created for each dollar we give.

And when we have some of these political groups come in, you know, we look at the ROI on that. While that may benefit some people in a particular group, the actual return on investment really isn’t there when compared to the potential ROI for things like sending underprivileged kids to school, helping with relief efforts for hurricane Sandy, or funding healthcare for low income people in the Upper Valley.

TDR: So, given that there’s a trade-off between giving now and growing the portfolio in the future, how do you decide how much to donate each year?

DA: We have a formula that essentially breaks down how much we made over the past year, and then also takes a conduct comparison of how much we donated the year before. That formula led to us donating $9,000 last year and this year it’s looking like it’s going to be closer to $13,000. So, broadly, it’s based on capital gains. If the portfolio went down, which it did during the recession obviously, we would withhold donations for the future. In fact, because of the recession, our first philanthropic giving began in 2011, four years after the fund started.  In our opinion, this is what’s best to do for everyone, including the organizations we are donating to, because if we give money away when the portfolio is doing well, that’s us giving away capital gains in the future that we could donate.

TDR: Let’s talk more about your overall portfolio strategy. I know that the fund is long-only, but beyond that, how would you guys describe the general investment approach?

DA: I would say we’re a mix between a value-based strategy and growth at a reasonable price (GARP). About 75 percent of the portfolio is in traditional value investments, where we see the intrinsic value as higher than the current market price. We also typically look for a catalyst to bring the stock to its fair value.  When we buy stocks, we are generally thinking about a three to five-year time horizon. So we’re not looking at quick trades and short-term profit opportunities.  Occasionally, if something appreciates we will sell it within a year or so, but our sweet spot is three to five years.

TDR: When you guys decide you want to buy a stock, how long does it take for you to get moving?

DA: We build positions over time, so especially right now, there’s a lot more volatility, but we’ll do is we’ll conduct our first phase of or research. So at the beginning of every term, each group will narrow it down to two or three names that they really like. We’ll meet as a leadership committee and decide which of those options we see as the most attractive.

TC: Something to note is that even though it might be a good company, if it doesn’t fit with our portfolio, we’ll pass.

TDR: The vast majority of your portfolio is comprised of blue-chip, large-cap stocks, is that by design?

DA: During the recession, there were a lot of large-caps with great businesses that were significantly undervalued. So a lot of those large-cap positions were initiated back then.  If you look at the stocks we’re buying today, it’s much more mid-cap and small-cap oriented than before.

TDR: The most successful holding in your portfolio to date has by far been Apple, which was first bought very early on in the fund’s history. It’s still the largest holding in your portfolio. Have you been trimming that position over time? What is your outlook on Apple in the future?

TC: We’ve been steadily trimming our position in Apple over time as it’s appreciated and as we’d had better ideas. At one point it was eight or nine percent of our portfolio, even after trimming a lot. But it’s really more of a question of whether or not we think there is something else that would be significantly better off.

DA: What Apple’s ultimate product is isn’t the phone as much as the ecosystem of products they sell. And so that network effect allows them to kind of be insulated from technological changes even though they are a technology company. Because if a new product comes out, people will wait for the Apple one, even if it’s like slightly worse just because they want to be integrated with everything they have.

TDR: Given your value-based investment strategy, the one outlier in your portfolio seems to be Amazon, which, trading at a P/E ratio of well over 200, probably won’t stand up well to most forms of technical analysis. What’s your investment thesis on that position?

DA: This is a big play on management and Jeff Bezos. In our opinion, he is the single best capital allocator of our generation. Many on Wall Street have pointed out that just because Amazon has disrupted industries doesn’t mean they’ll produce cash flows in all of those markets. However, we think that with our long-term time horizon, lets say we hold this for 10 years, that all of that disruption will eventually lead to cash flows. So we really have a lot of trust in Bezos and we think with our time horizon that it will play out well.

TC: Amazon also functions as a form of hedge for some of our other holdings, like Costco and Apple, for instance, because Amazon could potentially influence the future of a lot of those companies and their industries.

TDR: I’ve been told that you both have been somewhat bearish on the market for the past year or so. What led you to this stance, and how do you hedge the market in a long-only portfolio?

TC: I think both of us have been kind of bearish because we are running a value-based fund in a market that is largely overvalued.  If anything, that just means we have to be more selective in what we look for. The best way to protect the fund from a market downturn is to invest in good businesses that we think will perform well no matter what. We try to pick business models that have high recurring revenue and oftentimes large contracts going out 10 plus years. These businesses tend to fare pretty well regardless of the broader market performance. The other thing we’ve done is just maintain a larger cash position as sort of a buffer. Obviously when you hold cash, you lose some upside, but its the best form of protection we have available given that we can’t short. Even though we’ve had between 15 and 20 percent of the fund in cash the past year or so, we’ve still slightly outperformed the market, so we’re content with that strategy.

TDR: Can you take us through an example of how you pick a stock to invest in?

TC: Sure, so one position we recently initiated was U.S. Foods. Basically, they’re a distributor of food to primarily restaurants and other institutions ranging from government agencies to corporations who have cafeterias. So these guys deliver everything you need for your restaurant. They’re the second biggest company in the industry after Sysco, their biggest competitor.

What we liked about this business is that it’s an incredibly fragmented market. US foods and Sysco are basically the two main competitors, but US Foods is much more focused on smaller restaurants and franchises whereas Sysco is shipping to big food chains like Ruby Tuesdays. For instance, Ruby Tuesdays is doing terribly because millennials don’t like that type of restaurant. We like US foods since it serves these sort of smaller chains and individual restaurants that have generally been doing well.

We also liked that there was really only two companies in this market and the biggest competitor isn’t even competing directly. Given that competing in this market requires massive scale, there is a huge barrier to entry and limited competition risk.

TDR: Can you talk about how you analyze macro trends and how they relate to your investments?

DA: Yeah. So when we look at the portfolio as a whole, we will conduct a few risk scenarios. So we, might look at what would happen if interest rates were to to go up like 200 basis points (2%), which would be a pretty drastic change. We also might look at what would happen to the portfolio if we went into another recession.

TC: We’re not looking at macro trends and saying, “we think that oil is going to do well in the next two years, so let’s go buy more oil stocks.” We look for companies that we really think are good companies and then try to see how the macro trends will affect them. And that’s where valuation plays in. So if valuations are high, we think the equity markets are in a decline in the next year or two years, and we don’t think there’s a lot of upside for us to capture in this particular company. So we’re just finding names, period. For instance, with oil, we own oil names, but we own them because we think they have some sort of idiosyncratic benefit where the company is going to do better than the overall oil industry regardless of how oil prices play out. It’s not that we’re not looking at stuff to see how it would affect the companies we own, but it’s never the driving decision for going into a company. So we’re never like saying, “oh, we think big data is going to be a trend, so lets buy IBM.”

TDR: Have you guys explored getting into shorting and other kinds of financial instruments?

DA: One reason that we’re long-only is we put a lot of emphasis on quality of business and looking at business models, both in terms of our investment strategy and in our member education.  Also, while shorting would give us some downside protection, there’s also a lot of risk.  Shorts have a skewed risk-reward proposition where you can only make so much, but you can lose money indefinitely. So given that tradeoff the fund has stayed long.

In terms of the cash we have on hand, we have been exploring keeping some of our portfolio in a money market account. However, we don’t keep any of it in bonds, in part because the interest rate environment is so weak. Also, just because, you know, we’re young students, and we’re barely knowledgeable about the equity markets, let alone fixed income. So we really want to keep a narrow focus on what we think we can do best.

TDR: Is there any form of alumni oversight? What is alumni involvement like in the club?

DA: So we have an alumni board which consists of one president from each of the past six years. These are people who ran the club and then went on to work in various roles in finance. We have two board members in private equity, two in investment banking, one at a mutual fund and another at a hedge fund. Essentially their role is to kind of advise us. They are there to help us if there is something we don’t have knowledge about or we just want some assistance.

TC: They also speak to the club and talk to members members about their day to day lives. So someone going through the recruiting process doesn’t have to sit there and say “I don’t know if I like private equity or banking.” They already have some background about what work in each industry entails.

TDR: Can you talk a bit about membership and the club’s education process? Do people have to apply to join DIPP?

DA: You don’t have to apply to be a member. What happens is, during freshman fall, like every other club, we go to the club fair, we’ll send out emails to campus and we’ll try to spread the word. We generally have 120 kids show up the first day, and essentially that shrinks over time.

Every Thursday, a leadership member will go and teach a certain topic. So one week it will be about business models, the next it’ll be industry dynamics. The next week it’ll be financial modeling and accounting and at some point we’ll do a Bloomberg session. So we have these sessions and then we also have assignments throughout the way. We’re looking for kids who are very interested in investing, growing their investor toolkit, and having this hands on experience. We try to shy away from kids who are just doing this for their resume.

TC: At the start of the term, we give the prospective members a list of companies and tell them to pick one. They’ll write a page or two about the company and get feedback throughout the process as they learn about the company and study industry dynamics. We make cuts in two phases throughout the process, but aren’t really cutting based on ability or how much knowledge you already have. We make our decisions more based on effort and a person’s desire to learn and get involved. We also find that it is pretty self-selecting. Of the around 60 people who submit the first assignment, only 32 submitted the final assignment.

TDR: What is the level of expected background knowledge for prospective members?

TC: We start from square one, and we expect that people are coming in with zero knowledge. Often this isn’t the case, as there are a lot of people who have managed their personal accounts and have done some self-study, but we try to start everything from scratch.

TDR:  Although a lot of members of DIPP will likely go on to work in finance, few will be going into traditional stock-picking roles after graduation. What do you see as the main benefits of being involved in the club?

DA: We think the skills we teach are applicable no matter what field you go into. Familiarizing yourself with the ins and outs of a business is important for everyone. Not just learning terminology, but learning what matters in a business: what drives growth, what drives profitability, and also understanding how industries work and competitive dynamics. That stuff is really applicable to everything.