A Survey of Student Managed Funds
Walter P. Neely and Philip L. Cooley
Please reply to:
Walter P. Neely Philip L. Cooley
Millsaps College Trinity University
Else School of Management One Trinity Place
Jackson, MS 39210 San Antonio, TX 78212
A Survey of Student Managed Funds
“Are you the sage on the stage or the guide on the side?” That old question captures a
significant difference between teaching traditional finance courses and “teaching” a
student managed fund (SMF) course. A student managed fund offers students the
opportunity to invest real money, which tends to focus the mind more than simulated
investments can ever do. Reported here are the results of a nationwide survey of SMF
programs, including the names of colleges and universities offering such programs, the
sources of funding, and several aspects of operating SMFs. Useful benchmarks are
provided for those contemplating the establishment of an SMF.
The authors thank James Mallett, Ray Phelps, and Penelope Prenshaw for their help.
Thanks are also extended to the participants of past panel sessions on SMF issues at
meetings of the Southwestern Finance Association.
A Survey of Student Managed Funds
Student managed funds (SMF) provide special educational opportunities for students, often described as experiential learning or service learning. SMFs also provide special opportunities for the instructor. In traditional finance courses the instructor is the “sage on the stage.” In SMF courses, the instructor becomes the “guide on the side.”
The objective of an SMF is to enrich student education through active participation in financial markets. Students assist in stock selection and management of a real portfolio, thus gaining hands-on money management experience. They learn to deal with the uncertainty inherent in the process of estimating stock value and contrasting it to stock price. The process helps students to develop their intuition and their animal spirits as applied to investment decisions.
Outside of the individual colleges and universities involved, SMFs are not widely known or understood. The purpose of this article is to report survey results that describe how SMFs are structured. Along the way, we provide answers to several questions: Which colleges and universities have SMFs? Where does the money come from? Is it a one- or two-semester class? Or is it a class at all? Do students invest only in equities, bonds, and cash? Answers to these questions (and others) provide benchmarks for colleges and universities considering the origination of an SMF program. Questions left unanswered here can be addressed to instructors of SMF programs. (See Table 1 for a listing of colleges and universities with SMFs.) Based on our experience, we believe most of the SMF instructors would welcome the opportunity to discuss the structure of their program.
Lawrence  compiled a list of 22 SMFs in existence in 1988. Lawrence  updated his study, reporting on 34 colleges and universities with SMFs in 1993. Since that time, perhaps because of the bull market of the late 1990s, SMFs have proliferated. There are 98 institutions included in the recently formed Association of Student Managed Investment Programs (ASMIP) (Mallett and Lerro, 2001). A few of these institutions currently do not have an SMF program but are considering whether or not to start one.
As reported by Block and French  and by Lawrence , SMF funding comes from various sources: large specific gifts from one or several individuals, gifts from corporations or from corporate foundations, gifts from many small donors, gifts from university foundations or other foundations, and from carve-outs of university endowment or foundation assets. Some SMFs, such as the University of Texas at Austin manage funds for private clients, accredited investors under U.S. securities laws. Another special case is the loan that provides SMF funding at Cameron University [Bhattacharya and McClung, 1994]. The variety of funding methods suggests that many alternatives are possible, many of which are situation specific. Most SMFs, however, manage funds that are part of a university’s endowment fund or foundation. Grinder, Cooper, and Britt  point out the value of students investing on behalf of a client with objectives perhaps differing from their own.
Block and French  describe the organizational structure of the fund at Texas Christian University. It has a student administrator, portfolio managers, and operations managers. A survey by Ary and Webster  finds that some SMFs use a committee structure, others use a functional (accounting, public relations, etc.) organizational structure, and others organize by economic sectors. They find that while all funds in their
sample allow investments in common stocks, only 16 of 28 allow investments in bonds, and 14 allow investments in mutual funds. Three funds allow futures trading, short selling, and covered calls, and two funds allow put options. Only four of the funds invest in foreign securities. Lawrence  finds that most SMFs operate as part of a required investments course, both graduate and undergraduate. Some courses are open to students from across the university with or without prerequisites. Johnson, Alexander, and Allen  argue the merits of using electronic meeting systems for SMFs.
A five-page questionnaire was sent via email/fax to instructors of the SMFs included in the Association of Student Managed Investment Programs and to other instructors of known programs not included in the ASMIP list. A total of 124 instructors were surveyed with 61 usable responses. Of those surveyed several were not yet in operation with actual money. Those responses are not included in the results. Only operating funds are included, and only one fund per institution is detailed. (A copy of the questionnaire is available from the lead author.)
Survey questions include details about funding sources, SMF operations, and investment practices. Table 1 includes the colleges and universities that responded to the questionnaire—those marked with an asterisk. The other institutions listed in Table 1 are
those believed also to have an SMF. Where the information is available, we also include the year in which the SMF was established. Gannon University established the first fund, that in 1952. The proliferation of funds was to accelerate some 40 to 50 years later, with several more in the formative stages.
Source of Funding
Initial funding comes from many sources as shown in Table 2. In some cases initial funding comes from more than one source. Hence the number of sources reported by respondents (74) exceeds the number of respondents (61). The most common source of funding (21 of 61 SMFs) comes from individuals and families. These benefactors typically designate their gifts to universities for the purpose of helping students to learn about investing by actually doing it. Fifteen of the 61 SMFs are based on carve-outs from university endowments. Corporations provided funding for 7 SMFs, and foundations provided funding for 6 SMFs. In almost all of these cases, the students become money managers for the university because the university is the owner of the funds. Four of the SMFs manage funds for private clients, which in some cases resemble the operation of an open-end mutual fund.
The Tennessee Valley Authority’s Investment Challenge Program funds 9 of the SMFs surveyed. This program involves 19 participant universities in its service area with each university managing an initial $100,000 of the Nuclear Decommissioning Trust Fund. The universities compete for monetary prizes but do not retain ownership of the funds; instead they act as money managers for the Trust Fund [TVA Investment Challenge, 2002].
Dollar size of the initial funding for SMFs varies dramatically across universities. In some cases SMFs are started with less than $50,000, but in other cases they begin with more than $1,000,000. To illustrate, the SMF at Millsaps College began with $87,500, at Trinity University, $500,000, and at Ohio State University, $5,000,000. We estimate the current modal value to be in the range of $200,000 to $400,000.
Regardless of the source and size of initial funding, several differences exist in fund operating structures. For example, there may be more than one SMF at an individual university. Funds may be structured as a part of a class, or not, and the students may be undergraduates, MBAs, or a combination of both. Forty-seven of 61 respondents offer only one fund, 11 have two funds, and 3 offer three funds. Block and French  discuss the two-fund approach followed at some universities and the advantage of allowing more students to assume leadership positions. At one university the SMF fund has two sub-funds, one that follows a growth style and one that follows a value style. That approach allows students to choose according to their investing style preferences. At another university, one fund is associated with a course and another is extracurricular. Another program offers both equity and fixed income portfolios.
Some SMFs are highly structured organizations wherein students have specific job descriptions (analyst, economist, portfolio manager, etc.) In other SMFs job titles are not used and students conduct business without a formal organizational structure. Eleven of the 61 respondents operate outside a classroom structure as an extracurricular activity; eighteen operate within a one-semester course; eighteen operate within a two-semester course; and eight provide students an option for one or two semesters. Two-semester courses mitigate the problem of continuity and the problem of “the four-month time
horizon.” Some programs encourage students to be involved after an initial course period through directed studies or on a voluntary basis.
There are advantages in structuring the SMF as a part of a course: (1) students may devote more effort and their work may be more productive and organized, (2) instructors can allocate a part of their teaching loads to the SMF class rather than as an add-on
faculty responsibility, and most important (3) the educational experience may be richer due to the students’ added motivation gained from managing real money within the course context. Advantages of extracurricular SMF programs include: (1) access to students from across the university since there are often no course prerequisites, (2) attraction of students who choose to become involved because of a strong interest, and not simply to satisfy graduation requirements, and (3) the involvement of potentially more students.
Sixty percent of the SMF programs select the best student candidates and limit enrollment by using an application process. At a typical program students provide demographic information, write an essay about themselves, and are interviewed by the professor. This process takes place in the spring prior to registration for fall classes. Prerequisites for SMF courses range from the ubiquitous junior level corporate finance course (or its MBA counterpart) to two courses in investments and their concomitant prerequisites. Forty percent of the SMF programs do not require an application and are available on a first come, first served basis to qualified students. One in three of these programs are non-course, extracurricular arrangements.
When asked about special facilities and data, ten respondents mentioned having a trading room dedicated to the SMF. Eight have special subscriptions to Value Line, six have Bloomberg terminals, five have Bridge stations, and three have access to First Call. When asked about special features, 33 respondents said that their students and university support a website for the SMF. Other special features include the donor as teacher of the SMF course and a visiting portfolio manager teaching via video-conferencing. Several respondents mentioned guest speakers from the financial world and class trips to money center cities.
A written investment policy enhances communication among student money
managers and between the SMF and external constituencies, including university administrators and any clients that might be involved. Forty-nine of the respondents report that they have their own investment policy, while three use the university endowment policy statement. Three report not having an investment policy, and six report other variations of investment policy.
The process of writing an investment policy, or editing a previous investment policy, is a good student exercise. It forces students to consider risk-return objectives and constraints such as allowable securities for investment. Most of the SMFs, 57 of 61, are allowed to invest in U.S. equities, with the remaining four dedicated to bonds only. Seventeen of the 57 equity funds invest in U.S. equities only. Of the 40 remaining equity funds, 27 may also invest in bonds, 12 in options, 4 in futures, and 18 in open-end mutual funds. Twenty funds are allowed to invest in foreign securities.
Virtually all of the SMFs actively engage in stock picking, but 13 report a mix between active and passive strategies. Those following a mix include SMFs that invest proceeds from security sales into index funds (e.g., Standard & Poor’s Depositary Receipts) while waiting to invest in individual securities. Twice as many respondents report favoring value investing as compared to those favoring growth investing. Further, the number favoring the top-down analysis approach (economy, industry, company) about equals the number favoring the bottoms-up approach—selecting good stocks
without regard to industry and economy. There is general agreement among respondents that students should focus on security analysis and portfolio management with little emphasis devoted to market timing and technical analysis.
Other findings that may be beneficial to those considering the origination of an SMF
program are as follows:
? More emphasis tends to be placed on formal security analysis when the SMF
operates within the context of a course offering as compared with an
extracurricular activity. Also, instructors devote more time to the SMF when it is
embedded in a course.
? Respondents believe that students in SMF courses acquire valuable skills in
teamwork, research methods, public speaking, and analysis/synthesis, all of which
are attractive to employers.
? SMF instructors say that both they and the students spend more time on the SMF
course than is typical of other finance courses.
SMFs have grown in number, diversity, and size over the last decade. Their
popularity stems largely from the benefits of experiential learning. Students gain real-
world, hands-on experience in the management of relatively large sums of money.
Students develop an in-depth understanding of securities markets and the analysis of
securities. In many cases, they interact with members of the financial community and
become more attractive prospective employees. Another reason for the popularity of
SMFs is their use in public relations with the local business community. In addition, they
have become a useful tool in many admissions offices.