The Student Investment Fund was created in April 2003 as a sub-account of the MSU Foundation’s portfolio. The foundation initially funded the SIF with $750,000 and has made additional contributions since. These allocations, together with the returns achieved by the students, have grown the fund to a present value of approximately $5 million.

Full-Time MBA students and undergraduates manage the Student Investment Fund (SIF) as members of the college’s Security Analysis class (FI 457/FI 857). Under the instruction of Stephen Schiestel and using the tools of the Financial Analysis Laboratory, the students master the essentials of portfolio management, stock selection and stock performance evaluation. They continuously monitor the fund and ensure that its stated security selection discipline is maintained.

The investment strategies and decisions of the class are reviewed each semester by the Finance Advisory Board. During the board’s meetings, students present their analysis of the performance of the total portfolio and their buy and sell recommendations on individual stock holdings. Students gain experience in responding to the board’s rapid-fire questioning about the fund’s composition, current returns and future earnings outlook.

Investment Style

The Student Investment Fund is a diversified portfolio of common stocks following a small- to mid-cap value investment style. The fund’s focus is on stocks that are selling at a discount to their intrinsic value. The fund maintains a weighted-average price-to-book ratio below that of its benchmark index. Securities of firms with market capitalizations in excess of $5 billion are not purchased. The fund is managed with the intention of obtaining the highest possible total return consistent with maintaining prudent risk.

Eligible Securities

Securities eligible for purchase include stocks trading on the New York Stock Exchange (NYSE Euronext), American Stock Exchange (AMEX) and National Association of Securities Dealers Automated Quotation system (NASDAQ). Listed Level II and III American Depository Receipts (ADRs) are eligible for purchase. No explicit “social investment” screens restrict purchase of any security.

Diversification

The fund limits purchases of individual equity securities, so the position does not exceed 10 percent of the total market value of the portfolio. Ideally, no more than 5 percent is allocated to any one stock.

Security Selection

Identification of Promising Companies

Each student manager identifies promising companies for investment from an assigned industry sector (financials, consumer discretionary, etc.). For each prospective investment, students calculate an intrinsic value, based on a thorough fundamental economic analysis of the company. An attractive candidate will be in a business with a stable or growing long-term sales trend; declining industries are generally avoided.

Analyses of Financial Statements

Students reformulate both the income statement and balance sheet into separate operating and financing components. Students compare key financial ratios with those of close industry competitors, both in terms of levels and trends. They look for companies with low to moderate debt levels, stable or improving profit margins, and stable or improving asset turnover.

Forecast of Earnings

Student managers create pro forma income statements and balance sheets for the company for future years. Students evaluate the company’s past record at creating value from its capital investment and R&D decisions, and develop forecasts for the future. In forecasting sales and profit margins they analyze the competition and barriers to entry in the business, the potential for cost savings through use of technology, the macroeconomic outlook and the company’s operating leverage. Earnings quality is a strong focus.

Calculation of Intrinsic Value

Calculating intrinsic value requires students to estimate costs of debt and equity capital for the company. Student fund managers recommend purchasing stocks with an intrinsic value well above the market price, thus providing a sufficient margin of safety. Student managers recommend sale when the market price exceeds the current estimate of intrinsic value, either because of a change in prices or fundamentals.

Based on their analyses student managers make recommendations to the MSU Foundation to buy or sell a security. All decisions to recommend purchase or sale of a security require a simple majority vote of the students in the class.

Ethics and Reporting

Both student managers and supervising faculty have a fiduciary responsibility to the MSU Foundation. All participants in the SIF adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct.

Following presentation standards, the class produces a monthly report that details fund holdings and investment performance.