Magazine article Baylor Business Review

Portfolio Management in Academia

Magazine article Baylor Business Review

Portfolio Management in Academia

Article excerpt

Launching a Student-Managed Investment Fund

Thanks to a generous gift from Baylor alumnus Philip M. Dorr (BBA '80, MBA '83) and additional monies contributed by Baylor alumni and friends, the Department of Finance, Insurance, and Real Estate launched a course in portfolio management this spring.

The practicum enables participating students to gain valuable hands-on experience in securities research, valuation of risky assets, and asset allocation by managing an investment fund of real dollars. In so doing, students develop skills in evaluating economic, industry, and firm data; integrating such data into securities analysis; and communicating their research results to others. In addition, as envisioned by Mr. Dorr, once the value of the Fund reaches $1 million, part of the annual growth in fund value (net of any additional contributions) will be dedicated to providing scholarships for business student athletes.

The Fund should increase the employment opportunities of participating students in areas such as equity research, investment banking, commercial banking, and corporate finance. In addition, the Fund should enhance Baylor's reputation as a university offering courses that provide challenging, integrated, hands-on experience. As the program advances and becomes more visible, Baylor will likely attract more highly motivated and academically gifted students.

Investment Policy

The goal of the Fund is to obtain a long-term return (calculated on a five-year basis) as high as possible consistent with prudent risk limits but at least as high as the return on the S&P 500 (with dividends reinvested). Since the Fund is exempt from federal and state taxation, the return goal is based on total return with no preference given to whether the return comes from dividends, interest, or capital gains.

The Fund may invest in any U.S. exchange-traded securities of established firms. However, the Fund may not use financial leverage. Consistent with the Fund' s educational objective and goals, the target stock allocation should generally be 100%. The Fund's stock weight, however, may drop as low as 60%, permitting students to gain experience with other asset classes and to recognize that cash will exist after positions are liquidated. The purchase of derivative securities is not allowed except for such instruments as S&P Depository Receipts, which may be purchased for purposes of liquidity management. The Fund may not purchase mutual funds except for investment of cash balances in a money market fund.

At the end of each semester the Fund must be diversified across industry sectors and individual stocks. Each sector' s weight in the Fund must be within either 50% or 5 percentage points of its weight in the S&P 500. Thus, a sector with a 20% weight in the S&P 500 could have a weight in the Fund of 10% to 30%, while a sector with a 3% weight in the S&P 500 could have a weight of 0 to 8%. In addition, the maximum investment in any one stock should be no more than 5 percentage points in excess of its weight in the S&P 500. Thus, stocks with weights of 5% and 1% in the S&P 500 could have maximum weights in the Fund of 10% and 6%, respectively.

The selection process will focus on stocks that have the potential for good returns. Although the S&P 500 is the benchmark portfolio, investments can come from U.S. securities outside that index. However, restrictions on industry weights and individual stock weights will still apply, meaning that no more than 5% of the Fund can be invested in a single stock outside the S&P 500. In addition, no more than 20% of the Fund can be invested in all stocks outside the benchmark portfolio.

Fund Management

The Fund is managed in the fall and spring semesters through a three semester-hour practicum open to select graduate students and senior undergraduates. The class combines readings and research reports prepared by students working in teams. …

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