Investing by the Numbers
by Jarrod Wilcox
Published by Frank J. Fabozzi Associates, New Hope, PA, 1999
Book review by Harry Marmer

When I got the call to do a book review, I immediately thought, yes - action, romance, adventure! Well, little did I know that I would be writing a review on Investing by the Numbers, a book by a quantitative investor who actually argues for a synthesis view of quantitative analysis combined with qualitative judgements.

Jarrod Wilcox can claim both the academic qualities and practical experiences of investing, as he has a Ph.D. and CFA, as well as a number of investment work experiences.

Wilcox's excellent book reflects these varied experiences as he artfully reviews and discusses the practical application of a number of quantitative investment theories and tools. The essence of Wilcox's message is that if one is to succeed in active investment management a blend of quantitative techniques in combination with qualitative judgements is the way to go.

Quantitative analysis on its own is not sufficient to win at active management, for a number of reasons, including lack of data, simplified assumptions, and system structure instability. The bottom line is, even to successfully apply quantitative models one needs to have a rigorous qualitative understanding of how markets work and apply appropriate judgement to the method.

This up to date book covers such current investment topics such as behavioural finance and its application for investment strategies; trading cost, taxes and implementation shortfall; complexity theory and ecology; neural nets and genetic algorithms; and emerging markets. Models reviewed and assessed by Wilcox include: the Markowitz efficient frontier; the CAPM; option pricing; APT; and risk forecasting.

As with any hard core investment book there are parts that are particularly dry, but that comes with the territory.

While there is good coverage of currency from an investor's perspective, I would have preferred more discussion on how to actively forecast currency return and risk. Notwithstanding these later two comments, I would highly recommend this book for anyone who wanted an excellent update on the application of qualitative judgements from within a quantitative framework.

Harry Marmer is director of institutional services at Frank Russell Canada in Toronto.

International AFIR colloquium

Actuaries and investment professionals from around the world will meet at the 11th International AFIR colloquium to tackle the challenges of financial risk management. Participants will discuss and debate globalization of financial markets and financial institutions, to reach a better understanding of financial risks and the implications of greater integration of financial markets around the globe.

The Scientific Committee invites authors to submit papers for the Colloquium, and recommends topics such as principles of financial risk management, financial market risks, credit risks, capital management, and international standards for accounting and valuation of financial products and services. Papers on all topics of interest to participants are welcome.

The conference will be held September 6-7, 2001 at the Royal York Hotel in Toronto. To register or for more information, contact the Canadian Institute of Actuaries, at 613-236-8196.

What do you think?
In a recent survey of senior pension and investment managers in Canada conducted by The Fraser Institute:
* 96% of respondents agreed that flat tax reform would lead to higher levels of economic growth, greater capital formation and productivity gains
* 86% believe that new technology combined with globalization has allowed for greater rates of economic growth without commensurate inflationary pressures
* 65% think the threat of increased rates of inflation in the future is a real and potent issue
The top 10 wealth creators in Canada

In an annual study to determine which companies are doing the best for shareholders, Vijay Jog and Kobana Abukari discovered that in 1999: Almost 60% of All Firms Did Not Provide Adequate Returns to Their Shareholders.

This conclusion, based on the Annual Economic Return (AER) measure1, may come as a surprise to shareholders who have been contemplating early retirement based on the returns on their low MER, passively managed index funds. Positive AER value indicates that the stock market return exceeded the shareholders' expected return for the given risk level of the stock. Conversely, a negative AER indicates that actual returns were less than expected.

The results show that only 41% of the 453 companies in the study created positive shareholder wealth. The top 10 firms ranked in order of annualized AER is shown below. Four-year compounded return performance is presented to focus on the longer-term.

Leading the pack is a small Halifax based company (outstanding shares just under 2 million) . Also prominent on the list, in sixth place, is Ballard Power Systems, whose alternative power cell technologies and successful pilot projects with automotive companies continue to entice investors in spite of its lacklustre current (or historical) earnings and value creation. Small energy firms dominate the remainder of the list (and this is before the recent significant rise in energy prices). The 11th ranked company is Nortel Networks, which also provided 68% AER over the four year period.

Vijay Jog is a professor of finance at Carleton University in Ottawa and President of Corporate Renaissance Group in Ottawa. Kobana Abukari is a financial analyst at Corporate Renaissance Group in Ottawa.

1. The methodology for this measure is described in the Summer 1996 edition of the Canadian Investment Review.

Top Ten Wealth Creators
1996-1999 AER %
Knowledge House Inc.
Bonavista Petroleum Ltd.
C-MAC Industries Inc.
Q L T Inc.
Patheon Inc.
Ballard Power Systems Inc.
Nu-Gro Corporation
First Calgary Petroleums Ltd.
Purcell Energy Ltd.
Genesis Exploration Ltd.
Contex Group