Professor of Finance Sheri Tice, standing, with Constanta Lungu
(MFIN ’19), who completed the Darwin Fenner Student Managed Fund course in the spring of 2019.
When Constanta Lungu (MFIN ’19) interviewed for an internship with Merrill Lynch last summer, she went in prepared to talk about all her academic experience, but one subject in particular dominated the conversation.
“Half the interview was about Darwin Fenner,” she laughs. “They were really curious about the research papers I’d read and the bankruptcy screens I’d used. They said, ‘You actually know a lot of stuff,’ so that made me feel good.”
She got the internship.
Since 1999, the Darwin Fenner Student Managed Fund course has helped hundreds of students like Lungu gain the skills necessary to land highly coveted jobs in portfolio management and investment analysis. Like its sell-side counterpart Burkenroad Reports, Darwin Fenner is built on the premise that experience is the best teacher. Students in the invitation-only course learn stock picking and portfolio management not by listening to lectures or reading textbooks but by investing real money — $6.3 million of Tulane University endowment funds spread across three equity portfolios: a $3.2 million large-cap portfolio, a
$2.2 million mid-cap portfolio and an $884,000 small-cap portfolio. (Dollar values are as of April 2019.)
Along with Burkenroad Reports, Darwin Fenner was an early example of experiential learning at the Freeman School and helped pave the way for a host of courses that actively engage students to promote more powerful learning outcomes. Offerings like the Aaron Selber Jr. Courses in Alternative Investments, the Court Watch NOLA service learning class, and intersession courses in real estate, entrepreneurial hospitality, healthcare policy and energy trading build on Freeman’s experiential learning tradition by putting students to work on projects that enhance learning and include applicable, real-world skills.
In the case of the Darwin Fenner course, the students are tasked with an ambitious goal: Generate higher returns for each portfolio than its index without taking higher risk, a benchmark achieved by less than 8% percent of all actively managed funds. Trades take place once a year, at the conclusion of the classes each spring, and turnover is limited to 30% of portfolio market value, a constraint that focuses students on long-term investments.
The students spend the first part of the semester studying investing with the goal of identifying mispriced stocks that don’t expose the portfolios to significant risk. Later, they work in teams to analyze sectors and pick stocks using their own proprietary models. At the end of the semester, the teams present their recommendations to the class and everyone votes on which stocks to buy, hold and sell. 2019 marked the 20th anniversary of the program’s launch, and Professor of Finance Sheri Tice, who has taught the course since 2002, is proud to say that her student portfolio managers are still, for the most part, beating the Street.
“When the Darwin Fenner Fund was set up, everyone said they’d be happy if the students performed equal to the market,” Tice says. “It turns out, if you look at the dollar value created, they’ve done better.”
A lot better.
While the smallest of the portfolios, the smallcap portfolio, has recently lagged its benchmark, the S&P 600, both the large-cap and the mid-cap
have consistently over time beaten their indexes. Since inception, the large-cap portfolio has outperformed the S&P 500 by .83% and the mid-cap has outperformed the S&P 400 by 3.18%.
Those numbers might sound small, but their impact is huge. An investment of $1,000,000 in the Darwin Fenner large-cap portfolio at its inception would have generated $505,573 more than the same investment in the S&P 500, and an investment of $1,000,000 in the Darwin Fenner mid-cap portfolio at its inception would have generated $1,770,576 more than the same investment in the S&P 400.
“I tell my students if they have the ability, they should be able to generate abnormal returns of 1.5% per year,” Tice says. “That’s about what the large cap has generated, and the mid cap has generated even more.”
Tulane University Chief Investment Officer Jeremy Crigler (BSM ’88), who oversees the Darwin Fenner Fund as part of the university’s endowment, says the students’ performance rivals that of the best professional portfolio managers.
“When you have a track record as long as Darwin Fenner’s, I think it’s pretty clear the investment process generates alpha,” says Crigler. “I would have a much harder time with staying invested in Darwin Fenner if it didn’t demonstrate over the long term that it generally outperforms its benchmarks. That’s as good a metric as you can find and the same metric I use with all my other managers.”
Crigler can also attest to the role Darwin Fenner plays in preparing students for investment careers. Over the last 11 years, he’s hired 14 Darwin Fenner alumni to work in the Investment Management Office.
In theory, the fund could be run as a simulation with virtual investments, but students say the presence of real money — a lot of real money — plays an important role in the course.
“I absolutely felt that investing real money made me work harder,” says Arieh Dales (BSM ’18). “The fact that we invested on behalf of the Tulane endowment put pressure on us.”
“The fact that I knew it was real money and that the performance was going to be tracked for years added excitement to the learning process and pressure to make things perfect,” adds Gabriella Gonzalez (MFIN ’11). “I honestly felt like it was my own money.”
THE DARWIN FENNER STUDENT MANAGED FUND WAS established in 1999 through a gift of Darwin C. Fenner (BBA ’54, MBA ’69), chairman of Fenner, Plauche & Williams Investment Management Co., in honor of his late father, Darwin S. Fenner, vice president of Merrill, Lynch, Pierce, Fenner & Smith in New Orleans and a former chairman of the Board of Tulane.
Fenner donated Merrill Lynch stock to the Freeman School, which was combined with a portion of the endowment to create a $2 million fund for students to practice their investing skills with real money, but the program, which was offered first as an extracurricular and later as an independent study, was not successful. Students said they felt overwhelmed by the challenge of building a portfolio without the structure of a dedicated course, and the fund lost money its first three years. For a brief period, Tulane’s Investment Management Office considered pulling the plug on the program.
In 2002, Professor of Finance Paul Spindt, the finance area coordinator, asked Tice to take over the struggling program. Tice agreed to, but only if she could reorganize the fund by making it the centerpiece of an invitation-only honors seminar on investing and portfolio management.
“My goal was to expose student to high academic content.” Tice says. “That’s why we invite the top students and offer it as an honors class. It’s something special where they’re going to learn a lot of very advanced material.”
While a number of business schools offer student-managed investment funds, Tice says Darwin Fenner is unique in several ways. One is its focus on rigorous academic content.
“A lot of student-managed funds will have the students read One Up on Wall Street and try to implement that,” Tice says. “We’re actually reading academic papers, trying to be on the leading edge and understand those papers. It’s a much more academic approach.”
The course is also unusual in that it’s open to both undergrads and graduate students. While the classes responsible for managing the portfolios have changed over time, in recent years BSM students have managed the large-cap portfolio, Master of Finance students have managed the mid cap, and a mix of MBA, PMBA and MFIN students have managed the small cap. And unlike some other student investment funds, those students truly do manage the portfolios. All investment decisions are entirely up to the students.
Probably the most remarkable thing about the course is how much students love it. Despite the demanding workload, students consistently rate Darwin Fenner as one of their favorite classes.
“It was one of the best classes I took at the Freeman School,” says Jonathan Cukierwar (BSM ’15). “It taught me fundamental building blocks that were instrumental in shaping my idea of what a sound investment framework should look like.”
“It made us work in a real buy-side institution environment,” adds Lingpeng Xiao (MFIN ’17). “The way we applied the knowledge from academic papers into portfolio construction and the deliberation — even challenging each other’s ideas — to generate higher risk-adjusted return have influenced my investment philosophy a lot.”
“Hands down the best class I took at Freeman,” says Michael Avergun (BSM ’17). “Every single person put in hard work and contributed to the end result, which was a concrete result that you can see. I still monitor the performance of the stocks my group picked, and we’re doing quite well.”
Former students showed so much interest in monitoring the performance of their portfolios, in fact, that Tice created a LinkedIn group for Darwin Fenner alumni. To date, more than 750 former students have joined the group to receive monthly reports on the portfolios’ performance as well as updates on portfolio contents following trades and occasional articles and academic papers on investing.
As the Darwin Fenner Student Managed Fund begins its 21st year, Lungu, who graduated in December, will be among those former students excitedly monitoring its performance.
“I can’t say I learned more in Darwin Fenner than in other classes because I learned so much at Freeman, but I can say it was a more active and hands-on experience,” she says. “The stress of actual investing just made it feel like a real-world experience. It definitely prepared me for the real world out there.”
