How KU Stock-Pickers Play Offense

Last night, the University of Kansas Jayhawks won the N.C.A.A. basketball championship (their third and first since 1988). But how well do students in the Applied Portfolio Management Program (APM) at the "KU" School of Business perform in the stock market?

Started in 1994, the $1.4 million student-run APM investment fund is revered for cranking out major returns. "Our alpha has been very good over the past few years," says Ryan Peschka, one of the fund's assistant portfolio managers. "Since January of 2003, we're actually up 475%."

In fact, the program's impressive success prompted KU professors Catherine Shenoy and Kent McCarthy, the APM's faculty advisors, to pen a book on their experiences with the group, titled Applied Portfolio Management.

And while investing doesn't seem to have a lot to do with basketball, you might be surprised at just how much KU's basketball team owes the APM. Each year, the fund uses part of its proceeds to fund a scholarship for one of KU's basketball players. This year's recipient: Jayhawks senior guard Russell Robinson.

The APM's Five Largest Stock Holdings

Quicksilver Resources (KWK)

Golden Meditech (Honk Kong Stock Exchange: 8180)

LKQ Corp. (LKQX)

Internacional de Ceramica ("Interceramic," Mexico Exchange: CERAMICB, CERAMICD)

Kansas City Sothern (KSU)

Diageo (DEO)

Three of the APM's top five stock holdings are based overseas: Golden Meditech, Interceramic and Diageo. In fact, of all the 29 public companies in the APM portfolio, there is a clear emphasis on international investing. Why? Shenoy explains, "One of the tenants of our portfolio is international diversification... we started investing overseas three or four years ago. At that time, China really proved to be the place to be."

According to Shenoy, the fund has "tried to avoid state-owned companies" in China and focuses on finding "entrepreneurial companies" to invest in. Shenoy took a group of APM students to China in 2005, and recalls, "We just weren't as impressed with the state-owned companies. They were over-hyped and seemed more interested in rules than in innovation."

One of the APM's favorite China-based companies: the agriculture-focused China Green Holding (Honk Kong Exchange: 0904). "When we first started looking at China Green, it was trading at a P/E of 2," says Shenoy.

She adds, "[China Green's] main customers at that time were the Japanese. Since the Japanese are particularly picky about their food, we knew the quality was there in [China Green's] products... Also, they were planning on entering the Chinese market, which is a lot bigger than Japan's market."

The bottom line, according to Shenoy: China Green's low P/E of 2 "wasn't going to stay that low once they entered China."

The APM's global interest is not only limited to China. Their fourth largest holding right now is Mexico-based Interceramic. Shenoy explains, "Interceramic is one of the biggest producers of ceramic tile in North America. We first invested in them years back during the Mexican debt crisis. Around that time, they had taken a large loan out in U.S. dollars to build a new factory. Because of that, they were hit hard for a while, but we still felt that they were a good company."

Shenoy adds, "After Sarbanes-Oxley, the stock delisted on U.S. exchanges to avoid the administrative costs associated with keeping an ADR on an American exchange. Even so, we feel that since we've got a relatively small portfolio, the liquidity risk is worthwhile for this stock."

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