The Secret Behind Darden Capital Management’s Success Beating Benchmark Returns

A group of eight University of Virginia Darden School of Business students are gathered in the Camp Library, a Bloomberg terminal by their side, discussing the growth potential in emerging markets of a major distilled spirits company.

The team, all members of Darden Capital Management (DCM), look at the company’s valuation through a variety of lenses and debate what they know through personal experience with the industry and the countries eyed for expansion.

It’s the kind of deliberate analysis that has led the student-run organization to consistently beat benchmarks, with students growing $250,000 in seed money carved out of the Darden endowment in 1990 into roughly $19 million.

Along the way, the club has offered hands-on training to hundreds of students, opened numerous doors in the hard-to-crack investment management field and become a model of student-led, experiential education.

“We are effectively the longest running and best experiential learning platform at Darden,” said DCM CEO James Franco (Class of 2017). “We are running real money and have to present our performance in front of the [Darden Board of Trustees] two times a year and justify our returns. It’s invaluable experience and many students at Darden do not realize the extent of our responsibilities.”

DCM, which functions as both a club open to all students and a class restricted to Second Years, manages its money across five funds with differing investment approaches. The Cavalier Fund focuses primarily on domestic equities; the Darden Fund focuses its strategy on small-cap stocks; the Jefferson Fund is value-based; the Monticello Fund seeks undervalued high-growth companies with a significant portion of international companies and the Rotunda Fund considers sustainability practices to inform its investments.

A team of portfolio managers led by a senior portfolio manager oversees each fund, and a CEO, chief investment officer, chief operating officer and director of research help chart the DCM course.

Professor Rich Evans serves as the faculty advisor for the organization, but in a framework that separates the Darden initiative from some similar funds at peer schools: DCM places all decisions in the hands of Darden students.

“At the end of the day, I am purely advisory,” said Evans. “In terms of their investments or buy-sell decisions, I have no say, and that’s exactly the way it ought to be. It’s not me controlling them, it’s them truly experiencing on their own how this works.”

That can mean managing through the unexpected, such as when members of the Class of 2008 scrambled to transfer assets out of Lehman Brothers as that firm collapsed and a global recession led to fund losses in excess of 30 percent — losses that, though severe, still managed to beat benchmarks.

For recent classes, it’s meant managing through a financial world of seemingly modest returns and global uncertainty. In each scenario, the DCM managers have consistently proved more than capable stewards of endowment money.

“They have outperformed their benchmarks over the years so it has not only been great in terms of the pedagogy for the student and great in terms of helping them get jobs in this industry, but it’s great for the endowment as well,” said Evans. “We’ve got these talented, highly motivated individuals with great skills who are willing to work for the lowest management fee in the industry.”

Although Franco came to Darden with prior investment management experience, few students do, making the DCM experience the clearest way to gain potential entry into a world with steep barriers to entry.

Like most DCM members, Franco, who is pursuing a dual degree with the UVA School of Law, joined the club as a First Year, proved his interest and commitment to the organization, and applied for one of the coveted spots in the Second Year DCM elective.

In addition to experience mastering various methods of valuation, making effective stock pitches and executing trades, competitions and interactions with investment industry professionals — including a January Q&A and lunch with Warren Buffett — Franco says DCM gives students a much-needed leg-up in a competitive industry.

“Without DCM, it would be so hard to get into this business. Whether we’re talking about tangible skills or the intangibles of just how to think about investing and how to approach the business and how to approach the recruiting process, DCM provides all of that, and it’s absolutely critical,” Franco said. “I’ve seen it with people I started with who graduated in May and got into the business.”

Indeed, former DCM CEO Jake Dubois (MBA ’16) recently launched the Blue Hawk Fundamental Growth Fund as part of his Blue Hawk Investment Group. Investor Dick Mayo, chair of Mayo Capital Partners and the namesake of Darden’s Richard A. Mayo Center for Asset Management, will be an investor and advisor for the fund, which invests primarily in North American public equities.

Franco would like DCM to be a clear pipeline into the investment management industry, with the organization becoming top-of-mind for industry professionals looking for recruits and DCM alumni serving as a growing bridge to current students.

And for students who will not be in an asset management role after graduation, the DCM experience still pays dividends.

Evans says students recruiting in other fields often report that their DCM experience is among the topics to be broached in an interview, allowing students the opportunity to demonstrate their expertise on both asset management and their areas of focus at DCM.

Wyatt Somogyi (Class of 2017), a portfolio manager on the Rotunda Fund, came to Darden with a biotechnology background and experience in early stage venture capital. Somogyi, who is still considering his post-Darden options, said that regardless of his landing spot, the DCM experience had trained him how to think in ways previously unknown to him.

“Darden trains students to handle ambiguity. No one is handing you a case with 10 exhibits that are ready to go. You have to make it yourself,” Somogyi said. “Digesting an infinite amount of information to make investment decisions is an invaluable skill that DCM develops.”

Both Somogyi and Franco paint a direct correlation between Darden’s curriculum and success in DCM, with Somogyi crediting courses in ethics, finance and particularly strategy in aiding his DCM success.

The club members use skills from marketing, decision analysis and even management communication as they move from researching to pitching a potential investment.

It’s a system that has shown outsized returns for nearly three decades, and continues to plot a winning path.

Chief Investment Officer Jonathan Grushkin (Class of 2017) says DCM doesn’t provide specific return figures, but notes that the group outperformed global equity markets in 2016, “generating substantial profits for the School’s endowment.”