Fund Governance and Trade Events in a Student-Managed Portfolio

Abstract

Student-managed portfolios provide opportunities for real investment decision making experiences. Students function in clearly defined professional roles, gain experience, and are accountable for the fund’s processes and decisions. The authors describe the $2 million student-managed portfolio at the University of Delaware and detail its governance processes. A student team of 45 analyzes equity investment ideas and authorizes and carries out trades. The fund’s governance means its implementation of ideas is slower than it would be with a professional money manager. The authors test a hypothesis that the fund’s inclusive and deliberate governance and its process of authorizing and making trades negatively impact returns in the short run. If prices move systematically during the wait between when the selection of a buying or selling opportunity and the trade, then the delayed execution could “leave money on the table.” The analysis of all 61 trades made in an 18-month period ending March 31, 2017, shows that the student-managed portfolio does not miss out on short-term abnormal returns from its trade ideas. In fact, the fund’s buys are marked by a −2.2% CAR in the (−10, −6) pre-trade period. The fund’s governance and value orientation seem to lead to buying stocks that underperformed prior to the trade.

TOPICS: Fundamental equity analysis, performance measurement