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A group of 15 undergraduate students, five MBA students and two professors successfully invested $100,000 into 28 socially responsible securities on Thursday, March 25. The team was assembled in order to complete the wide array of tasks required for the success of such a course. Dr. David Nawrocki and Dr. David Shaffer acted as investment advisors, overseeing each division and providing knowledge and insight whenever possible. The MBA students designed and managed an effective organizational structure for the team. Since this is the first Student Managed Fund (SMF) course in Villanova history, this was a difficult task. The undergraduate students developed models for security analysis, conducted a business cycle analysis, an economic analysis, an industry analysis, and a security analysis. As the name of the course implies, all of the analysis was carried out by the undergraduates. Perhaps this is what makes the course so groundbreaking for Villanova.

The Arnone-Lerer Social Responsibility Fund, was created in memory of Eugene Arnone and Lawrence Lerer by virtue of endowment on behalf of Stephen A. Stumpf and Maria A. Stumpf. The fund will be used to benefit investment management education at Villanova and to fund the Center for Responsible Leadership and Governance. This semester marks the first time in Villanova C&F history that students have invested real money for academic credit. After much hard work, the SMF class created the framework that makes it possible for next year’s students to operate much like a mutual fund. To reach this point however, much hard work was necessary.

The first task for the class was to set up guidelines and define its organizational structure. The MBA students created several functional teams of undergraduates in the first few weeks of operations, each with its own MBA student leader. Each team had its own responsibilities and deadlines. The Investment Policy Group developed the Investment Policy Statement, which formally established guidelines and was submitted for approval to Dean Stumpf, Dr. Nawrocki, acting director for the Institute for Research in Advanced Financial Technology, Dr. Doh, director for the Center for Responsible Leadership and Governance and Ken Valosky, chief financial officer of the University.

While the finishing touches were being made to the Investment Policy Statement, the other teams were working on additional tasks. The Business Cycle Analysis Group analyzed economic data to determine the current stage of the business cycle. The group’s conclusion was that the economy was currently in a “Revival 2” stage. After determining this, the team continued monitoring the economy for any hint of deviation from the Revival 2 stage. he Business Cycle Group provided the Industry Analysis Group with a list of industries that historically performed well during this phase of the economic cycle.

The Industry Analysis Group gathered historical data that corresponded to the Revival 2 stage. This team was able to determine the highest historical returns for industries during this stage of the business cycle. In addition, the Industry Analysis group searched through current volumes of S&P industry forecasts, to determine which industries analysts felt would exhibit strong performance for 2004. The Industry Team then ranked these industries into three tiers. Every stock in each industry was screened for the social responsibility and the corporate governance requirements specified in the Investment Policy Statement.

Based on the analysis of these teams, the class began to conduct the security analysis. The social responsibility screening of the industries resulted in a list of approximately 230 securities. This was perhaps the most challenging part of the semester, narrowing down 230 securities to a target portfolio of 25-30 securities. The securities were first narrowed down to 160, with a market cap cutoff of $1 billion and a stock price cutoff of $10 per share. The security analysis, which was conducted purely by undergraduate students, involved two major stages. The first stage acted as an initial screening of the 160 securities. The security analysts used an Implied PE Model and Z-Score Analysis, designed by Eric Baeri, Kevin Martens, and Joonsup Park to narrow down the securities list to 96. The second stage of the security analysis used a Free Cash Flow Model, also designed by Baeri, Martens, and Park. After the second stage, only 71 stocks remained. While the models served as good quantitative screens, the security analysts engaged in an in-depth qualitative analysis of each remaining security.

The Portfolio Analysis Group then used a portfolio optimization package (PMSP) to optimize the securities that made it through both screenings. This program helped allocate funds to each security in accordance with the guidelines determined in the Investment Policy Statement. These included no more than 5 percent of the fund being allocated to any one security, and no more than 12.5 percent of the fund being allocated to one industry. The class was then ready to invest into 28 securities on March 25.

Since the initial investment, the focus of the class has been on performance analysis, compliance, an exit strategy, and planning for next year’s class. Three weeks after the initial investment, the fund has outperformed both the S&P 500 and the Domini 400, a socially responsible index. Presently, a selection committee has been appointed to review resumes and conduct interviews to choose qualified candidates for next year’s team. The class is dedicated to improving operations to make sure next year will be a smooth transition. Most recently, Baeri, Martens and Park attended the University of Dayton’s, Rise 2004 Symposium, a three day conference for universities with Student Managed Funds. The symposium consisted of special topic workshops as well as lectures from prominent guest speakers in the business community. The class representatives attended this event in order to learn from other Student Managed Fund programs and gain insight into possible enhancements for Villanova’s program. Park explained, “Over 1,000 students and teachers from universities across the United States and Canada attended this conference, which is in its 4th year.” Baeri further commented, “Speakers included many prominent people from all aspects of the industry including: Portfolio Management of Equity and Fixed Income Assets, Sales and Trading, Government (Federal Reserve), Private Equity, Real Estate (REIT's) etc.” The representatives were successful in gaining insight into future improvements for the SMF program. They learned for example, that many other SMF programs structured their security analysis teams differently than we had. The SMF class divided securities for analysis randomly. However, other schools suggested dividing securities based on industry. For example, one analyst would be responsible for all financial services companies. Park agreed, “We hope that the future technology and organization of the underclassmen analysts by industry will allow students to gain a more intimate knowledge of their industry, and thus produce higher quality research and work". Furthermore, the SMF team hopes to see future classes participate in the portfolio competition in which the symposium hosts each year. Future attendance of Villanova representatives at this conference can be expected due to the great opportunity it provides to interact with other SMF teams and prominent business figures.

In addition, the SMF team is confident that they have reached their goal in establishing sufficient groundwork for future classes to improve upon and expand the SMF program by integrating their knowledge and experience. Hopefully, new benefactors will create more investment opportunities. The SMF team also hopes to see the integration of the SMF program with the proposed Institute for Research in Advanced Financial Technology (IRAFT). IRAFT will establish a trading floor in Bartley, creating a real trading environment and blending classroom studies with a hands-on learning experience. The successful integration of these two programs will allow for endless possibilities for future Villanova business students. The members of Villanova’s first SMF team have gained a valuable educational experience by turning their studies into a reality and by participating in this unprecedented opportunity provided by the Finance Department. Good luck to the SMF team of 2005!

For more information on the Student Managed Fund please visit our web site: www.classwork.villanova.edu/studentmanagedfund