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How NYU MBA Students Learn to Run Real Money

Stockpickr Staff

MBA students of the New York University Leonard M. Stern School of Business are not only fortunate to be located within a few subway stops of Wall Street, but also to have the opportunity to participate in the Michael Price Student Investment Fund (MPSIF), a family of four student-run funds .

So what can you learn from the MPSIF?

According to NYU Stern Professor Anthony Marciano, when it comes to learning about investing, one of the benefits of a group-run fund like the MPSIF "is that you obtain the wisdom of the masses with possibly less psychological bias than with an organizational structure where one manager calls the shots." Marciano says, "There is a large body of evidence supporting the greater accuracy of mass opinion versus individual experts in many cases."

Part of the overall NYU endowment, the MPSIF was established at the height of the dot-com boom in March 2000, with an initial investment of $2 million from legendary value investor Michael Price (Stockpickr Portfolio).

Under the terms of the fund's charter, the student fund managers must disburse 5% of the fund's assets each year. The dividend is paid to Price's alma mater, the University of Oklahoma, to assist its MBA students with their tuition and travel expenses while they attend summer classes at Stern. According to Marciano, who oversees the MPSIF, in its seven years of existence, the fund has disbursed $664,000. Marciano adds, "The cumulative aggregate returns [of the fund] have been impressive -- higher than the appropriate blended index and have been achieving results superior to most professional money managers ."

According to the student-run fund's records, since its inception, the total return for the fund has been 60.45%. This compares favorably to its blended benchmark (Russell's value, growth, and small-cap indices and Vanguard's Fixed Income Index) return of 41.06% -- outperforming it by 19.39%.

How the Fund Works

The MPSIF is part of a rolling two-semester course in investment management taught by Marciano. Class size is limited to about 46 students and competition for each one of those slots is intense. According to Marciano, "We receive on average about 45 to 50 student applications for a new semester and we select about 23 students from that pool. The returning [student] analysts [from the previous semester] make up the other 23 students."

Although the students make all the fund's investment decisions by consensus and basically run the whole show, Marciano acts as the faculty advisor to the fund, by offering students his unique combination of knowledge from his real-world finance experience at Goldman Sachs (GS - Cramer's Take - Stockpickr) and Morgan Stanley (MS - Cramer's Take - Stockpickr) and his academic background at the MIT Sloan School of Management and the University of Chicago Graduate School of Business.

How the Fund Is Broken Up

The MPSIF portfolio consists of four fund types : growth , value , small-cap and fixed income . This allows the fund as a whole to gain the benefit of diversification among different investment styles, reducing the overall portfolio risk .

Each equity fund (growth, value and small-cap) is organized by two administrative student managers, while the fixed-income fund is headed up by one student. The goal of each of these sub-funds is to own approximately 20 individual investments. Why 20? Marciano says, "Diversification benefits are very large with approximately 20 securities ."

Beyond 20 securities, Marciano says there is "a relatively limited benefit from adding stocks to the portfolio." He adds, "The number of students in the fund can cover this number of stocks with diligence. If we were to add many more stocks to [each sub-fund], we would get only a relatively small increase in diversification benefits at the expense of increasing the difficulty of following these stocks carefully."

The student portfolio managers attempt to weigh the long positions equally. (Short selling is not permitted in the fund.) With 20 stocks, the ideal weight is for each position is to be 5% of the sub-fund's portfolio. But due to price fluctuations, the actual weight of each position can vary.

Twice a week, using a rigorous, fundamentals -based methodology, the student managers of each sub-fund pitch their investment ideas to the rest of the class. A majority "thumbs up" or "thumbs down" vote decides whether a particular investment is made or not.

Here are a few recent votes:

• Thumbs up: The fund recently bought oil and gas producer McDermott International (MDR - Cramer's Take - Stockpickr), based on favorable oil prices for capital projects, positive supply-demand dynamics and what was seen as an undervalued share price.
• Thumbs up: The group raised its price target for computer manufacturer Dell (DELL - Cramer's Take - Stockpickr), which the fund purchased earlier in the year at $23.77. Why? The students believe that Dell's stock price will receive a boost when it becomes up-to-date with its regulatory filings in November and can resume its share buyback program. Additionally, the group saw Dell's new partnership with GOME as a way to increase Dell sales in China, where it currently ranks fourth in PC sales.
• Thumbs down: Tim Hortons (THI - Cramer's Take - Stockpickr) was a recent sell. The stock was originally pitched (and bought) in March with a price target of $35. After hitting the target, the managers reviewed the company's fundamentals and determined that the stock was fully valued and sold it, earning a 13% gain over the six months that it owned the stock.