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

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

Preface

Not Dead Yet: How the Right Culture, Philosophy, and Technology Enable Active Investment Managers to Add Value

Part I Culture

Chapter 1 Culture at the Core

The Original Organizational Culture: Command–and–Control

An Alternative Culture for Knowledge Businesses

The Partnership Culture Model

Justice and Fairness

Chapter 2 Culture in Investment Management

Values

Integrity

Trust

Culture and Clients

Firm Culture under Stress

Culture in Recruiting

Acquisitions

Evolution of Culture

Part II Philosophy and Methodology

Chapter 3 The Nature of Equity Returns

The Real Economy versus the Financial Economy

Components of Stock Returns

Price Earnings Ratios

The Historical Makeup of Stock Returns

Chapter 4 The Great Investment Debate: Active or Passive Management?

The Debate Is Timeless

An Elegant Theory: The Capital Asset Pricing Model

Further Elegance: The Efficient Market Hypothesis

Reality intrudes

The Problem with MPT

Chapter 5 A More Human Description of Investors and Markets:

Behavioral Finance

Loss Aversion

Mental Accounting

Minimizing Regret

Overconfidence

Extrapolation and Reversal

Investor Behavior in Action

MPT Still Lives

Chapter 6 Active Versus Passive Management:

The Empirical Case

Market Regimes

Correlation and Dispersion

Company Quality

The Weight of Cash

Luck Versus Skill

Investors Voting with Their Dollars

Chapter 7 The Case for Active Management

April 2015: Investment Giants Square Off in New York City

An Active–Passive Equilibrium

The Case for Active Management

Chapter 8 Debates on Active Managers Styles and Methods

Manager Style

Free Cash Flow Is the Measure of Value

Depreciation

Accruals

Research and Development Costs

The CFO Perspective

Chapter 9 The Jump from Company Earnings to Stock Prices

Flaws in Traditional Valuation Measures

Accounting Versus Finance: A Case Study

Chapter 10 Epoch s Investment Philosophy

The Starting Point: Generating Free Cash Flow

Choosing to Reinvest

Capital Investment: Returns and Capital Costs

Once More: Cash–Flow Based Measures Are Superior

Trends in Capital Allocation

Dividends

Share Repurchases

Debt Buydowns

Capital Allocation: What s the Right Mix?

Part III Technology

Chapter 11 High–Speed Technology

Information Technology: Three Relentless Forces

Chapter 12 Technology in Investing

Information at Work

Order from Chaos: Applying Scientific Frameworks

Computers to the Rescue

A Virtuous Circle

Expansion of Index Funds

Betting against the CAPM

Concurrent Developments

The Spread of Quant

Computing and Data, Neck and Neck

Big Data beyond Bloomberg

Artificial Intelligence

Chapter 13 The Epoch Core Model

Factors in the Epoch Core Model

Results of the Epoch Core Model

Chapter 14 Racing with the Machine

Investing Is Too Important for Robots Alone

Racing with the Machine

Seeking High Return on Capital

A More Practical Study

Is Persistence Contradictory?

An ROIC strategy

The Value of Judgment

Epilogue

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

Appendix B:  Financial Asset Valuation

Appendix C:  Feathered Feast: A Case

Acknowledgments

About the Auhtors

Index

WILLIAM W. PRIEST is Chief Executive Officer, Co–Chief Investment Officer, and a co–founder of Epoch Investment Partners, and a long–time advocate of free cash flow investing. His other books include Free Cash Flow and Shareholder Yield and The Financial Reality of Pension Funding Under ERISA.

STEVEN D. BLEIBERG is a Managing Director and Global Portfolio Manager at Epoch Investment Partners.

MICHAEL A. WELHOELTER is a Managing Director, Portfolio Manager, and Head of QuantitativeResearch and Risk Management at Epoch Investment Partners.