Why Maryland's $1M MBA Fund Passed on Starwood

Maryland is well known for crab cakes, but investing should be added to their repertoire. Meet the University of Maryland's MBA-run Mayer Fund.

Here's a look at how a small group of graduate students mange a $1.2 million portfolio and their take on a recent pitch to invest in Starwood Hotels & Resorts (HOT).

Mayer Fund Quick Facts:

Established: 1993
Membership: 10 (2 portfolio managers, 8 sector analysts )
Application process: Selective
Money under management: $1.2 million (part of the business school's endowment)
Benchmark: S&P 500
Time-horizon/style: Long-term, growth

Started with $250,000 from the College of Business and Management Foundation, the Mayer Fund was the first student-run fund at the University of Maryland's Smith School of Business (its second is the undergrad-managed Senbet Fund).

The Mayer Fund is made up of 10 of the Smith School's best and brightest, who come from a wide array of areas of expertise. "Many of us are career switchers," notes Bill Song, who, along with Eric Olesh, acts as portfolio manager for the fund. Song is a West Point grad who was an Army officer before deciding to come back for his MBA.

And while not all of the fund's members came from the world of finance, they're quickly making their mark on it: Three of their own won Cornell's MBA Stock Pitch Competition this past November. The victory came on the heels of another win -- the Association for Corporate Growth's $10,000 M&A Competition.

Handing Over the Reins

The students involved in the fund manage it from March to March. Each year around this time, the departing class becomes responsible for picking its successors, the first-year MBA students who'll be able to keep up the Mayer Fund's record of beating the S&P.

Outperforming the broad market index is the fund's ultimate goal, and the students are doing a pretty impressive job of it this year. According to the group, since March 2007, the Mayer Fund's value is up 2.9% vs. the S&P's 3.8% decline during that time.

With 12 selected to make up the March '08 to March '09 group, the fund's current managers will soon be handing over the reins. But just because their tenure as managers of the fund is ending, doesn't mean that their responsibilities are winding down. Current members stay involved with the fund for the rest of the year. Song and Olesh say, "We still run the meetings. But by the end [of the year], the new group will be taking over." This transition period ensures that the fund avoids any hiccups that could cost the school real money.

Top-Down Discipline

Despite their laudable investment performance, the fund has taken some small hits from the rough market we've seen of late. "We're down about 10% from our peak for the year," says Olesh. "We were affected, but we went down less than the overall market."

Overwhelmingly, the Mayer Fund has avoided market missteps by relying largely on top-down indicators (stock picking from an economy-wide perspective) and discounted cash flow (DCF) models.

'HOT' or Not?

At the fund's most recent meeting, Chananate Niyamosot, Mayer's analyst for the consumer discretionary sector, pitched Starwood Hotels & Resorts as a buy.

According to Niyamosot, Starwood has a few things going for it: a foothold in the luxury niche, international diversification and new leadership. With the potential for a recession , she argued, focusing on the more price-insensitive luxury market with properties in vacation-hungry destinations in Europe and Asia (namely China) could be a recipe for success for the hotel chain.

"Through the increasing of fee-based revenue, selling off unprofitable assets and international expansion, I strongly believe that Starwood will meet its earnings target in 2008," said Niyamosot in her report to the group.