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Charles Trzcinka
Kelley School of Business

George Vlahakis
IU Media Relations

Anne Auer
Kelley School of Business

Last modified: Thursday, February 17, 2005

Kelley School stock analysts demonstrate their value with Reese Fund

Fund beat its benchmarks in a wary market

BLOOMINGTON, Ind. -- Their stock picks regularly outperform Standard and Poor's 500 and other benchmark market indicators, yet you'll never see a famous celebrity pitching his financial expertise on television.

These analysts, who manage the Reese Fund portfolio, saw a return on their investment this year of 5.9 percent, compared to S&P's 4.3 percent. They've appeared in past years on CNBC's Power Lunch program to explain their stock picks, which have been cited in the business pages.

Since 1986, groups of about 20 second-year students in Indiana University's Kelley School of Business have managed a stock portfolio established that year by a $100,000 gift from a successful Kelley alumnus. Since then, after good years as well as bad, the value of the 18-stock portfolio has grown to $445,000.

Students managing the fund over the last 19 years have seen an average annual compounded return of 8.2 percent.

According to Charles A. Trzcinka, the James and Virginia Cozad professor of finance and director of the Kelley School's Investment Management Academy, the fund grew by about $27,000 last year.

"This year, I think they were well-prepared, and they chose a wide variety of stocks. They weren't all concentrated in one sector or even one type," Trzcinka said. "They had some choices that were not common -- they weren't darlings of Wall Street. They had choices that some people knew about, but were less covered by analysts, which means that the market may discover them. If they discover them while we own them, then we're happy campers."

Last week, students in the academy offered their purchase recommendations to a panel of about 20 Wall Street advisors from the major investment houses. The resulting buying decisions, which are made once a year, are based on the students' written and oral presentations. Selling decisions are made throughout the year.

"To have the opportunity to present stock ideas in front of experienced investors is great," said Matthew Swaim, an MBA student from Iowa City, Iowa. "To hear what insights they have and the focus of the board's questions forces you to think differently about your company and what factors may affect the stock in the short and long run.

"It gives us the ability to practice what we will be doing for our career," Swaim added. "Researching stocks from the bottom up and presenting ideas to a group of experienced investors who will challenge your thought process, as any good investment professional will, creates a better product in the end and lets us experience the environment we should expect as we move forward in our careers."

James Veers, an MBA student from Chicago, said: "Getting to know a stock well enough to feel confident presenting it in front of these folks and defending the recommendation during a question-answer session was valuable experience for a process I will repeat often as an equity research analyst."

For the students, more than the portfolio's profits are on the line.

"Because the students have their careers at stake, they work much harder than many analysts," said Trzcinka, who is the author of The 2003 Forbes Stock Market Course, a well-known guide for individual investors. "On that day, they can dramatically help or hurt their careers -- even those with jobs -- and they know it."

Students who make the best presentations earn cash awards valued at more than $3,500 and, often, a lucrative job offer, including Swaim, who finished in second place.

Most of the stock picks fall into the small- to mid-cap category. No stock in the fund ever has a market capitalization (price of the share vs. the number of shares) of less than $1 billion.

Swaim recommended the stock Washington Mutual, the nation's largest thrift. In the past year, its stock has suffered. Reduced expectations about the organization's ability to sustain returns in the highly competitive mortgage and retail banking environment have hurt the stock's trading value. "I believe the market is underestimating the company and attempted to show how a natural business shift from mortgage origination to servicing, coupled with a profitable retail franchise, will sustain the cash earnings power of the organization going forward," he said.

Veers studied tech stocks in the fund and recommended National Instruments. "The stock is a great example of a quality business with a dominant position in its market and excellent management that help to foster a strong corporate culture and a loyal customer base," he said. "NATI has no debt, a sizeable cash balance, has repurchased its shares and recently began paying a dividend -- traits of a company that understands the merits of smart capital allocation. They have an impressive history of profitable organic growth, and profitability is improving after a slight decline in recent years."

Other examples of well-performing stocks in the student-managed fund were the mining company Placer Dome, the bakery-cafe company Panera Bread, heart value maker Edwards Life Sciences and pharmacy retailer Walgreen.