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including The Conductor, a special section of the Spectrum printed 4 times a year

Student investors receive more money to benefit university

By Sookhan Ho

Spectrum Volume 18 Issue 31 - May 9, 1996

Pamplin's student-investors, who have been managing $1 million of Virginia Tech's endowment over the past three years, have received another $1 million to invest in the stock market on the university's behalf.

Their fund, now valued at $2.35 million, is among the three largest funds of some three dozen student-run investment programs in the nation. Finance senior Lori Ratliff, who serves as executive chair of the student group known as Student-managed Endowment for Educational Development, says that SEED is distinct among the top programs. "The funds we manage are an actual part of the school's endowment-not money donated or set aside specifically for student investing."

The funds are also managed entirely by a select group of 17 students as an extracurricular activity, not as part of a course taught by a faculty member. "We're the only one among the top three funds with both these characteristics," she says.

Finance professor Don Chance, one of SEED's two faculty advisors, says that the past year was "an excellent one" for SEED. "Although it did not beat its own extremely challenging benchmark-a 50-50 combination of the S&P 500 and the NASDAQ index-its performance in comparison to that of professional money managers was outstanding."

SEED achieved an annual return of 32.5 percent last year-outperforming two of the university's four professional fund managers in the third quarter. It beat 18 mutual fund groups last year, and was bested by only three groups, Health and Biotechnology, Financial Services, and Science and Technology-but these, Chance says, "are highly specialized types of funds." Compared to groups with objectives more like its own, SEED outperformed, by more than 200 basis points, the Growth and Capital Appreciation fund groups, he says. "It beat the Russell 2000 by over 600 basis points."

SEED members have also been delighted to discover that their program is regarded as a model by other schools. "We seem to have earned a reputation for being one of the best organized funds," Ratliff says. "Other schools have called us to find out how we do things."

The students work in four committees: executive, administrative, accounting, and investment. The decision to buy or sell stocks is made by investment-committee members, who each specialize in three or four industries. Chance says that while he or co-advisor Greg Kadlec may occasionally suggest a particular stock or industry, the students do all the research and come up with their own recommendations. The university's Director of Investments and Debt Management, John Cusimano (FIN '83/MBA '94), monitors the students' performance to ensure that it conforms to foundation guidelines.

The students are among the college's best. To apply to join SEED, students must be either upperclass undergraduates or graduate students and have a grade-point average of at least 2.75 overall-though the qualifications of those chosen typically far exceed this minimum requirement. Candidates must describe how they can contribute to the program and what they expect to gain from it. They have to supply references, a resumé, and a transcript of previous course work. Those selected volunteer their time and don't earn any academic credits by participating.

Last fall, SEED members met to "brainstorm" on how they could "take their project to the next level." Says Ratliff: "We really went to work on a detailed proposal that set out our performance to date, our reasons for wanting more funding, our philosophy, and our hopes for the future." Ratliff and the heads of the other three committees presented the proposal to the members of the Virginia Tech Foundation, which manages and disburses private funds donated to the university.

SEED sought additional moneys for a number of reasons. "First, we wanted new opportunities to improve our performance," said John Pataki, an MBA student who chairs the investment committee.

"Additional funding would permit us to diversify without restructuring our current portfolio extensively, which would result in huge transaction costs and force us to sell securities that we'd rather hold on to for now," says Ratliff. The new funding, she said, will also improve cost efficiency and increase educational opportunities through recruitment of new members.

Though the student-investors have had their share of "Maalox moments," they have learned to stay calm and focused. "With a high-return, high-risk stock-sometimes that risk turns around and bites you. It happens to professional money managers too," Pataki said. "We have to accept the loss, analyze and learn from the mistake, and move on and try and make money elsewhere. We've learned to watch stocks that take off abnormally and not be afraid to take our gains while we can."

SEED now operates out of its own offices in Pamplin Hall. It publishes an annual newsletter and a Web page (http://www.vt.edu:10021/org/seed/). It is eyeing fresh challenges. Members are working with Trey Snow (FIN '93, MBA '95), a SEED alumnus who now works in the university's investments and debt management office, to establish a national association and an annual, national conference of student-run investment funds.

The fact that the university has doubled the amount for SEED to manage, Ratliff says, is not only a reflection of SEED's good performance, but also "a progressive and bold statement" that the university is genuinely interested in enhancing learning opportunities for students.

"We don't just teach strictly theory, but we also support it by giving our students practical experience."