Student Funds Tackle a Bear Market

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"The beauty about this is [students] really feel the pleasure and pain of running money," said Sanjeev Bhojraj, faculty director of the Cayuga MBA Fund at Cornell University's S.C. Johnson Graduate School of Management (Johnson MBA Profile). "At the same time, if you're down, it can really hurt if you lose $40,000 or $50,000."

In the classrooms-turned-boardrooms, groups are feeling added pressure. Students who might otherwise be sleeping in or eating lunch are finding themselves checking stocks or conferencing with fellow investors. Steve Katchur, a second-year MBA at NYU and portfolio manager of the Michael Price Investment Fund, says fund meetings that were laid back in bull markets, "definitely get heated up" as students pitch and defend their picks in front of the class. Raised voices are not uncommon. "People are cordial when the class is over with, but people are passionate in their opinions," he said. "If you have a point, then you raise it."

Risk Averse

Lenny Buzik, also on the fund, admitted to being nervous before he pitched a $20,000 investment in J.M. Smucker Company (SJM) to the group in late April. Most of his prep time, he said, was spent "getting ready for what questions might be flying at me." Standing at a podium in front of a dozen students with laptops scouring Smucker's records, Buzik had reason to be nervous. Deftly fielding questions that were technical and often pointed, Buzik managed to convince the students to invest $10,000 by only a two-vote margin—a victory, but a close one.

At Villanova University's School of Business (Villanova Undergraduate Profile), where the Haley Group Mid-Cap Fund won the University of Dayton forum's award for best undergraduate growth portfolio, faculty adviser David Nawrocki said the prevailing mood after the fall's market turmoil was one of determination. "They weren't going to be the class that wiped out the funds for future generations," he said.

One of the reasons many student fund losses may have been limited is that most of the portfolios are particularly risk-averse—often kept in check by stop-loss orders (which sell shares when they fall to a predetermined price) and mandates for diversification. Most make long investments only, though some, like Cornell University's Cayuga MBA fund, now valued at about $14 million, used aggressive short-selling to take advantage of the downturn. Cayuga posted a small profit for 2008 and only a 1% decline for the first quarter of 2009.

Also, whether or not they're earning a grade, students are often dedicated and proficient researchers. "An analyst will spend weeks—40, 50, 60 hours—developing a pitch," says Akash Ghiya, an MBA investor for the Wharton Investment Management fund at the University of Pennsylvania's Wharton School (Wharton MBA Profile). Ideas, Ghiya said, come from "anywhere and everywhere." A few of Wharton's best-performing picks have been Jos. A. Bank (JOSB), an upscale men's clothier gaining fame now for its recession specials, the Corrections Corporation of America (CXW), a prison operator, and Hanesbrands (HBI), the underwear company.

unparalleled experience

Ben Biddle, an MBA student investor at the University of California at Berkeley's Haas School of Business (Haas MBA Profile) says his fund's strategy has been to focus on quality, not short-term returns. "If you believe in the company you're investing in, then market noise is easier to tune out," he says. Biddle's first pick, Cisco Systems (CSCO), dipped 13% the week after he bought it. Instead of backing down, Biddle lobbied classmates to double their investment directly after the dip. They can now claim a $7,000 profit on the stock.

Several funds have been trying to play the downturn—picking recession favorites like TJX (TJX), owner of the T.J. Maxx discount clothing chain, which performed well for the University of Connecticut students. Others have stuck to downturn-resistant industries. For example, NYU put $10,000 each into budget-friendly Smuckers products, a soap company called Ecolab (ECL) and a LED technology company called CREE Inc. (CREE). "People are still eating, people are still cleaning, and people are still lighting," Levich says.

And for the first time in years, student investors are contemplating possible bankruptcies of companies when they eye their choices. In a market where credit is limited, low debt and high cash flow have become far more important. Faculty advisers say students are scouring balance sheets in a way they never have before.

"This period is, from a historical perspective, very, very, very, significant," Sauer said, adding that the learning experience is virtually unparalleled by other classes. "They might not realize the significance now, but they really realize that it's extremely difficult and challenging. It's never easy, but it's even more difficult now."

Anne VanderMey is a B-schools writer at BusinessWeek.

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