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 Quant jocks

By Kelly Rawlings

“The literature tells us that stock analysts as a group can’t consistently pick individual stocks,” says Prof. Mike Cooper, finance. “It’s a doomed approach.”

As individual securities analysis, according to some investors, heads the way of the dinosaur, students involved with the Student Managed Investment Fund (SMIF) are eagerly exploring new investment approaches.

One motivator is the performance of the six-figure fund (valued at $147,000 as of July 1, 2000). During the two years of the fund’s existence, SMIF members have had annual gains of 25.5 and 16.5 percent, respectively, but haven’t managed to beat their S&P 500 Index benchmark. A second motivator is the already strong emphasis in Krannert curricula on quantitative and technology skills.

SMIF Chair Timothy Dona says the group is turning to quantitative methods to determine future investment strategies. “Beginning this fall we are starting a bold new investment strategy that will use computer modeling and quantitative analysis to select stocks,” he says. The quantitative approach uses statistical models to forecast performance of big baskets of stocks, 50 or 100
at a time.

“The quantitative approach is what the real world, the hedge funds and mutual funds, are doing,” Cooper, SMIF’s faculty advisor, says. “You can take the historical financial databases, such as Compustat, CRSP, and Datastream, and use statistical tools to back test different investment strategies.”

Cooper says companies are looking for graduates with such programming and analysis skills. “SMIF jibes with the strengths of Krannert,” he says. “And it gives students the tools. A lot of these companies want hard-core quantitative backgrounds, people who can program really well.” The payoff for graduates with such skills can be starting salaries in the mid-$150,000 range.

Formerly, members of SMIF analyzed and invested in individual stocks in eight industry sectors, including aerospace, automotive/transportation, financial services, health care, high technology, industrial, retail, and telecom/media. The new plan, explains Dona, organizes the fund into four teams. “Q1 and Q2 will study various quantitative strategies, the fundamental/investment education group will present topics relating to personal investing and examine the portfolio’s stocks from a fundamental viewpoint, and the alumni relations/activities committee will schedule events and speakers and seek funds.”

“I’ve been impressed with the go-getter attitude of the SMIF leadership,” says Cooper. Students bring a range of market experience to SMIF. Dona, for example, was a stockbroker for four years with Morgan Stanley Dean Witter and Charles Schwab. Vice President Thomas Blake has worked for Andersen Consulting and interned this summer with GM. Vice President Sandeep Puri worked as a mutual fund manager at the largest fund group in India and served as a corporate finance intern at Whirlpool this summer.

SMIF members meet about every two weeks during the school year to discuss investment strategies and listen to presentations by industry experts on such topics as fundamental analysis and personal investing. Plans for the 2000-01 school year include field trips to the Chicago Board Option Exchange and the Chicago Board of Trade. Students particularly would like to bring high-profile speakers to Krannert and plans are in the works to do so.

Benchmarking of other student investment funds and of industry trends reflects positively on SMIF’s new strategy. When former SMIF portfolio manager Eric Bruun, MSM ‘00, attended a conference of other student-managed funds, for example, he found that about half were using the individual security analysis approach and half were using technical analysis.

One major challenge SMIF will face using technical analysis is the fact that the size of the fund limits economies of scale in purchasing large lots of stock. “I think that the quantitative approach is going to be an exciting change for SMIF,” says Vice President Thomas Blake. “The only problem that we face now is the size of our fund. We want to work to grow the fund through this new approach as well as try to get new, outside sources of investment to help make SMIF one of the top MBA funds in the country.” Until the fund grows through investment or outside funding, members may keep the fund in the S&P 500 Index all year while they learn the quantitative tools and streamline their approach.

Whatever investment approaches the students eventually employ, SMIF is fulfilling its mission as a hands-on “sandbox” for individuals interested in pursuing careers in the markets, says founding SMIF advisor Prof. Keith Smith, finance. Smith and a dedicated group of students deserve the credit for forming SMIF. MSM ‘97 graduates Sinan Kaya, Brad Larson, and Rich Windatt initially proposed the idea of a student-managed fund to Smith, who championed the idea as a complement to coursework and a welcome dose of real-time portfolio management experience.

An initial gift of $100,000 from Richard A., MSIA ‘67, and Penny Hansen and support from the Purdue Research Foundation enabled SMIF to begin investing with a purchase of 100 shares of Sanmina Corp. in February 1998. Other benefactors also have contributed to the fund. Joanne C. Widiger, BSSHU ‘49, for example, has funded and recently endowed the Stock Picker’s Graduate Award, which was awarded this spring to Tim Dona.

“The academic year 2000-01 should be the most exciting and (hopefully!) profitable year in SMIF history,” Tim Dona says. No matter what the returns, Krannert has picked a winner with SMIF.

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