ASU’s student-led portfolio management program offers practical experience alongside investment professionals
Endowed funds are an important source of revenue for the long-term health of Arizona State University’s research, teaching and learning activities, but their returns are not just monetary: Each year, about 30 students gain rigorous, hands-on experience analyzing and managing a small percentage of ASU’s endowment assets as part of the Student Investment Management (SIM) Fund.
On Dec. 1, those undergraduates and master’s in business administration candidates presented their initial portfolio recommendations to investment professionals — including experts in the community, members of ASU Enterprise Partners’ Investment Committee and representatives from its outsourced chief investment officer, BlackRock Inc.
“The level of sophistication students are bringing to security analysis and portfolio construction is phenomenal. It reflects the investment depth of ASU’s SIM Fund program,” said Suzanne Peck, head of endowments and foundations at BlackRock. The firm will provide portfolio insights to students in the program as part of its new partnership with ASU. “The other thing that stood out was the quality of the oral presentations — in addition to portfolio management skills, it’s clear they’re gaining marketing skills, too.”
The SIM Fund was established in 1996 by ASU’s W. P. Carey School of Business’ Department of Finance and has evolved to meet the demands of the industry. After returning to ASU from two years navigating the financial crisis at Dimensional Fund Advisors, SIM Fund Director and Jack D. Furst Professor of Finance Sunil Wahal recognized the need for experts who, in his words, “understand financial markets in a quantitative, sensible way guided by science.”
Wahal wanted to deliver students a structured experience in portfolio management and securities analysis while they earned credit toward their degrees — not merely a club-like or extra-curricular activity in the field. Though most of the 200 or so student-run funds in the country operate on “stock-picker” models, in which analysts forecast how a company will perform and buy or sell accordingly, ASU’s SIM Fund participants build quantitative portfolios, which require thorough understanding of academic theories applied to large groups of securities.
“You can think of the investment management process — the process of building portfolios themselves — as sort of an engineering problem,” said Wahal, who created a new course, “Portfolio Engineering,” for students enrolled in the SIM Fund program. “The analogy holds reasonably well: you cannot engineer a product unless you understand the science behind it. If I told you, ‘Here, go build a car,’ you wouldn’t know how to build a car unless you understand the basics of propulsion, friction, motion, etc. So, to me, it didn’t make sense that we have students build the equivalent of a car without understanding the science behind it.”
In the course, students learn about financial markets, asset allocation, portfolio chance and drivers of risk and return. From there, they evaluate original, published, academic research focused on anomalies in the market. These theories, such as the use of profitability, volatility or insider trading, have been shown to generate higher (and thus, riskier) returns.
Each of the three teams that made up this year’s SIM Fund program selected and presented one such theory. Coincidentally, each group elected to build their portfolio by linking the value and profitability of companies with relatively small or mid-range market capitalizations. After receiving feedback from faculty and the funds’ advisers, who will gather again in the spring to review results, they will execute their strategy within the restrictions mandated by the funds’ investment policy.
Paige Weisman, a senior studying math and physics, joined the SIM Fund as a junior and is leading a team this year.
“A lot of our decisions are democratic — to a point,” Weisman said of her new position. “It’s hard to put your foot down at certain times without being discouraging. You’ve always got to keep things positive and make everyone feel good about the work they’re doing.”
In addition to reviewing literature, students must identify and scrape their own data, transform signals into an optimized portfolio and, ultimately, automate each step.
“It’s a fair amount of work,” Wahal said. “And let’s not forget, these are students.”