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Exit Know-How: Why Minnesota's $10.5M Growth Fund Beat the R2K

Most people probably don't think of Minnesota as a breeding ground for investment managers . Believe it or not, though, while most of the North Star state endures the sting of single digit winters, students at the University of Minnesota's Carlson School of Management are learning how to heat things up on the investment front. Here's a look at how the school's Carlson Growth Fund managed to generate 17% returns.

Carlson Growth Fund Quick Facts

Established:1998
Membership: 15 (9 MBA students, 6 undergraduates)
Application process: Rigorous
Money under management: $10.5 million (approximate current value)
Benchmark: Russell 2000 Index
Number of Holdings: 20-25 (average)
Time-horizon/style: Long-term, growth , with a focus on small-cap stocks (program director Joe Barsky describes it as a "value approach to growth investing")

The Carlson Growth Fund together with the Carlson Fixed Income Fund make up one of the largest collegiate investment portfolios in the country, with a combined $25.8 million (approximate current value) under management.

Most of the fund's members are in the Carlson school's MBA program, but that's changing according to Lisa Wangchuk, the fund's managing director and an MBA student herself. "It's mostly MBA students, but our MBA full-time class is getting smaller and smaller, while the undergraduate class is getting larger and larger, says Wangchuk. "Last year, we only had one undergraduate in the growth fund , but this year we have six. Depending on the interest, that might change in the future.".

Well Endowed? Not Really. Well Organized? Definitely.

Unlike most student-managed portfolios out there, the Carlson Growth Fund isn't funded by the school's endowment. The fund has a group of investors (called participants), mainly from the finance world in the Twin Cities (Minneapolis-St. Paul) , who fund the portfolio and offer students with professional perspective as they manage the multi-million dollar portfolio. And like any professional asset manager, the Carlson Growth Fund charges their participants a management fee (see expense ratio ).

The fund also has a group of mentors -- local financial professionals based (many of whom represent participants and/or are alumni of the fund). Students are all assigned mentors who answer questions, listen to presentations and make students defend their investment analyses. Students have told Barsky that the mentorship element of the program was one of their best college experiences -- one of the reasons so many alums come back to mentor the fund.

Who Needs Summer Break?

Unlike college, the stock market doesn't take a summer vacation. With real investors to report to, students managing the Carlson Growth Fund have to keep a year-round eye on the financial world. "During breaks we keep in constant contact via email," says Wangchuk. "Portfolio strategists still have to do their weekly reports and we have to continue to close our books, do our accounting and send things out to the clients."

Keeping on top of things can really pay off when a stock takes a bad turn, which is exactly what happened last summer. Wangchuk recalls, "Last year, we held Merge Technologies (MRGE) and they had lots of problems and were missing their filings, so we had to call an emergency meeting over the summer to try to unload the total position."

How the Fund Approaches Stock Selection

New stocks are generally added to the fund twice per year (May and December), after a stock analysis process that includes screens , discounted cash flow analysis and a presentation to the fund's oversight committee. The fund takes a bottom-up approach to investing that starts off with their stock screens and industry knowledge. Since many MBA students have work experience, industries that students are familiar with are popular starting points.

Stocks are weeded out based on a predetermined list of criteria (like a market cap between $10 million and $2 billion), and students are forced to defend their discounted cash flow (DCF) analyses in front of mentors and oversight committee members who know DCF inside and out.

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