Active Investing in the Age of Disruption

Active Investing in the Age of Disruption
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Outperforming the market—or “alpha creation” as it’s sometimes called—is very possible with the proper investment discipline and methodologies. But the market-beating strategies that will work today are not the same as those that worked in the past. Central bank intervention and the accelerated pace of technology have caused an increase in the disruption of traditional business models across many industries. These industry paradigm shifts combined with macro-driven financial markets have created one of the toughest environments for active investment managers in history. Active Investing in the Age of Disruption details the disruptive forces in the market today and how to navigate them to outperform. This book discusses winning equity investment strategies with lofty goals of alpha creation. Understanding the limits and potential of each unique investment methodology and portfolio strategy will allow you to generate higher returns. Even when your luck runs out or the market works against you, the ideas and disciplined approach in this book will keep you one step ahead of the market. · Understand the disruptive forces affecting the market today · Discover equity investment strategies uniquely targeting alpha generation—beating the market · Understand which features of active investing need to be implemented and stressed from a risk perspective to outperform the market · Learn which previously solid investment tenets may no longer hold true in the age of market disruption · Hone the craft of active investing—identify markets with the greatest profit potential, hedge against strategy limitations, and more It has been a very tough decade for active investment managers, but this book will inspire you to think differently about risks and opportunity. A deeper understanding of the forces affecting the market and a commitment to refining your investment process using the techniques in this book will help you step across the margin of error between under and outperforming.

Оглавление

Evan L. Jones. Active Investing in the Age of Disruption

Table of Contents

List of Illustrations

Guide

Pages

ACTIVE INVESTING IN THE AGE OF DISRUPTION. The Confluence of Central Bank Intervention and Technology Acceleration

ABOUT THE AUTHOR

ACKNOWLEDGMENTS

PREFACE

PART I MARKET ENVIRONMENT: THE 2010S AND 2020S

Note

CHAPTER 1 CHALLENGES TO ACTIVE INVESTING

Active investing alpha has been falling

Self-reinforcing cycle driving poor performance

Why do these forces pressure investment decisions?

Key investment tenets

Goal congruence and fiduciary responsibility

Invest in business fundamentals

Understand the role of valuation in future returns

Contrarianism

Time horizon

Portfolio concentration

Behavioral pitfalls

Process

CHAPTER 2 GLOBAL CENTRAL BANK INTERVENTION

Unprecedented global central bank intervention

Fundamental investing overwhelmed by central bank intervention

Low rates and the US consumer

CHAPTER 3 ACCELERATED PACE OF TECHNOLOGY = DISRUPTION

Innovation adoption tipping point

Innovation and Financial Capital

Outperformance potential with unprofitable but disruptive companies?

Private markets overheating?

Contrarianism and paradigm shifts

CHAPTER 4 PASSIVE INVESTING

Factor investing

How far can passive investing go?

Are the losers quitting the game?

Financial product creation and passive alternatives

CHAPTER 5 THE 2020S

Economic drivers of the 2020s

Continuation of technology-driven disruption

American dream

Populism

The biggest downside risk: Loss of faith in central banks

Consequences for active investing

Is value investing dead?

PART II CREATING ALPHA

CHAPTER 6 A COHESIVE STRATEGY

Aligning pieces of the puzzle

Benchmarks and security selection universes that are too narrow or broad

Diversification and performance goals

Assets under management (AUM) relationship to strategy

Matching the time horizon of the strategy to the investor base

Fees in relation to the strategy return potential

Shorting and your strategy

Academic analysis and investment reality

Firm incentives

Executing the strategy

CHAPTER 7 INVESTMENT PROCESS

Process evolves; it is not stagnant

Functions served by process

Documenting and memory

Investment thesis

Deep work: Trying to avoid the noise

Channel checks

Management meetings

Systems and technology

CHAPTER 8 SECURITY SELECTION

Superior business models

Idea generation: Top down to narrow the universe

Timing business cycles

Roll-up acquisition strategy

Other types of companies to be wary of

What to look for in a company: Sales growth

What to look for in a company: Operating margins

What to look for in a company: Market power sustainability

Management teams

Being contrarian and time horizon

CHAPTER 9 VALUATION

Importance of valuation in fundamental versus value investing

Fundamental investing: Big picture

Owner's yield

Free cash flow as an important metric

Company balance sheet leverage

Price target creation and channels

CHAPTER 10 CAPITAL ALLOCATION

Capital expenditures (capex) and research and development (R&D)

Acquisitions and corporate strategy

Stock buybacks, dividends, and debt pay-down

Return on equity of new investments: First priority

CHAPTER 11 PORTFOLIO MANAGEMENT

Portfolio construction: Top down

Portfolio construction: Bottom up

Gross and net exposures

Market timing

Portfolio risk

Equity factors and your portfolio

Volatility and behavioral mistakes

Managing individual portfolio positions

Portfolio rebalancing

Conviction and portfolio management

Managing individual portfolio positions and behavioral pitfalls

Trading

Options

CHAPTER 12 SHORT INVESTING

Why manage a short portfolio?

The shorting paradigm and short portfolio management

Quantitatively the risk reward ratio is different

Short security selection

PART III THE BIGGER PICTURE

CHAPTER 13 GOAL CONGRUENCE, FIDUCIARY RESPONSIBILITY, AND LEARNING

Executive compensation and board structure

Assets under management (AUM) and fee structures

Corporate acquisition conflicts

Country regulatory issues

Learning

GLOSSARY

INDEX

WILEY END USER LICENSE AGREEMENT

Отрывок из книги

Evan L. Jones

DUMAC manages $19 billion on behalf of Duke University and affiliates investing globally across all asset classes. Direct investments span global equities, commodities, credit, and market-neutral strategies.

.....

We will dig deeper into central bank intervention and the accelerated pace of technology in chapters 2 and 3, but first we need to briefly introduce the key investment tenets that are coming under magnified pressure. Although there is no one right way to be a successful active investment manager, the following investment tenets, to be developed fully in Part II, are central to the majority of successful fundamentally based equity investment firms.

In order to discuss the unique challenges of today's environment in relation to history, it is worth quickly defining the key investment tenets in question.

.....

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