Managing a ‘Cool Million’

Photo credit: Janet Rogers, Strategic Marketing and Communications

Graduate Investment Class in Charge of Portfolio

Several finance majors are getting a rare opportunity: to manage a $1 million portfolio using real – not imaginary – money. This graduate-level class can be instrumental in learning first-hand about investment research and portfolio management.

The inaugural Student Investment Fund class is led by John M. Clark, Ph.D., CFA, CFP®, and is charged with managing funds provided by the Marion and Henry Bloch Family Foundation. An associate professor of finance at the Henry W. Bloch School of Management, Clark has learned from experience that when students are investing real funds, they are less likely to take big risks. When using imaginary funds in a simulation, however, the student appetite for risk increases enormously.

Typically student investment funds gravitate toward stocks the students are familiar with, but simulations usually result in students holding positions that are highly concentrated in a few stocks that are smaller and more volatile.

“Early in my career, I had students simulate running a portfolio with few rules, resulting in students with portfolios that had very few positions. The worst case was a student who invested all of the allotted cash into futures contracts on a single commodity,” said Clark. “When I was faculty advisor for the fund at the University of Southern Mississippi, I was surprised at how quickly this attitude toward risk changed, and at one point I had to tell the students that we needed to increase risk to be consistent with our benchmark,” said Clark.

Clark’s expertise is in portfolio management, exchange-traded funds, personal financial planning and derivative securities, perfect experiences for managing the class funds.

Prior to this appointment, Clark served as director of the Center for Financial Services and as an associate professor of finance at Southern Mississippi, where he supervised the student investment fund.

“Since I arrived here, I have wanted to create classes similar to what I taught at USM. The Bloch Family Foundation made this possible by generously allowing us to serve as the money manager for this portion of their portfolio,” said Clark. “The $1 million portfolio is above the average size for student investment funds and will provide an authentic experience for students to learn about investments and the risks associated with managing a portfolio.”

Clark said there are approximately 500 real-money student funds in the world and most of them are under $500,000.

“We hope to increase the number of students each semester,” said Clark. “Our current class is the perfect size for establishing our initial asset allocation and creating a template that will be used for making financial presentations about the performance of the portfolio.”

October is historically an unusual month since it is the end of the fiscal year for many money management funds, which tends to result in funds rebalancing their portfolios to minimize tax exposures for their clients.

“Since our portfolio was originally funded, there has been increased market volatility. As a result, we have been slowly easing into the market and buying on days when the prices are down,” said Clark.

Clark typically checks the market three times a day – when the stock exchange opens, at lunch and at the close of the market.

According to graduate student Colin Livasy, they are initially using Exchange-Traded Funds (ETFs) for the portfolio. ETFs are funds that trade like stocks. ETFs are an easy-to-use, low cost and tax efficient way to invest money.

The class activities continue from semester to semester, and new students will enter the process.

“Three of the five students graduate at the end of the semester, and we will have new students learning about our portfolio in the spring,” said Clark. “For this inaugural class, we wanted to select the funds, and begin getting the money invested. We first needed to determine our asset allocation,” said Clark. “Now, we are designing a template for our presentation to our advisory board, for our end-of-semester student presentations and for each class thereafter,” said Clark.

Clark hopes to have the board in place by the end of the Spring semester.

The portfolio has a target asset allocation of 25 percent bonds and 75 percent equities. The fund is exclusively invested in bond and stock ETFs. The equity portion of the portfolio is allocated to ETFs in sectors, including financials, health care and technology. The bond portion is currently invested in short- and mid-term bond ETFs.

“The final goal for this semester is to learn how to effectively use a performance reporting tool – Morningstar Direct – to provide annual reports,” said Clark. “This product has some outstanding tools, and it will provide our students an experiential learning opportunity,” concluded Clark.

|Wandra Brooks Green, Division of Strategic Marketing and Communications

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