1-Art to Engineering Page 1 Wednesday, February 4, 2004 12:38 PM

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CHAPTER

1

From Art to Engineering in

Finance

t is often said that investment management is an art, not a science.

However since early 1990s the market has witnessed a progressive

shift towards a more industrial view of the investment management pro-

cess. There are several reasons for this change. First, with globalization

the universe of investable assets has grown many times over. Asset man-

agers might have to choose from among several thousand possible

investments from around the globe. The S&P 500 index is itself chosen

from a pool of 8,000 investable U.S. stocks. Second, institutional inves-

tors, often together with their investment consultants, have encouraged

asset management firms to adopt an increasingly structured process

with documented steps and measurable results. Pressure from regulators

and the media is another factor. Lastly, the sheer size of the markets

makes it imperative to adopt safe and repeatable methodologies. The

volumes are staggering. With the recent growth of the world’s stock

markets, total market capitalization is now in the range of tens of tril-

lions of dollars^1 while derivatives held by U. S. commercial banks

topped $65.8 trillion in the second quarter of 2003.^2

(^1) Exact numbers are difficult to come up with as information about many markets is
missing and price fluctuations remain large.
(^2) Office of the Comptroller of the Currency, Quarterly Derivatives Report, Second
Quarter 2003.
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