From Art to Engineering in Finance
It 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 process. There are several reasons for this change. First, with globalization the universe of investable assets has grown many times over. Asset managers 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 investors, 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 trillions of dollars1 while derivatives held by U. S. commercial banks topped $65.8 trillion in the second quarter of 2003.2
