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Quite a return on investment

Students working on the Dreyfus Portfolio gain hands-on trading experience using professional-quality data, software and equipment available in Lehigh's Financial Services Lab.

Most classes, even those dreaded first-year labs, end at 4:00 p.m. But, at that time back on Tuesday Oct. 28, five seniors gathered in Rauch Business Center’s Financial Services Laboratory. No professor was in sight.

“I’ve been reading a survey of 100 retail company CFOs,” says Kevin Kurylak ’09, a student in the integrated business and engineering program majoring in industrial engineering. “We’re going to have a terrible holiday season.”

“Consumer confidence was 38. If it drops below 50, that means we’re in trouble. This is the lowest reading ever,” Mike Serpico ’09 chimed in.

The others elaborated on the gloomy forecast before Kurylak continued describing changes in the commodities market. The cosmetic industry’s stocks had improved but remained volatile, and Wal-Mart decided to open fewer stores. After Kurylak’s report, other students provided information on the general economy and the energy, industrial, health-care and financial industries.

The conversation then morphed into a debate about the merits of investing in a couple of companies. It resolved with a decision to watch the markets closely over the next two days.

The students’ conversations are not merely academic; they are investing real money into the stock, bond and option markets. Kurylak manages the Dreyfus Portfolio with four senior finance majors—Serpico, Bill Maurer ’09, Jon Abramson ’09 and Patrick DePalma ’09—and one graduate accounting student, Bridget Clancy ’08. Usually, the six students meet Tuesday and Thursday evenings to determine their investment strategy, but other responsibilities prevented Clancy from attending that Tuesday meeting.

As Lehigh’s largest student-run investment portfolio, the Dreyfus Portfolio allows senior and junior finance majors to practice trading techniques. David Myers, the Joseph R. Perella and Amy M. Perella Professor of Practice, advises the students but says they operate autonomously.

As with nearly every investment portfolio, the value of the Dreyfus Portfolio plummeted this semester. Myers believes that October may be Dreyfus’s worst month since 2000, surpassing February 2001, when the Internet bubble popped.

Outperforming its benchmark index

Despite a decline in value, the Dreyfus Portfolio has done comparatively well.

The students employ an active management business model in which they strive to outperform an investment benchmark index through buying undervalued securities or short selling those that are overvalued, making money when the price falls. As of Oct. 22, the Dreyfus Portfolio had outperformed its benchmark index by more than 20 percent.

“They are making good decisions. They are trying to weigh the available information correctly,” Myers says. “It’s a different world they are looking at, but they have the tools and the intellect to ask the right questions both of me and of the information.”

Rather than focus on quick gains, they must look at the overall economic situation and determine if an assigned price reflects its current and future value.

“One of the things we have learned during this time is not to panic,” Maurer says. “A large portion of investors out there have been overcome by fear and are selling some or all of their holdings. We have not done this. While we are watching things closely, we remain focused on our long-term growth strategy, which we believe will work out in the end.”

Maurer explains that he and the other Dreyfus managers are protecting the portfolio by keeping a quarter of the portfolio as cash until the markets become more stable. To hedge their bets, the students have also shorted the international and emerging markets so that they will profit if their price drops as expected.

“We have a lot more of a big-picture mindset,” says Abramson, who has been personally affected by the fallout.

"We want to prepare them for life after Lehigh"

Abramson worked as an intern at Lehman Brothers in equity research last summer. Earlier this year, he received and accepted a job offer in sales and trading for the financial-service firm. When Lehman Brothers went bankrupt in September, Barclays Capital bought Lehman’s Capital Markets business and honored Lehman’s offer to Abramson.

Three other Dreyfus managers have jobs waiting for them next year. Kurylak received an offer from Goldman Sachs on Sept. 29, the day the Dow Jones Industrial Average fell 777 points, and Clancy, a presidential scholar, works at KPMG. Last week, Serpico accepted an offer from Group One Trading LP, one of the nation’s largest proprietary option trading firms.

In the past, four or five of Dreyfus’s six managers have jobs before November, Myer recalls. He says that employers are still seeking finance majors.

“Accounting firms may need more (finance majors) to clean up—or at least figure out—the mess,” he says. Banks and businesses are hiring traders, and a few Lehigh seniors have even landed Wall Street jobs despite the fallout.

These employers value the mixture of theory and practical experience incorporated in Lehigh’s finance degree, he says. Students working on the Dreyfus Portfolio or the university’s other two student-run investment portfolios gain hands-on trading experience using professional-quality data, software and equipment available in the Financial Services Lab. The students running these portfolios are not only become adept at using the profession’s physical tools, but also the critical thinking skills needed to spot wrong assumptions.

“They have the opportunity to make decisions that they can see and feel the impact of those choices,” Myers says. “It highlights the practical aspect of learning at Lehigh. We’re not just academic and theory—we want to prepare them for life after Lehigh."

--Becky Straw

Posted on Thursday, November 06, 2008

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