Butler class to invest university endowment money

July 23, 2007

When a Butler University finance class starts investing in the stock market this fall, it won't be Monopoly money that's on the line.

In a three-year pilot program that is unique for a school of Butler's size, a group of senior finance students will be using $1 million from the university's endowment fund to invest. Whether they see a profit or a loss, it will be real money.

"The primary objective is education," said finance professor Steven Dolvin. "The mission of the university ... has been more toward experiential learning, taking what we learn in the classroom and putting it into practice. This is just one way of doing that."

Dolvin's fall investment class, Applied Portfolio Management, will have 15 seniors, who will be divided into teams of three. In addition to receiving normal, twice-weekly instruction, the students will host visits from prominent business executives--including Jim Cornelius, CEO of Bristol-Myers Squibb; Michael Kleinman, vice president of investor relations at WellPoint Inc.; and Andy Giesler, director of investor relations at HHGregg Inc.

An MBA class will manage the fund during the spring semester.

"It's a wonderful way of applying classroom theory," said J.P. Morgan Private Bank Vice President John Perry, a Butler grad who is one of six members of an advisory board that will aid the students.

Dolvin predicted that "because it is real money, students will be careful with their decisions. When there is not real money on the line, trading is much more aggressive. They make riskier decisions."

Other colleges or universities have trading rooms and student-managed investments, but they generally use smaller amounts, starting in the $100,000 to $200,000 range, Dolvin said.

"The size and scope of our program is different because $1 million is a pretty significant commitment," he said.

Indiana University started its Reese Fund, managed by MBA students, in 1985. The fund has grown to more than $600,000. Purdue University's student-managed investment fund started in December 1998 and now has more than $400,000.

The amount of Butler's initial investment is what impressed Paul Coan, managing partner of Indianapolis-based Wealth Planning and Management. Some large Eastern universities with multibillion-dollar endowments, such as Harvard and Yale, may have student-led investments that grow to more than $1 million over time. But starting with $1 million at Butler, a 4,200-student school with an endowment of only $150 million, is noteworthy, he said.

"Conceptually, it sounds good. It's logical. They get to manage money instead of paper," Coan said. "I would prefer money managers coming out of a university who have managed real money."

The students will invest in stocks that are part of the Standard and Poor's 500 index. No more than 5 percent of the fund can go into any single company, according to the course description. And students must list any conflicts of interest.

A local office of SmithBarney will provide research and analysis to help the students make their trading choices, said Scott Luc, a financial adviser at the Rathbun Group of SmithBarney and a 2005 Butler graduate. Trades will be made through an account at SmithBarney.

During the classes, each group of students will make reports on the companies they follow. They then will make trading recommendations and provide the rationale for their decisions.

"The teams must present and defend their recommendations in class presentations," Dolvin said. Then, the entire class must vote on whether to buy or sell the stock.

Before the end of each class, Dolvin will go online and make trades. Only Dolvin and two assistant university vice presidents will have that authority.

Dolvin will have veto power over trades, but will exercise it only if a decision violates the university's investment policy. The policy does not prohibit investments in any particular stock or industry. Thus, the students could invest in tobacco companies or other stocks that might be considered controversial.

"We have not made a socially conscious class," Dolvin said. But he expects students' beliefs will affect which stocks they recommend.

The prospect of managing real money is exciting, said one of the students, Keith Hitchen, a 21-year-old senior from Bloomington, Ill.

"This is my ideal [college] class," he said. "It will give us an opportunity to see what we have earned. But they are trusting us and I don't want the school to lose money. So I think I will make more conservative decisions."

Fifteen percent of students' grades will be tied to their work on the investment portfolio. They'll be evaluated on such issues as the level of their participation and the quality of their presentations, along with how investments actually performed.

The course objective is to at least match the overall market. On average, the S&P 500 appreciates about 10 percent annually, though some years it loses value and others it performs far better.

The students will regularly update the university on how their portfolio is performing. At the end of the semester, they'll make a recommendation to Butler's Investment and Endowment Committee, which will decide how any profits are used.

"They will come under scrutiny like any of our other [investment] managers," said Bruce Arick, the university's vice president for finance.

But Arick said the university is "really excited" about both the educational and profit potential of the program.

"At the end of the day, we think this fund could outperform our professionally managed funds," he said.

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