The Aristotle Challenge Jonathan Commers, M.B.A. '00 January 4, 2001 Investment policies have moved from textbooks to market realities for classes of Master of Business Administration students at St. Thomas."It’s a real, live situation," Peter Frenz describes his experience this year as one of 12 student managers of the University of St. Thomas Aristotle Fund. "You just learn an incredible amount. It’s an incredible opportunity — lots of time, lots of energy, and incredible." He’s talking about an MBA elective, "Student Managed Fund Class," but everyone calls it simply — the Aristotle Fund.Now in its second academic year of operation, the Aristotle Fund was established with a large gift from an anonymous donor and is managed by graduate students of business. Why the "Aristotle" fund? The donor of the start-up capital — a successful businessman and investor — studied philosophy at St. Thomas. He remembered that it was Aristotle, the great Greek philosopher, who had an enormous influence in shaping the teachings of St. Thomas Aquinas, the patron of the university"It was the donor’s hope that professors, in teaching the student investors, and the students, in actually managing the funds, would have the inspiration of Aristotle, the teacher, and Thomas, the student, to guide them in arriving at wise, prudent investment decisions," explained Quentin J. Hietpas, senior vice president of external affairs at St. Thomas.The gift is divided into five equal installments of zero coupon bonds, which appreciate in value each year and will be worth at least $5 million at maturation in 2016.With substantial advising from Dr. Mary Daugherty, professor of finance at St. Thomas, and a team of seasoned, enthusiastic mentors, students are charged with the process of creating and operating an investment firm in the span of 12 months. "By 2016 we hope to do so well in investing that we have a lot more than $5 million in the fund," Daugherty said.Frenz, a supervisor at Dain Rauscher Wessels in Minneapolis, is among the 12 managers serving the fund for the calendar year that started in August 2000. "It’s all new, which is difficult," says Frenz. "But after six months or so, you really get to know it.""It," in this case, represents not only knowledge of specific industries but an array of skills and plans that need to be developed each year before students can begin presenting and evaluating investments.In the fund’s early development, numerous hands helped to shape the donation into an ongoing, functioning program. Daugherty, a 1980 graduate of St. Thomas and holder of a Ph.D. from the University of Minnesota, was inspired by her own experience of working with graduates of the University of Wisconsin-Madison Student Manage-ment Fund. She remembers discussing the idea as early as 1988.When she began working in the financial industry, Daugherty recalls that Wisconsin fund alumni wielded "an incredible advantage in the workplace — both in getting a job and retaining it. Students had so much more experience and knowledge about investments because they had participated in the student fund." She was convinced it would represent a fruitful opportunity for graduate students specializing in finance, and that a student-managed fund could become an example of St. Thomas’ emphasis on experiential education.Dr. Stan Nyquist, director of the Evening MBA program, remembers that after years of casual conversation about such an idea, the notion of a student-managed fund assumed a new sense of immediacy when the donor came forth and offered to establish the Aristotle Fund. "This all unfolded when Mary was on sabbatical — and when I pulled her aside in the hall after she returned, she was thrilled.""It was evident to me from the very beginning," says Daugherty, "that my challenge was to bring the concept at the top administrative level down to the actual practice in the classroom." Students applied and were selected for the first class in the spring and summer of 1999, and began their tenure as student managers in August 1999.Meeting every other Saturday for eight-hour sessions, the group began to wade into the steps required to establish the fund. The limitations of meeting infrequently and the sheer volume of details to be resolved kept progress slow at first.Brent Cook, an equity research assistant at Dain Rauscher Wessels, was among the first-year group of student managers. "Many of us shared an impatience because we wanted to start investing. The market was going crazy, and yet we needed to do our due diligence … at the same time, we worked on valuation, and we had incredible speakers coming in and sharing their viewpoints."In the fall of 1999, the group changed its schedule to weekly meetings and increased its pace. In the first six months of meeting, the managers developed an investment policy, determined an investment style, established criteria with which to evaluate potential holdings, explored the many information sources available, created a trading mechanism and an account, agreed on a model for equity research reports and began distributing quarterly newsletters. The managers were exposed to the views of industry speakers, who stressed issues from meticulous accounting analysis to the importance of developing consensus about interest rates and other key variables.Among the experienced voices who addressed the students was Rick Rinkoff, managing partner of Woodland Partners. "I enjoy sharing what I’ve learned in what has now been 25 years. And I missed out on that when I got into the business," Rinkoff says, looking back on his decision to become a mentor to student managers after he initially addressed the group. Rinkoff, students say, has been a champion of scrutiny — "the mentor’s job is to guide the managers in their assumptions," he says. And, fundamentally, the stakes are real for student managers: they have exclusive voting power for buying and selling decisions, as well as the structuring of investment style and criteria.Nine mentors commit time and energy to such guidance, attending many of the weekly evening sessions, meeting with students in the workplace, and offering critiques of ideas and reports. In both years of its operation, mentors have represented "a powerful piece of the program," says Nyquist, an assertion to which student managers would undoubtedly agree.After almost six months of preparation, the first group of student managers began to present potential holdings to fellow managers and seven nonvoting advisers in February 2000. Initially, many managers struggled with the challenge of knowing a company — its industry, its products, its management — in sufficient detail to answer questions for 40 minutes or more. Even more important, a manager presenting an idea for purchase must persuade fellow managers and communicate why the myriad factors involved spell opportunity for the Aristotle Fund."No amount of preparation could prepare you for the first presentation," says Cook. "It was tough to know what to expect. I used sort of a shotgun approach. I read everything and anything relating to what I was presenting." Still, the first several presentations resulted in decisions not to buy shares or to request further information from the student presenting. The learning curve had steepened.Daugherty watched the managers learn from each other’s presentations and from the question-and-answer sessions that followed. "Presenting a stock idea to a room full of people with real money on the line is an experience like no other in the classroom. I admit that sometimes I would leave the first presentations thinking, ‘Where did I fail this student?’ But then the next time around I would be thrilled at their success at becoming an expert."In the first half of 2000, the managers did develop expertise specific to their assigned industries, and to the skills required to give a persuasive, comprehensive presentation. The fund’s first purchase took place on March 8, 2000, just days before a dramatic drop in major indices. In the following five months, managers proceeded to buy shares of Cisco Systems, Royal Caribbean, Walgreens, Home Depot, MedImmune, Corning, JDS Uniphase and Scientific Atlanta. The balance of the donation was invested in the equivalent of an index fund.The students invested a total portfolio value of $699,100 and reported a gain of $55,395, according to their annual report of July 31, 2000.Between March 8 and July 31, the first group of student managers achieved a growth of 22.3 percent in the portion of the fund actively managed. Incorporating the remainder of the funds, the Aristotle Fund appreciated 7.9 percent during that period, in comparison with 5 percent for the Standard and Poor’s 500 Index.Today, "the growth sector has fallen out of bed entirely," notes Rinkoff, and economic slowdown has made finding promising stocks — and selling them to a skeptical audience of both growth and value-oriented managers — difficult for the current class. At a recent meeting, the class heard a thorough analysis of American Airlines and followed up with informed, rigorous questions. In the end, the group asked the presenter to return with more information about specific issues.Students hope that serving the university in this capacity will help to maintain and improve the programs offered by St. Thomas; the process of exchange and strengthening analytical and verbal skills is another reward.More than a "growth fund," or "value fund," Aristotle is a process.On one hand, it is an opportunity for graduate students of finance to hear from and meet mentors, alumni and friends of the university who are in the investment business and are open to addressing the group.On another, student managers take responsibility for developing and operating the fund almost from scratch each year — a practicum in investment, entrepreneurship, written and verbal presentation, and time management, among others.It is a unique opportunity for students, and a significant asset to the graduate program and university at large.Jonathan Commers finished his M.B.A. at St. Thomas in July 2000, specializing in finance. Holder of a B.A. in history from Carleton College, he is employed as a project manager with Springsted, a St. Paul company providing financial advice to the public sector.Related LinksAlumni and friends interested in receiving newsletters or volunteering their time for the Aristotle Fund can e-mail Aristotle@stthomas.edu.The link for the Aristotle Fund’s Web page is www.stthomas.edu/gradbusiness/Aristotle.