Teaching the Industry Review Process in Student-Managed Investment Funds

Scott Stewart, clinical professor at the Samuel Curtis Johnson School of Management, part of the SC Johnson College of Business, recently presented a talk on “Teaching Industry Reviews and Using Them In A Student-managed Investment Fund” at the 25^th annual Financial Education Association conference.

He delivered his lecture to an audience of faculty from business schools across the U.S. According to Stewart, the equity research process is a critical aspect of investment management, yet many university courses fail to adequately prepare students for the realities of conducting industry reviews – a critical step in professional equity analysis.

“A curriculum developed over 20 years at both graduate and undergraduate levels offers a solution to this gap, providing students with hands-on experience in preparing real-time, proprietary industry reviews within a single semester,” said Stewart. He said this type of curriculum is available at the Cornell SC Johnson College of Business both as a standalone course and as part of the Cayuga Fund program offered by the Parker Center for Investment Research.

He noted that in professional settings, both sell-side and buy-side analysts commonly begin their coverage of new sectors by conducting comprehensive industry reviews. The process involves selecting companies that are business competitors and investment alternatives, researching primary sources to understand business models and industry trends, identifying appropriate valuation metrics, and preparing financial forecasts to prepare an investment recommendation on the industry’s overall rank stocks’ attractiveness.

These industry reviews serve as essential reference guides, often called “industry primers” on the sell side, and inform tactical recommendations to portfolio managers on the buy side. Traditionally, the depth and time required for industry reviews have made them impractical to include in a single-semester course. Professional analysts may spend 3-6 months preparing reviews covering 30 or more companies.

The proposed curriculum addresses these challenges by providing students with examples, templates, and exercises, guiding students through data collection, analysis, and valuation steps, enabling students to produce individual, real-time, proprietary industry reviews, and preparing students to write detailed stock reports in the final third of the course. This approach has been refined for over two decades and has proven successful in graduate and undergraduate settings.

The curriculum emphasizes several important areas of industry analysis as part of primary source research. Students learn to collect information from 10-K reports, earnings releases, investor presentations, company conference calls, and to develop customized valuation techniques.

“The course teaches students to determine appropriate valuation multiples, identify drivers of these multiples and develop specialized techniques for company valuation. Students gain a deep understanding of how companies in the industry make money, underlying business trends and competitive dynamics,” said Stewart.

The effectiveness of this curriculum is demonstrated by its application in a student-managed investment fund. Over nearly eight years, student-sourced industry recommendations have contributed to the fund’s outperformance of the Russell 2000 benchmark index by 400 basis points per annum, top quartile results within mutual fund and institutional manager universes.

While industry analysis is mentioned in financial education literature, the depth and rigor of the proposed curriculum appear to be unique. A review of 67 student-managed investment fund websites revealed that industry or sector analysis represented only 1.0% of key investment terms mentioned, significantly lower than other aspects of investment management

Some of the benefits for students include the following:

• By mid-semester, students often possess more in-depth knowledge of their 3-company industry than many professionals.
• The ability to share proprietary work with potential employers
• An opportunity to develop a strong foundation for detailed stock analysis
• The potential to gain practical experience in professional equity research

“The industry review process is a crucial yet often overlooked aspect of investment education. By incorporating this comprehensive curriculum, universities can better prepare students for careers in investment research and management. The success of the student-managed fund utilizing this approach suggests that it offers distinct advantages over traditional curricula, bridging the gap between academic learning and professional practice in fundamental equity analysis,” said Stewart.

As the investment landscape continues to evolve, equipping students with the skills to conduct thorough industry reviews will remain essential. This curriculum provides a robust framework for developing these critical analytical abilities, setting students on a path to success in the competitive field of investment management.