The Student Investment Fund was created in April 2003 as one of the managed funds 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 $6 million.
Full-Time MBA, Master of Finance, Master of Accounting, and undergraduate students manage the Student Investment Fund (SIF) as members of the college’s Security Analysis class (FI 457/FI 857) and Equity Portfolio Management class (FI 458/FI 858). Under the instruction of John Steffen and using the tools of the Financial Analysis Laboratory, the students master the essentials of stock selection, security analysis, and portfolio management. They continuously monitor the fund and ensure that its stated security selection discipline is maintained.
The investment strategy and portfolio 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 questions regarding their thesis, overall analysis and future outlook.
Investment Style
The Student Investment Fund is a diversified portfolio of U.S. equities using the S&P 400 MidCap as its benchmark. The fund is sector neutral and focuses on the best companies in its index while utilizing a Growth at a Reasonable Price (GARP) approach. The fund seeks long-term growth of capital while maintaining prudent risk.
Diversification and Risk Management
The fund maintains approximately 30 – 50 positions each not to exceed 5%. The fund incorporates a sell discipline that monitors both fundamental and price changes.
Security Selection
Identification of Promising Companies
Each student 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 analysis of the company. An attractive candidate will be a business with growing revenues and expanding margins, generating consistent free cash flow, led by a strong management team and can be purchased at a reasonable price.
Analyses of Financial Statements
Students spread financial statements into a model and 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
Students create 3-year pro forma income statements and balance sheets for the company. 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 and Free Cash Flow are a strong focus.
Stock Recommendations
Following a full analysis of the company and the development of a 3 year model projection, the students then generate a 1 year price target and a Two Tier Rating of the company that determines whether the stock is a buy, hold or sell. This approach requires the student to analyze the company and the stock individually. This methodology prevents purchasing poor companies despite them appearing to be inexpensive.
Based on their analyses students make recommendations to the class. All decisions to recommend purchase or sale of a security is made by the faculty advisor with input from the students and these recommendations are made to the MSU Foundation for trade execution.
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.
