Will Nealon expected to learn a lot in his finance classes. But last year, thanks to a new course—the Xavier Student Investment Fund—Nealon learned more than he expected. And in this case, what he and his classmates learned had an impact on the University’s financial status.
Last fall, a class of eight finance majors, under the direction of professor of finance Stafford Johnson, were handed management of a portion of Xavier’s investment portfolio. In four months, the class took a principle of $991,146.79 in bonds and cash, made three trades and, in the face of a fickle market, beat the Lehman index and raised the overall value of the portfolio to $1,001,645.96— a gain of $10,499.17.
Such collegiate student funds aren’t a new idea, says James Pawlukiewicz, chair of the department of finance. But the Xavier fund has a twist that makes it one of the few, if not the only, one of its kind. Most such funds focus on equity income investment—stocks. The Xavier fund, however, gives students a unique opportunity by focusing on fixed income investments—bonds.
Long on Pawlukiewicz’s wish list, the student fund began moving toward reality in late 2003. The following spring, students were invited to apply for the fund, which would be taught as a new course. Nine were chosen; eight ultimately signed up. Johnson taught the class and served as fund advisor along with three financial professionals with the Fort Washington Investment Advisors, the investment arm of Cincinnati-based Western Southern Life Insurance.
The decision to focus on bonds may have offered the students an unusual opportunity, but it meant additional intensive training. “Bonds are a little more technical,” Johnson says. “So one of the early things that we decided on is that even though this group had finance classes, they needed a boot camp.” In September, the students began meeting three or four times a week for lectures and to work through exercises. On Nov. 15, they took the next step: management of their fund. In reality, however, the real learning curve was just beginning.
The value of bonds is tied, inversely, to interest rates. As rates rise, bond value sinks, and vice versa. Part of the challenge then, Johnson says, lies in predicting movement in short- and long-term interest rates. And the general uncertainty about the economy added another potent X-factor.
“The industry as a whole was struggling to make nickels and dimes and we were struggling to make pennies,” says Nathan Wander, one of the students. Still, when interest rates seemed headed in the wrong direction, Johnson says the students made some tough calls that proved ultimately correct.
Then there was the time element to contend with. “It took awhile for us to get a trade together,” Nealon says. “We were taking full course loads, and a lot of people had jobs on the side. We were always thinking about what to do and doing research, but once we figured out what to do, it might have taken three weeks of analysis, exploring the economic outlook and the structure of the trade before we were able to vote.”
Johnson let the students find their own roles in the project and says the team began to coalesce around the time of their first trade in late December. “We were the first group, so we were kind of guinea pigs,” says student Molly Bayer. “We just sort of fell into the places that suited us. I did a lot of credit analysis.” The project took another significant leap forward shortly after the first of the year with the arrival of a Bloomberg data terminal, generously funded by Xavier alumnus Stephen S. Smith, senior vice president of the Delaware-based Brandywine Management Group. The terminal gave the team immediate access to real-time and archived financial and market data, pricing, trading, news and communications tools.
The team capped the year with a trip to New York, where the students visited Merrill Lynch, Bloomberg and JP Morgan & Co., and made a presentation before the fund’s board of directors, a group drawn from the financial world and the University. And while the course will continue to evolve when the next team takes over in October, Pawlukiewicz and Johnson say the first year was a success.
Nealon, Bayer and Wander agree: The real-world perspective was a revelation. “Going into it,” Nealon says, “I knew very little about fixed income compared to what I learned.”