How UC Berkeley MBAs beat the market with a socially responsible fund
Source: The Guardian | Published: April 17, 2014 by Jeff Leinaweaver
Students at UC Berkeley’s Haas School of Business manage a real-life investment fund to learn about ethical investing. That fund has achieved a 50% return over six years.
The University of California at Berkeley has a long tradition of activism and social engagement, but few would expect to see its MBA program embracing that ethos. Yet, since 2008, the Haas School of Business has done just that, giving MBA students the opportunity to manage the Haas Socially Responsible Investment Fund (HSRIF). Last year, the fund beat the market by almost 5%. It has achieved over 50% return on investment since its inception.
Call it capitalism with a conscience: the fund’s student managers spend their time in a high-stakes, purpose-driven learning lab, where they wrestle through the fine details of what it means to be responsible for and manage a $2m investment vehicle.
The first, and largest, student-led SRI fund within a leading business school, the HSRIF was launched with $1.1m in donations from Haas alumni. The idea was to offer students a unique learning opportunity at the intersection of business and social impact. One of the original funders, alumnus Charlie Michaels, said that his investment was an attempt to “make a difference in this field, which used to be called business ethics, now corporate social responsibility. It’s just the right thing to do.”
Today, 15 students receive class credit for managing a real-world portfolio of about 20 companies, including Google, Accenture, Starbucks and other blue chips. A Bloomberg platform tracks the fund’s performance.
Like traditional fund managers, students spend time on financial terminals, researching, investigating and analyzing risks, controversies, market trends, rankings and best practices. Unlike traditional approaches to investment management, each principal only tracks between one and three companies, deeply monitoring the behaviour and management decisions which impact each organization’s environmental practices, human rights records, labour rights, community and government relations. The principals are principled, argue passionately for responsible corporate citizenship and are less fazed by the quarterly client pressure of an investment house. This is, in a way, part of Haas’ secret sauce.
Mixing education and investment
For the student principals, involvement in the fund blurs the line between the classroom and the boardroom. They meet weekly to participate in operational and due diligence work, and they receive guidance from both a faculty advisor and an investment advisory committee. Each semester, students attend day-long workshops with the advisory committee getting input and advice on portfolio management, portfolio performance, risk assessment and environmental, social and governance (ESG) investing.
Nikita Mitchell, a current MBA student, emphasized the real-world aspects of the fund: “They are willing to put you in the situation where you get to learn by doing, and have access to people who are very knowledgeable about the process, have the expertise, and make sure you don’t fail.” But while the program provides a safety net, it doesn’t give its students easy answers. “They won’t tell you what to do, what the right answer is,” Mitchell said.
As a student-run process, all investment decisions start with a “one page” quick-pitch discussion by MBA students. Once complete, winning ideas move to a second-round pitch, in which students submit a 15- to 20-page investment proposal with specific and focused analysis on ESG indicators. The principals vote as a management team, deciding which pitches to pursue, which holdings to jettison and which trends to monitor.
One of the current principals, Tom Garland, comes from a private wealth and investment management background. Unlike most of the business analysis that he’s experienced, he said, HSRIF pushes for a much more “in-depth” perspective. “It’s much less spreadsheet-driven,” he said. “You sit down and have a much more qualitative discussion about a company, what makes it tick, what drives this company’s decision-making.”
This April, following on the success of the HSRIF program, the non-profit Haas Center for Responsible Business (CRB) just completed its first crowdfunding campaign, raising more than $126,000 for the student-run fund. With the help of a match from original HSRIF funder Charlie Michaels, the campaign netted over $250,000. The hope is that by crowdsourcing the fund, the CRB will generate alternative means of income, while simultaneously modeling new ways of raising income for non-profits.
The HSRIF has already exceeded its founder’s expectations: “I’ve never dreamt they would take it this far,” Michaels said, noting that the fund has turned a $1m initial investment into $2m, and that it plans to reach $15m by 2020. Ultimately, he hopes, it will become “self-sustaining, a socially-sustainable investment fund, funding the Center for Responsible Business”.
Taking an intergenerational approach
For a fund like the HSRIF, continuity is a big challenge. Because of graduation, 50% of the student principals turn over each year. That’s partly reflected in the fund’s long-term financial performance: in the six years since its inception, returns have swung between a 6.6% loss and a 30.2% gain annually.
The HSRIF’s student principals and investment advisory council take the turnover issue very seriously, devoting a great deal of time and energy toward recruiting and mentoring top talent from within the business school. Their recruitment philosophy seeks a diversity of viewpoints and experience, and the current principals, recognizing the importance of fiduciary responsibility, the fund’s legacy and their own role in the institutional process of knowledge management, lead the recruitment search for their own replacements.
To further ensure consistency, student principals operate an on-boarding process designed to ensure that incoming students understand the fund’s values, investment culture and view of corporate social responsibility. New student fund managers shadow principals for a semester before moving to the investment pitch process.
While some of the student applicants have significant investment experience, many come to the process as newbies, unfamiliar with the complexities of managing a high-stakes investment fund. Instead, these principals often have expertise in other areas, such as international development, non-profits, corporate philanthropy, public-sector engagement and environmental management.
“People bring different experiences to the table, and it allows us to help each other out a lot,” Garland said. When you have “someone who’s spent the last five years working in finance” working side-by-side with someone who “knows a lot about how to evaluate a company’s ethics”, he said, “one can keep the other one quite honest”.
Raising the bar for CSR in academia and management
In addition to its financial success, the Haas program also carries professional dividends for its participants. HSRIF fund alumni are now in leadership positions at firms like Cambridge Associates, Citi Community Capital, Calvert Social Investment Foundation and others.
Center for Responsible Business Faculty Director Kellie McElhaney, who helped secure HSRIF’s initial funding, pointed out the program’s unique balance: “When it comes to socially responsible investing, many people try to lead with their heart, versus investing with knowledge of social responsibility,” she said. “At Haas, we are training hard-core investment folks, who also understand what it really means to look at ESG indicators.”
The HSRIF aims to raise new, questions about the pedagogy and approach to teaching socially responsible investing. Ultimately, it suggests, the issue comes down to balance: How will future leaders and managers learn to wrestle with the head and the heart of social-impact investment?
Patrick Drum, finance faculty at the Bainbridge Graduate Institute and senior portfolio manager at UBS Financial Services, sees this question of head or heart as the essential tension in teaching corporate finance and social responsibility to the Millennial generation. “These learners have tremendous passion for doing the right thing, but at the end of the day, you’ve still got to know the numbers and the economics. You need to have students who can communicate the same way to the chief financial officer or each other, whether they are from Duke, BGI or Berkeley.”