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Winning at Active Management. The Essential Roles of Culture, Philosophy, and Technology

  • ID: 3610221
  • Book
  • 336 Pages
  • John Wiley and Sons Ltd
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Praise for winning at active management

"In this highly accessible book, Bill Priest and his co–authors do a masterful job demonstrating the critical components of success for any investment manager: maintaining the right culture, developing a rigorous and effective investment philosophy, and embracing technologies that can capture greater value from fundamental insights. Investors interested in improving their results will benefit from the five decades of wisdom and experience that are so engagingly captured here, and come away with profound insights about the active/passive debate, how both culture and technology are underappreciated drivers of success, and the future of investing. Bill′s highly successful career as an investor, innovator, and industry leader give this work tremendous depth and perspective—I strongly recommend it."
— BLAKE GROSSMAN, Managing Partner, CHJ Capital Management; Chairman of the Board of Directors, Financial Engines; former Chief Executive Officer, Barclays Global Investors

"While having the right corporate culture is essential for successful asset management, culture is surprisingly under–researched in finance. Winning at Active Management is a bold step forward in filling this gap."
— CAMPBELL R. HARVEY, PHD, Professor of Finance, Duke University; co–author of Corporate Culture: Evidence from the Field

"Bill Priest and his co–authors expertly capture what′s at stake in the debate about active versus passive investing. In Winning at Active Management, they identify the styles and traits in active management that outperform over the long term."
— FLEMING MEEKS, Executive Editor, Barron′s

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Preface xi

Active Management is Not Dead Yet

PART I Culture

CHAPTER 1 Culture at the Core 3

The Original Organizational Culture: Commandand–Control 5

An Alternative Culture for Knowledge Businesses 8

The Partnership Culture Model 10

Justice and Fairness 17

CHAPTER 2 Culture in Investment Management 21

Values 22

Integrity 26

Trust 28

Culture and Clients 32

Firm Culture under Stress 34

Culture in Recruiting 35

Acquisitions 38

Evolution of Culture 41

PART II Philosophy and Methodology

CHAPTER 3 The Nature of Equity Returns 49

Linkages: The Real Economy and the Financial Economy 49

Components of Stock Returns 51

Price–Earnings Ratios 53

The Historical Makeup of Stock Returns 59

CHAPTER 4 The Great Investment Debate: Active or Passive Management? 63

The Debate Is Timeless 65

An Elegant Theory: The Capital Asset Pricing Model 66

Further Elegance: The Efficient Market Hypothesis 68

Reality Intrudes 69

The Problem with MPT 71

CHAPTER 5 A More Human Description of Investors and Markets: Behavioral Finance 73

Loss Aversion 74

Mental Accounting 75

Minimizing Regret 76

Overconfi dence 77

Extrapolation and Reversal 78

Investor Behavior in Action 78

MPT Still Lives 80

CHAPTER 6 Active versus Passive Management: The Empirical Case 85

Market Regimes 87

Correlation and Dispersion 87

Company Quality 89

The Weight of Cash 90

Luck versus Skill 91

Investors Voting with Their Dollars 96

CHAPTER 7 The Case for Active Management 101

April 2015: Investment Giants Square Off in New York City 101

An Active–Passive Equilibrium 103

The Case for Active Management 105

CHAPTER 8 Debates on Active Managers’ Styles and Methods 109

Manager Style 110

Free Cash Flow Is the Measure of Value 112

Depreciation 113

Accruals 114

Research and Development Costs 118

The CFO Perspective 120

CHAPTER 9 The Jump from Company Earnings to Stock Prices 125

Flaws in Traditional Valuation Measures 125

Accounting versus Finance: A Case Study 128

CHAPTER 10 Epoch’s Investment Philosophy 133

The Starting Point: Generating Free Cash Flow 134

Choosing to Reinvest 135

Capital Investment: Returns and Capital Costs 136

Once More: Cash Flow–Based Measures Are Superior 139

Trends in Capital Allocation 142

Dividends 143

Share Repurchases 145

Debt Buydowns 150

Capital Allocation: What’s the Right Mix? 151

PART III Technology

CHAPTER 11 High–Speed Technology 159

Information Technology: Three Relentless Forces 162

CHAPTER 12 Technology in Investing 171

Information at Work 172

Order from Chaos: Applying Scientific Frameworks 172

Computers to the Rescue 174

A Virtuous Circle 176

Expansion of Index Funds 177

Betting Against the CAPM 177

Concurrent Developments 179

The Spread of Quant 181

Computing and Data, Neck and Neck 181

Big Data—Beyond Bloomberg 183

Artifi cial Intelligence 187

CHAPTER 13 The Epoch Core Model 191

Factors in the Epoch Core Model 192

Results of the Epoch Core Model 196

CHAPTER 14 Racing with the Machine 201

Investing Is Too Important for Robots Alone 201

Racing with the Machine 202

Seeking High Return on Capital 204

A More Practical Study 206

Is Persistence Contradictory? 208

An ROIC Strategy 211

The Value of Judgment 214

Epilogue 219

Appendix A: Selected Articles and White Papers of Epoch Investment Partners 223

Appendix B: Financial Asset Valuation 273

Appendix C: Feathered Feast: A Case 285

Acknowledgements 295

About the Authors 297

Index 299

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William W. Priest
Steven D. Bleiberg
Michael A. Welhoelter
John Keefe
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