Winning at Active Management

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, both individuals and professionals (Chapter 5). Granted, the stock market may have become harder for many managers to beat for several years. But inefficiencies in the pricing of stocks are timeless, and we believe that active equity management ...