SMF Advisory Board article -- 2004 Financial Education Conference


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SMF Advisory Board article -- 2004 Financial Education Conference

  1. 1. USING BOARDS OF ADVISORS OF STUDENT MANAGED FUNDS For presentation to Financial Education Association By Walter P. Neely Professor of Finance Else School of Management Millsaps College Jackson, MS 39210 601-974-1263 601-974-1260 (fax) April, 2004
  2. 2. 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 The advisory board is an integral part of most organizational structures. According to 2
  3. 3. 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. SMF Boards and the University According to Neely and Cooley (2004) 34% of SMF initial funding comes from 3
  4. 4. 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 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 4
  5. 5. 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, and the detail of prospective purchases and sales. Two excellent examples of comprehensive reports to the board are The Wright Fund (Rice) 2002 Report ( Misc_PDF/wright_board_meeting_spring_02.pdf ) and Stetson’s "George Investments View," (2004). While SMF students and college staff develop 5
  6. 6. 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 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 6
  7. 7. 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 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 7
  8. 8. 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 (, 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 The use of web portals such as Yahoo allows students and advisors access to real-time stock pricing. (see 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 ( nr/041202.html). These events allow the students to visit with other students in the competition 8
  9. 9. 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 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 9
  10. 10. 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. 10
  11. 11. 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+. 11
  12. 12. 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. 12