Back in 1994, e-mail was a novelty, Intel was trading at nine times earnings, Enron was a highly desirable place to work,
and The MBA Investment Fund, L.L.C. was as yet an untested experiment in finance education.
What a Difference a Decade Can Make
The world is a changed place now, for better or for worse, but definitely in the better category, The MBA Investment Fund has proven to be one of the best innovations ever conceived at the McCombs School of Business at UT at Austin. By all accounts, the Fund is a paragon of industry-education collaboration, where theory and practice join in an unprecedented union to create the most capable young money managers coming out of any graduate business school in the world.
From an improbable suggestion to a model for top b-schools worldwide, the Fund represents a happy confluence of events coupled with copious hard work and vision.
An Idea Takes Root
By 1993, several U.S. business schools had set up investment funds that were nominally managed by students; in every case involving either “pretend” money or donated endowment funds. Conventional wisdom indicated that simulations were good educational tools, and market simulations were thus a powerful means to teach finance students the ins and outs of trading.
That year, Jim Mulva, then CFO of Phillips Petroleum and a member of the Business School’s Advisory Council, attended the council’s spring meeting. Though not in the money management business himself, he raised a question that pertained to it. If other schools were creating investment funds run by students, why couldn’t UT? This was not idle chit-chat. To show that he was serious about the suggestion, Mulva pledged to contribute $30,000 that students could manage in such a fund.
The idea had had a predecessor. As much as eight years earlier, a group of business students had approached finance professor Keith Brown with a similar proposal for a student-managed fund. Brown had suggested that the students write a business plan for the venture and present it to the dean. In concept, Dean Witt agreed that the plan had merit. “But Witt knew they’d need money to get started, and there were too many other priorities for the school at that time,” Brown says. And so, the idea had died on the vine.
Now Mulva had not only rekindled the idea, he was willing to back it up with cash. Following the Advisory Council meeting, finance chair George Gau met with Mulva to discuss the idea. “We knew Jim’s donation was not sufficient to create a viable student fund,” Gau remembers, “so I asked Keith Brown to help me explore what we should do to develop a high-quality student investment experience.” Besides being a finance professor teaching investments, Brown had worked on Wall Street and run his own bond management fund.
A Business is Born
The key meeting was in September, 1993 when Gau and Brown, with the help of Business School development director Bob Casey, met for lunch at the River Oaks Country Club in Houston with some leading investment professionals. The meeting was attended by several business school alumni who worked in the money management field, including Gary Crum (MBA 72), Scott Caven (BBA 64), and Ralph Thomas (BBA 66, MBA 68).
As the businessmen discussed the possibility of establishing a student-run fund, talk turned, as it often does in Texas, to how the investment fund could be made bigger and better than the funds found at other schools of business. Why couldn’t the school create a fund that would be run by students managing real money from actual investors? Individuals would make investments, and just like they do in real life, would expect a return on those investments. A real investment company would be a much better educational tool, they surmised, than a simulation or the existing student investment activities at other schools.
“I thought the whole idea made a lot of sense,” recalls Gary Crum, retired chairman of AIM Capital Management. “When I was in grad school, we did a computer-simulated money management exercise; but once I was in the business, I knew there were a lot more issues that come up day to day that cannot be simulated.”
“We had this vision of a private investment company to be run by students, but didn’t know how to make it work within the UT framework. It wasn’t clear how it could be established legally,” Gau says. With Mulva’s agreement, his $30,000
donation, coupled with a loan from the Business School Foundation, was used to hire legal help to create an entirely independent company that operated without support or resources from the University at all. The lawyers also prepared an offering memorandum to enable the Fund to solicit investors under securities laws.
Crum, who eventually became one of the original investors in the Fund and served on its board, had not been involved with his alma mater prior to Gau’s request for a meeting. In the Fund, he had found his perfect conduit for interacting with the school. “I believed the students would get a tremendous education and an idea of how difficult it is to manage money in the real world,” he says. He has been a strong advocate for the Fund and the school and a top employer of Fund students ever since.
“The biggest surprises for us in our naiveté,” Gau remembers from that period, “were the implications of running a private company.” Gau served as president and CEO and Keith Brown as chief operating officer of the Fund. Standing on the principle that the University would neither benefit from the Fund’s earnings nor subsidize its operations in order to boost the returns of investors, Gau and Brown received no material or administrative support from the University in running the Fund. Thus, they spent much of their spare time working as employees of the company, without pay. Aside from doing the legwork to bring on investors, establish the company structure, and hire the first batch of student managers, in the early years the two performed the most mundane of tasks: collecting the mail from a P.O. box, paying the bills, and making copies. It’s likely their appreciation for the Finance Department’s administrative assistants grew during that early period of the Fund’s existence.
Soon, Gau and Brown settled into their separate roles. To Brown, a.k.a. Mr. Inside, fell the task of working with the first class of money managers to establish the structure of the organization. “It seems like we were devoting almost all of our free time to writing the bylaws and establishing the procedures for Fund operations,” Rob Bryngelson, one of the first Fund managers, recalls. “Once things got kicked off, we put in a lot of time on developing models and tracking programs to look at the investments (initially called the Kuykendall Gain-Loss Indicator) in addition to coming up with new investment ideas.”
In the meantime, Gau was hearing positive feedback from the firms and potential investors he visited, and grew confident that they could attract enough investors to build the critical capital mass necessary to create a working fund. Thus, he proceeded to file the paperwork for the first public offering, to be closed on December 6, 1994, and started soliciting investors.
Ralph Thomas, now senior vice president of Fayez Sarofim, was one of the original investors. “What I thought was so wonderful about the Fund,” he says, “is that it was this incredible example of interaction among the Advisory Council, dean and faculty leading to a very innovative and at that time ground-breaking proposal.” Like the other investors, Thomas expected a reasonable return on his investment, but he was also enamored with the educational mission of the Fund, and he invested with that end in mind.
Thomas and Crum were joined by 32 other investors, and the December IPO garnered $1.6 million in capital for the fledgling company.
So it was that the capital, a single donated Bloomberg terminal, fifteen eager MBA students and a windowless spare office on the sixth floor of the CBA North building became The MBA Investment Fund LLC. “Thankfully, Pilar Aguilar, the sole woman in the group, wore nice perfume; otherwise, I think that tiny room would have been unbearable,” says Bryngelson. “But we had a lot of fun with it—we were a very spontaneous group trying to figure it all out.”
The Students Speak
The first test of the Fund’s status as an autonomous, fully student-run business came even before the group bought its first stock. The initial public offering having closed right around the winter break, the students were about to disperse for vacation until mid-January 1995, and they had decided they wouldn’t begin managing the money until their return to school. The $1.6 million was sitting in a bank account awaiting their action, and the dean was nervous.
“Bob Witt came to us with the suggestion that we invest the money in T-bills for ‘safekeeping’ for the first quarter of 1995,” says Brown. “He reasoned that the students could begin working with the money March 1, and that way the Fund would show a positive return for the first quarter.”
Gau and Brown felt the dean had a fair concern, but by the rules they had established, the students were to make the decisions
about the money and not the faculty or dean. “We had decided that we would not impose ourselves in the process. We would manage the managers, we would ensure the integrity of the process, but we had no intention of having veto power over the students’ decisions or control over the money,” explains Brown.
When Brown presented the students with the dean’s suggestion, the managers were plainspoken. “I didn’t come to school to buy no stinkin’ T-bills,” Brown recalls one of the students proclaiming (only not so delicately). The others emphatically agreed. The students had spoken, and the money stayed in the bank until they returned from break.
And so it was on January 17, 1995 that The MBA Investment Fund made its first purchase of Citigroup stock, and the Fund was officially in business.
“What was incredible,” Brown says with hindsight, “is that January of 1995 launched the most spectacular rally in the history of the U.S. stock market, and we would have missed the beginning of it had we waited until the second quarter to start buying stocks.”
An Institution Grows
“Our most serious challenge,” remembers Kevin Kuykendall, another of the first class of managers, “was just trying to get enough resources to be able to actually do some work. With only one Bridge Feed [shortly after operations began, the Fund acquired a Bridge feed in addition to it’s original Bloomberg terminal], it was always a challenge to be able to get some ‘Bridge Time.’” But mostly, the first class, exhilarated by the novelty of it all and bound tightly together as the founders of a company, discovered that the experience defined their graduate school experience.
“Whether it was one of our managers taking phone calls for ‘Hickey Freeman’ suits in the middle of class, or another saying that email was not an effective way to communicate with him (even though the other 14 of us agreed it was), or another buying a foreign stock that we were not allowed to—I just remember it being a lot of fun,” says Bryngelson. “We had great interactions with Dr. Gau and Dr. Brown, and I learned a lot from both of them and they made it a truly enjoyable and memorable experience, but kept us working hard and pushing forward.”
Brown, who has a lot of affection for that first group of students, refers to them as the ‘founding fathers.’ “These students were charged with designing the organization and they did an incredible job: it has remained virtually unchanged for a decade.” He continues, “That first group was remarkable because there was no precedent. Every class since has had the shoulders of the group before it to stand on.”
By 1996, the Fund’s reputation and competitiveness were growing. The facilities and resources problems had been ameliorated with the construction of the EDS Financial Trading and Technology Center on the third floor of the GSB building, which included a trading room modeled on those found in Wall Street firms. The student managers finally had a home, and more computers and enough data feeds to satisfy the research needs of everyone on the Fund. The highly visible façade leant additional credibility and interest to the group, as now passers-by could watch the Fund managers at work. Invitees to the grand opening of the trading center included then Texas Governor George W. Bush and many Texas business luminaries and executives from Wall Street investment firms.
In the years that followed, Fund students have continued to distinguish themselves as some of the most highly sought money managers in the business. “People who have gone through the Fund are far better trained on the process than students we’ve hired from anywhere—including those from the private top ten,” asserts Scott Caven, until recently a Vice President of Goldman Sachs and currently managing director with Atlantic Trust Company and a UT Regent. Caven recalls a summer at Goldman Sachs when five MBA Investment Fund students from UT held internships alongside eight interns from Harvard. At the end of the summer, all five Texas students were offered jobs, but only one of the Harvard students was asked to return. “They talk the talk and walk the walk,” he says. “This is invaluable for the productivity of Wall Street.”
In May of 2001, the Fund received another boon. UT alumni Gary Crum (MBA 72) and Bob Graham (MBA 73) of the AIM Management Group, along with 63 AIM employees, pledged $5.5 million in endowments, part of which would go toward renovating the trading room and supporting it indefinitely. Renamed the AIM Trading Room, the replica now has a 64-foot-long stock ticker, sleek new equipment, a different layout, a warm wood interior and comfortable chairs. The room adjacent to the trading area, which had been an equipment room, was converted into a conference area, adding to the functionality of the space.
Second to None
While the student managers do not always beat the market, the educational experience they get by handling real money is, without question, second to none in the world. Beyond learning how to value and choose stocks, the students learn how to run an investment company, build a consensus for their ideas, put together a compelling story, and get things done. What’s astonishing to Brown is that the company operates well without the benefit of institutional memory. “The MBA Investment Fund is the only money management organization in the world that has more turnover among its employees than its assets,” Brown points out. “Each year, we replace our entire student management team, so creating and maintaining institutional memory is a huge challenge, and consequently, each group has made at least some of the same mistakes its predecessors have.”
For George Gau—and particularly for Keith Brown, who is the only person to have personally interviewed and worked with every single Fund student—managing The MBA Investment Fund has truly been a labor of love. “I wouldn’t trade the experience,” Brown says. “As an educator, I feel privileged to have been able to get to know, very well in many cases, a truly remarkable group of students. Some of these people have become my good friends and colleagues.”
Another testament to the Fund’s success is the way it has galvanized alumni support for the Finance Department and raised the profile of the McCombs School among Wall Street firms and potential students alike. “The Fund has made McCombs a very attractive place for students of finance,” says Graham of AIM, who recently joined the Fund’s board. “It’s much admired by other schools and a feather in the cap of The University.” Caven agrees that the Fund has put the McCombs School on the map as the target for those who want to learn the investment process.
“I have stayed involved over the years and watched the Fund evolve. I’m extremely impressed with what they’ve done to make the experience grow with the students, including improving access to and interaction with investment professionals,” says Thomas. “I can think of no greater contribution to the success of UT’s MBA program.”