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Market Master's

By Nancy Trejos
Washington Post Staff Writer
Sunday, May 11, 2008

There were some rocky moments for the 10 business-school students responsible for investing $1.2 million in a fund belonging to the University of Maryland.

In September, they bought shares of Fannie Mae, the mortgage lender that last week declared a $2.2 billion quarterly loss. "Total disaster," said College Park student Jonathan Steele, 28, who analyzes the financial sector.

They increased their holdings in Citigroup, Wachovia and E-Trade Financial, which have all felt the impact of falling home values and rising foreclosures. "Big mistake," said Bill Song, 32, one of two portfolio managers.

Still, when the fiscal year ended on March 31 for the Mayer Fund, it had a total return of 0.57 percent, according to preliminary figures. Other professionally managed funds, such as Putnam's Voyager Fund, were in negative territory. In fact, the Mayer Fund beat its benchmark, the Standard and Poor's 500 stock index, which lost ground during the period.

"We spanked their butts," Song said while practicing the speech he plans to make during his annual report to the dean of the Robert H. Smith School of Business. (It is unclear whether the spanking or butts will make it into the speech.)

While the professionals were reeling from the market downturn, these investment gurus-in-training were eking out a profit -- eking being the operative word. Still, in this volatile market, it wasn't bad for a bunch of second-year MBA students. "When they outperform their benchmark by that much, they've had a great year," said Sarah Kroncke, a lecturer in the school's department of finance and the fund's faculty adviser, after watching the students run through their presentation last week.

In doing so, they underscored this basic tenet of investing: Do your research. As investment guru-already-made Warren E. Buffett said, "Never invest in a business you cannot understand."

That advice has certainly been heeded by the two portfolio managers and eight sector analysts who run the Mayer Fund, financed through the business school's endowment and with profits earned by classes that have come and gone since 1993.

Each analyst pitched four stocks during the year and had to persuade not just a majority but the entire group to buy. They spent many hours researching the companies, reading Securities and Exchange Commission filings, looking at trading data, studying acquisitions and comparing them to others in the industry. "We get into the nitty-gritty of the company," said Song, an Iraq war veteran who plans to work for Wachovia Securities after he graduates later this month.

Investment clubs such as the Mayer Fund have become a popular tool for business schools across the country to teach students how to become future Buffetts -- or, at the very least, well-educated investors. More than 200 universities now have such student-run investment funds, ranging from several hundred thousands of dollars to several millions. Twenty-five years ago, there were only about six, said Larry Belcher, president of the Association of Student Managed Investment Programs and chairman of the finance department at Stetson University in Florida.

The theory is that students will learn more if they're not just sitting in a classroom learning about, well, theory.

"You can teach kids how to manage money, you can teach them theory about portfolio management, you can give them play money and run simulations, but what you can't do with those vehicles is teach them fiduciary responsibility," Belcher said. "What we're seeing is that schools want experiential learning, and . . . they want to train students exactly the way they'll be working."

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