Investment upset: College kids dunk on the pros

The hype and glory that is the NCAA men’s basketball tournament officially begins tonight. But fans are already engaged in their annual tinderbox of a debate topic: Who gives a better showing — the college kids or the pros?

Surprisingly, that same question can be asked about investing. Student-managed investment funds, once the domain of graduate schools of business, have become extremely popular with underclassmen. And while such funds are designed as teaching tools, they often outperform bellwether indexes such as the S&P 500. In some cases, student fund managers have outdone the professional investors who manage their university endowments.

The numbers tell the tale. In 2008, the S&P 500 fell 37%. University endowments fared somewhat better, losing 18.7% of their value. Student-managed assets, on the other hand, shrank by a mere 16.2%, according to InvestmentNews research. In fact, since 2007, the undergraduate-managed funds have outperformed their respective benchmarks by an average of 265 basis points.
More than half of the top 50 undergraduate schools in BusinessWeek’s 2009 college rankings now offer student investment programs, which are tied to for-credit courses. At these top schools, assets under student management average about $2 million per fund. Typically, the cash for the portfolios comes from alumni donations or corporate gifts, along with carve-outs of university foundations. Some student-managed investment portfolios — such as the one at the University of Texas — manage funds for private clients.
Instructors noted that student-run funds tend to have little volatility, due in large part to restrictions placed on investments. Generally, the fund managers may not engage in short selling. They’re also not permitted to purchase derivatives, structured products or foreign securities.
In fact, the funds are mostly limited to plain-vanilla stocks and bonds. Of course, since student managers don’t live and die with the performance of their investments, they don’t do a lot of panic selling of these stocks. “Student-managed funds tend to have more of a long-term focus, and don’t feel the need for rapid trade executions,” David Sauer, director of the Davis Center for Portfolio Management at the University of Dayton, said.
Faculty advisers provide guidance but rarely make overt investment suggestions. That makes the students’ performance all the more impressive. At a recent gathering of some 300 schools with student fund programs, 40 teams participated in a competition to see who netted the highest return.
“What the students lack in experience,” Mr. Sauer said, “they often make up in the enthusiasm and energy that they bring to the stock-picking process.”