Showing the Money
Hot investment tip: I know a stock fund that has beaten the S&P 500 consistently for one-, three- and five-year periods. It pursues an aggressively conservative investment model. It changes managers every year. It’s advised by some of the best names in the business, and works out of a state-of-the-art trading facility in a quiet, wealthy Boston suburb. Want in?
Too bad—you can’t invest with the fund, and neither can I. In fact, the fund has only one investor, and that’s not even a person. The sole investor in the Babson College Fund (BCF) is ... Babson College.
The Trustees of Babson College entrust a portion of the college’s endowment to 22 hand-picked student managers and their mentors. This is not play money; it’s the real thing.
In the heart of Babson’s Stephen D. Cutler Center for Investments and Finance, you’ll find a dark, glass-walled, elliptical room glowing in the light of a dozen Bloomberg terminals. Overhead, an LED zipper displays stock prices. CNBC drones from a pair of flat-panel TVs. A wall of clocks shows the time in Boston, London, Paris, Mumbai, and Tokyo. Seated before PC screens, students pore over data from Capital IQ, FactSet, and Morningstar.
Contrasting this rush of instant market information, one wall bears a time line of investment trends, fads, and bubbles on a Periodic Table of Investment Returns, showing annual returns of various investments from 1926 to 2008. A glance at the wall reminds visitors that European stock funds soared 34.4 percent in 2007, and then fell 46.1 percent the following year. Another glance tells the history of gold investments, S&P 500 stocks, or U.S. Treasury bonds. The table is both addictive and cautionary, and under it the managers of the BCF grind through mountains of information, searching for undervalued stocks.
Monday Night Mashup
Babson College Fund Faculty and Advisors
Richard Spillane and his team of five executives in residence meet Monday nights with the BCF student managers. The advisers are quite a group—former portfolio managers and economists who, according to Spillane, have managed $30 billion–$40 billion in their combined careers. Spillane, formally a top executive at Fidelity Investments, runs the meeting like he did as the portfolio manager he was for 30 years. Students have just a few minutes to present their recommendations. The executives question, comment, and probe the data, and point out gaps in information or judgment.
“The students can read everything that comes into the Cutler Center,” says Spillane. “I send them Wall Street research. One student gives a weekly report on the macroeconomic scene. We have quantitative analysis from experts. The students call company executives and they call a company’s competitors.
“Managing the BCF, they can get overwhelmed with incredible amounts of information, and that’s part of what we learn with real-world investing. How do you pick out the important stuff?”
Scott Kern ’11 remembers the early pressure to perform. “My team couldn’t make a decision whether to buy shares of the restaurant company Panera. We did the quant—it was trading at a slight discount but we were really worried—we were investing Babson’s money! We went to their stores, ate the food, took notes, talked to employees, and finally made a recommendation. It actually ended up being our best-performing stock of the year.”
The students improve progressively on the skills that matter to investment firms. They learn to differentiate fundamental value from trends. They learn to anticipate the unexpected turn of events (Spillane to a student: “Your recommendation would be good if Bain Capital didn’t own most of this stock. What happens when they change their position?”)
By the second semester, investment reports distill from 20 pages to three. Presentations become more polished. Monday night meetings move faster as investments are quickly assessed by the group.
It isn’t that the pressure lets up, recalls Brad Weafer M’11. “If there’s a hole in your thesis or something wrong with your model, they’re there to catch it and help you through it, and, to make sure you don’t make that same mistake next time, or you grow from the experience.” Now an equity analyst at a private wealth management firm, Weafer affirms the fidelity of the BCF’s work. “I can tell you from professional experience, I had just as much if not more resources at Babson.”
Real pressure, real expertise, real money. For aspiring investment managers, it doesn’t get any more real.