The Gabelli undergraduates who ran the Student Managed Investment Fund last semester successfully shepherded more than $1 million of the university’s endowment money through a period of unprecedented volatility, learning valuable lessons about how to weather a stormy market.
The Student Managed Investment Fund provides Gabelli students an experience that few other universities offer. Sure, lots of schools put slices of their endowment funds into the hands of undergraduates, but Gabelli’s program is unique in that students manage both international and domestic investments and a variety of asset classes, including stocks, bonds, commodities and foreign exchanges. (Most universities’ funds invest only in U.S. stocks, producing a much more limited experience.) In addition, Fordham’s fund, with a value of $1 million, is much larger than many of its peers, which often total $150,000 to $200,000.
The 24 students who handled Fordham’s fund last semester, under the guidance of Professor James Kelly, learned to ride a bucking bronco of a market that no prior team had ever seen. The market’s volatility index averaged 32.9 from September through December 2011, compared with an average of 19.9 over the entire invested history of the fund during active school terms. The only period that even came close in volatility was from May through August of 2010 — but back then, the endowment was invested in money-market funds, largely shielded from the roller coaster.
Making life additionally complex for last semester’s students was a marked increase in correlation of various measures with the S&P 500. With international and emerging-market stocks, spot gold, copper futures, the Euro, commodities and other indices tracking close to the S&P, diversification and hedging became much more difficult. There were fewer places to go with investments, fewer opportunities to grab.
So what did the students do? The first-semester analysts conducted intensive research on individual securities such as Caterpillar, BlackRock, Express Scripts and Total, the French energy company. The second-semester portfolio managers researched important issues such as the European macro environment, U.S. monetary and tax policy, mergers and acquisitions, leveraged buyouts, risk management, exchange-traded funds and more. Then they investigated possible investment strategies and debated them in class, challenging one another’s opinions to make sure the decisions they were making were the right ones.
Last semester’s fund managers also made a move to use about 1 percent of the portfolio’s value to purchase put options, pushing down the fund’s overall returns slightly but yielding a measure of insurance. They expected that this move would preserve the fund’s capital, particularly through the European sovereign debt crisis.
“We stand by the protective insurance positions we took regarding these options, given the realistic possibility for another global recession precipitated by major defaults in Europe,” wrote the fund’s three managing directors, Kyle Brengel (GSB ’12), Adam Kotrinsky (GSB ’12) and Michael Wolff (GSB ’12) in their end-of-semester report.
Congratulations to the student fund managers for competently weathering a finicky market — an experience that, should current economic conditions persist, they will surely have the chance to do again as full-time finance professionals.
Photograph courtesy of Liam Cooke on Flickr’s Creative Commons.