Mock investing games have long been a popular way to teach high school and college students about the ups and downs of investing.
But how much more successful would those games be if the students were working with real money?
That’s the question Montana-based brokerage firm D.A. Davidson & Co. set out to answer with its Student Investment Program (SIP). Launched in 1985, the program offers $50,000 each year to 20 colleges in the Northwest and Pacific region to give students a chance to test their investing chops.
First launched at Montana State University, the SIP is geared at giving upper-level college students “a hands-on education in finance, stock research, portfolio management and investment topic,” and developing teamwork, decision-making, research and communications skills. For those who aspire to a career in financial services, the opportunity to test their knowledge and judgment to achieve real-world results can be a priceless experience.
“It is our privilege to be associated with these bright students and fine institutions in our own back yard. World-class higher education has been a fundamental driver of the U.S. economic success story to date and holds an important key to our collective future,” said Dustin Brumbaugh, director of research for D.A. Davidson’s Individual Investor Group.
“The value of the program for students lies in the hands-on learning opportunity; what better way for aspiring financial professionals to learn about capital markets than through the experience of managing portfolios where real dollars are at stake,” added Dr. Elizabeth Tashjian, the professor responsible for implementing the program at the University of Utah.
Here’s how it works: Each participating college receives the $50,000 grant at the beginning of the program in September. Working with a D.A. Davidson financial advisor, the teams develop and implement their own investment strategies, paying execution costs and earning interest on cash and dividends on securities. At the end of the program year in August, the teams are assessed on their total returns.
The 2014 participants posted impressive gains, with some teams even outperforming the benchmark S&P 500 index. The top performer in 2014 was Oregon State University, where the student team posted a 38% return; at the end of the program year, their portfolio had grown to more than $69,000. Over the same period, the S&P 500 returned 22.7%.
Other leading teams include the University of Oregon (31.7%); the University of Utah (24.8%); and Gonzaga University (24.1%). The composite index for the entire program, which reflects the collective results of all 20 participating institutions, was a respectable 11%.
Spotting what makes a good investment isn’t easy, and different programs adopt differing investing approaches aimed at maximizing returns. For example, at Creighton University, a Catholic college located in Omaha, Neb., the program focuses on value investing, the analytical strategy popularized by legendary investor and local resident Warren Buffett.
So given the impressive returns that many of the student teams post, what happens to the gains? That’s where the students learn a lesson about profit sharing.
Those schools that perform well in the SIP are eligible to retain a portion of the profits. At the end of the school year, each school receives half of its team’s earnings above 5% to spend as it chooses.
In the case of 2014’s winning team at Oregon State University, that amounted to a pay-out of more than $8,000. For the entire 2013-14 program, it resulted in a total of $48,652 for the schools. Since the profit sharing aspect of the program started in 1995, D.A. Davidson has awarded $510,230 to participating colleges and universities. The schools choose how to allocate the pay-outs ranging from supporting students, providing food at events, or sending students to conferences.
And in at least one respect, students are shielded from the potential downside of any investing strategy: in the case of teams that post negative returns, D.A. Davidson absorbs any losses.
Students who plan to manage money for living need to hone their skills with real world experience, which the SIP provides.
“When there’s real money involved, then I think it would give you a little more comfort level when you go out and save on your own, being confident you can identify and buy things you think are attractive in price that are good businesses,” says Creighton University Associate Professor Lee Dunham, who oversees his school’s student team as part of a class he teaches in portfolio management.
“Over the last five years, 82 students have participated in the Student Investment Program. Of those who have graduated, I have placement data on all but six. I also have information on upcoming internships or full-time placement for a number of students who are currently in school. The top two fields for our students are sell-side equity research and investment banking. Together, we placed 21% of our students in those areas at firms including Barclays, BMO, Credit Suisse, Goldman Sachs, Jefferies, JP Morgan, and Nomura. These areas are two of the most competitive areas for jobs in finance with a high fraction of those positions filled by Ivy League graduates. Prior to SIP, we typically placed one graduate every few years in those positions,” said Dr. Tashjian.
It’s an innovative way for a financial firm to give back, while at the same time promoting a deeper understanding and appreciation of how the capital markets work. Today’s students may not always receive a lot of positive messages about the markets or the business world in general, while those that do have a positive view of the markets too often don’t entirely understand how they function. Investing wisely takes knowledge and work, and D.A. Davidson’s Student Investing Program plays a vital role in helping to drive home that key lesson.
The SIP Composite Index, which includes all twenty colleges and universities, in 2014, returned 11.0%. Other participating schools that posted positive returns and received checks from D.A. Davidson in the 2014 Student Investment Program:
- Eastern Washington University (21.3% total return);
- University of Montana (21.0% return);
- Portland State University (20.8% return);
- Seattle University (18.6% return);
- Idaho State University (17.2% return);
- Creighton University (16.6% return);
- Boise State University (13.2% return); and
- Westminster College (7.2% return).