PORTFOLIO ANALYSIS: COLGATE AND ETHYL

GROUP 18

JOE GILVARRY (16498344)

RHIANNON O’CONNOR (17203625)

XIAOMENG WANG (17206112)

ALAN FLEMING (12472848)

FIN 42040: CAPITAL MARKETS AND INSTRUMENTS

PROF. JOHN COTTER AND DR. KEVIN GAM

UCD SMURFIT SCHOOL OF BUSINESS

DUBLIN, IRELAND

5 OCTOBER 2021
 GROUP CONTRIBUTIONS

Each member of the group participated in the analysis of the assets and portfolios.
Rhiannon and Wendy primarily focused on the analysis and consistently collaborated with
one another to ensure accuracy of results and using different methods for the analysis.
Rhiannon authored the methodology section and Wendy the results section. Rhiannon and
Wendy consistently corresponded with Joe and Alan regarding findings. Joe wrote the
introduction section and conducted background research on both companies. Alan wrote the
conclusions section, taking into account the background research and interpreting and
drawing insights from the findings. A ‘coordinator’ position of the group was not designated,
however all members communicated openly and consistently throughout the project. Any
issues that arose were swiftly discussed and each member organically chose their own section
of the written report and PowerPoint presentation.

We confirm that we have acknowledged all sources and that we have not given nor
received unpermitted aid in completion of this assignment/assessment. The work here is
entirely our own work, and any work of others which is included has been properly
acknowledged and referenced according to normal academic guidelines.

Name: Student Number:

Joe Gilvarry 16498344

Rhiannon O’Connor 17203625

Xiaomeng Wang 17206112

Alan Fleming 12472848

Signed: 5 October 2021

I. INTRODUCTION

Colgate-Palmolive Company (NYSE: CL) operates through two primary segments;

oral, personal and home Care, and pet nutrition. Market data indicates CL is a leader in oral
care. The company operates through five geographic segments with the majority of revenue
coming from North and Latin America. (Colgate Palmolive, 2020). Total revenue as of 2020
amounted to $16.5 billion with the majority comprising of Oral care product revenue. Sales
of Oral, Personal and Home Care products accounted for 44%, 21% and 18%, respectively, of
total worldwide Net sales in 2020.

NewMarket (NYSE: NEU) was formed in 2004 as a holding company for Ethyl and
sister company for Afton Chemical (Dun & Bradstreet, 2021). The parent company together
with its two aforementioned subsidiaries participate in one business segment: fuel additives,
which is primarily represented by Afton. Ethyl Corp produces anti-knock additive tetraethyl
lead (TEL), which once was a primary product line for Ethyl but has seen diminishing returns
since the U.S. Clean Air Act came into effect and had a negative impact on demand. The
decline of the TEL business left Ethyl as a manufacturer of specialty chemicals (Robert,
1984). The company offers tetraethyl lead for aviation and racing fuel, as well as providing
analytical, process studies, logistics, and process engineering services (Bloomberg, 2021).
This product segment operates internationally but derives most of its revenue from two
geographic segments: The United States (32.36%) and Asia Pacific (13.9%). NewMarket’s
total revenue for 2020 amounted to $2.01 billion. The core foreign customers consist
primarily of global, national and independent oil companies (NewMarket, 2020).

Portfolios of different combinations of CL and NEU are observed. Market returns were
used for comparing performance. The capital market line (CML) and capital allocation line
(CAL) were derived, along with value at risk (VaR) and risk measures to see how a portfolio
of these two assets would perform. The capital asset pricing model (CAPM) and Fama-
French Three-Factor Model were also regressed. Findings imply many investors may
disregard the CL and NEU portfolio, but there may be benefits for diversification in larger
portfolios.
II. METHODOLOGY

Aligning to the provided market data and the Fama-French Three-Factor data, our
observed time period was 1 June 2011 – 1 June 2021. Historical data was downloaded from
Yahoo! Finance for CL and NEU (2021a; 2021b) and imported into Microsoft Excel.
Monthly rates of return were calculated using the adjusted closing prices on the first of each
month. Statistical values of the returns were then calculated. Annualised variance, standard
deviation, and geometric mean of returns were derived along with covariance and standard
deviations. The geometric mean and standard deviation of returns were calculated using
functions following these formulae:

! ∑(%# &%# )$
𝑅"! = [∏(1 + 𝑅" )]!" − 1 𝜎" = - ()
× √12

The annualised variance used throughout analyses is the annualised standard deviation
squared.

An investment opportunity set was created reflecting different weights of each asset in
intervals of 10% (e.g.: for Portfolio 1, 𝑤*+ =100% 𝑤-./ = 0%; for Portfolio 2 𝑤*+ = 90%
and 𝑤-./ =10%). The weighted average of the annualised mean returns provided each
portfolio’s return. Portfolios leveraging CL were also created following intervals of 10%. The
Efficient Frontier was plotted using Excel’s scatterplot function. The minimum-variance
portfolio was derived by using the following function to find the weight of CL:
4
𝜎*+ − (𝜌*+,-./ 𝜎*+ 𝜎-./ )
𝑤*+,123 = 4 4
𝜎-./ + 𝜎*+ − 2(𝜌*+,-./ 𝜎*+ 𝜎-./ )

The weight of NEU is given by 100% - 𝑤*+,123 . The optimal risky portfolio, or the
tangential portfolio, was found using Excel’s solver function. The function solved for the
%% &%&
maximum value of the Sharpe Ratio, or 5%
, by changing the weight of CL, on the

condition of 𝑤*+ + 𝑤-./ = 100%. The slope of the capital allocation line (CAL) is Sharpe
Ratio of the tangential portfolio, and can be plotted using the below equation. Similarly, the
capital market line (CML) is instead calculated by using the Sharpe ratio of the market
portfolio.

𝑅 = 𝑟6 + 𝑆123 𝜎

The Kenneth R. French Data Library (2021) Fama-French Three-Factor data was used
for market returns less the risk-free rate as well as for the small minus big (SMB) and high
minus low (HML) phenomena. Each asset’s betas were found in a linear regression using
Excel for all factors. The portfolios’ betas are simply the weighted average of the assets’
betas towards the respective benchmarks. Volatility relative to the S&P 500 Index was also
investigated. The market risk premium divided by 𝛽3 yielded the Treynor Ratio.

The value at risk (VaR) was derived for all portfolios. Using the
=NORMINV(𝑃, 𝑅3 , 𝜎3 ) function in Excel, a stress event (SE) metric was created at 95% and
99% confidence. VaR as a percentage was be calculated as follows:

𝑡
𝑉𝑎𝑅3 = 𝑆𝐸3 × 𝜎3 × >
252

Where t is the number of days in the trading year used for estimation. In this instance, the
VaR for only one year was calculated so the last term is 1.

III. RESULTS

CL outperformed NEU in the last 10 years according to derived data (below, left).
The 0.2 correlation coefficient shows that there is a slightly positive correlation between
these two stocks. The investment opportunity set (below, right)) indicates that the weight of
CL in the minimum variance portfolio is 72.09%. When 𝑤*+ <72.09% the portfolio should
therefore be neglected by rational investors. The investment opportunity set can be expanded
to include leveraged positions of short-selling NEU shares to purchase those of CL and still
be above the MVP.
 The efficient frontier (below) reflects leveraged positions. It is important to note that if the
portfolio had more than two risky assets, the efficient frontier would not be reflected in the
opportunity set in this fashion. The efficient frontier otherwise only includes the MVP at any
specific return while the opportunity set includes all possible portfolios. The standard deviation
of the MVP is smaller than that of either of the individual component stocks, indicating
unsystematic risk being mitigated due to the diversification effect. The return of the MVP is
also notably greater than the mean annual return of NEU.

Efficient Frontier
10.00%

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
0.0000% 5.0000% 10.0000% 15.0000% 20.0000% 25.0000%

Efficient Frontier Leveraged Portfolios Tangent Portfolio

The Sharpe and Treynor Ratios of the tested portfolios are seen below. The MVP does not
have the largest Sharpe Ratio, although the tangential portfolio’s Sharpe Ratio is not
significantly larger. The Sharpe Ratio of the tangential portfolio implies investors demand
0.6184 excess return for an increase of one unit of risk.
 The Sharpe Ratio of the tangential portfolio also serves as the slope of the Capital
Allocation Line (CAL). Based on their risk aversion levels, investors can reach any points
between risk-free asset and the optimal risky portfolio in CAL by combining these two. If
short sales are allowed, they can reach points above the optimal risky portfolio by short
selling risk-free asset. The CML is notably steeper than our CAL. In the last 10 years, an
investor using a passive strategy on the market portfolio required a >1% excess return for
each additional unit of risk. With higher returns and a lower standard deviation, a passive
strategy for the market portfolio would outperform any of our positions.

Investment Opportunities, CAL, and CML

10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
0.0000% 5.0000% 10.0000% 15.0000% 20.0000% 25.0000%

Efficient Frontier Leveraged Portfolios Tangent Portfolio

CAL Min.-Var. Portfoli o CML
 The two-asset portfolios’ returns may be estimated using the CAPM as well as the
Fama-French Three-Factor Model. The R-sq. of the Fama-French Model, however, was
greater than that of the CAPM in the regressions, indicating the Fama-French Model better-
explains variations in excess returns than the CAPM. As observed in Portfolios 9-11, returns
may be overestimated due to the higher 𝑤-./ . Results can be seen on the following page.
 VaR results (left) reveal leveraged portfolios with weights proportionally higher in CL
obtained the largest Value-at-Risk. Similarly, portfolios with the majority invested in NEU
resulted in higher VaR than the minimum variance and tangential portfolio. VaR was observed
to be lowest for the MVP.

IV. CONCLUSIONS

Performance

Neither the minimum variance nor the tangential portfolio provides an efficient
investment opportunity in terms of return or volatility in comparison to benchmarks. One
benchmark portfolio (S&P 500) had a return of 12.29% for the observed 10-year period,
outperforming the two-asset portfolio by 3.62% (below). The benchmark portfolio also
expectedly had less volatility in returns than the two-asset portfolio due to the benefits of far
greater diversification. Any investor would be better off investing in an exchange traded fund
tracking the S&P 500, allowing them to benefit from higher returns whilst decreasing
volatility due to greater diversification.
Fama-French Three-Factor Model

Both assets have a negative beta in relation to the SMB and HML factors. The
negative beta indicates neither of our assets have exposure to these categories as defined by
the Fama - French model. The Fama-French model also showed a reduction in mean return
for NEU to 5.9%, further decreasing the investment appeal when additional factors are
considered.

Risk-Adjusted Returns

For risk adjusted returns we also looked at the Sharpe and Treynor ratios. As we are
looking at a two-asset portfolio which is not well-diversified, the Sharpe ratio is more
appropriate as it is a measure of total risk rather than systematic. As observed below, our two-
asset tangential portfolio had a Sharpe ratio of 0.62 which is less than 1 and therefore
considered sub-optimal.
Performance vs Peers

To assess the portfolio investment opportunity, we can also look at the performance of
our assets against industry peers. As can be seen from the below table CL underperformed
industry peers Unilever and P&G over the observed 10-year period, whilst NEU significantly
outperformed industry peer Chevron but underperformed the comparable DBO Oil Fund
from Invesco (Yahoo!Finance, 2021c; 2021d; 2021e;2021f). Comparative performance
shows that within CL and NEU’s market segments there are better investment opportunities
for investors seeking such exposure.

CL and NEU

CL not only outperformed NEU in the last decade but saw less volatility in returns.
Through fundamental comparison one could also say that NEU’s long term outlook as a
player in a declining industry (crude oil) is far less promising than that of CL, who are an
industry leader in a growing industry (Oral Healthcare). As standalone investments CL
would be the better option for any investor according to our analysis.

Construction

Noting the small range of values for portfolio returns across different combinations is
vital for this portfolio construction. The range of values for portfolio returns (8.0%-8.99%) is
particularly small considering the significantly wider range of volatility (13.1%-21.25%). If
an investor were to construct a portfolio only using CL and NEU stocks, the tangential
portfolio would be the best choice for a risk-averse position.
 A more risk-seeking investor would lie in the upper quantile selection between
Portfolios 1 and 2. The increase in return an investor would realise from choosing a higher
weighting in CL, however, would not be worth the trade off on the increase in risk.

Although there is not much room for obtaining higher returns than the MVP by
choosing a higher weighting in CL in the opportunity set, a more risk seeking investor would
be able to obtain higher returns via leveraging. By shorting NEU, a more risk seeking
investor would be able to obtain returns of more than 9% by increasing their weighting in CL
to 110-150%. The trade-off for the increased volatility with leveraging, or a standard
deviation over 22% in a portfolio we tested, does not appear to be worth the risk.

Portfolio Benefits

The low range of returns from un-leveraged portfolios does not necessarily mean a
portfolio construction with these two assets are irrational. Analysis found that this
combination of assets has a portfolio beta of 0.6. Which indicates that the assets are less
volatile than the market (unfortunately this also comes with lesser returns). A risk averse
investor, however, looking to reduce the overall volatility in their portfolio and mitigate
against market risk, may find it to be a worthwhile investment.

CL and NEU had a low correlation (0.2) since June 2011, indicating their inclusion in
a portfolio may decrease overall risk through diversification. The assets also have
outperformed the risk-free rate over the observed period by a premium of 6-8%. The VaR of
the minimum variance and tangential portfolios are relatively low (below). These VaR values
for these positions indicate that for the upcoming year, 95% (99%) of losses will not
exceed .52% (.67%, .68%) for the MVP or tangential portfolio, respectively.
 The investment opportunity set indicates some potential benefits to investing in these
assets, particularly when used to mitigate overall risk from other positions. There are more
sensical alternative positions, however, for the rational investor to take, such as an exchange-
traded fund. In doing so the investor will see a higher Sharpe Ratio that is more like the
Sharpe Ratio of market returns from the diversification effect. Additionally, other segment
exposures may be more appropriate for the investor than solely CL and NEU.
REFERENCES

Bloomberg, 2021. Bloomberg - Ethyl Corp Company Profile. [online] Bloomberg.com. Available at:
<https://www.bloomberg.com/profile/company/0216872D:US> [Accessed 2 October 2021].
Colgate Palmolive, 2020. Annual Report. Form 10-K. [online] Available at:
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2 October 2021].
Dun&Bradstreet, 2021. company-profiles.ethyl_corporation. [online] dnb.com. Available at:
<https://www.dnb.com/business-directory/company-
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October 2021].
Reuters, 2021. CL.N - Colgate-Palmolive Company Profile | Reuters. [online] Reuters.com. Available at:
<https://www.reuters.com/companies/CL.N> [Accessed 1 October 2021].
Robert, J., 1984. Ethyl. 1st ed. Charlottesville: University Press of Virginia, pp.216-220.
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&filter=history&frequency=1mo&includeAdjustedClose=true
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mo&filter=history&frequency=1mo&includeAdjustedClose=true
Yahoo! Finance. (2021e) ‘Invesco DB Oil Fund (DBO) : Historical Returns’. Available at:
https://finance.yahoo.com/quote/DBO/history?p=DBO
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