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Boston College Fund Hooks Up With Interactive Brokers

Stockpickr Staff

The 25-year-old Boston College Investment Club watched its stake in the stock market reach a club high of $360,000 in November 2007. Since then, extreme volatility took over the market, and at the club's final meeting before winter break on Dec. 3, members discovered the value of their portfolio had dropped to $345,293.

With an essentially hands-off approach to the portfolio during winter break, how has the B.C. Investment Club's portfolio held up? Here's a look inside the club's first meeting of 2008 and how they plan to navigate the continuing choppy market with Interactive Brokers IBKR.

Monday, January 28: When the Market Gives Your Portfolio Lemons ...

As the club's co-directors of research Steve Regan and Tony Weldon presented during their market review, the stock market has not been generous to many investors over the past month and a half. Regan and Weldon highlighted such negative forces as poor winter holiday sales, fears of recession and numerous corporate writedowns.

Nevertheless, the club's portfolio did outperform its benchmark . "Our portfolio has suffered recently due to the overall downturn in the market", says club president Scott Atha, "but we continue to outperform the market. Last semester our portfolio was relatively flat, with a return of 0.33%, whereas the S&P 500 SPX had a return of -3.56%. We have been pleased with the relative performance of our portfolio, especially given the fact that we manage a long -only portfolio".

As in previous years, during the winter break, nobody was watching the club's portfolio, which is heavily weighted towards financial stocks such as Bank of America BAC, JP Morgan JPM and Wachovia Bank WB. "Since that last meeting [of the fall semester]," says Atha, "the fund lost 6.8%, or $23,500." As of Monday, Jan. 28, the portfolio is worth $321,800. "Even so, the portfolio continues to solidly beat the S&P 500, which lost 11.31% during the same period."

However, the club's most recent buys performed worse than the fund's average:

Dec. 12, 2007: The club bought shares of building materials manufacturer USG Corporation USG, at $36.96 per share. "We decided to purchase shares of USG", says Atha, "because the members felt that the stock's price had declined to a point where it was very cheap as a long-term play."

USG closed Monday at $33.25, a loss of more than 10%.

So does the club plan to sell any of these current losers? For now, no. "In particular, we feel that Apple will rebound from its recent decline and regain its previous momentum," says Atha.

In spite of the market turmoil, the portfolio did produce some impressive winners over the winter break:

Overall, Atha remains upbeat. "Only 8 of our 35 positions were trading higher after the winter break," says Atha, "but we are optimistic that our diversified portfolio will continue to outperform the market."

How the B.C. Investment Club Plans to Make Lemonade

The lemons generated by the market's volatility were a sour taste for the club's investment managers , but as the old saying goes, they resolved to make lemonade.

Managers Ben Jordan and Anthony Vitiello came up with a creative solution: invest in a company that would profit from market volatility. Monday night, during their successful pitch, Jordan and Vitiello explained their reasoning for Interactive Brokers Group, a market maker and broker that specializes in options , futures and foreign currency transactions.

Vitiello cites the following reasons for buying Interactive Brokers:

The ability to profit from market volatility: Vitiello explains that when uncertainty rules the market, investors turn to options, futures and other ways to offset market risk.

A unique platform that gives the company an edge in the market: Interactive Brokers' "Trader Workstation," which Vitiello uses for trading in his own account, allows people to test complicated trading scenarios. Such an environment appeals to high net worth investors, who tend to trade more than the average investor and thus bring more revenue to Interactive Brokers.

The stock is "cheap" relative to competitors: Compared with Charles Schwab SCHW, Knight Capital Group NITE and TD Ameritrade AMTD, Interactive Brokers' PEG ratio is 0.606. vs. 0.79 for Knight Capital, 1.07 for Schwab and 0.88 for TD Ameritrade.

A compelling trend play: The financial environment is trending to more complex products with global scope. Interactive Brokers allows trading in over 70 stock markets around the world, where an investor can trade any financial instrument without having to open up separate accounts at different institutions.

Based on a valuation of Interactive Brokers, Jordan and Vitiello came up with a target price range of $36.70 to $42.42 per share, which would translate into a return of 16.7% to 34.8% from its Monday closing price of $33.34.

How did they come up with that target price range? "In order to estimate price targets for Interactive Brokers we performed a blended multiple valuation," says Vitiello. "We broke the valuation into the firm's two major business units: brokerage and market making. We used PEG ratios as the valuation metric and at the end we weighted each side of the business based on each division's respective percentage of Interactive Brokers's earnings ."

Are Futures in the B.C. Investment Club's Future?

The club's management team has a long-term goal in mind: educate club members on hedging strategies, such as options and futures. They plan on inviting alumni traders, who work at companies such as Lehman Brothers LEH and Goldman Sachs GS, to speak to the club about their professional hedging experiences.

Although most of the undergraduate members of the club are not finance majors, the goal of the club is to give all members a basic understanding of investment possibilities that go beyond the buying and selling stocks. A possible result would be to go beyond their historic "long only" strategy to include options and ETFs , which would employ all the tools a modern portfolio manager uses to maximize profit while minimizing risk.