School of Business > UPDATE > Fall 2002 > Article

Battling the Bear
Applied Security Students Learn to Manage Money in Tough Times

Jay Warner and Tara Torrens have experienced the challenges of investing in a bear market during their time as students in the business school's Applied Security Analysis Program.

You'd have to forgive last year's class in the Applied Security Analysis Program (ASAP) if they felt a bit unlucky. Few students in the program's history have encountered a more challenging economy.

Since 1970, ASAP has been a leader in applied investment education. One of the first student-managed investment funds in the country, the program has more than 400 alumni.

At the start of last fall, the ASAP program had roughly $12 million in three student-managed investment funds, consisting of equity, fixed-income and REIT portfolios. The economy was already in decline; then came the tragic events of September 11, 2001. The 15 students in the program scrambled to put together an investment strategy able to stand the test of a sagging economy and volatile markets caused by September 11, the war in Afghanistan and an unprecedented rash of corporate accounting scandals and bankruptcies.

The students' portfolios held up in what has turned out to be one of the worst economic environments in the program's 30-year history.

Both the equity and fixed-income portfolios outperformed their respective benchmarks, with the equity portfolio declining 4.09 percent versus the S&P 500 Index, which shed 12.94 percent since the beginning of October last year through September 13 of this year.

Isthmusfund, Wisconsin's REIT portfolio, gained 13.44 percent versus its Morgan Stanley REIT benchmark, which returned 12.42 percent over the same time horizon. The fixed-income portfolio, which is measured over the school year, beat the Lehman Intermediate Government Corporate Index by 152 basis points from September 1, 2001, to April 30, 2002 (4.62 percent vs. the benchmark 3.10 percent).

Not bad results for a group of young investors looking to follow in the footsteps of some of the Applied Program's most prominent alumni. The program's alumni list boasts names such as Rick Lane of the FMI Focus Fund, Broadview Advisors and Bill Nygren of the Oakmark Funds, among others, who regularly grace the covers of the nation's most respected finance magazines and newspapers. (See related story.)
So, how did a group of students beat the market?

The team of students working on the equity fund developed a very defensive portfolio, picking household names like Wells Fargo and Pepsi. The fund's biggest winners included Devon Energy, Ryder and Cooper Tire. In addition to the defensive stock picks resulting from a cautious market outlook, the team's rigorous, fundamental research prevented investing in names like Enron, Tyco and WorldCom. "We were positioned to withstand the sell-off in July," explained Amanda Bryant, who graduated in May. Many money managers and their investors weren't so fortunate.

The fixed-income group was able to beat the benchmark through a timely use of duration shifts, in an attempt to profit from the market's over- or under-reaction to economic news. Because of the group's negative outlook, relative to consensus, the students were able to benefit from a strategic underweight in corporate bonds, coupled with an overweight in mortgage-backed securities. "We performed detailed credit analysis in an attempt to find bonds that would not experience the spread widening we anticipated in the general corporate sector. Additionally, we aggressively managed our portfolio sector weightings based on our economic outlook," said Tara Torrens, a returning student from last year's fixed-income team.

Ron Redmerski, another returning graduate student, credited the group's ability to "put together a well-balanced portfolio of stocks, running the spectrum from Sara Lee to eBay, that performed nicely in the poor economic environment that we had." Dan Rambert, a continuing graduate student added, "We realize that a short-term track record of less than one year does not give us a career, but it's a good start."

This is not the first time that ASAP students have confronted a challenging economic situation. Jeffrey Diermeier, BBA '74, MBA '75, chief investment officer with UBS Global Asset Management in Chicago, entered the ASAP program in 1973, just as the U.S. stock market was taking a nosedive. Many investors were losing between 50 and 85 percent of their equity. Diermeier's group managed to retain a respectable portion of their portfolio by investing in commercial paper.

Today, Diermeier looks back and sees confronting a tough economy while in the applied program as an invaluable learning experience. "Those of us in the ASAP class of 1974 had an education you rarely receive. With the market similar to what we now are experiencing, our class had to dig deep to simply minimize our losses. The experience forever influenced the way I look at investing. I was able to develop a perspective about the extremes that markets can go to-- which has been of great benefit even in the much more favorable markets that followed."

Kristofer Breitzman, a graduate of the ASAP class of 2002 now working in investment at Artisan Partners, LP, in Milwaukee, also found the rigors of the ASAP program ideal preparation for coping in the professional arena. "Every single day your ideas get challenged by some of the best and most savvy investors in the world," Breitzman said. "The ASAP program prepared me to work in this competitive environment."

The key --whether battling the bear or running with the bulls-- is simple, according to Associate Professor of Finance Mark Fedenia, ASAP's long-time academic director. "Over the past 32 years, we have developed a template for success in training excellent money managers. However, nothing is guaranteed. The students must work hard to achieve success -- whether the market is going up or down. Those who truly apply themselves will go on to find good careers in a highly competitive field."

For more information about the Applied Security Analysis Program, contact the Stephen L. Hawk Center for Applied Security Analysis, 608/263-3465, http://www.uwasap.org.