Student Funds Tackle a Bear Market

Student-managed portfolios at MBA and undergraduate business programs have taken a hit, but many have held up surprisingly well amid the economic wreckage

By Anne VanderMey

Katherine Avery and her MBA classmates knew they were facing a bear market when they made their first investments as a class last October. So as managers of the Student Managed Fund at the University of Connecticut School of Business (Connecticut MBA Profile), Avery's class analyzed, plotted, and planned for all possible market outcomes. But amid a nearly unprecedented market meltdown, the MBA class found that finance classes can only prepare you so well.

The Student Managed Fund, once worth more than $1 million, is one of an estimated 200 graduate and undergraduate student-run portfolios in the country operated with very little faculty involvement. The funds research companies and decide which stocks to buy and sell, using a chunk of cash that usually comes from the university's endowment. The idea is to let students experience first-hand what it's like to play the market—and learn from their mistakes.

This year the learning curve is steeper than most. Two days after the SMF class's first purchases, the Dow Jones industrial average tumbled 800 points and finished the day below 10,000 for the first time since 2004. The class's meticulous mathematical modeling and historical analysis suddenly meant nothing as the MBAs saw stocks they thought were safe bets—Johnson & Johnson (JNJ), Procter & Gamble (PG), Exxon Mobil (XOM), and IBM (IBM)—crash and burn.

Losing Less Than the S&P 500

"It was just so far outside what any of us anticipated," Avery said. The second-year finance student says she now regrets not buying back in immediately to catch the subsequent bounce, but at the time the uncertainty was too great. "Oh my God," she remembers thinking. "Is this going to drop another 20% overnight?"

The fund—worth more than $897,000 when Avery's group got its hands on it on Oct. 3—has since shrunk to about $672,000. Even so, once the worst days of the crisis were over, Avery's class would go on to outperform the Standard & Poor's 500-stock index by an impressive margin in many areas. Heavy losses are a common tale this year at student-managed funds, at both the graduate and undergraduate level, with many losing several hundred thousand dollars. But given the economic calamity, what may be more remarkable is how much student-run funds didn't lose.

At the University of Dayton's annual forum on student investing, 50 different funds entered the student portfolio competition, which David Sauer, an associate finance professor at Dayton, oversees. He says that of those entrants, about 75% beat the S&P 500 last year—meaning they lost less than 38% in 2008. Of course, contest entrants represent the funds which performed well, and many others fell short. Of the contest winners though, all beat their benchmarks and some posted overall gains in 2008, besting some of the most respected—and highest-paid—portfolio managers in the country.

Take for example, the professionally invested endowments at most colleges and universities. From July to November, university endowments fared better than the S&P 500, which lost 30%, but still sustained crippling 23% losses on average, according to a recent study by the National Association of College and University Business Officers and TIAA-CREF Asset Management. The bulk of the losses were the result of the market's decline, but a weakness for risky investments on the part of big endowments and the machinations of at least one well-known predatory investor didn't help. New York University, for one, lost $24 million to Bernie Madoff.

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