Beating the market: UI’s student-managed Henry Fund wins national kudos

Some of the nation’s savviest investors reside right here in the Corridor. In fact, they’re University of Iowa students, and last month they proved their mettle by being named the nation’s top graduate student-managed investment fund. The Henry Fund, a real-money investment fund managed by students in the UI’s Tippie College of Business’ master’s in finance program, beat out the likes of Rice and Northeastern universities to take top honors at Quinnipiac University’s Global Asset Management Education (GAME) Forum – the largest student-run financial conference in the world. The students managed to return 29.99% in 2020, exceeding the performance of any other fund. They also bested the S&P 500 index by more than 11%. At the end of 2020, the portfolio had a value of $16.9 million, a far cry from the $50,000 it began with when the fund was founded in 1994. As of last week, that number had swelled past $18 million. “So impressed with this amazing fund!” Tippie Dean Amy Kristof-Brown wrote on Facebook just after The Henry Fund won top GAME honors. “Starting with a gift of $50,000 from Henry Tippie, the students under the direction of Todd Houge have grown the capital to almost $17 [million]! Best experience you can get!” Mr. Houge, a professor of instruction of finance and director of undergraduate studies for Tippie’s Department of Finance, has served as The Henry Fund’s academic advisor for the past 22 years, leading students to six top-place finishes in the GAME Forum. “Beating the market is incredibly difficult,” Mr. Houge said. “Over long periods of time, studies show that 80-90% of funds will underperform the market. This is why index investing is so popular. Yet somehow the Henry Fund has outperformed the S&P 500 by an average of 1.61% per year over our 27-year history (12.37% vs. 10.76%). It takes luck to beat the market in any given year. But I think our long-term success is partially attributable to the process that we use for analyzing and selecting companies.” To invest in any company, Mr. Houge said, it must pass muster with two-thirds of the student analyst team as well as win approval from an advisory board of financial professionals from companies such as AEGON USA, Principal Financial Group, COUNTRY Financial and HNI Corp. “So a student must provide a very compelling argument to the team,” he said. “In addition, every year our team of fund managers turns over, so each year our portfolio holdings get reviewed by a fresh set of eyes. This helps to eliminate some of the behavioral biases which can sometimes plague fund managers over time.” This year’s winning management team members included Raymund Boltron, Matt Hodges, Jacob Kammerer, Jack Moore, Yasmine Nosair, Fangxing Wei, Jack Wells and XianXi Yang. Master of Finance students making up The Henry Fund team are selected via a competitive application process, then must analyze a company and give a brief presentation. “We know students enter the Master of Finance program with different backgrounds, so our selection process is really focused on work ethic and a broad understanding of the business,” Mr. Houge said. “We are less concerned with a student’s technical skills coming into the program, as we can teach them what they need to know. Instead, we want to make sure the analysts chosen to manage the Henry Fund are willing to put in the work and effort necessary. We are fiduciaries for the $18.3 million of assets that have been entrusted to us.” Once selected, each student analyst specializes in at least one of 10 economic sectors, analyzing current holdings, identifying potential opportunities, implementing control systems and monitoring the fund’s performance. Analysts deliver semi-annual presentations to the advisory board, which oversees all investment decisions. Over the year they serve in the program, Mr. Houge said, student managers produce six research reports, including one industry report and five individual company reports. Students are expected to become experts in their sector and serve as both sector analysts and portfolio managers, providing basic industry research, proposing investment ideas and evaluating the ideas of the other managers. “Students must build a detailed valuation model for each company, and they develop these from scratch. We do not use a pre-canned spreadsheet,” said, adding students use tools such as Bloomberg, FactSet and data resources available through the Pomerantz Library. “Each analyst has flexibility to cover any company they feel might be a potential investment for the fund, although we also have an investment charter which stipulates some constraints to the types of companies, we can invest in.” The fund, named for its two founding benefactors, Henry Royer and Henry B. Tippie, is an endowed equity portfolio required to meet the same basic performance guidelines as equity accounts in the UI’s long-term investment pool. That means fund managers seek to achieve the highest level of return while maintaining a risk profile like the S&P 500 index. The fund’s charter requires the portfolio to be at least 95% invested in equities of individual companies across diversified industries. Proceeds and income from the fund’s assets are distributed annually to support scholarships and other programs that benefit UI students. “We just withdrew $529,775 this morning for our annual distribution,” Mr. Houge said last week, adding they would go towards funding student scholarships for master of finance students and student-athletes, and to support athletic and administrative programs. Over the last five years, the Henry Fund has distributed $1,327,767 in total scholarship and program support from the portfolio. Mr. Houge said there was no “secret” to the fund’s success. On the contrary, he said, “We are probably the most transparent program in the country. We post our entire portfolio and document every trade on our website. Anyone can follow along. We post all student research on the website. This provides visibility of our program but also increases accountability for the student fund managers. “Our primary focus in the Henry Fund is developing analytical investment skills that students can utilize in their future careers. We want students to be well-trained and ready to hit the ground running,” he continued. “The Henry Fund is a one-year program, and it requires a huge time commitment from the students who participate. Over the course of the year, the students learn to dive deeply into companies, industries, and the economy. They build very detailed valuation models for each company and present their research several times per semester to the class as well as to an advisory board of finance professionals. I believe that Henry Fund students produce some of the highest quality research of any program in the country.” Winning the GAME Forum competition, which draws 2,000 participants from hundreds of schools annually, is recognition for hardworking students and a powerful draw for Tippie’s master of finance program, said Mr. Houge, who likened his advisory role to that of a quality control manager. “I do not have veto power over any trades, and I do not have a vote in any trade proposal. I am only their advisor. My role is to play devil’s advocate and challenge them on their research,” he said, adding it has been an honor to be part of The Henry Fund for the past two decades. “It has been amazing to see how the program has grown,” he said. “The students in this program work incredibly hard, and I am always impressed by the capacity of our students to produce high-quality research. The success of our program, though, is not in the size of the portfolio the students are managing. The success is the 300-plus alums who have served as Henry Fund managers and gone on to great careers.” To learn more, visit www.henryfund.org