Desautels Capital Management provides McGill finance students with experiential learning

With four diverse funds to manage, talented Master of Management in Finance (MMF) and Honours in Investment Management (HIM) students experience real-world learning in professional investment management.

Since its inception in 2009, Desautels Capital Management (DCM) has given business students at McGill the opportunity to acquire real-world investment management skills and experience by running multi-million-dollar investment funds and being accountable to external investors for their performance.

“There’s nothing like practical experience and the ability to feel the pain of making the wrong investment decision to help business students learn investment management skills. I wish I could have had the same opportunity for hands-on training when I was a student at Desautels,” says Neil Murdoch, BCom’81, an investor in DCM from the outset, who had a stellar career in the investment industry as founder, CEO and president of Connor, Clark & Lunn Capital Markets Inc. in 2003 through its sale to Aston Hill Asset Management in 2013, and previously as Executive Vice-President and Portfolio Manager at AIC Group of Funds.

Accountability to investors matters

DCM was launched as Canada’s first student-run, registered investment management firm, then offering students in the Honours in Investment Management (HIM) program a unique experiential learning opportunity through hands-on management of a global equity and a fixed-income fund.

“Investment management students had been learning theory quite well, but there was a gap between theory and what happens in practice. DCM bridged that gap. Students’ accountability to external investors has been key to DCM’s success because it makes the experiential learning process more serious and real. If performance lags, investors can redeem funds and if performance is strong, they can add funds,” says Vadim di Pietro, Associate Professor of Finance and Chief Investment Officer at DCM, who must approve all trades.

Today, all students enrolled in the Faculty’s HIM and Master of Management in Finance (MMF) programs work for the company, collectively having the opportunity to manage four funds with a total of about $7.4 million in assets. Students are mentored and supported by experienced faculty members including di Pietro and Assistant Professor of Finance Jiro Kondo, and an advisory board of investment professionals.

Training “rookies” to be pros

Making the DCM learning experience real was also a top priority for original investors like Don Lewtas, BCom ’75. Lewtas strongly supported the concept, but he wanted assurance that the DCM funds would follow the same practices with respect to standards, controls, compliance, custodianship, and monthly reporting as any other registered investment fund and that students would be involved in all these activities.

“I felt it was important to make DCM as professional as possible for student learning and to make the funds attractive to people considering investing. Professor di Pietro had the right vision and was able to address and think about the concerns that investors would have as far as compliance, reporting and oversight. Students need to have autonomy in terms of where they want to invest. But with rookies investing funds, the professors also bring a level of experienced oversight to this, which gives people putting up the money confidence,” explains Lewtas, chair of the Desautels Faculty of Management International Advisory Board, who had an outstanding 33-year career in private equity at Onex Corp., where he was Chief Financial Officer, and prior to that a Vice President, Finance, and Director of Finance.

Ensuring stability and continuity in the DCM funds’ underlying investment strategies mattered too. “An initial concern was that students’ established investment strategies for particular funds could shift or drift with the next crop of students. The discipline has been there to avoid that,” says Lewtas.

Sustainable learning and investing

The success of DCM as a core experiential learning component in the HIM program was a catalyst for launching Desautels’ MMF program in 2016, and creating two new DCM funds, which attract top finance students from around the world and broaden choices for investors.

The Alpha Squared Fund invests mainly in high-quality equities in North America, based on a combination of quantitative technical and bottom-up fundamental analysis. The SRI Equity Fund, launched in September 2018, provides a framework for students to learn about Socially Responsible Investing (SRI). This is a strategy which avoids investments that don’t meet certain social, environmental or ethical criteria, and considers not only the risk-return performance but also the social benefits and ethics of an investment.

As DCM employees, HIM and MMF students learn on the job and are directly involved in every aspect of running the four funds. “In addition to developing practical portfolio management skills, students get hands-on experience in other important areas such as raising funds from investors, client communications, marketing, accounting, financial reporting, compliance, and regulation,” explains di Pietro.

That gives them a competitive edge in pursuing a wide range of career options in the investment and financial services industries. “Our DCM graduates get jobs in investment management, private equity, investment banking, consulting, and some start their own businesses. They develop skills that are important for a broad set of jobs in finance. Sustainability is an area more students are focusing on, where there are a lot of job opportunities and not enough students with the specialized training to meet the demand. For example, last year’s MMF Chief Sustainability Officer, Mitch McEwen, is now working at TD Bank as an Associate in ESG Reporting and Impact Measurement,” says di Pietro, noting the HIM funds also have a student as Chief Sustainability Officer.

Analyzing pandemic investment risks and rewards

Di Pietro has seen the students’ analytical skills and knowledge evolve since the early days of DCM. “The quality of research from our students has improved from year to year and the program is continuously building on previously acquired knowledge. In the HIM program, for example, seniors do a lot of mentoring of juniors. That history of knowledge gets passed on to from year to year, and also as our graduates come back to visit and share what they’ve learned,” he says.

This was evident in how DCM students adapted and applied their analytical skills to address changes in the investment landscape arising out of the pandemic. “As the pandemic unfolded in March 2020 and McGill closed, DCM student-analysts were working full-time on a special note to investors on how the pandemic would affect their sectors and how the funds would be managing the situation. This was followed up later in the year with an online presentation to investors and industry professionals on which companies had the most upside potential based on current valuations,” says di Pietro.

The students’ hard work and analysis paid off as the four DCM funds posted strong results in 2020. “The average return across the four DCM funds in 2020 was 13.6% net of fees, representing an average outperformance of 3.9% relative to the funds’ benchmarks. But most importantly, DCM is doing a tremendous amount of good in terms of student learning and training them to be responsible investment professionals and leaders in the financial sector in the future,” says di Pietro.

ROI in learning and earnings

Just as SRI investors consider not only risk-return performance, long-time investors like Lewtas and Murdoch measure DCM’s performance in terms of educational and social benefits, as well as the ability to produce solid financial results.

Lewtas is pleased with DCM’s real-world learning and earnings performance. “Students make presentations to an advisory board of investment professionals, which includes some very sharp investors. It’s a real-world experience because the advisors are polite, but very direct in their questions and criticisms. I’ve observed that the quality of the presentations has evolved and improved considerably over the years and the students today are pretty spectacular,” says Lewtas, noting that DCM investors are also encouraged by the longevity, stability and respectable performance of the funds.

Another common theme among investors is they want to do something meaningful to support students in gaining high-quality, practical experience managing investments. The DCM funds are open to new qualified investors to grow the assets managed by Desautels’ HIM and MMF students, which would further enhance their learning opportunities and experience. “With four funds today and each having a different strategy, DCM can appeal to more qualified investors,” says Lewtas.

Murdoch sees his contribution to DCM as an investment that offers big upside educational potential, with a relatively low downside cost or risk. “DCM is such a great opportunity for the students to acquire the ability to do a professional assessment and valuation of the stocks of companies, and to develop their presentation skills. The students have delivered performance that typically meets or beats the benchmarks. People often think of an investment like this as a donation. But it’s not a gift. It’s an investment where you’re supporting the students and not giving up anything,” he says.

Learn more about Desautels Capital Management

Regulatory Disclosure

This article was created for informational purposes only and does not constitute an offer to sell units of a fund managed by Desautels Capital Management Inc. Units of such funds are only available to Canadian resident investors who meet the applicable investor suitability and sophistication requirements. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions. Each investor should evaluate its ability to invest for a long term. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed.

Article by: Mark Witten
Photo: Desautels Capital Management Networking Reception (Oct. 2019)
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