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.
“Even though they don’t take the money home with them, there is a pride of victory that is really critical,” says Wilson.
The fear of losing is also an important part of the learning process, according to Prof. Bhojraj, who has counseled students during office hours about crashing portfolios. “Often the limitation of experiential learning is that they’re no real consequences of bad decisions,” adds Dan LeClair, vice president and chief knowledge officer of AACSB, the Association to Advance Collegiate Schools of Business. “In these cases, there are real consequences.”
Universities often start the funds with a portion of the school’s endowment. Some, such as the Tuck Investment Club at Dartmouth University, began with an alumni donation, while others are funded entirely by investors. “In some ways this is the school putting its money where it’s mouth is,” says LeClair. “Business schools need to be involved in practice; we can’t live in an abstract world.”
Students seem to agree, and clamor for classes and school clubs that offer investment funds. The funds also have become a major recruiting tool for the MBA programs that have them. Many use glossy annual reports to publicize the investing success of their funds, and their students.
A Job at Fidelity
Amrita Dukeshier, a second-year MBA student at McCombs, says she probably would not have the job that she has lined up at Fidelity were it not for her experience working on the university’s $16-million fund covering the energy markets. “What we do in the fund is exactly what an equity analyst does,” Dukeshier says.
MBA investment funds are also growing out of a sense of competition and a desire to be cutting-edge. In its recent pitch to create a student investment fund at the University of Georgia’s Terry College of Business, the school noted that many of the top ten public MBA programs have student managed funds and that Terry would need one if it wanted to compete. Funds are also focusing on hot areas of finance, testing out hedge fund strategies and different mixes of investments. The Haas School of Business at the University of California, Berkeley, in keeping with its high-minded reputation, is even starting a fund dedicated to socially responsible investing.
The biggest knock on the programs is the same one that applies to MBA programs for finance in general: that existing in the educational setting as they do, they simply are too theoretical compared to on-the-job work in a finance department.
Tim Zack, a recruiter for In-Site Search who looks for candidates to work in hedge funds and investment banks, says he usually avoids MBAs altogether, regardless of any school-based investing background. He prefers PhDs or masters-degree students with rigorous quantitative and technical training. At Credit Suisse, the head of U.S. recruiting, Julie Kalish, says that experience at a university investment fund has not been a deciding factor when hiring at the investment bank, however the additional practical experience is always helpful.
But other employers are paying attention to the trend. “I think companies do take seriously the real life experiences that are provided by the educational environment,” AACSB’s Dan LeClair says. “When you can provide situations where there are some meaty consequences, that’s even better.”
Most useful might be the chance to work with classmates in an environment that is more openly competitive than the classroom.
First-year MBA students at Tuck are required to make stock pitches to second-year members of the investment club as a pre-requisite for entering the interview pool to meet with investment firms. Professor Robert Howell, the advisor for Tuck’s club, says that students who do not experience that hazing ritual will find the actual interview process overwhelming. Still, he acknowledges, even the most realistic university investment club cannot fully replicate the pace and stress of the real job. “They have a good time with it,” Howell says of the school’s fund, which manages between $250,000 and $500,000. “It’s a toy for them.”
As for comparisons with school-based investing in the 1960s, technology has made a huge difference, of course. And learning to manage a portfolio is much more exciting than it was back then. “It wasn’t as engaging a game as it is today,” Dave Wilson notes. “You had to write a letter to a company to get a 10K or annual report. To follow the stock prices, you had to go downtown and watch the ticker.”