Wednesday December 21, 2005

Picking Winners

Finance students at the University of Dayton consistently beat their benchmark when investing their multimillion dollar portfolio. That's why UD's trustees are entrusting them with another $2 million to invest.

Finance majors at the University of Dayton believe high energy prices and the threat of a colder-than-normal winter will impact the spending habits of consumers on big-ticket items such as cars, appliances and furniture.

That's why these students are overweighting stocks in the consumer staples, energy and health care sectors when investing their multimillion dollar portfolio.

Their picks are usually on the mark. During the past year, the equity portion of their portfolio outperformed the S&P 500 by 3.55 percent. They've posted an annualized 12.5 percent gain during the past three years -- averaging 3.2 percent per year higher than their benchmark.

Consumer confidence may be lagging nationwide, but there's no lack of confidence in these student investors. In October, the University of Dayton's board of trustees voted to allocate an additional $2 million to their portfolio -- $1 million in November and another $1 million in March 2006. In all, they'll be managing approximately $6 million of the University of Dayton's endowment. It's one of the largest undergraduate-managed funds in the country.

"They're doing a spectacular job, and we trust them," said Dick Davis, a University of Dayton trustee who chairs the board's investment committee. Their client gave them more money because they're doing so well. They're aggressively focused. In fact, they are one of the best-performing money managers employed by the University of Dayton, according to their performance against the benchmark. These students are the real winners because they are gaining real-world money-management experience while still in college."

The infusion of another $2 million shows "the trustees' commitment to our innovative, successful, applied-investment program," said David Sauer, associate professor of finance and director of UD's Davis Center for Portfolio Management. "About 75 percent of money managers don't realize benchmark returns, but our students have consistently beaten their benchmark by 3 percent every year for the last five years in both an up and down market."

The students manage the portfolio in the state-of-the-art Davis Center for Portfolio Management, which simulates Wall Street with the same analytical software and database subscription services used by financial institutions globally. Dick Davis, a retired investment professional, and his wife, Susan, gave the University of Dayton $1 million to endow the center. Here, the students experience the real-life competitive pressure of the world of money before they land their first job on Wall Street.

As part of the students' final semester presentation this month, they offered investors their outlook on the market and the economy in 2006. Some of their views:

* The Federal Reserve will increase interest rates to between 4.25 to 4.5 percent, they predicted the day before the central bank raised the rate by 25 points to 4.25 percent.

* Inflation will slowly rise to higher levels, ranging from 3.9 to 4.2 percent.

* The damage inflicted by Hurricane Katrina on oil facilities will cause oil prices to remain historically high at approximately $60 to $65 a barrel.

* Consumer confidence will slip -- except among those with high disposable incomes.

* The threat of terrorism will not significantly impact markets around the world.

"Our stance on terrorism is different from years past," said Vince Nasserbakht, a senior finance and economics major from Chicago. "We believe the financial markets have already priced in concerns about terrorism, which occur at random times. For instance, the attack on London's mass transit system in July did not significantly affect markets around the world."

Nasserbakht, who's already been offered a job as an analyst for Merrill Lynch Investment Managers' Quantitative Investments Team in New York upon graduation this coming May, said the experience of successfully managing a multimillion dollar portfolio helped him land the Wall Street job.

"Professional money managers have told us that we are gaining the equivalent of two to three years of professional experience by working in the Davis Center," he said. "This is the forefront of investment education."

Matt Farrell, a senior finance and economics major from Beavercreek, Ohio, said he's not surprised that the trustees are willing to entrust millions more of the University's money in students' hands. "We've been successful," said Farrell, noting that teams of students prepare a 30- to 50-page evaluation report on each stock examined. "For each security we bring to the table, two-thirds of the class has to approve the purchase."

What about the pressure of handling such a large portfolio? "Sure, there's pressure," Farrell said, "but we know we're equipped and prepared by the education we've received."

Contact David Sauer at (937) 229-2757; Vince Nasserbakht at (847) 337-3813; and Matt Farrell at (937) 545-0907.