Quantitative Quality

Quantitative Quality

Money managers by Mark Gordon | Managing Editor

The statistical approach to stock selection hasn't always been the most popular. But that's irrelevant to Doug Case, who has used the theory to build a firm managing almost $2 billon.

Advanced Investment Partners is what happens when a group of number-crunching math and science geeks get a hold of the stock market: The 10-year-old Safety Harbor-based firm has spent most of its first decade proving that while a quantitative approach to the stock market might not be sexy, it can be successful.

The firm, which counts a former Motorola research lab director and an investment manager with the Florida State retirement system as partners, had about $1.8 billion in investments in 2006, a quantum jump from the $250 million or so its first year. Revenues have blossomed over that time as well, especially during the late 1990s bull market, when performance incentive fees kicked in, firm president Doug Case says. He declined to release specific revenue numbers.

And late last year, the 15-employee firm moved into a new 8,000-square-foot office in the quaint downtown section of the village bordering Clearwater, with postcard-like views overlooking Tampa Bay.

Case picked up his methods while managing stocks and index funds for the retirement accounts of Florida's public employees in the mid 1980s and early 1990s. He remembers going out to dinner semi-regularly with private sector investment mangers while working in Tallahassee - peers he refers to as "stock storytellers."

The stories were nice, Case says, colorful in why one stock was a great buy and layered with juicy behind the scenes details about how the stock was picked. But the actual performance of the stock didn't normally match up to the glory of the story.

On the other hand, while Case concedes his dinnertime stories were normally dry and dull - and they remain that way today - the stocks he picked outperform the market more often than not.

"The traditional manager specializes in stock stories," says Case, who doubles as his firm's chief investment officer. "The quantitative manager specializes in the process of managing a portfolio over time. And the returns we get are a lot more interesting."

Advanced Investment Partners has another unique twist: It has a classic entrepreneurial vibe, as most of the employees came from a more stifling corporate or government environment. But it's also an affiliate of State Street Global Alliance, a behemoth investment company that, among other businesses, runs the pension fund for governmental and educational workers in the Netherlands. Boston-based State Street is one of the largest institutional asset managers in the world, with $1.6 trillion in assets.

Case says the partnership is the best possible scenario. It allows the firm to stay entrepreneurial while utilizing some of the mother ship's best resources, such as its legal department. "This business has a lot of entrepreneurial opportunities," says Case, 45, "and that's what this is for me."

'Systematic and rigorous'

Case grew up in McKeesport, Pa., a small steel-town just south of Pittsburgh. Despite having little interest in numbers and stats as a child - except for the ones on the backs of baseball cards - he graduated from the University of Pittsburgh in 1984 with a degree in applied mathematics and business. After graduating, he spent some vacation time with his parents in Clearwater, with the intention of retuning to Pittsburgh to go to graduate school.

But the entrance exam he was scheduled to take at Pitt was snowed out, so he decided to stay in Florida, ultimately earning an MBA from Florida State. He worked as a corporate loan officer for Southeast Bank in Miami before taking a job with the Florida State Board of Administration.

In 2000, Case met Orhan Karaali, a fellow quantitative investor working with Mellon Equity in Pittsburgh; Karaali had previously been in charge of the research laboratory for machine learning and speech synthesis at cell phone company Motorola. Karaali came educationally well equipped to join forces with Case in picking stocks on numbers, not stories. Karaali's degrees include: a PhD in computer engineering from Florida Atlantic University; an MBA in finance and econometrics from the University of Chicago and a BS in electrical engineering from the University of Wisconsin.  

In the early going, the firm's quantitative methods were not universally accepted by the investing community, a belief that still lingers in some circles today. Its acceptance has grown over the last five years though, Case says, as the sophisticated computer-based data and research tools necessary for picking stocks quantitatively have grown in prominence and availability.

Says Case: "It's a systematic, rigorous way of combing through complicated financial data."

What's more, some investors - both institutions and private individuals - were looking for a more stable, mathematical approach after getting burned with the stock market's early-decade drop. The quantitative approach, says Case, tries to be both bull- and bear-proof. Case and his army of mathematicians pick stocks based solely on analyzing numerical charts and what stocks will do against the market.

"There's not a lot of elation to what the market is doing," Case says. "Our psyche is more in tune with what we are doing in relation to the market."

REVIEW SUMMARY

Company. Advanced Investment Partners, Safety Harbor

Business. Money, wealth management

Key. Firm picks stocks based on quantitative analysis and research.

AN ADVANCED SYSTEM

Doug Case, chief investment officer of Advanced Investment Partners, focuses on beating the market, whatever it may be doing. The system starts with using several research methods independent of each other. That includes a quantitative weekly evaluation of every stock in the Russell 3000 Index: What the stock's value is relative to all stocks in the market; what the stock's value is relative to other stocks in the same sector; and what the stock's value is relative to its own history.

The firm then builds a portfolio, eliminating stocks selling below $5 a share. It's then monitored in much of the same way it was built, using at least three valuation perspectives.

The system is stock specific, as opposed to sectors. Its offerings are broken down into investment strategies, such as its LargeCap, which Case considers the firm's flagship. It has outperformed the S & P 500 six out of its seven years.

The top five holdings in LargeCap are diverse in terms of industries, but similar in terms of earnings growth rates and other key statistics. The top five stocks in the LargeCap strategy are:

Holdings % of total funds

• Bank of America 4.18%

• ExxonMobil 3.27%

• JP Morgan 3.27%

• PepsiCo 3.17%

• Comcast 3.12%