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Winning at Active Management

Book Description

Winning at Active Management conducts an in-depth examination of crucial issues facing the investment management industry, and will be a valuable resource for asset managers, institutional consultants, managers of pension and endowment funds, and advisers to individual investors. Bill Priest, Steve Bleiberg and Mike Welhoelter all experienced investment professionals, consider the challenges of managing portfolios through complex markets, as well as managing the cultural and technological complexities of the investment business.

The book’s initial section highlights the importance of culture within an investment firm – the characteristics of strong cultures, the imperatives of communication and support, and suggestions for leading firms through times of both adversity and prosperity.

It continues with a thorough discussion of active portfolio management for equities. The ongoing debate over active versus passive management is reviewed in detail, drawing on both financial theory and real-world investing results. The book also contrasts traditional methods of portfolio management, based on accounting metrics and price-earnings ratios, with Epoch Investment Partners’ philosophy of investing on free cash flow and appropriate capital allocation.

Winning at Active Management closes with an inquiry into the crucial and growing role of technology in investing. The authors assert that the most effective portfolio strategies result from neither pure fundamental nor quantitative methods, but instead from thoughtful combinations of analyst and portfolio manager experience and skill with the speed and breadth of quantitative analysis. The authors illustrate the point with an example of an innovative Epoch equity strategy based on economic logic and judgment, but enabled by information technology.

Winning at Active Management also offers important insights into selecting active managers – the market cycle factors that have held back many managers’ performance in recent years, and the difficulty of identifying those firms that truly possess investment skill. Drawing on behavioral economic theory and empirical research, the book makes a convincing case that many active investment managers can and do generate returns superior to those of the broad market.

Table of Contents

  1. Preface: Active Management is Not Dead Yet
    1. Notes
  2. PART I: Culture
    1. Chapter 1: Culture at the Core
      1. The Original Organizational Culture: Command-and-Control
      2. An Alternative Culture for Knowledge Businesses
      3. The Partnership Culture Model
      4. Justice and Fairness
      5. Notes
    2. Chapter 2: Culture in Investment Management
      1. Values
      2. Integrity
      3. Trust
      4. Culture and Clients
      5. Firm Culture under Stress
      6. Culture in Recruiting
      7. Acquisitions
      8. Evolution of Culture
      9. Notes
  3. PART II: Philosophy and Methodology
    1. Note
    2. Chapter 3: The Nature of Equity Returns
      1. Linkages: The Real Economy and the Financial Economy
      2. Components of Stock Returns
      3. Price-Earnings Ratios
      4. The Historical Makeup of Stock Returns
      5. Notes
    3. Chapter 4: The Great Investment Debate: Active or Passive Management?
      1. The Debate Is Timeless
      2. An Elegant Theory: The Capital Asset Pricing Model
      3. Further Elegance: The Efficient Market Hypothesis
      4. Reality Intrudes
      5. The Problem with MPT
      6. Notes
    4. Chapter 5: A More Human Description of Investors and Markets: Behavioral Finance
      1. Loss Aversion
      2. Mental Accounting
      3. Minimizing Regret
      4. Overconfidence
      5. Extrapolation and Reversal
      6. Investor Behavior in Action
      7. MPT Still Lives
      8. Notes
    5. Chapter 6: Active versus Passive Management: The Empirical Case
      1. Market Regimes
      2. Correlation and Dispersion
      3. Company Quality
      4. The Weight of Cash
      5. Luck versus Skill
      6. Investors Voting with Their Dollars
      7. Notes
    6. Chapter 7: The Case for Active Management
      1. April 2015: Investment Giants Square Off in New York City
      2. An Active-Passive Equilibrium
      3. The Case for Active Management
      4. Notes
    7. Chapter 8: Debates on Active Managers’ Styles and Methods
      1. Manager Style
      2. Free Cash Flow Is the Measure of Value
      3. Depreciation
      4. Accruals
      5. Research and Development Costs
      6. The CFO Perspective
      7. Notes
    8. Chapter 9: The Jump from Company Earnings to Stock Prices
      1. Flaws in Traditional Valuation Measures
      2. Accounting versus Finance: A Case Study
      3. Notes
    9. Chapter 10: Epoch’s Investment Philosophy
      1. The Starting Point: Generating Free Cash Flow
      2. Choosing to Reinvest
      3. Capital Investment: Returns and Capital Costs
      4. Once More: Cash Flow-Based Measures Are Superior
      5. Trends in Capital Allocation
      6. Dividends
      7. Share Repurchases
      8. Debt Buydowns
      9. Capital Allocation: What’s the Right Mix?
      10. Notes
  4. PART III: Technology
    1. Notes
    2. Chapter 11: High-Speed Technology
      1. Information Technology: Three Relentless Forces
      2. Notes
    3. Chapter 12: Technology in Investing
      1. Information at Work
      2. Order from Chaos: Applying Scientific Frameworks
      3. Computers to the Rescue
      4. A Virtuous Circle
      5. Expansion of Index Funds
      6. Betting Against the CAPM
      7. Concurrent Developments
      8. The Spread of Quant
      9. Computing and Data, Neck and Neck
      10. Big Data—Beyond Bloomberg
      11. Artificial Intelligence
      12. Notes
    4. Chapter 13: The Epoch Core Model
      1. Factors in the Epoch Core Model
      2. Results of the Epoch Core Model
      3. Notes
    5. Chapter 14: Racing with the Machine
      1. Investing Is Too Important for Robots Alone
      2. Racing with the Machine
      3. Seeking High Return on Capital
      4. A More Practical Study
      5. Is Persistence Contradictory?
      6. An ROIC Strategy
      7. The Value of Judgment
      8. Notes
  5. Epilogue
    1. Notes
  6. Appendix A: Selected Articles and White Papers of Epoch Investment Partners
    1. The Canary in the Coal Mine: Subprime Mortgages, Mortgage-Backed Securities, and the US Housing Bust
    2. The Financial Crisis: A “Whodunit” Perspective
    3. The Power of Zero + The Power of the Word
  7. Appendix B: Financial Asset Valuation
    1. Bonds—A Basic Case
    2. Stock Valuation through Cash Flows
    3. Notes
  8. Appendix C: Feathered Feast: A Case
    1. Feathered Feast: A Case
  9. Acknowledgements
  10. About the Authors
  11. Index
  12. EULA