USING BOARDS OF ADVISORS OF STUDENT MANAGED FUNDS

For presentation to

Financial Education Association

By

Walter P. NeelyProfessor of Finance

Else School of ManagementMillsaps College

Jackson, MS 39210

601-974-1263601-974-1260 (fax)

Neelywp@millsaps.edu

April, 2004

USING BOARDS OF ADVISORS OF STUDENT MANAGED FUNDS

Through their participation in student-managed funds (SMFs), students gain practical

experience in formulating investment strategies through their management of an actual securities

portfolio. Advisory boards, comprised of knowledgeable alumni and investment professionals,

enhance the educational benefits of the program. SMF boards of advisors serve as mentors who

guide students throughout the investment process and who introduce them to real-world

investment management issues. A recent survey, cited in a Neely and Cooley (2004) paper,

indicates that approximately eighty percent of the SMF faculty utilize advisory boards. Neely

and Cooley (2004) provide a list of 128 SMFs (some of which are not operational) which have

grown in number from less than 35 in 1988. Their popularity stems largely from the benefits of

experiential learning. Students gain real-world, hands-on experience in the management of

relatively large sums of money. Students develop an in-depth understanding of securities

markets and the analysis of securities. In many cases, they interact with members of the

financial community and become more attractive prospective employees.

The paper will describe how boards of advisors are effectively used to in enhancing the

already rich experiences enabled by SMFs. We will first examine the literature on corporate

and non-profit boards of directors and university advisory boards. Next the literature relating to

SMF boards of advisors will be examined. Then results of our recent survey will be reviewed.

Finally conclusions are drawn.

Literature on Boards

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The advisory board is an integral part of most organizational structures. According to

Carlyle (1995), a business advisory board provides expertise and acts as a “sounding board,”

offering knowledgeable and frank advice on specific areas in which an organization needs

improvement. A board, comprised of dedicated, enthusiastic and innovative members,

contributes new ideas, feedback, and overall direction to an organization’s management team.

In an article dealing with corporate boards of directors, Thain and Leighton (1995)

suggest that successful boards have in common the following factors: (1) a sense of legitimacy

and power; (2) a clear definition of their jobs and some guides to how to succeed; (3) a sense of

“board culture” derived from common board experiences, values, and relationships that subtly

guides what directors do; (4) a variety of competencies on the board keyed to the needs of the

organization; (5) effective administration of the board including well organized meetings; and

(6) effective leadership by (a) certain member(s) of the board. College boards of trustees, SMF

boards, and college advisory boards may be improved if they are guided by these factors.

The Conroy, Lefever, and Glenn (1996) survey, conducted on college advisory boards of

four-year hotel administration programs, provides valuable insight for SMF boards. The survey

results indicate that 90 percent of board members work in the hotel industry, with the most

important board component being that of the alumni membership. The authors’ consensus is

that current students should have a representation on the advisory board, while departmental

faculty should not play a significant role in program governance. The hotel industry boards

provide advice on special projects and offer valuable insight on matters concerning program

curriculum and facilities. Relating the survey results to SMFs, the advisory board’s role would

likely include offering students and departmental faculty advice on appropriate trading rooms,

research and data resources, and software needs.

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SMF Boards and the University

According to Neely and Cooley (2004) 34% of SMF initial funding comes from

individuals and families. Donors may designate gifts to universities for the purpose of

encouraging learning about investing. University endowments fund twenty-five percent of

SMFs. Regardless of the initial source of funds, the ultimate ownership and responsibility for

the oversight of the university endowment, which often includes the SMF, often lies with the

university administration’s financial executive or with a committee of university’s board of

trustees. Since most SMFs are considered endowments or quaisi endowments, the university

ownership structure simplifies accounting, control, and tax preparation for the SMFs. However,

as cited by Lawrence (1994), the use of endowment resources can limit the fund’s flexibility.

Often investment restrictions imposed on SMFs, such as those prohibiting foreign security

investments, limit the fund’s available diversification options and can inhibit optimal fund

performance. SMF underperformance will jeopardize the fund’s independent operating strategy,

and continued underperformance can result in the redirection of fund management. While these

restrictions may seem onerous, they do serve as learning tools for students interested in

investment professions, as practitioners must successfully manage investments according to the

objectives and limitations imposed by their clients (Grinder, Cooper, and Britt, 1999).

Donors of gifts that comprise the initial funding of SMFs often provide additional

informal oversight of the fund. In many instances, individuals representing these interests are

members of or ex-officio members of advisory boards, or they may be university board

members. Grinder, Cooper, and Britt (1999) suggest that “it is essential” for living donors and

donors’ families, or the representatives of donor organizations, to be a regular part of classes and

to “discuss their goals and objectives for the portfolio with the students.” This open line of

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communication facilitates the students’ thorough understanding of the risk and return objectives

desired by the donors. Original donors may seek memberships on the advisory board, or they

may want to serve only in occasional roles, such as attending luncheons with student managers

and/or hearing student presentations of fund performance and future investment strategies.

Many SMF programs today follow a model that stipulates quarterly advisory board

meetings in which the students present written and oral reports and field “tough and challenging

questions” from board members. Block and French (1991) refer to these meetings as “the most

valuable experience for the students.” Following the AIMR Performance Presentation Standards

(1992), participants begin the meetings with the introduction of board members and student

managers, and proceed with the student presentations of reports regarding the fund performance

over the last five years and the transactions occurring since the last meeting. Students then

present the economic forecast as it relates to the holdings and proposed security sales and

additions, and follow with presentations of individual company stock and bond research. Board

members frequently ask questions and often present alternative viewpoints from their personal

perspectives on the markets. Finally, the students and the board review the effects of

restructuring the portfolio and formulate plans for executing their decisions. In addition, they

make provisions for monitoring the fund’s status during the transition period preceding the next

team of SMF managers.

Most programs meet formally with the board at least once and often twice a year. This

meeting includes the presentation of a student-prepared document that introduces the students

and the board and that informs the board of the students’ past actions and future plans. The

report includes dialogue on the economic outlook, the fund’s performance, the transactions

initiated by the student managers, the reviews and/or the research reports on current holdings,

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and the detail of prospective purchases and sales. Two excellent examples of comprehensive

reports to the board are The Wright Fund (Rice) 2002 Report

(http://www.ruf.rice.edu/~admn543/ Misc_PDF/wright_board_meeting_spring_02.pdf ) and

Stetson’s "George Investments View," (2004). While SMF students and college staff develop

these reports, the format and the quality are of the same professional nature as that of official

corporate and/or university reports.

Survey Method and Results

The faculty advisors of 124 faculty advisors of 124 member SMFs of the Association of

Student Managed Investment Programs (Lerro and Mallett 2001) along with other instructors of

known programs not included in the ASMIP list were sent a survey. Only respondents in

operation with funding are included in the results, and only one fund per institution is included

in the 61 respondents. The survey was sent by E-mail with follow-up by fax when requested by

respondents. (A copy of the questionnaire is available from the author.)

One series of survey questions queried SMF advisors on the extent of their advisory

boards’ involvement in overall fund and program management. Only ten of forty-eight SMF

faculty advisors responded that their advisory boards participate in the approval of transactions.

The lack of positive responses to this question indicates that while many advisory boards offer

guidance and suggestions, they leave the final investment decisions to the discretion of the

students. With regard to effective investment advice, twenty-eight of the thirty-nine usable

responses indicated that the advisory boards’ investment advice was effective, while ten

responses revealed that the boards’ advice had little effect on the success of investment

decisions. One response revealed poor investment advice from the board. When queried about

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the board’s input relative to technologies and facilities, only twenty of the forty-eight faculty

advisors revealed that their boards actively participate in decisions regarding program facilities

and technologies. In contrast, the study of hotel administration advisory boards by Conroy,

Lefever, and Glenn (1996) revealed that board advisors provide significant input on facility and

technology decisions. This finding is indicative of the varying degrees to which advisory

boards serve their organizations, the extent to which is dictated by the industries in which they

operate.

Another series of survey questions pertained to the relevance of the board with regard to

the perceived quality of the SMF by the community and from within the university. Thirty of

the forty-two respondents indicated that their advisory boards enhance the community’s and the

university’s perceptions of the viability of their SMF program. Advisory boards can act as an

advocate for the program within the university, and thirty-three of forty-three indicated that their

boards were effective in this capacity. Some advisory boards, especially those composed of

donors, provide funding for SMF programs. Nine of the twenty-seven SMFs responding to the

question indicated that their boards are effective in providing funding for investment purposes,

and eleven of twenty-seven indicated that their boards provide some funding for student needs.

The boards of SMFs seem more effective with advice and advocacy than with funding.

Advisory boards can and do work directly with students and provide SMF students with

analytical advice and job opportunities. When asked whether board members were effective in

mentoring students, thirty-two of forty-four agreed, with ten stating that the board had little

effect on mentoring students. In addition to mentoring, enhanced opportunities for student

learning comes from internship experiences. Twenty-one of 39 respondents indicated that their

boards were effective at providing internship opportunities and post-graduate job for their

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students.

Of the forty-eight SMF respondents with advisory boards, forty-four listed the

backgrounds of its members. Advisory boards often include investment professionals from the

local area, interested professionals who work in money centers and travel or attend meetings via

teleconferencing, and alumni who previously served as student managers of the SMF. These

board members are valuable because they understand the students’ decision making process. Of

the forty-four SMFs listing their board members’ backgrounds, twenty-three have boards that

include investment professionals, the largest single category of membership, eighteen have

faculty and business deans on the board, while only seven indicated that trustees or non-finance-

professional alumni are board members. An interesting fact to note is the lack of significant

participation by stakeholders such as university board of trustee or administration members, or

donors, although university oversight beyond the advisory board level is likely.

Communications with the Advisory Board

Internet communication including e-mail, Yahoo Groups (http://groups.yahoo.com/),

chat room, and web broadcasting can streamline communication, not only among students, but

also between students, faculty advisors, and advisory board members. Early each semester

Millsaps College SMF advisory board members are queried by e-mail for their

recommendations, including specific stocks for student research. Students select for research

companies recommended by board members as well as the students' own selections. The two

companies selected are often in the same industry or economic sector.

SMF web sites enhance resource availability among students, faculty advisors, the

advisory board, and other SMF students. For a list of web sites see Trinity's SMF web site

http://www.trinity.edu/smf/links.htm. The use of web portals such as Yahoo allows students

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and advisors access to real-time stock pricing. (see

http://www.millsaps.edu/esom/wilfund/yahoo login.html). In addition, Internet web casts

facilitate video and audio broadcasts of board meetings, allowing board members to participate

remotely, if necessary.

SMF students often take field trips to visit brokerage offices, money center sites, or to

participate in competitions such as the Dayton RISE competition

(http://www.udayton.edu/news/nr/041202.html). These events allow the students to visit with

other students in the competition or to visit with professionals many of whom may be members

of the advisory boards. These opportunities give SMF students better ideas of what other SMFs

are doing and to learn more about the professions of finance.

Conclusions

Advisory boards can and do enhance the educational process for SMFs across the

country. Student learning, internship, and placement opportunities are improved as a direct

result of advisory board relationships. Just having an advisory board can improve the image of a

SMF both on the campus and to outside constituencies. Relationships between investment

professionals and alumni are improved as a result of their participation as members of the

advisory board. However, it is obvious that these advisory boards can be time consuming and

require diligent efforts to maintain and enhance the relationships. It is vital to define and expand

the roles of advisory boards to promote student interaction with the board. Boards can do more

in the areas of curriculum advice, fund-raising activities, promotion, and advocacy within the

university, and special projects. Using boards can and should enhance the experiences of student

participants of the expanding list of SMFs.

Mentor programs can be a natural outgrowth of SMF boards. Boards act as a stimulus for

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performance, both investment and academic. Boards provide important investment guidance and

also become mentors for students. As a mentor, the board member may talk with the student

about the field or discuss the student’s project, which may involve specific company security

analysis. There are formal mentor programs that match a mentor with a particular student, and

informal programs that Board members provide internship and placement opportunities for

students. One-on-one communication using e-mail and telephone allows distant or busy board

members to provide mentoring and student contact on varying levels of frequency depending of

the student and the mentor. Because board members have contact with students, opportunities

are enhanced for placement in the investments field. Mentor programs exist at many universities

and future research should enumerate the benefits of these programs.

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REFERENCES

AIMR Performance Presentation Standards, A Practitioner's Workbook, Charlottesville, VA, 1992.

Ary, Eddie J. and Robert L. Webster, "Survey of University Student Investment Funds," (unpublished paper, 1998).

Bhattacharya, T.K. and Jacquetta J. McClung, Cameron University's Unique Student-Managed Investment Portfolios," Financial Practice and Education, Spring / Summer 1994, pp. 55-60.

Block Stanley B., and Dan W. French, "The Student-Managed Investment Fund: A Special Opportunity in Learning," Financial Practice and Education, Spring 1991, 1,1, pp. 35-40.

Carlyle, Nathalie B., "Expert Advice: A Look at Advisory Boards," Canadian Business Review, Ottawa, 22,3, Autumn 1995, p. 27+.

Conroy, Phillip A., Michael M. Lefever, and Withiam Glenn, "The Value of College Advisory Boards," Cornell Hotel and Restaurant Administration Quarterly, Ithaca, 37, 4, August 1996, p. 85+.

"George Investments View," Stetson University, Fall 2003.

Grinder, Brian, Dan W. Cooper, and Michael Britt, "An Integrative Approach to Student Investment Clubs and Student Investment Funds in the Finance Curriculum," Financial Services Review, 8 (1999), pp. 211-221.

Johnson, David W., Joe F. Alexander and Garth H. Allen, "Student-Managed Investment Funds: A Comparison of Alternative Decision-Making Environments," Financial Practice and Education, Spring / Summer 1996, 6, 1, pp. 97-101.

Lawrence, Edward C., "Financial Innovation: The Case of Student Investment Funds at United States Universities," Financial Practice and Education, 4, 1 Spring / Summer 1994, pp. 47-53. Lerro, Anthony and James E. Mallett, "Establishing and Running a Student Managed Investment Program," unpublished manuscript, 2001.

Neely, Walter P. and Phillip L. Cooley, "A Survey of Student Managed Funds," to appear Advances in Financial Education, 2004.

Thain, Donald H. and David H. Leighton, "Why Boards Fail," Ivey Business Quarterly , London, Spring 1995, 59, 3, p 71+.

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ABSTRACT

USING BOARDS OF ADVISORS OF STUDENT MANAGED FUNDS

Student-managed funds (SMF) provide opportunities for innovative educational opportunities, and boards of advisors can offer even more richness to the educational process. The survey results suggest that boards of advisors are effective and do enhance the educational process for SMFs across the country. Student learning, internship, and placement opportunities are improved as a direct result of advisory board relationships. Just having an advisory board can improve the image of a SMF both on the campus and to outside constituencies. Relationships between investment professionals and alumni are improved as a result of their participation as members of the advisory board.

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