Active Investing in the Age of Disruption
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Evan L. Jones. Active Investing in the Age of Disruption
Table of Contents
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Guide
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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
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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.
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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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