Student-run investment funds are getting real-time lessons in riding out down markets

William Aldridge knew he had his work cut out for him when he started this January as the financial services analyst for the University of Iowa’s Henry Fund, a graduate student investment fund, run out of the school’s Tippie College of Business.

The first-year MBA student is one of two students responsible for managing the fund’s financial sector, an area battered by the subprime meltdown, and the pressure is on to make sure his area doesn’t succumb to market volatility. Aldridge is currently researching his forecasts for the coming year and thinking about what action to take on his holdings, which includes stocks like Bank of America (BAC), Equifax (EFX), and Travelers Cos. (TRV).

While Aldridge admits it can be stressful making investment decisions in this economic climate, he says he is savoring the challenge. I think it is a better learning experience in this economy because we really have to think more about risk, says Aldridge, who wants to go into corporate banking after school. Everyone can do well in a bull market, but it is times like these that the fundamental stuff we do is the most important.

Weathering the Storm

Student-managed investment funds—a staple of many undergraduate and graduate business schools in the country—have not managed to escape the current economic downturn unscathed. Yet the majority have managed to stay afloat and, in some instances, yield impressive returns. There are an estimated 200 student-run investment funds in the country, most funded through endowment or donor funds, and students use them to learn about finance and the markets. During the course of the semester, students are assigned roles such as chief economic forecaster, sector analyst, and chief investment officer, getting hands-on experience in security research, valuation of risky assets, and portfolio management.

The past year has provided student fund managers with an unusual learning experience. While most have seen a slight dip in the return on their portfolios, a conservative and disciplined investment approach has taught the student funds how to minimize risk and maximize returns in a shaky market, students and faculty advisers say.

This is especially true in the case of the 11 student funds that took top prizes at the University of Dayton’s U.N. Global Compact: Redefining Investment Strategy Education (RISE) Forum, held each spring at the University of Dayton in Ohio. The national competition is among the largest of its kind in the country and rates student-managed portfolios in 11 different categories, of which there are six undergraduate and five graduate winners. Of the 11 winning teams this year, all had positive annual returns for 2007, ranging from 5.41% to 21.37%.

Economic Forecasts Provide Guidance

Obtaining the top prize in one of the 11 categories, which range from fixed-income to growth-style portfolios, was no easy feat this year, says David Sauer, managing director and program co-chair of the investment forum. I think the teams that do rise to the top in terms of performance are the ones that have a well-defined investment process and well-defined investment philosophy, Sauer says. The ones that don’t do the thorough analysis and do not stay true to a discipline are more likely to get adversely impacted when the market is volatile.

Many of the RISE winners depend on their economic forecasts to help them decide which stocks, bonds, and equities to purchase or sell. For example, students at St. Mary’s University’s Sobey School of Business in Nova Scotia—a winner in the undergraduate portfolio category—had concerns about the U.S. housing bubble and its possible effects on equity markets as early as the fall semester of 2006. As a result, the group decided to underweight equities while overweighting fixed income for the year in their portfolio. In addition, they picked a handful of aggressive stocks on a case-by-case basis, said Greg MacKinnon, the fund’s faculty adviser and a professor in petroleum financial management.

Their strategy was not perfect, but it ultimately paid off. By the end of 2007, the $184,086.98 portfolio posted a 6.98% return, though it still lagged behind the benchmark they devised, which gained 8.36%. One lesson we have learned from the beginning of the year is ‘don’t panic,’ said Nitchawan Sriviboone, a second-year MBA student and the fund manager and lead analyst for the fund’s real estate and health-care sector. There actually might be a great opportunity hidden in that circumstance. If we can find that opportunity and take it in the right time, we will be able to earn positive returns to our portfolio.

Gold Shares Shine for UAB

Having some insight into the market also helped the University of Alabama-Birmingham’s Green & Gold Fund—another RISE winner, in the undergraduate growth-style category—end the year with a 5.46% annual return on its $404,536.94 portfolio. The team adopted a mostly conservative investing stance, holding onto more stable stocks, such as Streetracks Gold Shares (GLD) and others, says Stephanie Rauterkus, an assistant professor of finance at the school and the fund’s faculty adviser.

With the political climate, the Presidential election, and the uncertainty surrounding oil and interest rates, we thought we needed to keep a significant chunk of our money in something that will be safe and stable, Rauterkus says. We’re not trying to do a lot of trading and react to every market event, and that has worked for us.

Still, even student funds that did well in 2007 are having trouble maintaining their gains in the first and second quarters of this year. For example, Iowa’s Henry Fund—another RISE winner, in the graduate growth-style porfolio—ended the year with a portfolio worth $1,571,814 and an annual return of 12.59%. As of Apr. 10, the fund was valued at $1.467,404 and was down 6.64% for the year, though still ahead of its benchmark, the Standard & Poor’s 500-stock index, which was down 7.53%.

Despite the losses, students remain optimistic about the fund’s performance and long-term health, says Todd Hogue, the Henry Fund’s faculty adviser and an assistant professor of finance at Tippie. All things considered, [we] are having a good year, Hogue says.