AIMING TO INVEST

Applied Investment Management students have chosen wisely — and it’s paying dividends for Mendoza.

It is morning in Manhattan, and an indistinct hum fills the Grand Central terminal. 

Thousands of commuters are shuffling through one of the busiest transportation hubs in the world’s biggest financial center, the click of their hard-soled shoes echoing off the terminal’s polished granite floors. And on one of the 44 platforms tucked below New York City’s most iconic train station, the doors of a commuter train chime closed with their distinctive “bing-bong” sound. And with that, the sounds of a midtown morning fade away.    

Stephanie Mellert (BBA ’18) doesn’t hear any of it. She has her AirPods in and her focus squarely trained on a presentation she’ll be giving that afternoon. Mellert is a senior associate at L Catterton, a Connecticut-based private equity firm specializing in consumer goods. On Mondays, L Catterton’s associates present prospective investments to the firm’s partners at a weekly meeting of its investment committee. 

On presentation day commutes, Mellert silently rehearses on the train. She anticipates questions she might be asked and practices how she will defend her investment thesis. Once she arrives at the office, Mellert will share her thoughts with trusted colleagues to see if they spot risks that she does not. 

“In so many ways, it is exactly the same as what we did in the Applied Investment Management (AIM) course at Mendoza,” says Mellert. “AIM taught us to come up with an investment thesis. To ask ourselves what categories we want to invest in and why. To think about which subcategories will have long tailwinds and which companies will actually be the most successful. These questions are very helpful in distilling why you want to invest in something and articulating it.” 

AIM is a limited enrollment course at the University of Notre Dame’s Mendoza College of Business that has become one of the highly ranked College’s most sought-after courses. The course is known for the rigor of its curriculum, the student-led approach in the classroom, its real-world applicability and, perhaps most distinctively, for building a close-knit community of alumni who hold reunions and continue to engage in the program years after they graduate. 

AIM students show an extraordinary degree of dedication to their coursework, often pouring long hours into equities research and pushing each other to excel. And they learn from some of the best. AIM has been taught by some of Notre Dame’s finance “giants,” including former Notre Dame Executive Vice President John Affleck-Graves, former Notre Dame Chief Investment Officer Scott Malpass and the legendary finance professor and former Mendoza dean Frank Reilly. 

Each year, a select group of upperclass undergraduates and MBA students manage a real-world portfolio of 25 publicly traded stocks. The portfolio’s current value tops $30 million. Since 1995, students have been conducting thorough analyses of equities and choosing the stocks they think the AIM fund should buy, sell and hold. At the end of each semester, AIM students make the decisions about which stocks should be added to the portfolio that will be passed onto next semester’s class. 

And they have proven very good at it. 

“Even for professional investors, it can be very difficult to outperform the market,” says Shane Corwin, professor and chair of the Department of Finance, who teaches in the program. “For student investors, the feat is even more exceptional.” 

Since AIM’s launch, its fully student-managed portfolio has earned an average annual return of 12.1%, well above the total returns of the S&P 500 and Russell 3000, which measures the performance of the 3,000 largest companies in the U.S. 

A single dollar invested in the AIM portfolio at the time of its launch would have grown to more than $24 by the end of 2023 compared to approximately $13 for the two market benchmarks. Over the past three decades, the AIM portfolio has outperformed the broader market on a risk-adjusted basis by an average of 2% per year. 

AIM’s outstanding performance has offered another kind of investment opportunity for the program — to give back to Mendoza now and in the future through funding a faculty position in the Department of Finance. In February, Mendoza announced the establishment of the Applied Investment Management Alumni Collegiate Professor of Finance, funded by a payout from the AIM portfolio — the first time in Mendoza’s history that a student effort has yielded reinvestment back into the College.

Corwin was named to the inaugural position in recognition of his widespread contributions to the College, including research, service and teaching in AIM and other courses. The AIM funding for this position allows for the hiring of an additional tenured or tenure-track faculty member in the finance department, extending the College’s teaching and research mission.

FUNDAMENTAL INVESTING

A lot has changed since the AIM course launched in 1995. Back then, some of the biggest companies in the world — and the best-known stocks held in the AIM portfolio — were still years away from their initial public offerings. That year, Jeff Bezos ran Amazon from a Seattle-area garage, reportedly barely clearing $500,000 in gross revenue. It would be three more years until Sergey Brin and Larry Page rented the Silicon Valley garage that would become the first offices of Google.

One constant is the fundamental investing approach that the AIM course teaches to students, which traces back to principles laid out by Columbia University professors Benjamin Graham and David Dodd in their 1934 book, “Security Analysis.”

“Fundamental investing is the industry standard, and it is how we have been thinking about businesses for a very long time,” says Jason Reed, the associate faculty director for the Notre Dame Institute for Global Investing (NDIGI) and a co-instructor of AIM. “AIM students use the same framework that many of them will use in their professional lives.”

Fundamental investors seek to identify inefficiencies in the stock market — underpriced stocks with a greater potential to generate profits over a long-term investment horizon than their current market price implies. Over time, as an underpriced company outperforms expectations, the stock market is expected to correct the inefficiency. The stock’s price should eventually align with its intrinsic value. Yet many factors can affect a stock’s value and price, and not all are immediately apparent. To identify risks to a stock’s future earnings, an investor needs to ask the right questions.

“The fundamental investing framework allows students to understand a business at its core,” says Reed. “In determining the valuation of a business, it asks the same questions of early stage companies and very mature ones. How do you make money? What is your competitive advantage? And how long will that advantage last?”

AIM students research these questions and evaluate what they could mean. But in markets, what investors don’t know can hurt them. AIM teaches students to anticipate that, too.

“When we think about the unknown, we split it into two categories: the known unknowns and unknown unknowns,” says Reed. “We can seek answers to the known unknowns.”

He points toward generative artificial intelligence (AI) as an example. Though its ultimate impact is unknown, students can ask how a company might leverage AI to make operations more efficient, whether executives are investing enough in its development or whether it could undermine a competitive advantage.

“But there are also unknown unknowns,” Reed says. “We don't know what breakthrough technology will come next, and we push students to consider scenarios that could destroy a company’s competitive advantage or make its product or service obsolete.”

CULTURE OF COLLABORATION

AIM students take pride in their collaborative spirit — and in their ability to push each other. During the first half of the course, each student analyzes one of the 25 stocks currently held in AIM’s portfolio. In the second half, they choose a stock that is not currently in the portfolio to analyze and advocate for. At the end of the course, the class considers the analysis of all 50 stocks and decides which ones the fund should hold moving forward. During this process, AIM students make six presentations on their research, and they get feedback. Lots and lots of feedback.

In AIM, questions do not wait until after a presentation is completed. Students sometimes interrupt to question assumptions embedded in the analysis or request the source of facts and figures. This mimics the professional environment of financial services firms, where questions flow in real time.

“The AIM culture is respectful and professional, but people are willing to challenge others if they disagree,” says Corwin. “Students push each other to find the answers analysts want to know. AIM is run very much like a portfolio management team where you get challenged on your investment thesis about a company and have to support it.”

AIM is a selective course. Students apply with their transcripts, a list of their extracurricular activities and an essay about what they would bring to the class. Though most are finance students, they come to the course with a wide range of skill sets. Some might have experience with financial modeling, others very little. This variation helps drive collaboration.

“One thing that is unique about Notre Dame is its cooperative culture,” Corwin says. “Students are constantly going to each other with questions. There is a lot of joint learning, and a lot of it happens through informal interactions outside of class time.”

Ollie Bernasek (BBA ’24) places a high value on this aspect of AIM. The finance major took the course in fall 2023 and counts it as the most valuable experience he’s had at Mendoza.

“There are not many college classes where people are willing to work 20, 30, 40 hours a week for a course that gives you the same six credits,” says Bernasek. “The professors make that culture. Shane and Jason are phenomenal teachers, and they have instilled a culture of collaboration. AIM doesn’t guarantee you a job, but it does let you be part of something bigger than yourself.”

A BLEND OF THEORY AND PRACTICE

Many universities have some kind of student-managed investment fund, but few have delivered like AIM. To explain the program’s success, Affleck-Graves, who retired from the University in 2019, credits the fact that it is a for-credit course and not an extracurricular club. In the early 1990s, the professor emeritus of finance served as co-faculty advisor to Mendoza’s Undergraduate Investment Club. And it wasn’t going so well.

“We were impressed with the quality and enthusiasm of our students but concerned that their analysis of stocks was superficial,” says Affleck-Graves. “My faculty co-advisor, Mark Yusko, and I realized that it was not because the students were not smart or talented, but because they couldn’t devote enough time to the club, given the demands of their academic courses. We knew we could not expect more of them unless there was a grade attached to their work. But we recognized the enormous talent in our student body and knew we had the opportunity to provide them with a much more comprehensive education by creating a for-credit course.”

Affleck-Graves wanted that course to be a multi-dimensional blend of theory and practice. He brought in long-time finance professor Reilly, whose passion, vision and enthusiasm shaped AIM’s academic approach. To ensure the curriculum was grounded and practical, AIM began working with Notre Dame’s then-Chief Investment Officer Scott Malpass, who recommended that the class take trips to meet with investment firms in capital market centers including New York, Chicago, San Francisco and Boston.

"AIM provided a curriculum on how to project earnings and value companies and how to blend that with case studies by practitioners that focused on how to make investment decisions and construct portfolios over time,” says Malpass. “All of the curriculum was imbued with the values of a Notre Dame education to provide leadership for the next generation of money managers."

AIM’s pragmatic approach pushes students to develop the skills they will need to succeed in finance. Jim Parsons (BBA ’96) has done exactly that. He was a member of the inaugural AIM class in 1995, and he drew on the experience when he moved into an analyst role. Parsons later became a portfolio manager and founded Junto Capital Management LP in 2014. The Manhattan-headquartered hedge fund now manages upward of $6 billion in assets.  

In 2015, Parsons and his wife, Dr. Carrie Quinn (ND '96), gave a gift to the University to establish NDIGI, which has as part of its mission to add depth and breadth to Mendoza’s finance curriculum. He believes Mendoza can play a unique role in shaping the leaders of the future by teaching them what’s truly important.

“Investment management has never had a greater need for outstanding leadership,” Parsons says. “And courses like AIM lay the foundation for success. It teaches students to ask the right questions and interrogate the answers. And it teaches them to take an ethical approach, which is more important now than ever.”

Classroom photos by Peter Ringenberg

AIM Performance

For more details about AIM and the program’s quarterly performance reports, visit aim.nd.edu.