Investing in Tough Times
Financial Analyst Program marks its 10th anniversary
Has the stock market bottomed out? Are we likely to have inflation or deflation in the coming year?
For seven Southwestern students, these are not just academic questions. Their knowledge of the stock market and the current economy has real-life implications.
The students are participants in Southwestern’s Financial Analyst Program, which gives students the opportunity to invest a portion of the university’s endowment.
This is the 10th year of the program, which is directed by A.J. Senchack, holder of the Lucy King Brown Chair in International Business. The program began in March 1999 when the Board of Trustees authorized the transfer of $200,000 in endowment assets to student management. Southwestern was one of the first liberal arts colleges to provide such an opportunity for its students. Senchack still has the first trade the group ever made - a purchase of Lowe’s stock - framed in his office.
Each year, up to 12 students are selected for the program. Each student is assigned a role similar to what might be found in an investment firm. A portfolio manager oversees the group; a statistician keeps track of the team’s investments; an economist follows trends in unemployment, inflation, housing, the labor market and consumer confidence; a market technician looks at trends in the market and tries to predict what stocks will do; a trader handles the purchases and sales; an accountant keeps a spreadsheet of the portfolio standing and compares it to the Standard & Poor’s 500, and a public relations person prepares the team’s annual report. The team meets weekly to hear reports from each member.
A new team is selected each spring so they can start learning the ropes from the previous year’s team. The group has an office in the Mood Building, where they have access to five different online databases as well as a variety of financial publications.
Like Southwestern’s overall endowment, the student-managed portfolio has had its ups and downs over the past decade. It fell to a record low of $160,000 in late 2003 and reached an all-time high in the summer of 2008 with a value of more than $367,000. It currently has a market value of slightly over $250,000.
However, Senchack is proud of the fact that his students have consistently outperformed the S&P 500, which is their performance benchmark. They also have consistently ranked in the upper quartile of all mutual fund managers.
Since the stock market has been down for six straight quarters now, the students participating in the program this year are having a much different experience than participants the past nine years.
Last semester, the students converted a lot of what had been invested in stocks to cash. About 60 percent of their money is now in cash. The remaining 40 percent is invested in 12 different investment vehicles, including stocks, short- and long-term treasury securities, high-yield bonds and a fund that is tied to gold. Each student has an investment vehicle they are responsible for tracking.
The focus this semester has been on buying safer fixed-income vehicles such as treasuries and bonds.
“In good times you don’t know whether it is skill or luck if you make money,” Senchack says. “Bear markets like today are where you really learn.”
The rules governing the program require that the students limit their investment in any particular security to 6 percent of the total fund value. If they agree to purchase something, they send a request to the university’s Business Office and that office makes the transaction for them.
Although students participating in the Financial Analyst Program do not get academic credit for it, it does qualify as a business honors program if they have a high enough GPA. Students participating in the program must take an investments class and a portfolio management class in the fall.
Most students participating in the program this year say they applied because of personal interest as opposed to the desire to have a career in finance.
“This is knowledge I can use my whole life,” says Sarah Clevenger, a senior business major from Sulphur, La., who hopes to go to medical school. Clevenger is the statistician for the group this year.
“Learning to invest is a beneficial life skill that many people have to learn the hard way on their own,” says Debran Meyer, a senior business major who plans to attend law school at Baylor University in the fall. “By participating in the FAP I was able to learn so much through hands-on experience. It will very beneficial to me in the future!” Meyer is the accountant for the team this year.
Kevin O’Neil, a senior business and physics major, is the trader for the group this year. “I decided to join the FAP for the opportunity to apply the theoretical concepts learned in my business courses to real-world financial markets,” O’Neil says. “I believe that familiarity with financial markets and investments represents an invaluable personal and professional skill.” O’Neil plans to attend graduate school for mechanical engineering,
Brian Kabat, a senior math major who plans to work as an actuarial consultant in Dallas after graduation, is the portfolio manager this year.
“The program help you know what to look at when you are investing,” Kabat says. “Professor Senchack has lots of good investment ideas.”
During a recent meeting of the group, Kabat spent much of the time educating his fellow students about convertible securities, an investment vehicle Senchack had recommended that does not perform as well as stocks, but is a way to earn more money than cash. After tough questioning from Senchack, however, Kabat decided he needed to do some more research on convertible securities before making a recommendation to the group about purchasing them. He promised to do so and get back to everyone via e-mail.
Kabat says losing money in the portfolio this year has been a humbling experience, but also a learning experience. “You have a lot more interest when you are working with real money,” he says.
Some program participants have used it as a springboard to careers in the financial industry, however. Travis Casner, a 2007 graduate and program participant, now works for Navigant Consulting in Austin in their Disputes and Investigations practice. His section conducts investigations that are of a financial nature and typically relate to fraud or other types of white collar crime. It also provides analysis for litigation disputes relating to lost profits or damage claims.
“The two and a half years that I spent in the Financial Analyst Program provided me with a framework for utilizing an analytical, top-down approach in examining different industries and business models which has carried over to my current profession as a consultant,” Casner says.
Senchack says his ultimate goal for the program would be to have additional money in the account so that each student could have a separate portfolio to manage.