"Hi Dollface! Can I buy you a drink?"
With lines like that and such characters as Tiffany Meyer, Professor Robert A. Haugen has conceived one of the most unusual works in investment finance.
Mr. Haugen, a professor of finance at the University of California, Irvine, makes the case for inefficient markets and his approach to equity valuation in a trilogy of books. The second detours part way from financial economics into a mystery novel.
With the engaging but unusual diversion, his three books make an unequivocal argument against efficient markets and widely popular indexed management.
Despite the diversion, which has a pedagogic, as well as entertaining, purpose, the trilogy is a serious work, laying out his argument for the inefficient stock market. Even Tiffany Meyer, a savvy lawyer who manages a presidential campaign, becomes part of an authentic-sounding and provocative discussion on stock market returns and volatility.
Mr. Haugen's case becomes more persuasive when one considers the money actually being managed, or model portfolios being studied, using the approach he discusses in his books.
His company, Haugen Custom Financial Systems Inc., has licensed his investment management software, for both experimental model portfolios and active money management, to some 20 pension funds, mutual funds and other money managers and investment organizations.
Among the clients is the Missouri State Employees' Retirement System, Jefferson City, which has been intrigued enough to license the software to run model portfolios. "We have not run live money with it yet," said Gary Findlay, executive director. "It sounds like an interesting quantitative approach."
Analytic Investors Inc., Los Angeles, a United Asset Management Co. unit that used to be called Analytic/TSA, runs some $235 million under the approach, including $200 million in separate accounts for pension funds and other institutions and a $35 million mutual fund.
Mr. Haugen's trilogy, all published by Prentice Hall Inc., Upper Saddle River, N.J., begins with "The New Finance: The Case Against Efficient Markets." First published in 1995, an updated second edition came out last month.
The second volume, "Beast on Wall Street: How Stock Volatility Devours Our Wealth," was published last July.
The final book in the trilogy, "The Inefficient Stock Market: What Pays Off and Why," was published this month.
The books are serious, but lively and wonderfully succinct, running only about 150 pages each, including tables and charts.
Analytic has been managing money based on Professor Haugen's quantitative model for more than two years. Its portfolios using the model have outperformed the Standard & Poor's 500 stock index. From inception, Oct. 1, 1996, through Dec. 31, the institutional separate account composite returned an annual average 39.48% and its mutual fund, 35.91%, while the S&P returned 31.7%. For 1998, its institutional composite returned 36.19% and its mutual fund, 37.86%, while the S&P 500 returned 28.6%
Dennis M. Bein, co-portfolio manager of the separate accounts and mutual fund, said, Mr. Haugen's ideas are "absolutely" right concerning inefficient markets and valuation.
Analytic licenses the Haugen model but then adds its own risk-control and transaction-cost management to the investment process. Analytic's portfolios contain about 70 stocks. For its universe, it uses only stocks in the S&P 500. When Standard & Poor's drops a stock from the index, Analytic drops it from the portfolio, too.
In an interview, Professor Haugen thinks pension funds could do away with money managers entirely for equities and beat the markets by using his approach. He might enable them to do away with novelists, too.
