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Student Investors Stay Ahead of the Curve
The leading performers in our first-ever All-America Student Analyst Competition demonstrated an uncanny ability to manage risk and deliver alpha.
|All-America Student Analyst Competition Top 100 OverallSector WinnersLong AlphaShort AlphaNet Benchmark OutperformanceSchools by Students in the Top 100Most Popular Stocks|
Investing is an art as well as an imperfect science. The intricate juxtaposition of research, timing, incomplete information and John Maynard Keynes's "animal spirits" makes it difficult for even the most notable investors to return a profit, especially given the diffuse peaks and troughs of the economy over the past decade.
Surely then college, even graduate, students don't stand a chance. Don't tell that to Daniel McAllister, a 28-year-old MBA candidate at the University of San Diego School of Business Administration.
McAllister finishes first overall in the inaugural Institutional Investor All-America Student Analyst Competition. A former intern and financial analyst at Jack in the Box corporate headquarters, McAllister is no burger-flipper. He admits to changing his notions about investing to better suit the competition, which ran from September 10 through January. Though a believer in value investing over technical analysis in the long run, McAllister addressed the short-term nature of the contest by adopting a strategy much more prevalent in investing today he went algorithmic.
Utilizing a very different strategy, University of Virginia undergraduate Matthew Olfat constructed a portfolio that would make famed hedge fund manager and UVA alum Paul Tudor Jones II proud. Olfat, a 19-year-old systems engineering and financial math double major, took a macro approach, using exchange-traded funds to play the broad market and go in and out of sectors.
The stark differences in background, strategy and execution of these top competitors stand to highlight the ongoing question of just what is the right approach for young people coming out of school into the world of finance and investing. As rapid-fire trading, as opposed to buying and holding, has taken over the professional world, finance students are forced to consider or reconsider what makes them valuable assets as they look to join the workforce.
The II All-America Student Analyst Competition has provided an opportunity for students with a nose for investing to test their mettle against like-minded participants from around the U.S. The investing platform, AlphaSeal, was created by Stamford, Connecticutbased Mark My Media and seeks to represent a professional trading environment. The cloud-based system creates a personal portfolio for each competitor, tracking the equity value, net asset value, and profits and losses on a daily basis, and marking to market all positions, as a prime broker would. To determine the overall ranking, II and Mark My Media compiled analytical data on six investment factors: net benchmark outperformance, volatility, balance sheet impact, net exposure impact, long alpha and short alpha.
Students started their portfolios with $100,000 each and had to follow Regulation T, the Federal Reserve Board rule designating a 50 percent margin requirement on initial stock purchases. They were then free to trade in any of the seven industry sectors Basic Materials, Capital Goods/Industrials, Consumer, Energy, Financial Institutions, Health Care and Technology, Media & Telecommunications. The trading books were maintained in a dedicated server that sits in an SAS-70 security-rated co-location facility similar to those financial institutions use.
Overall, 34 colleges and universities participated in this contest, totaling just under 700 students and covering the U.S. from the University of California, Berkeley, to Florida International University. The competition was open to both undergraduate and MBA students, offering a limited but notable view into the value of an advanced degree in finance.
Thirteen of the top 100 students overall come from the Zicklin School of Business at Baruch College/City University of New York, home of the state-of-the-art Wasserman Trading Floor. Drexel University in Philadelphia is second, with 11 competitors in the top 100, followed by the McCombs School of Business at the University of Texas at Austin, which has nine students who make the cut. Winners from all three are in undergraduate programs. Two MBA programs slot seven and six students, respectively: New York City's Fordham Graduate School of Business Administration and Cornell University's Johnson Graduate School of Management in Ithaca, New York. Seven of the top ten students overall are currently working toward their undergraduate degrees, as are 60 of the top 100, though, to be sure, a little over 70 percent of competitors are undergraduate students. A Bayesian inference analysis, a statistical method in which evidence is used to derive probability, shows that graduate student competitors were 9 percent more likely than undergraduates to rank in the top 50 overall or top five in any of the sector or factor rankings.
USD's McAllister made his first investment in the seventh grade. On the recommendation of his older brother, he bought a few shares of Sun Microsystems, and with the influx of web start-up business boosting technology share prices, found himself with several thousand dollars. An inexperienced investor, as most 13-year-olds tend to be, McAllister then watched it all disappear when the bubble burst. He was drawn to learn more about the markets. McAllister would go on to hone his understanding at the University of Minnesota, earning a bachelor's degree in finance and international business.
For the competition he settled on the health care and financial institutions sectors, assuming in part that these would be more volatile in the short term than the other sectors. These sectors, he figured, also provided decent exposure to companies of all sizes and trading volumes. McAllister handled the technical analysis, choosing the companies and managing the portfolio, while a former colleague at Jack in the Box, Adam Husein, built an algorithm to rank companies to consider.
The algorithm pointed to undue optimism in Celsion Corp., a Lawrenceville, New Jerseybased oncology drug development company. In mid-December, McAllister took action and shorted the stock, and on the final day of the competition, one of the company's drugs, ThermoDox, an experimental liver cancer treatment, failed a late-stage trial. The stock price plummeted over 80 percent on the day, and McAllister's bet paid off, securing him the top spot in the competition.
Rather than sifting through financial statements and price-earnings ratios, UVA School of Engineering & Applied Science's Olfat, a Tehran, Iran, native who is on track to graduate a year early in the spring of 2014, took a more generalized approach, searching for a single sector of the market where he thought there would be a lot of movement. He settled on the financial services sector, which had taken a public beating after the 2008 crisis. He initially moved into the triple-bear finance ETF, Direxion Daily Financial Bear 3x Shares, to ride the wave of negativity. In the middle of the fall semester, Olfat reversed gears, trading the triple bear for Direxion Daily Financial Bull 3x Shares, reasoning that given the bad press the only course available to the sector was to advance.
"Especially after the crisis, the public tends to magnify any bad news about Wall Street," he says. Financial firms like JPMorgan Chase & Co., for all the negative press, are still relatively well run and continue to churn out profits, he notes. His deft moves help Olfat place seventh overall in net benchmark outperformance as well as second in balance sheet impact.
Investing is all about alpha, or market outperformance. Just generating market returns is akin to treading water; alpha separates the great investors from the good. To determine which students were best able to deliver it, we calculated their net benchmark outperformance by comparing their portfolio returns against that of the Russell 3000 Index.
By that metric, Chen Li of Fordham University's GBA outdistances the field. Li, 23, beat the benchmark by 1.29 percent a day, on average, with an incredible net portfolio return of 112 percent. The Beijing-born Li, who studies quantitative finance and technical analysis at the Bronx-based school, looked to take advantage of a very volatile market. He spends several hours a day following the news and markets, and used his insight to home in on Acadia Pharmaceuticals as a long position. Li scored big with a bet on the San Diegobased biopharmaceuticals company when one of its products passed through an important phase of testing in late November. This trade helps Li, who finishes 12th overall, earn the second spot in long alpha.
Manuel Cifuentes, 28, of Baruch's Zicklin School comes out on top in this category, riding penny stock EP Global Communications, an Irvine, Californiabased medical device manufacturer and marketing company. The stock was trading under 1 cent per share when Cifuentes, a finance major, picked it up and had risen to 4 cents by the end of January. The returns, though not large, were consistent for the Brooklyn-born student.
Short alpha represents an investor's ability to time the fall of a company's stock price; Doug Daniels of UT Austin outperformed more than any other student by this factor. Shorting equities has been in the news as hedge fund manager William Ackman of New Yorkbased Pershing Square Capital Management has taken a very public position against nutritional supplements company Herbalife. The practice is riskier than holding long positions, as potential losses are unlimited, and is thus considered a more advanced maneuver. Students were encouraged to attempt shorting, and the short alpha ranking was weighted to automatically tie a participant for last place by the short alpha factor if he or she did not do so. The fact that fewer than 30 percent of participants attempted a short position may speak to the lack of attention it is given in finance curriculums.
Professor Kelly Kamm of UT Austin says her students are exposed to the concept of shorting. Kamm leads the Financial Analyst Program at the McCombs School. The curriculum is set up to further develop the analytical and modeling skills of talented undergrads through practical experience and advanced research. These students also act as research analysts for the graduate portfolio managers of the MBA Investment Fund at the University of Texas, a growth and value portfolio with about $13 million in assets under management.
At the graduate level, Cornell Johnson's Lakshmi Bhojraj, executive director of the Parker Center for Investment Research, says mechanisms are in place to aid in the development of promising candidates at her school. Students there run the approximately $8 million Cayuga MBA Fund, facing requirements similar to those that equity managers do board meetings on stock pitches and asset allocation. Robert Fuest, COO and head of investment at New Yorkbased Landor & Fuest Capital Managers, finds it necessary for students to gain trading experience. "I think there has to be [this practical education] in the world we live in today because there aren't as many slots open" and corporations are demanding more of new hires, says Fuest, an adjunct professor at Fordham's business school.
Higher-level skills of application could mean specialization. Across the asset management industry, analysts are generally organized by market sectors, which they get to know and love as if they were their own children. For the student investment competition, we employed the seven broad industry classifications long used in II's All-America Research Team ranking. The ability to bore into a sector's roots and master it inside and out is an invaluable skill on Wall Street, and one that students, both undergraduates and MBA candidates, are being taught to focus on more and more.
Not surprisingly, Technology, Media & Telecommunications was the most popular sector among students, with the four most widely held positions coming from this pool (see Most Popular Stocks). Nearly 200 students traded Apple, but fewer than 10 percent of them held a short position on the Cupertino, Californiabased iPhone maker, missing its 23 percent drop during the span of the competition.
Twenty-eight-year-old Simeon Iheagwam of Cornell-Johnson is one of the few prescient students who bet against Apple. The Brooklyn native coupled this short with a long position in Facebook. Although the Menlo Park, Californiabased social network company's shares initially plummeted after its disastrous May 2012 initial public offering, they rebounded during the course of the competition from their September 2012 low, giving Iheagwam a nearly 50 percent return on his investment.
Iheagwam's success was achieved in a manner starkly different from that of the overall winner. Then again, there is no predefined makeup of a savvy investor. Traits like attention to detail and critical thinking are naturally more likely than laziness and forgetfulness to translate into positive returns, but good ideas can come from anywhere. Michael Jimney is one of several Baruch students who took the opportunity to put into practice the lessons they learned in professor Bruce Kamich's classroom. Jimney, a 22-year-old finance student from Ossining, New York, who finishes ninth overall, combined his macro outlook with a busy schedule balancing work, school and clubs to settle on a passively managed approach to his portfolio. He was looking for a chance to test his technical analysis skills, identifying just a few promising stocks and letting them run. Jimney diversified across the sectors, with energy, financial institutions and telecommunications tickers half long, half short to reduce risk and hedge his portfolio. While his individual stock picks did well, Jimney went long the SPDR S&P 500 ETF Trust in mid-November to try to profit from his positive outlook on the overall market. "I figured this would outperform most of the other people who were trying to actively manage their portfolios," he says, "because trying to beat the S&P is hard enough for professional managers."
Today's finance students are tomorrow's portfolio managers and research analysts. Although most of them don't have access to the incredible speed and power that high frequency traders do, students are more equipped than ever to prepare themselves for careers in finance. Information flows at rates surpassing those previously known, and as the University of Texas at Austin's stellar performance in this competition shows even in undergraduate programs professors are looking to introduce real-world application into the curriculum. Overall winner McAllister went the algorithmic route; his runner-up used a macro strategy to plan his investments. In the end, alpha is what matters. Tomorrow's financiers need to figure out how to get there and if the results of the first Institutional Investor All-America Student Analyst Competition are any indication, it seems like they're off on the right foot.