For the Fund of It
When David Carpenter, one of managers of the UCLA Student Investment Fund, read a newspaper article last spring that Southwest Airlines had begun making a push to expand its routes coast-to-coast, he got excited.
The no-frills regional carrier, he thought, “has done a phenomenal job since the early ‘70s. If you’d bought stock in that airline then, you’d be sitting on beach somewhere now.” The airline’s expansion, he was convinced, presented an opportunity for the fund to get in on this stock before it was poised to take off again. He presented his case to the six other graduate students on this year’s fund management team. They weren’t convinced.
“They talked about the additional investment Southwest would have to make in [buying long-haul] airplanes, and how you can’t do no-frills service on a five-hour flight. And by providing meals, the airline would need to put on two additional attendants per flight,” he says. In presenting additional research of their own, the others also questioned whether Dallas-based Southwest could get adequate gate space--and thus passengers--at Chicago’s O’Hare airport.
And so, after a “vigorous” debate, Carpenter says, Southwest was voted down.
Welcome to the UCLA Student Investment Fund, one of at least several dozen such college student-managed funds in the country begun with the idea that young people studying business and finance can benefit from real-world experience handling real money.
The UCLA fund began 12 years ago with a private donation of $50,000, with donors since adding $600,000 to the original bequest. Under student management, the fund’s assets have now grown to about $1.5 million. (Two years ago, after assets topped the $1-million mark, the fund began setting aside 5% of its total value each year for scholarships.)
Says Brian Massey, a research analyst for Santa Monica-based Roxbury Capital Management who was a member of the last class of UCLA fund managers, “The experience you get in the fund is as close as you’re going to get, in an academic setting, of the real world.”
The main difference, he says, is that at Roxbury, which manages $4 billion, the stakes are higher, whereas in the student fund, “you’re allowed to make mistakes.”
Such as that decision last June to pass on Southwest, which was selling then at around $18 and is now around $30. “It would have been a good buy,” says Carpenter.
But, of course, even investing geniuses like Warren Buffett make mistakes.
Through mid-February, the UCLA stock-and-bond fund posted a lifetime average annual return of 12%, says faculty advisor William Cockrum, a financial consultant who teaches courses in finance and investment management, among other subjects, at the Anderson School of management at UCLA.
That isn’t as high as the average annual total return of 15% for the stock-only Standard & Poor’s 500 over the same period, but it is respectable compared with mixed bond-stock funds.
Since May 1, when the current class took over management of the portfolio, the fund is up more than 20%, Cockrum says. If that pace can be sustained, this class could beat the previous one, which achieved a 12-month return of about 23%, one of the fund’s best ever.
Why not just have students make theoretical choices for a paper portfolio, as many schools do? Students working that way tend to “take very extreme positions knowing there’s no real penalty,” Cockrum explains. “Instead of [learning about] having a properly diversified set of securities, they make terribly risky bets which you and I wouldn’t do if we were investing several million real dollars.”
Working with real money helps ground the UCLA students in reality, he says.
The fund is the main part of an investment class that runs from May through April in which students also visit about 30 mutual funds and private investment firms. The class is kept small, with just six to eight graduate students chosen from about 40 applicants, nearly all of them male, Cockrum says.
The great majority of students have had some kind of experience with money management.
Each new class starts in May, its portfolio consisting of the previous class’ holdings. Based on unanimous votes, the students make all the buy and sell decisions. There are certain checks on their actions. For instance, no security may make up more than 7% of the fund portfolio, and Cockrum can veto a choice--something that he’s never done--if he believes it would lead to disaster.
Along the way, the students also get job offers--generally for positions with salaries starting from $60,000 to $100,000 a year, plus bonuses. This go-round, all seven students, whose ages range from 26 to 31, had been placed in jobs by February, four of them on Wall Street, Cockrum says.
The first thing for a new class to do when it takes over the portfolio, Cockrum says, is to consider the economy’s direction and decide on asset allocation. Actually, that’s basically the approach Cockrum believes every investor should take.
This class, optimistic about the economy, decided on a more aggressive weighting of 70% stocks, 20% bonds and 10% cash, he says. Generally, though, the divvy has been 65/25/10.
The second major decision is stock sector weightings. Currently, Cockrum says, the stock portion of the UCLA portfolio is, relative to the S&P; 500, weighted heavily in technology and health care, light in consumer cyclicals, close to the S&P; in energy and in line with the S&P; on financial services.
The least important decision for any investor, Cockrum argues, is the picking of individual stocks. Studies show it’s the choice of asset allocation that accounts for the greatest part of an investor’s total return in the long term, he says, with sector choices next-most-important. The picking of individual stocks accounts for just 3%.
“Decisions on whether to enter a market, and in which sector to enter, have way more impact than decisions on which stocks to pick,” he tells his classes. “That’s why you can match the picks of several securities analysts against picks derived from throwing darts randomly at a board, and the random choices will often outperform those of the experts.”
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After deciding upon sector allocations, the class studies a number of individual stocks and approves a securities shopping list. This list then becomes the basis for actual buying decisions, which are made throughout the rest of the school year. Each approved security is followed closely by a student, who reports on it throughout the year.
Each November, the fund’s stock holdings are divided among the individual students, each of whom at that point begins managing his own mini-portfolio with his share of the class’ portfolio. That worked out to $125,000 each for the current group.
Each manager is free to buy or sell class-approved securities in his portfolio. There is less emphasis on trading the part of the fund in bonds. This class’ bond holdings include three U.S. Treasury issues and a corporate bond with an average maturity of nearly five years, for a total market value of $280,000.
The students want “to avoid interest-rate bets, preferring to bet instead on the stock market,” explains class member Shawn Boyd.
The fund’s holdings at any given time, then, are the composite of the individual students’ decisions. Practically speaking, that means that about a third of the securities in the portfolio will turn over every year, Cockrum says.
Current major holdings include:
* Pfizer. “The health-care sector is generally outperforming the market” and should continue to do well as the baby boom generation ages, says Boyd, explaining why the students like the pharmaceutical company’s stock. In addition, he says, the Food and Drug Administration has approved a few of Pfizer’s new drugs, which are not yet being sold.
* Intel. The company’s dominance in the computer chip market impressed the students, Boyd says--or at least, they were impressed before Intel last week warned of weaker-than-expected sales.
* General Electric. “One of the few successful conglomerates out there--a diversified company managed by a strong leader,” Boyd says, summing up the students’ opinion on a market favorite.
* Microsoft. The software company “dominates the existing market and has got a financial balance sheet second to none,” Boyd says.
Students also learn that all the extensive research doesn’t constitute a guarantee of good performance. And also that the need for research doesn’t end with a purchase. Massey recalls that when his class took over the fund about two years ago, they took a complacent attitude toward three small-cap stocks inherited from the previous class. This attitude proved expensive, as the stocks proceeded to plunge by more than 50% over four months. “We did our homework then,” after the stocks had already been sinking for a while, recalls Massey. “It was a real trial by fire.” His class finally sold them, at fire-sale prices.
Student manager Rich Graziadei, 31, says what he’s doing with the class is not entirely different from his previous job in the Navy, breaking secret codes. “Both fields value having a global perspective and focusing in on a particular issue. Both try to predict the future in different ways. And both let you know quickly if you did well or make a mistake,” he says.
Although Graziadei is proud of his class’ record thus far, he hasn’t forgotten the mistake it made earlier this year when AT&T;, which had plunged after a management shake-up, started back up. The class sold its position at $37, for a small profit. With AT&T;’s new management team, however, AT&T; kept climbing and is now in the low $60s. Ouch.
Experience at guiding the growth of the fund’s assets doesn’t necessarily mean the participants follow their own advice when it comes to their own money. Student Cleve Tzung admits that, rather than buying stocks picked by the fund for his own private portfolio, he has “stuck with the [personal] portfolio I had from before the class.” He finds the class’ picks too conservative.
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Joseph Hanania is a regular contributor to The Times.
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Top Holdings
The UCLA Student Investment Fund is a stock and bond portfolio managed by a class of six to eight graduate students in the management school. Here are the fund’s top 10 stock holdings as of Monday:
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Stock (ticker symbol) No. of shares Value Bristol-Myers Squibb (BMY) 770 $80,900 Pfizer (PFE) 900 78,200 General Electric (GE) 950 74,600 Merck (MRK) 550 70,800 SunAmerica (SAI) 1,500 68,800 Intel (INTC) 900 67,600 Microsoft (MSFT) 800 63,700 Fannie Mae (FNM) 1,000 63,300 Lucent Technologies (LU) 562 60,600 BankBoston (BKB) 530 54,300
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Note: Value rounded to nearest hundred dollars.
Source: UCLA Student Investment Fund
