For the second consecutive year, Chapman University’s Student Managed Investment Fund has outperformed its benchmark.  Established in November 2009 with $1 million and a charter to invest in a portfolio benchmarked to the S&P 500, the fund earned 2.62% in the fiscal year ending September 30, 2011 compared to a 1.14% return on the S&P 500.  From inception to September 30, 2011, the SMIF portfolio delivered an annualized return of 6.03% which exceeds the total annualized return on the S&P 500 by 2.21%.  This is remarkable since in most years the majority of professionally managed funds fail to match the returns on the S&P benchmark.

SMIF portfolio managers are students in Chapman’s Portfolio Management course. The SMIF managers employ an ‘enhanced indexing’ approach and make all decisions regarding sector allocation and security selection.  The process begins with a decision to overweight, underweight, or market weight the 10 sectors of the S&P 500.  This is based on valuation and trend analysis and forecasts of economic conditions.  Students are assigned to sectors and make presentations in which they formulate and defend their recommendations regarding sector weighting.  After discussions among all SMIF members, a decision is made regarding the sector weighting.  At this point, the sector positions are taken using S&P sector ETFs.  Students then research the constituent stocks in their assigned sector.  They perform discounted cash flow analysis and use relative valuation techniques (e.g. P/E analysis) as the basis for recommending individual stocks for the portfolio.  Their recommendations are presented to the SMIF team.  Once the individual stock positions have been determined, a portion of the ETF positions are liquidated and the proceeds invested in individual stocks.  Forty to fifty percent of the value of the fund is in individual stocks with the balance in S&P sector ETFs.  In the most recent year the fund allocated a modest portion of its funds to fixed income ETFs.

“We couldn’t be more pleased with the performance of the fund so far,” says Professor Jack Broughton, the faculty advisor and instructor for the Portfolio Management class.  “However, the real benefit is that the students acquire practical experience that will position them to compete successfully for careers in the investment management industry.  Not only are they gaining skills in portfolio management and stock selection, but they are also developing facility with widely used investment tools such as the Bloomberg terminal.”

As of January 13, 2012, the total value of the SMIF portfolio was $1,249,883.52.  In the current year the fund plans to liquidate $150,000 in profits to help finance the construction of a financial trading room in Beckman Hall.  Stay tuned for more information!