Calculated risksThe peso devaluation taught finance students a lesson
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"Scudder's the only one that's been friendly to us," says Christine Massey. "Has Europacific been nice?"
"Europacific's not bad. We're still down, less than a dollar," says Christopher Urban, gesturing toward hand-scrawled lines on his legal pad. "It was $21.13 and right now we're at $20.77. Look at the graphs, it's kind of interesting. The monthly one shows the downhill slide that's been occurring since late November. But if you look at it over the long run, it's definitely been up."
Financial exchanges like this one happen routinely in Lehigh University's new course, "International Financial Markets and Investments." The course prepares finance majors for careers in the global marketplace, where communication and business activities increasingly supersede national boundaries. Students learn about foreign exchange markets and financial risks by managing a real stock portfolio, the Thompson International Investment Portfolio, established by an anonymous $10,000 donation in honor of Lehigh alumnus Peter Thompson.
Last fall, the finance department selected seven finance majors to establish the portfolio. With advice from Professor Geraldo Vasconcellos and alumnus Neil Schwab, a broker with SmithBarney of Allentown, Pa., the students purchased stocks in four major-market funds to create a balanced, flexible portfolio.
Student manager Arthur Comstock, of Waverly, Pa., says, "Professor Vasconcellos gave us a little push to get us going, but then he stepped back and let us take over the show. All our decisions were on our own, based on recommendations from the class."
The finance students analyze three areas of international investment: mature markets, including the U.S., Canada, Western Europe, Japan and the Pacific Rim; emerging markets, such as Latin America, China and southeast Asia; and global allocations, which divides funds among markets. Most of the student research, however, has no immediate application for the portfolio because very little buying and selling is done in any given year; rarely does the value of the student analysts' tips exceed the commission fees incurred by switching funds.
In effect, the course mimics what a professional investment broker does. Let's say a student believes that investing in the the banking industry of Scandinavia offers a promising opportunity. After researching the industry, that student presents findings to the class. If the other students agree, they can move money to a mutual fund with stocks in Scandinavian banks.
A global allocation unit determines how to divide investment money among markets in a way that will minimize risk and maximize profit. Originally, more than a third of the portfolio's value was invested in risky but profitable emerging markets such as Mexico and Brazil. "At the time, people were throwing money into Latin America," says Comstock, who plans to pursue a Ph.D. in economics at Lehigh next year. "Call it a herd instinct. When we saw the Mexican market go down all of a sudden, it was a slap in the face."
The peso devaluation last winter taught an all-too-real lesson in the importance of risk management and timing. "We bought our portfolio the day before the devaluation," says Massey, who acted as the portfolio's general manager last year. "Had we waited a week, even a couple of days, our portfolio would have been worth more."
To date, the student-selected funds have outperformed their peers. In the first quarter, the Thompson portfolio's mature market funds went up two percent and its emerging market funds slipped 10 percent, yielding an overall decrease of 2.6 percent -- a commendable showing in the shaky international climate.
Students learn by experience that textbook financial theories can be applied to actual activity in global markets. For example, the greater the variety of assets you have in your portfolio, the less volatile it should be. Massey, of Ridgewood, N.J., has seen this theory borne out. "We have a really balanced portfolio," she says. "Even though Mexico hit us, it didn't hit us as hard as it should have."
The class faces the somewhat daunting dilemma of taking calculated chances versus conserving capital for future students. Urban, of Ashland, Pa., says, "There was a lot of anxiety when we set up the portfolio, but we got more comfortable. We realized that investment is like anything else in life: there are risks and there are returns, and we do our best to evaluate them."
Following the class's advice, the managers diverted money in May to more stable European funds. They've increased their investment in mature markets from 67 percent to 77 percent, with the remainder in emerging markets, and decreased their Mexican investment from five percent to two percent. They've also "dumped" their Japanese investment, Massey says, "because Japan's been doing awful. They're in their worst depression since World War II, and export industries are down because of the currency problem."
Vasconcellos praises the students' hard work and investment savvy. He says, "I'm glad this group decided to stick their necks out and invest in emerging markets, even though they took a hit. This is how the game is played in the real world."
Many of the students who took "International Finance and Investing" this spring plan on pursuing careers in the field. "For me, this is perfect," says Massey. "It's a real-life situation. It's given me more of an understanding of what portfolio management is, so I know it's something I want to do."
Real financial markets don't come to a halt when the school year does, and the setbacks that spur panic today may well prove to be peanuts over the years. The international finance class that pioneered the Thompson fund hopes that future students will look at its long-term performance and echo Urban's observation: "It's definitely been up."
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