MBA Investment League: Notre Dame Stands Pat, Posts Win

Editor's Note: More than 30 college business schools have some kind of student-managed investment portfolio. In November we launched the

TSC

-Purdue MBA Investment League to highlight the picks of some of the best and brightest collegiate investors. For more background, read the introduction to the series.

Notre Dame once again took top monthly honors in the

TSC-Purdue MBA Investment League

, posting an 8% gain for December that handily beat the

S&P 500's

5.8% performance.

Last month's champ, Vanderbilt, failed to repeat its stunning 22.6% November return. Instead, it struggled to eke out a mere 0.8% return, third-best for the month. Texas Christian finished second with a 4.9% return.

In the end, however, Vanderbilt's November blitzkrieg did provide enough momentum to land the school in first place for the quarter with a 9% average monthly return, edging out Notre Dame's 8.2% effort. Both programs beat the S&P 500's average return of 6.7% for the quarter. TCU finished the quarter with a 4.3% average return.

A fourth founding school, Wharton, remained absent from the contest for the second month in a row. Additional schools will be added to the contest next month.

Managers of the student-run funds forecast continued gains in January. "We expect a strong performance in January and probably the first quarter as a result of inflows from year-end bonuses and retirement plan contributions, and the fabled January effect as portfolio managers dress up their holdings after the end of the year selling," says TCU's Al Prentice.

"We are very impressed with the fund flows so far in 1999 which appear to be very strong," adds Jason Beaird of Vanderbilt.

Longer term, the student managers remain cautiously optimistic. "We think many multinational companies will have posted crippled fourth-quarter profits due to global economic pressures. This might cause the market to stall after what looks to be the start of a January rally. We predict that the bull will ride again in 1999 but not without a fair amount of volatility, especially as Y2K concerns continue to mount," says Beaird.

It's important to note that the performance figures disguise some important inner workings of the three different funds. For example, Vanderbilt's impressive quarterly performance came at significant risk to its growing asset base. The fund sported a standard deviation of returns for the quarter (one measure of volatility) of 11.6% -- nearly eight times higher than Notre Dame's 1.5%, and nearly nine times the market figure of 1.3%.

On the other hand, TCU holds around 20% of its portfolio in fixed-income investments, which makes direct comparisons to all-equity portfolios and indexes a potentially misleading proposition.

Here's a school-by-school look at December's results:

Notre Dame

Notre Dame's winning December performance was based strictly on a buy-and-hold approach. "The undergraduates handed over the portfolio to the MBA students earlier this month," says Professor John Affleck-Graves, faculty adviser for the fund. The transition, coupled with pending winter break, resulted in a month without any buying or selling in the portfolio.

As a result, the fund's positions and sector weightings remain intact, and its solid performance can be attributed to longtime holdings in such technology bellwethers as

Cisco

(CSCO) - Get Report

,

MCI Worldcom

(WCOM)

,

Microsoft

(MSFT) - Get Report

and

Intel

(INTC) - Get Report

. November purchases

Enron

(ENE)

and

Ethan Allen

(ETH) - Get Report

were flat for the period.

Despite the fund's inactivity in December, it scored a victory in a

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poll, as 58% of readers endorsed the school's November decision to sell its

Disney

(DIS) - Get Report

stock. The decision proved correct, at least for now, as the stock fell 6.8% during the month.

TCU

A modest 5.7% pop in petroleum pipeline company

Kinder Morgan Energy Partners

(ENP)

was enough to bump oil laggard

Texaco

(TX) - Get Report

from TCU's list of top five holdings for December. While the mammoth fund maintains a 22% stake in high tech, the irrepressible Texans continued to trade heavily in oil-related issues, betting on a turnaround.

The fund bailed out of deep-water

Noble Drilling

(NE) - Get Report

at 12 3/8 after a blood-chilling summer dive of 64%. Undaunted by plummeting oil prices, TCU bought 600 shares of offshore oil supplier

Tidewater Marine

(TDW) - Get Report

in early December.

Vanderbilt

The Vanderbilt team is still riding the small-cap tech wave but may be getting a little edgy from the adrenaline overload. "We still are carrying a heavy technology exposure that we would like to reduce in the coming months," says Beaird. Recent activity shows just how tricky the small-cap sector can be.

After watching its investment in

Onsale

(ONSL)

more than double in November, the school picked another rocket, online banker

Telebanc Financial

(TBFC)

, which soared 77.8% in December. But the Telebanc gain was largely offset by losses in other issues, such as

Interwest Bancorporation

(IWBK)

, which lost 13.6% for the month.

The student managers also bought micro-cap biotech research firm

Kendle International

(KNDL)

, which should prove to be a wild ride based on previous volatility.

"We think global worries will draw investors away from blue chips and more into small-caps because of their low exposure to foreign economic problems," says Beaird.

Andrew Greta is a business student and onetime stockbroker who lives in West Lafayette, Ind.