MBA “Games” Lead to Real-World Investing Success

Student exercises in institutional investing become more widespread and sophisticated, making graduates better at their finance jobs.

In the 1960s, as a professor at Queen’s University in Kingston, Ontario, Dave Wilson made his students create hypothetical portfolios, buying and selling stocks — without money — to develop their institutional investing skills. These days, Wilson is eagerly encouraging a popular movement in business schools to turn such a “game” approach into a real money-making proposition.

The former professor is now president and CEO of the Graduate Management Admission Council, creator of the GMAT entrance exam, which surveys business schools. In that role he spends time visiting MBA programs across the country, many of which now boast their own investment funds, often in slick “real world” atmosphere — and sometimes producing healthy returns. Other schools have taken approaches that mimic such trendy finance areas as hedge-fund or socially responsible investing.

While the practice has its detractors, it seems to offer a promise that MBA programs can improve their image for being all theory and no practice — at least in this key area. “I think they’re a great learning experience,” says Wilson. “Any way that you can get a real taste of what it’s like sitting there looking at a portfolio going up or down and knowing that it’s going to affect your performance is a good thing.”

“I think employers like the hands-on experience that they get working on a real portfolio,” adds Gautam Guruprasad, a second-year MBA student at Emory University’s Goizueta Business School in Atlanta, which has a fund managing $333,000, mostly in equities. “We’ve experienced what’s going on with the credit crunch, the housing markets.”

MBA-based investment funds have been a solid growth story themselves. In 1988, just 34 of them existed, according to a 2003 survey of student managed funds by two professors, Walter Neely, of the Else School of Management at Millsaps College, Jackson, Miss., and Philip Cody, of Trinity University in San Antonio. By 2003 the number had soared to 98, reflecting in part the ease with which financial information can allow fund management from any location. Some universities operate student-managed funds through investment clubs while others, such as Cornell University’s Johnson School of Management and the McCombs School of Business at the University of Texas, incorporate them into the curriculum.

At Cornell, Professor Sanjeev Bhojraj, who uses the fund as a platform for his applied portfolio management class, says that many of his students have had job offers based on their experience working on the school’s Cayuga MBA Fund LLC, named for the Ithaca, N.Y., lake near campus. With $14.5 million under management and a legion of Cornell alumni as investors, Cayuga represents one of the more sophisticated MBA investment funds. Students have to apply to take Bhojraj’s class and those who make it are broken into teams covering different sectors. The fund is “market neutral” and often beats the S&P 500. “The mandate for the fund is educational, primarily,” Bhojraj says. “Secondary is generating good returns.”

Too Much Success?

The Cayuga Fund now is closed to new investors; it had become too big — and even, professors suggest, a bit too profit-driven — to fulfill its first priority as an educational tool. Students do not actually earn anything from their fund’s performance. In fact, they pay a tidy sum in tuition — not to mention the “opportunity cost” represented by lost wages — just to be there. But their sense of competition and desire to outrank each other has many students burning the midnight oil as if they were cramming for a final.

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