Jim O'Shaughnessy, author of the 2005 business bestseller What works on Wall Street and star money manager at Bear Stearns (BSC.N: Quote, Profile, Research), is leaving the investment bank to set up his own asset-management shop -- but he won't leave empty handed.
He'll take with him about $8 billion of Bear Stearns Asset Management's $44 billion in assets under management, as well as portfolio and sales staff. Another thing that will depart with him -- the investment strategy that guided him through his six-year run at the No. 5 brokerage.
What always works on Wall Street is strict adherence to underlying strategies that have proven themselves under a variety of market environments, O'Shaughnessy told Reuters in an interview.
That approach -- available to anyone willing to part with the $34.95 retail price of his book -- has guided O'Shaughnessy and his team at Bear Stearns Asset Management in managing more than $12 billion in assets. He said he will use an identical approach at O'Shaughnessy Asset Management, which is based in Stamford, Connecticut, and already open for business.
He is leaving Bear Stearns at a time when the bank's credibility is suffering after subprime mortgage-related losses led to the failure of two of its hedge funds earlier this year, costing investors as much as $1.6 billion and leading some clients to take their business elsewhere.
O'Shaughnessy said his negotiations to leave Bear Stearns predated the credit crunch and stemmed from a desire to work in a firm focused solely on quantitative investing, which relies on identifying patterns from decades worth of data to evaluate potential investments.
Many of his clients -- including Royal Bank of Canada (RY.TO: Quote, Profile, Research), which has a suite of O'Shaughnessy funds that he advises on -- are following him to the new firm.
He said his amicable departure from Bear Stearns, being done in phases over the next three months, includes the Wall Street bank taking a minority stake in his new firm, and O'Shaughnessy Asset Management acting as sub-adviser for several Bear Stearns Asset Management clients.
O'Shaughnessy said of his investment strategy, Our approach is to be completely dispassionate and let empirical facts guide us to securities that we want to buy. Our approach is based on decade upon decade of tests of the underlying strategies.
He shot down the notion that some strategies that were winners in the past are now starting to show cracks.
If I had a nickel for every time people tell me that something used to work but isn't going to work anymore, I'd have a lot of nickels.
O'Shaughnessy also does not buy in to concerns that a surge in the trillion-dollar hedge fund industry is taxing the often riskier investment strategies the sector is known for.
Any time you have dislocations, people begin to speculate what the long-term impact will be, he said. It is a growing asset class, and will remain a growing asset class.
The sector will grow even stronger as it becomes more institutionalized, and draws even larger pools of capital, he added.
But O'Shaughnessy -- who will serve both institutional clients at his new firm and retail ones through expanded mutual fund partnerships such as the one he has with Royal Bank of Canada -- said one of the most effective investment metrics does not require fancy computer terminals or complex mathematical formulas, and is often overlooked.
In research, the price-to-sales ratio emerged as the best single factor to look at when determining whether a stock is undervalued or overvalued, he said.
It tends to be overlooked. Most go to the default price-to-earnings ratio, but (price-to-sales) works so well because it is so difficult to monkey with that number. You can change earnings all day long but sales are far harder to manipulate.