Where does the next generation of fund managers come from?

According to Malcolm Gladwell’s Outliers, at least 10,000 hours of practice is needed to be a success at your chosen profession. This means that a fund manager will hit their strides around age 40. But the London Business School is giving its students a leg up in that quest to find success. They have real-life stockpicking responsibilities as part of the student-run investment fund.

Ever wondered where the next generation of funds managers will come from? Well the London Business School is helping to nurture this next breed of money managers.

The first European school to have a student-run investment fund, it cultivates an environment of learning by doing. Students are taught to think like funds managers and three times a year there is a competition giving students the chance to pick the fund’s next stock.

The winner doesn’t just get the glory of beating their fellow students, but the honour of having real money allocated from the Student Investment Fund.

On Thursday June 5 the Summer Stock Picking Competition took place and the stockpicking finalists, students from the Masters in Finance and Executive MBA programs, were ready to present.

Each had five minutes to sell their best idea to the three-person judging panel of Dan Brocklebank director at Orbis, Jon Guiness an equity analyst from Fidelity Worldwide, Konstantin Leidman and investment manager from Schroders, (all three LBS recruiters, the latter two LBS alumni).

The Student Investment Fund was created in 2003, with LBS alumni Clint Coghill and James Lyle the first benefactors donating $100,000 over five years. The first stocks were Valero Energy and DFS Furniture, with Fimalac added to the fund in March 2004 after the first stock picking competition.

Emeritus professor, Elroy Dimson, who taught the school’s first Topics in Asset Management in February 2004, was integral in setting up the fund more than 10 years ago. Although he now has a role at Cambridge Judge Business School, he remains involved today.

“The aim of the fund is to help students understand security analysis and portfolio management,” Dimson says. “A secondary goal is to eventually provide scholarships.”

The fund has assets of around £400,000 and when it reaches £1 million it may start making distributions for scholarship purposes.

It is a long-only fund with a long-term horizon emphasising bottom-up portfolio construction and a fundamentally-driven research process. About 40 per cent is invested passively in the MSCI and the remainder is active equities.

The rules for the stockpicking competition are simple. Students present their best ideas with the only limitation that the stock has to be investable. There is no minimum market cap and the universe is global.

More broadly the fund is currently prohibited from investing in bonds, options, private placements, short sales, margin transactions, financial futures, and commodities.

Eddie Ramsden, who teaches a finance class in value investing, says “remarkably” the fund has outperformed.

“This is a totally student-led fund and it has outperformed. It’s outperformed by 9 per cent over the time frame,” he says.

Ramsden’s course is also instrumental in helping students to “think” like funds managers. They are asked to take the perspective of an investment fund manager who has to make real-time buy, sell and portfolio sizing decisions based upon their analyses and changes in both fundamentals and market prices.

“There is not usually the same level of familiarity with stockpicking at other schools,” he says. “We teach the basic concepts of what to look for in stockpicking. In the stockpicking competition students have the chance to express an idea in a concise way and there is a huge value in that. It’s about saying what the market view is and why your consensus differs.”

The competition

The 2014 Summer Stock Pitch Competition is run by the LBS Investment Management Club, whose catchcry is “walk on the buy side”, and the winner will become a member of the investment committee.

There are very different styles in the finalists’ presentations and the judges are determined to focus on the quality of the ideas and not the presentations.

There are about 30 in the room and European and American accents highlight the global nature of the student body at LBS. Of the five finalists presenting none of the students are British.

Many of the presentations get bogged down in unnecessary detail, with the judges wanting metrics of how the businesses will perform over the next 10 years, such as revenue, growth, or EBIT.

“We want to know what the competitive advantage of the business is,” Guiness says.

Depending on the stock the general feedback was that more useful information was needed in the presentations – whether it be context around the management and competitive advantage, the wider industry and its volatility, or whether the market was building in any price corrections. For one stock, Seadrill, the judges said it was a “minefield of financial engineering and it was not clear what you’re buying”.

In this case the judges struggled to make a decision but in the end decided to take two half positions, in Cairn Energy and Prosegur – allocating £35,000 or 8 per cent of the fund across the two stocks – with one of the PhD students’ executing the trades the day after the competition.

The students congregated afterwards for free beer and networking. They were pleased with themselves. For those that participated there was a sense they were one step closer (with two more hours under their belts) to their dreams of becoming fund managers; and for those that watched, a sense of pride in their colleagues and their institution that what they had witnessed was part of the future of funds management.

The student finalists in the LBS Investment Management Club Summer Stockpicking Competition

• Johannes Arnold’s chosen stock was Folli Follie

• Joan Esteve Manasanach’s chosen stock was CVR

• Jeff Smith’s chosen stock was Prosegur Compania Seguridad

• Henrik Madsen’s chosen stock was Cairn Energy

• Alex Karam’s chosen stock was Seadrill

LBS student investment fund performance