Student-Run Endowments, Explained
Student-run endowment funds can give real-world money management and investment experience to undergraduate and graduate students. But relatively few schools offer these educational opportunities. We provide tips on how to get a student-managed investment fund started on your campus.
In 1946, returning World War II veterans made a $3,000 donation to Lafayette College in Easton, PA, to start a campus-based investing club. Student members of the club could use the funds to decide which stocks to buy or sell, and to make other investment decisions. A faculty advisor could help with research or other needs, but ultimately students would make the investment decisions with the money received.
According to the Lafayette College Investment Club’s website, the initial $3,000 investment is now worth over $1 million. The club uses a portion of the income received from its investments to fund educational experiences for current and future Layette College students.
Over the past few decades, other campuses have followed Lafayette College’s lead. According to the Intentional Endowment Network (IEN) and the SIILK Network, there are nearly 600 student-run investment funds at U.S. colleges and universities. The vast majority were founded in the early to mid-2000s.
Many of these newer funds, now commonly referred to student-run endowments or Student-Managed Investment Funds (SMIFs), have much more formal structures and relationships with their campuses. Many also include formal guidance from a university dean, faculty member, or other professionals; and many also offer academic credit for student participants.
It is likely that the number of schools offering these investment vehicles will continue to grow. Given the interest in SMIFs, NACUBO and TIAA are offering this brief summary of some of the features, trends, and issues with student-run endowments, the impact they have had on both the student participants and institutions, and advice for higher education endowments and affiliated foundations that may seek to start new funds.
What are Student-Managed Investment Funds (SMIFs)?
As the name implies, SMIFs are pools of funds that college students can use to research and invest in stocks, bonds, or other financial assets. Students make the decisions on which assets to buy or sell—either on their own or with the assistance of faculty advisors or volunteers from investment firms. The funds are usually provided by donors, although some institutions have provided the funds through carve-outs from their endowments or other assets. While students are involved in the investment decisions, technically and legally, SMIFs are owned by the sponsoring universities. As such, any gains generated by SMIFs must be used to benefit the sponsoring university, not the individual student investors.
Many modern-day student-managed investment funds have a few other distinguishing characteristics:
- They are housed in and supported by a campus academic department, such the school of business.
- They allow student participants to receive academic credit, mentoring from industry experts, or other educational benefits for participating.
- They give students real-world experience in researching stocks and other activities related to investment management.
SMIFs tend to be relatively small. Many hold between 10-30 securities and have a total value ranging from a few thousand dollars to several million.
Regardless of the size of a SMIF, institutions can benefit from these student funds. The primary benefit is the educational and career opportunities they provide to students. For instance, students involved with the University of South Florida’s (USF) Student-Managed Investment Fund learn modeling and other strategies needed to become investment research and stock analysts. The USF fund, established through a gift in 2010 and housed at the Muma College of Business, had a value of over $1.5 million as of early 2022.
“The skills and contacts these student participants develop open a lot of career doors,” says Ken Souza, senior director of investments at the University of South Florida Foundation. “The students in the program over the last 12 years have achieved outstanding professional success. Many are now working as equity analysts or have reached management positions at firms such as Goldman Sachs, Raymond James Financial, and others.”
Student endowments also give institutions opportunities to recruit and retain a diverse set of students. The University of South Alabama’s Jaguars Investment Fund (JIF), started in 2015 with an initial gift of $250,000 and valued at $750,000 as of early 2022, has allowed the university’s Mitchell College of Business to “increase student diversity within the program,” according to Chris Lawrey, assistant professor of economics, finance, and real estate and director of the JIF. “We are able to recruit students from different academic and geographic backgrounds largely because they want the experience of managing real money.”
USF has had a similar experience with its student-managed fund, according to Souza. “There are students from nearly every continent who have enrolled in the program and managed the assets in the SMIF,” Souza says.
Some schools may have adopted SMIFs as a response to students’ calls to gain more experience in investing in socially responsible investment strategies. Data from IEN show that at least 10 percent of student-run endowments have one or more sustainable investing mandates, including environmental, social, and governance (ESG) integration; impact investing; negative and positive screening; and shareholder engagement.
“SMIFs are a great investment in students’ education and their future,” says Nicole Torrico, program director for IEN. “SMIFs can provide new research and ideas and serve as tests for various sustainable investing strategies—including incorporating ESG factors into the investment process, implementing positive or negative screens, exploring investments with deeper impact, and actively engaging stakeholders.”
The Number and Size of SMIFs
For the past two years, NACUBO and TIAA, through the annual NACUBO-TIAA Study of Endowments (NTSE), have collected summary data on student-run endowments. Table 1 provides an overview of this data for FY21.
Of the 720 colleges and universities that participated in the FY21 survey, 225 (about 31 percent) said they had at least one student-run endowment fund. Collectively, these SMIFs held approximately $521 million in assets. The median student-run endowment was $800,000.
But the presence of a student-run endowment varies greatly when total endowment market value of NTSE participants is considered. About 43 percent of the campuses with over $1 billion in total endowments had student-run funds, compared with only 10 percent of the schools with less than $25 million total. And among schools with SMIFs, on average the largest-endowed schools had about $3.8 million in student funds, compared with $80,000 for schools with endowments below $25 million.
“Most of the schools that have SMIFs are already well resourced,” says Torrico. “SMIFs at these institutions should also focus on recruiting and retaining historically marginalized students who would greatly benefit from the educational opportunity of student-run investments.”
Investment Performance and Issues
SMIFs tended to do very well in FY21 in nearly all endowment size categories. During the year, on average, the student endowments returned 34.9 percent, compared with 30.6 percent for all institutional participants in the NTSE (see Table 2).
According to Terry Albano, university treasurer and senior investment manager at the University of South Alabama, the outperformance of student-run endowment funds has in some cases occurred for more than one year; for example, his school’s Jaguars Investment Fund outperformed the foundation’s U.S. stock portfolio for the past five years. The success of the student-run fund has been so profound that in 2021, students were given the opportunity to manage a separate pool of $750,000 for the University of South Alabama Foundation in the same way they do in the JIF.
SMIFs often do well because they are not endowments that are invested in well-diversified portfolios; instead, they tend to be invested primarily in U.S. stocks. “Our student fund is a long-only U.S. equity portfolio that in recent years has benefited from strong financial markets, especially in growth stocks. It’s not a balanced endowment portfolio like an endowment that would be in bonds and other assets,” says Souza.
The relatively heavy reliance on U.S. stocks in SMIF portfolios also brings greater risks, particularly with the U.S. stock market, as measured by the Standard and Poor’s 500 Index®, returning -20.6 percent in the first six months of calendar year 2022. The structure of SMIFs may continue to adversely affect their near-term performance.
“With the market down now, we can’t liquidate our student funds or make any other changes, even if we wanted to, because the students have to make those decisions,” Lawrey says. “We don’t have any hedging or other strategies, so we need to ride out the downturns and get students to make any decisions related to selling or replacing stocks.”
However, like all endowed funds, it is important to recognize that student-managed investments are often designed to last into perpetuity, and short-term declines should not be the sole basis for making changes in long-term investment philosophies.
Advice for Other Institutions
While the data from the NTSE and other sources are only rough estimates of the full number of student-managed funds at U.S. colleges and universities, it is likely that the majority of institutions do not formal SMIFs. Opportunities exist for more schools to adopt or expand these opportunities for current and future generations.
What are the best ways for interested campuses to start these funds? Given the broad range of possibilities, it is important to note that no SMIF structure is “right,” as it often depends on each college or university’s context and student interests. However, institutional money managers can provide some valuable advice for campuses to consider as they get started.
The most important step, besides acquiring a source of funds, is to get involvement from senior institutional leadership.
“You have to get buy-in from a dean or other senior leader,” says Albano from the University of South Alabama.
Senior leaders can, for instance, tie a SMIF to university goals and mandates, especially those related to student recruitment, sustainable investments, and other campus-wide initiatives. Senior leaders also can provide a pathway for students to earn academic credit for their efforts, especially if the student-run endowment can be run through a business school or related program.
Campus leaders also can help by involving local businesses. “Members of the local finance and investment community can be a source for student advisors, internships, and mentoring opportunities, USF Foundation’s Souza says.
The establishment of student-run funds also could be a way for higher education to help address issues of diversity, equity, and inclusion in the financial services sector. “People of color are significantly underrepresented in the investment management industry,” Torrico says. “By starting SMIFs, and prioritizing involvement by students of color, colleges and universities provide valuable education, real-world training, and networking opportunities to empower students to enter the investment management industry, addressing sector-wide inequity head-on.”
Albano adds that campus leadership can convince faculty to become involved, particularly if the school’s goal is to use the student-run endowment as an additional educational tool for students. “Everything should be created around what is best for the students,” Albano says.
Souza and Albano both stress the need to involve campus infrastructure personnel, who will need to be involved with establishing the student funds, managing daily operations (especially when students are not enrolled), and other tasks.
“Take advantage of what a foundation or investment office can offer—especially in areas of cultivating donors, providing custody of the assets, audit, and other matters that students likely will not have expertise in,” Souza says. “We are happy to help the students and the university to be successful in this endeavor.”