The $6 million class

Applied Investment Management posts impressive returns, launches Wall Street careers

The Coca-Cola Company, Brady Blackett assured his fellow stock analysts, is not about to run out of customers any time soon.

Per-capita consumption of Coke beverages in the United States amounts to 394 eight-ounce servings a year, he said. The number is even higher in Mexico.

“In China,” he said, “it’s 34.”

Growth opportunities like that and the fact that the company has increased its dividend for 50 consecutive years would appear to make Coke a stock worth buying or keeping. But, surprisingly, not in Blackett’s view.

“I’m going to say it’s time to sell it,” he said this past February.

Blackett, a graduating Notre Dame MBA student, was offering his analysis of the prospects for Coca-Cola stock to fellow students in this past spring’s Applied Investment Management course or AIM.

In this class, students—MBAs in the spring semester, undergraduate seniors in the fall—act as stock analysts and portfolio managers. But it’s not play acting. They decide which stocks to buy, hold or sell using real money—more than $6.5 million as of early April—from Notre Dame’s $7 billion endowment.

They’ve done it well. During the 17 years the class has existed, the AIM portfolio has significantly outperformed its primary benchmark, the S&P 500. For example, in terms of average annual returns over the past three years, the S&P 500 was up 11.41 percent by the end of last fall semester. The AIM portfolio: 18.13 percent.

“You want to beat the index, and research has shown that at least two-thirds of money managers cannot beat the index,” said Frank Reilly, Bernard J. Hank Professor of Finance. 

The course was created by Reilly; Notre Dame Executive Vice President John Affleck-Graves, a former chair of the finance department; and Scott Malpass (MBA ’86, ’84), Notre Dame vice president and the University’s chief investment officer since 1989. Mark Yusko (’85), a member of Malpass’s staff, also helped get the course off the ground. Malpass, one of the most successful investment directors in higher education, still guest-lectures in AIM a few times each semester. Reilly co-leads the undergraduate class in the fall.

Recalling the course’s origins, Reilly said, “All of us thought it was a good idea. We’re all glad we did it. Nobody had any idea what it would turn into.”

What it has turned into is one of the courses most prized by students in the business school. 

Why such demand? Because it’s a unique way to learn finance theory by applying it. And because the course can pave the way to a lucrative job on Wall Street.

 AIM not only has a 100 percent placement rate, but graduates typically receive a dozen or more interviews and multiple offers. Salaries for alumni of last fall’s undergraduate class started at about $70,000 with signing bonuses of $10,000 to $15,000, according to Notre Dame’s Career Center.

Jerry Langley, an executive in residence who co-teaches the course both semesters, said Wall Street firms have begun calling him nine months before fall semester to find out which undergrads have been selected for admission. They want to get an early start on recruiting.

Sean Klimczak (’98), an AIM alum and now managing director at The Blackstone Group global investment and advisory firm, said, “We usually have our pick from the top five students from Ivy League schools, and the AIM students consistently stack up incredibly well.”

Klimczak, who leads recruiting efforts for Blackstone’s private-equity team, said plenty of Notre Dame graduates have found success on Wall Street without going through AIM. But recruiters know how tough it is to get into and survive the course.

AIM requires students to do what many of them will be doing on Wall Street: calculate the intrinsic value of stocks. Over the course of the semester, each student will investigate two stocks using a bewildering array of tools of fundamental analysis. The objective: to determine what the stock ought to be selling for, given the company’s present condition and future prospects.

In the first half of the semester, each student is assigned one of the 25 stocks in the portfolio the class inherited from the previous semester’s class. If the student determines the stock to be worth more than its current selling price, a “hold” recommendation usually results. But not always.

In the case of The Coca-Cola Company—which has been in the AIM portfolio for about 10 years, Reilly said—Brady Blackett valued the stock at $71.50 per share. At that time, late February, it was selling for $69.04. That meant the stock had a theoretical upside, by his analysis, of 3.6 percent. But Blackett saw Coke facing thinning operating margins and other issues. He thought the portfolio could do better with a different stock.

“There’s a saying that only liars buy at the 52-week low and sell at the 52-week high,” Blackett told the class. “So getting out of this and chasing another 30 percent increase somewhere else, I think, is probably the way to go.”

The class’s spring-semester co-instructor, Bill McDonald, Thomas A. and James J. Bruder Professor in Administrative Leadership, reminded Blackett that he was getting ahead of himself. The decision on whether to sell a stock out of the portfolio doesn’t come until the end of the semester.

In the second half of the semester, the analysts (class members also are called “portfolio managers” but never “students”) pick a company that interests them and conduct the same thorough analysis. After that, they recommend whether the fund should buy or not.

So at the end of the two rounds, the portfolio managers have detailed valuations and hold or sell recommendations on the 25 inherited stocks plus buy or don’t-buy recommendations on 25 new stocks.

The class ends with a formal presentation to AIM’s advisory board, consisting of about two dozen money-management and financial-services professionals, roughly one-third of them AIM alumni. By then, the student analysts will have already met with active money managers, including AIM alumni, during field trips to Chicago and New York City.

As on Wall Street, there are hits and misses in the group’s portfolio decisions. This past fall, for example, analyst John Goedert valued RBC Bearings at $47.06 a share when it was selling for $38.90. The majority of his classmates agreed with his buy recommendation and purchased 4,800 shares. As of April 5, the stock was selling for $45.47, netting the AIM fund a profit, on paper, of $31,536. (View the current portfolio and learn more about the class at aim.nd.edu.)

On the other hand, another analyst made a convincing argument that Starbucks was overvalued. The fund jettisoned its holdings at $41.88 a share. As of April 5, the coffee chain’s stock price had climbed to $58.18.

In case you’re wondering, these outcomes have no bearing on grades. Students are evaluated on the quality of their research, presentations and other assignments, Reilly says. The emphasis is on learning how to calculate a company’s value rationally, not on whether it turns out that the market agrees.