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      William W. Priest

      Winning at Active Management

      Further praise for Winning at Active Management

      “The chances of success in fund management, as in professional sports coaching, are inversely proportional to time. The longer you are in the game, the greater your chance of having a poor run over a measurable window (say, three years), and involuntarily exiting the field. So the thoughts of a manager with 50 years' experience are worth reading. This book, unlike many written by active managers, does not claim to have found El Dorado and a path to untold riches; indeed, it acknowledges that passive investment may be appropriate for some applications.

      The reason Bill has succeeded for so long comes across well in his and his co-authors' approach to culture, and in their dismissal of the Price-Earnings Ratio – a figure that whilst discredited, and never used in private markets, remains a mainstay of most active managers' processes. Economies and markets do not stand still, and yet many active and quant managers believe that what worked before will work again without the need to change and evolve their processes. It is in this area, more than any other, that 50 years of experience is invaluable.”

Robert Waugh Chief Investment Officer The Royal Bank of Scotland Group

      “One of the most difficult aspects of consulting to institutional investors is finding active investment managers who will produce consistent results over a long period. While an investment process that is both sound and repeatable across different market environments is critical, it is insufficient unless implemented in a thoughtful way by an investment team that possesses the skills and values, and is offered the right incentives, to make optimal investment decisions. To my mind, a firm's leadership must inculcate and manage this sort of culture within the entire team in order to remain successful over a long period, and the first part of this book highlights that cultural challenge.

      Technology has become a game changer in the investment industry, and the organizations that apply it most effectively will be the long term winners. Given the incredible amount of information that is now available, winnowing the critical insights to a manageable amount and sharing them among the investment team has become essential to an investor's success. In addition, using technology to better understand the factors behind market behavior can help an investment firm to evaluate its own performance. Again, the book speaks effectively of the need to make better use of technology within all parts of the investment industry.”

David Service Director, Investment Consulting Willis Towers Watson (Retired)

      “Bill Priest, a leading practitioner of free cash flow-based investing, explains why that philosophy has been so successful. And much more: he and his co-authors tackle the most difficult issue in the investment management business – culture – and demonstrate how to maintain it in challenging periods. The book also addresses the industry's latest challenge, the proliferation of quantitative algorithms in every corner of the investment world, and describes how the value of judgment has increased as machines have come to exploit the short-term relationships that can be tested. Recommended reading for this generation of investors, and the next one.”

Michael Goldstein Managing Partner Empirical Research Partners

      WINNING AT ACTIVE MANAGEMENT

      The Essential Roles of Culture, Philosophy, and Technology

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

      Cover image: © Maxiphoto/Getty Images, Inc.

      Cover design: Wiley

      Copyright © 2016 by William W. Priest. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

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       Library of Congress Cataloging-in-Publication Data:

      ISBN 9781119051824 (Hardcover)

      ISBN 9781119051770 (ePDF)

      ISBN 9781119051909 (ePub)

To Jack L. Treynor – the Albert Einstein of Finance, a man of great principle, a co-author, and a friend, from whom I learned more finance and economics than any other person

And to my family – wife Katherine, Jeff, Karen, Amanda, Jack, Jacob, Hayley, Spencer, Joan, and Steve, who provide support, questions, and the occasional “what in the world were you thinking!” – William W. Priest

To Terri, Ben, Katie, and Ellie, and to my father, Lawrence Bleiberg, in whose footsteps I have followed – Steven D. Bleiberg

To my wife, Leslie, and my children, Christopher, Megan, and Lindsay – Michael A. Welhoelter

      Preface Active Management is Not Dead Yet

      During a writing project like this one, once the key ideas are established, a question nags at the authors: What should we call it? Early on we came up with a working title “Not Dead Yet.”1 It was meant as a tongue-in-cheek response to the stream of reports over the past few years on the decline of active management of equity portfolios flowing from financial journalists and market observers – as well as the marketers of index funds, exchange-traded funds and other products that compete with actively managed strategies. To an extent, they make a valid point: the performance of active managers as a group has been less than desired. But there are several reasons to explain managers’ underperformance: some are cyclical, as markets of recent years have been affected by new sorts of macro influences, while others are secular, and related to how managers carry out their investment processes (Chapter 6).

      However, the markets have not changed inalterably, at least not in our view. The essence of active management is a well-designed investment process that measures the relative value of individual stocks, and takes advantage of the many mispricings that result from less-than-optimal actions of investors,