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SPA Archive
June 2006
SPATalk
Science and Peace in Antarctica
Twin tracks to tackle climate challenge
Budget throws sensitivities into relief
News in Brief
Morality,theology and action on climate change
What are we going to do about the decline in chemistry students?
The psychology of terrorism
Science meets policy
Where did texting come from?
The self-sorting tendency
Physics in the City
Young people and gambling problems
Deaf people and linguistic research
Food labelling in Europe - We need information for the majority
Food labelling in Europe - We want nutrition labelling
Food labelling in Europe - It's a mess
Mobile phones and children - Voluntary Code
Mobile phones and children - Children face risks
Mobile phones and children-UK code of practice
And then there was one
Joys and duties of a scientist
Scientists in the pay of industry
Creationism reviving; science recruitment declining
All hail the new Science Supremo
Physics in the City
Paul Bostock on a good investment
People are often surprised to find a former physicist employed as an investment manager and curious to know about the transition. My own career is an example.
Managing investments
Investment managers compete with each other for the privilege of managing funds that belong to private individuals, corporations, endowments and so on. Twenty years ago, investment management was done largely on the basis of well-informed intuition.
Since then there has been an enormous increase in the volume of data on shares and the performance of the companies, and this data has become highly accessible. At the same time, computing power has also increased, allowing the development of altogether more sophisticated investment processes.
A state of the art investment process is now capable of processing information on more than 20,000 companies worldwide. The information runs to hundreds of available items per company: turnover, profits, assets owned, long term debts, cash flow, trading volumes and other costs, plus the history and variability of those measures over time, and so on.
From physics to finance
After completing a D Phil in physics, I started working in investment at Baring Brothers in 1985. I had little idea what I really wanted to do, save that it should provide a broad introduction to business. Baring’s investment group had become interested in the new ‘quantitative’ finance – using mathematics to understand financial markets – and they wanted a graduate with computing abilities, a mathematical background and an interest in research.
Much of my learning was on the job. I began with some mundane tasks – I still remember building a global asset database over a few months, by typing hundreds of time series from booklets into spreadsheets. Later, as a fitting reward, I was able to analyse these time series and, for example, to explore the relationships between how investments performed in different countries. This led to the creation of some risk and return models for international investment. Having contributed to the analysis, I was also able to participate in client meetings and began to learn more about what investors were looking for from their investment advisors.
Branching out
After two years, the director in charge of our group left to form a new company and I decided to go too. Although it seemed risky, I felt that being involved with starting a new firm would be a great experience even if it did not become successful. My last day at Barings was the day of the October 1987 hurricane and the following Monday, my first day at the new firm, was ‘Black Monday’, when the markets fell 20 per cent. Although it was odd having to find out what was going on from the radio news, it was at least a good day not to have clients.
I continued to look at international market valuations and became interested in how individual shares were priced. Research in these areas is certainly challenging – not conceptually perhaps, like physics, but because it so hard to establish any definitively right principles to work from.
Soon I began to manage funds myself. This meant trading and keeping track of all the clients’ positions. Although this was very enjoyable, it made less use of my strengths and after a few years I went back to spending more time on research, as well as by then helping to manage and run the business.
I remain particularly interested in the challenges of valuing companies, which has become a richer subject as the amount of information has expanded. I am also keen to explore our understanding of risk, an area that I believe is ready for a breakthrough.
Science and investment
Scientists are often recruited to work on new models for evaluating opportunities or on risk controls (a particularly technical role). However, depending on personality and other interests, a scientist does not necessarily have a technical role, and science graduates often become involved in sales, business or people management.
Now that investment practice can fully reflect the best theoretical knowledge, we look forward to a new era which will advance the boundaries of the theory. So perhaps it is not surprising that science graduates – together with some highly numerate economists and MBAs – have been attracted to this area. Many are at the forefront of making these investment processes work.
Dr Paul Bostock manages the London office of GMO, a global investment management partnership
paul.bostock@gmo.com