Adding Value in Student-Managed Funds: Benchmark and Sector Selection

Abstract

Student-managed portfolios offer a practical learning environment but often miss opportunities for outperformance. The authors provide several recommendations for structuring fund trades to enhance the pedagogical experience for the students in addition to generating alpha. A strategy that targets midcap stocks offers favorable risk–return characteristics and focuses on a market capitalization category that receives relatively less attention from professional money managers. Furthermore, a formal sector allocation strategy provides an additional source of portfolio outperformance when using a metric that is robust to differences in companies across sectors. The authors document the high relative return dispersion among sectors in midcap stocks and show that enterprise value/EBITDA is a consistently effective ratio in identifying both undervalued and overvalued stocks.