Fund Managers Before They Graduate

Some B-schools put real money in students' hands

Most MBA students test their stock market acumen through hypothetical investment portfolios. But at several dozen business schools, select students manage investment funds with real money. It's an especially tricky assignment at a time when getting ahead in the market is tougher than it has been in nearly a decade. By most accounts, the MBA candidates stand up well to the pressure. "When students come out of the programs, they're at least a couple of years ahead of most other graduate students," says Gary Crum, chief executive of AIM Capital Management. "They're able to speak the language. They know how trading operations work."

Student-managed investment funds put anywhere from $100,000 to several million dollars into the hands of MBA candidates under the watchful eye of faculty. The goal is to do more than beat benchmarks. "We're trying to offer a powerful rate of return for our investors, but we're also trying to provide a powerful educational experience," says Steve Sharrat, adviser for the $2.5 million Cayuga MBA Fund at Cornell University's Johnson Graduate School of Management.

The funds are usually set up in one of three ways: as investment clubs that manage less than $500,000, typically donated by alumni; as funds that oversee part of a B-school's endowment; or as limited-liability corporations that handle private money. Managers are chosen by professors or come aboard after a rigorous application process that involves writing essays and being interviewed by a faculty panel and an advisory board. Already strapped with intensive coursework, student managers can spend more than 20 unpaid hours a week researching company financials and tracking stock performance.

Each fund tries to instill its own investment philosophies and strategies. The $12.5 million MBA Investment Fund, consisting of a growth fund, a value fund, and a small piece of the endowment, at the University of Texas at Austin's McCombs School of Business, is one of the largest MBA-run fund operations. Created in 1994 with money from private investors affiliated with the school, it aims to minimize risk.

These funds stick to a "disciplined approach on the sell side," always off-loading stocks when they reach a set target price. In the past year, the growth fund has struggled while the value fund has beaten its benchmark by about five percentage points, according to Keith Brown, a finance professor and president of the operation.

Unlike the Texas students, who base stock picks on their own independent research, managers of Cornell's Cayuga MBA fund rely on a computer model. A second program guides them on how many shares to buy. As of Mar. 8, this value fund is ahead of its benchmark, the Standard & Poor's 500-stock index, by 6.77 percentage points--better than many professional money managers.

Funds like those at Texas and Cornell operate out of state-of-the-art facilities, complete with trading floors and live market feeds. But Purdue University's Krannert School of Business investment club, started in 1997 with a $100,000 donation by a venture-capitalist alumnus, meets in a windowless basement classroom, says Daniel Gertner, a second-year MBA and fund manager.

This club is open to all. Students spend little time on specific companies, relying instead on investment models built from their faculty adviser's research. Early this year, the model generated a list of stocks to buy based on the January effect--a theory that says the market will rise in January as investors take tax losses in December and reinvest in the beginning of the new year.

Last year, the fund--now about $180,000--was up 51%. Its results would have been even better if club members hadn't cashed out $3,000 for a trip to New York. It seems the six managers have done well enough to gain the attention of Nasdaq officials and earn an invitation to open the market on Apr. 16. That's an honor most MBAs can't put on their résumés.

By Jennifer Merritt

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